UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-K





ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
fiscal year endedDecember 31,
2009




Commission
File Number:001-12575




UTAH
MEDICAL PRODUCTS, INC.


(Exact
name of registrant as specified in its charter)




Utah
            87-0342734(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)7043
      S 300 W, Midvale Utah
            84047(Address
      of principal executive offices)
            (Zip
      Code)Registrant’s
      telephone number, including area code:
            Telephone
      (801) 566-1200Facsimile
      (801) 566-7305Securities
      registered pursuant to Section 12(b) of the Act:Title
      of each class
            Name
      of each exchange on which registeredCommon
      Stock, $.01 Par Value
            The
      NASDAQ Global MarketPreferred
      Stock Purchase Rights





Securities
registered pursuant to Section 12(g) of the Act:


(Title of
Class)


None




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


Yes o   No x




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


Yes o   No x




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  x




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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.


Large
      accelerated filer o
            Accelerated
      filer x
            Non-accelerated
      filer o
            Smaller
      reporting company o





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




State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.  As of June
30, 2009, the aggregate market value of the voting and nonvoting common equity
held by nonaffiliates of the registrant was$85,911,000.




Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.  As of March 4, 2010, common shares
outstanding were 3,617,000.




DOCUMENTS
INCORPORATED BY REFERENCE.  The Company’s definitive proxy
statement for the Annual Meeting of Shareholders is incorporated by reference
into Part III, Item 10, 11, 12, 13 and 14 of this Form
10-K.





INDEX TO FORM
10-K








PAGEPART
      IItem
      1
            
            Business
            1Item
      1A
            
            Risk
      Factors
            12Item
      1B
            
            Unresolved
      Staff Comments
            13Item
      2
            
            Properties
            13Item
      3
            
            Legal
      Proceedings
            14Item
      4
            
            Reserved
            14PART
      IIItem
      5
            
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            15Item
      6
            
            Selected
      Financial Data
            16Item
      7
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            17Item
      7A
            
            Quantitative
      and Qualitative Disclosures About Market Risk
            27Item
      8
            
            Financial
      Statements and Supplementary Data
            27Item
      9
            
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            45Item
      9A
            
            Controls
      and Procedures
            45Item
      9B
            
            Other
      Information
            46PART
      IIIItem
      10
            
            Directors,
      Executive Officers and Corporate Governance
            47Item
      11
            
            Executive
      Compensation
            47Item
      12
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            47Item
      13
            
            Certain
      Relationships and Related Transactions, and Director
      Independence
            48Item
      14
            
            Principal
      Accounting Fees and Services
            48PART
      IVItem
      15
            
            Exhibits,
      Financial Statement Schedules
            49SIGNATURES
            51







PART I





ITEM
1 – BUSINESS





Dollar amounts throughout this report
are in thousands except per-share amounts and where noted.





Utah Medical Products, Inc. (“UTMD” or
“the Company”) is in the business of producing high quality cost-effective
medical devices that are predominantly proprietary, disposable and for hospital
use.  Success depends on 1) recognizing needs of clinicians and
patients,  2) rapidly designing or acquiring economical solutions that
gain premarketing regulatory concurrence,  3) reliably producing
products that meet those clinical needs, and then  4) selling
through


a)
            UTMD's
      own direct channels into markets where the Company enjoys an established
      reputation and has a critical mass of sales and support resources,
      or


b)
            establishing
      relationships with other medical companies that have the resources to
      effectively introduce and support the Company's
  products.





UTMD's success in providing reliable
solutions comes from its proven ability to integrate a number of engineering and
technical disciplines in electronics, software, mechanical packaging,
instrumentation, plastics processing and materials.   The
resulting proprietary products represent significant incremental improvements in
patient safety, clinical outcomes and/or total cost over preexisting clinical
tools. UTMD's experience is that, in the case of labor-saving devices, the
improvement in cost-effectiveness of clinical procedures also leads to an
improvement in overall healthcare including lower risk of
complications.  UTMD markets a broad range of medical devices used in
critical care areas, especially the neonatal intensive care unit (NICU), the
labor and delivery (L&D) department and the women’s health center in
hospitals, as well as products sold to outpatient clinics and physician's
offices.





The opportunity to apply solutions to
recognized needs results from an excellent core of practicing clinicians who
introduce ideas to the Company, and key employees who are both clinical
applications savvy and development engineering adept.





UTMD’s products are sold directly to
end users in the U.S. domestic market by the Company’s own direct sales
representatives and independent manufacturers’ representatives.  In
addition, some of UTMD’s products are sold through specialty distributors,
national hospital distribution companies and other medical device
manufacturers.  Internationally, products are sold through other
medical device companies and through independent medical products
distributors.  UTMD has representation in all major developed
countries through several hundred distributors, 117 of which purchased at least
five thousand dollars in UTMD medical devices during 2009.





UTMD was formed as a Utah corporation
in 1978.  UTMD sold stock to the public one time in 1982 for $1,750
(before offering costs of $321).  Since 1992, UTMD has returned
$111,738 in the form of share repurchases, and an additional $18,460 in the form
of cash dividends, to its public shareholders.





In 1995, Utah Medical Products Ltd., a
wholly-owned subsidiary with manufacturing located in Ireland, was formed to
better serve UTMD’s international customers. In 1997, UTMD purchased Columbia
Medical, Inc. (CMI), a Redmond, Oregon company specializing in silicone
injection molding, assembly and marketing vacuum-assisted obstetrical delivery
systems.  In 1998, UTMD acquired the neonatal product line of Gesco
International, a subsidiary of Bard Access Systems and C.R. Bard,
Inc.  In 2004, UTMD acquired Abcorp, Inc., its supplier of fetal
monitoring belts.  Sales of the products, or derivatives of the
products, from the three acquisitions noted above, comprised about 39% of UTMD’s
2009 sales.  The net book value of intangible assets (goodwill)
remaining on UTMD’s balance sheet at the end of 2009 resulting from the three
acquisitions, as a ratio of 2009 sales, was 28%.





UTMD's corporate offices are located
at 7043 South 300 West, Midvale, Utah 84047 USA.  The corporate office
telephone number is (801) 566-1200.  Ireland operations are located at
Athlone Business and Technology Park, Athlone, County Westmeath,
Ireland.  The Ireland telephone number is 353 (90)
647-3932.


1


PRODUCTS





More complete descriptions
including part numbers and pictures of UTMD’s devices can be conveniently
reviewed at www.utahmed.com.





Labor and Delivery/
Obstetrics:


Fetal
Monitoring Accessories.


The majority of births are considered
"higher risk" due to lack of prenatal care, or use of anesthesia, among other
factors.  In many of these births, labor may become complicated and
does not progress normally.  The obstetrician or perinatologist must
assess progression of labor to be able to intervene with drug therapy, infuse a
solution to augment amniotic fluid, or ultimately if necessary, perform an
operative procedure, and then be prepared for complications immediately
following childbirth.





To assist the physician in controlling
the effectiveness of administration of oxytocin and monitoring effects of
amnioinfusion, contraction intensities, uterine resting tones and peak
contraction pressures are closely monitored through the use of an invasive
intrauterine pressure catheter system.  In addition, to help identify
the possible onset of fetal hypoxia, correlation of the changes in fetal heart
rate (FHR) relative to the frequency and duration of contractions are often
electronically monitored.  UTMD’s intrauterine pressure (IUP)
catheters provide for clinician choices from a traditional fluid-filled system
to INTRAN® PLUS, the most widely accepted transducer-tipped
system.  In addition, adjunct FHR electrodes, leg plates, toco belts
and chart paper are provided by UTMD to complete a package of fetal monitoring
supplies.  UTMD’s IUP catheters include:





·
            IUP-075
      and UTMD’s other custom fluid-filled clear catheter kits utilize a
      saline-filled catheter that is placed within the uterine cavity, connected
      to a separate external reusable or disposable transducer.  This
      product package, utilizing double lumen catheters, was the traditional
      mode of intrauterine monitoring prior to the introduction of
      INTRAN.  An intrauterine pressure change is transmitted through
      the fluid column to the external pressure
  transducer.





·
            Introduced
      in 1987, INTRAN was the first disposable intrauterine pressure catheter
      that placed the pressure transducer at the pressure source within the
      uterine cavity.  This design eliminated the complicated setup of
      fluid-filled systems and provided more accurate pressure
      waveforms.  INTRAN I was discontinued in 1995 in favor of the
      more widely preferred INTRAN PLUS, also covered by UTMD’s original INTRAN
      patent.





·
            INTRAN
      PLUS was introduced in 1991.  The INTRAN PLUS catheter combines
      the transducer tip concept of INTRAN I with a refined tip design, a
      zeroing switch that allows the clinician to reset the reference of the
      monitor, and a dedicated amnio lumen which provides access to the amniotic
      fluid environment which may be helpful in the diagnosis and intervention
      of certain fetal conditions.  In 1996, a viewport enhancement
      which allows physicians to observe amniotic fluid in a closed system was
      added to INTRAN PLUS.  In 1997, UTMD introduced several
      variations to allow user preferences in tip size, zero switch location and
      amniotic fluid visualization.





UTMD markets tocodynamometer belts,
disposable electrodes, catheters and accessories as outlined above, but does not
currently market electronic monitors, the capital equipment that process the
electrical signals.  In addition to products currently offered, UTMD
intends to continue to investigate and introduce tools that enhance fetal
monitoring techniques.





Vacuum-Assisted
Delivery Systems (VAD).


UTMD’s VAD Systems include CMI®
patented soft silicone bell-shaped birthing cups and patented hand-held vacuum
pumps which UTMD believes are the safest products available for use in
vacuum-assisted operative deliveries.  UTMD’s patented soft silicone
cup is a bell-shaped cup design that should be preferred for fetal well-being in
low or outlet fetal stations with occiput anterior presentations, which
represent more than 90% of the cases where VAD is
indicated.  Operative vaginal deliveries using forceps or
vacuum-assisted delivery systems provide knowledgeable physicians with a trial
vaginal operative delivery prior to a more invasive C-section
intervention.  Although there are risks associated with vaginal
operative deliveries which may currently represent 4-8% of all U.S. hospital
births, the procedures are generally regarded as safer long term for the mother,
and at least as safe for the fetus, as abdominal (Cesarean) delivery in
comparable clinical situations.  UTMD estimates that the VAD operative
approach is used for about 3-7% of all U.S. births, with forceps as the
alternative.  UTMD’s patented bell-shaped soft silicone TENDER TOUCH®
cups enjoy a low reported complication rate compared to other vacuum cup
designs, as evidenced by the FDA Medical Device Reporting System which reports
specific names of products used in hospitals.


2





Other
Obstetrical Tools.


AROM-COTTM is a finger cover with a
patented prong design to rupture maternal membranes with less patient pain and
anxiety.  MUC-X is an aspiration device used immediately after birth
to clear neonatal respiratory passages and reduce exposure to potential
infections.  CORDGUARD® is a product which unifies the multiple steps
of clamping the neonate’s cord close to the umbilicus, severing the cord without
splattering blood, drawing a clean cord blood sample, and assisting in the
removal of the placenta.  CORDGUARD’s sharpless, closed system reduces
the risk of exposure to potentially infected blood, and consequently reduces the
high cost of exposure treatment under OSHA and CDC guidelines.  In
addition, CORDGUARD facilitates obtaining neonatal blood that is otherwise hard
to obtain safely and cleanly.  BT-Cath®, is a uterine balloon
tamponade catheter for controlling severe postpartum hemorrhage.  Its
benefits include the ease of rapid deployment and ability to monitor further
bleeding after the tamponade has been placed.  Abcorp toco belts and
straps for fetal monitoring by an external tocodynamometer are provided in
latex-free form in several configurations.





Neonatal Intensive
Care:


DISPOSA-HOODTM


The DISPOSA-HOOD is an infant
respiratory hood that is used in the NICU to administer oxygen to neonates and
flush CO2 (carbon dioxide) while maintaining a neutral thermal environment
critical to proper physiologic responses.  The DISPOSA-HOOD, placed
over the infant's head, incorporates a round diffusor connection specifically
designed to disperse the incoming gases along the inner surfaces of the hood,
rather than allowing them to blow directly on the infant's head.  The
design allows more precise FIO2 (fractional inspired oxygen) control, minimizes
convective heat loss from the head and provides optimum flows for elimination of
CO2 by ventilation. DISPOSA-HOOD, in contrast to an incubator, allows for
excellent access to and visualization of the underdeveloped
infant.  Because it is a disposable product, it also prevents
cross-contamination.





DELTRAN®
PLUS


UTMD’s DELTRAN blood pressure
monitoring system has been adapted specifically for use in the
NICU.  The streamlined version eliminates needles used for blood
sampling, avoids the loss of scarce neonatal blood volume and provides a closed
system that reduces the risk of infection.  The system features
excellent visualization of clearing volume, and one-handed use.





GESCO®


In the third quarter of 1998, UTMD
acquired the neonatal product line of Gesco International.  GESCO,
best known for innovative silicone catheters, gained an early distinctive
reputation for its focus on the special developmental needs of tiny,
critically-ill babies.





A class of catheters called umbilical
vessel catheters (UVCs) are specially designed for administering vital
medications and fluids immediately following birth through the infant’s
umbilical vessel into the inferior vena cava.  Because of the
neonate’s small size and lack of vascular development, there is no better access
to vital organs.  The catheters are also called umbilical artery
catheters (UACs) when placed in one of the umbilical arteries to measure blood
pressure or monitor metabolic processes through blood analysis.  In
developing its UMBILI-CATHTM product line, Gesco pioneered the use of soft,
biocompatible silicone catheters, helping to reduce the number of insertions
required as well as other complications associated with invasive
applications.  UTMD has expanded the UVC product line to include
catheters made from a proprietary thermosensitive polyurethane (Tecoflex®) that
offers many of the flexibility and biocompatibility advantages of silicone after
insertion, with the greater rigidity of polyurethane preferred by many
clinicians for insertion. In addition, GESCO provides a convenient
catheterization procedure tray of implements and supplies necessary to place UVC
catheters, as well as perform other similar procedures.





The
primary distinction of GESCO products is that they were developed with the
special needs of the neonate in mind, not just cut-down or smaller versions of
adult devices.  For example, in the case of invasive catheters, the
introducer, the soft rounded distal tip, mode of securing to the patient after
insertion to avoid migration, luer-locking hub with minimal dead space, number
of lumens, catheter radiopaque striping for visualization, variations in
catheter lengths and diameters and special packaging are all features specially
designed for neonates.  UTMD continues to modify product features to
incorporate current neonatal nurse practitioner preferences.


3





The soft, biocompatible silicone
catheter concept had important advantages in other applications including
peripherally inserted central venous catheters (PICC lines), enteral feeding
tubes, urinary drainage catheters, and chest drainage tubes.  GESCO
developed and marketed initial versions of all of these neonatal
products.  In order to keep pace with the trend of caring for smaller
babies, UTMD has added smaller diameter versions of its URI-CATH® and
NUTRI-CATH® products. At the request of customers who prefer a stiffer catheter
for insertion, UTMD added a Tecoflex polyurethane oral-connection only
Nutri-Cath series in 2009.





In 2000, UTMD gained FDA premarketing
clearance of a new PICC family of products specifically designed to minimize
trauma to the critically ill neonate, named PICC-NATE®.  The PICC-Nate
product line was designed with the input of experienced neonatal nurse
practitioners for use as a long-term indwelling catheter system for single-use,
therapeutic central venous infusion of drug solutions, blood products or other
fluids and for blood sampling.  The soft, strong silicone PICC-Nate
comes in two diameter sizes and two hub configurations.  In early
2003, UTMD added a Tecoflex polyurethane version that offers many of the
flexibility and biocompatibility advantages of silicone after insertion, with
the greater rigidity of polyurethane preferred by many clinicians for
insertion.





In 2006, UTMD developed a unique
enteral feeding-only extension set named NUTRI-LOK® that addresses important
safety risks in the NICU – inadvertent connections with IV lines and inadvertent
disconnections of components of the system spanning the dispensing container
through the infusion catheter.  NUTRI-LOK, patent pending, was
launched to the market in January 2007.  In October 2007, UTMD added
dispensing syringes with interlocking connectors to its NUTRI-CATH/NUTRI-LOK
family of devices.  In 2008, UTMD expanded the NUTRI-LOK system with
specialty extension sets for GI tubes and for continuous connection to a fluid
pump. In 2009, UTMD added a Kangaroo bag for larger feeds along with other
NUTRI-LOK accessories.





In 2006, UTMD completed the
replacement of all DEHP plasticizer PVC materials in its Gesco product line that
may come in contact with neonatal patients, addressing another evolving safety
concern related specifically to the possible maldevelopment of male
neonates.





Other GESCO specialty products include
a disposable peritoneal dialysis set that is a pre-assembled, sterile, closed
system, called DIALY-NATE®;  a patented silicone oral protection
device used to prevent palatal soft tissue injury by orotracheal tubes, called
PALA-NATE®; and a lumbar sampling kit with a tiny, specially-beveled needle for
obtaining cerebral spinal fluid samples, called MYELO-NATE®.





GESCO’s first patented product,
HEMO-NATE®, is a disposable filter designed to remove microaggregates from
stored blood prior to transfusion into a neonate where any deficiency can have
an overwhelmingly negative impact on a neonate’s chances for survival, given an
under-developed vasculature and small total blood volume.  In 2001,
UTMD introduced a new filter and an improved blood bag spike for Hemo-Nate, and
a needleless version.





In 2010, UTMD will continue to improve
and expand its neonatal product line, seeking to reinforce a reputation as
having the most developmentally-friendly NICU specialty products in the medical
device industry.  In addition to products already offered and being
developed internally, UTMD will look to continue to expand sales through
international distribution arrangements, and through selective complementary
product acquisitions.





Gynecology /Urology
/Electrosurgery:


LETZ®
System


The LETZ System (loop excision of the
transformation zone) is used to excise cervical intraepithelial neoplasia (CIN)
and other lower genital tract lesions related to human papilloma virus (HPV)
infections.  The electrosurgery procedure with hemostasis has become
the standard of care for HPV cervical infection treatment, replacing cold knife
scalpel, laser and cryotherapy procedural approaches because it is economical,
safe, effective, quick and easy to perform, has fewer potential side effects,
and requires little physician training.  A major incentive for
performing the LETZ procedure is that it may be performed using local anesthetic
in a physician's office, eliminating the time and expense of hospital or
surgical center admittance.  Most importantly clinically, in contrast
to laser (tissue ablation) and cryotherapy (freezing of tissue), LETZ provides a
fine tissue specimen for pathological assessment.


4





UTMD’s LETZ System includes patented
disposable electrodes, the patented FINESSE® electrosurgical generator, and
other miscellaneous components.  A disposable loop electrode used to
excise the tissue specimen is a pencil-like tube with a thin tungsten wire loop
attached.  The loop is available in varying sizes and includes a
patented Safe-T-Gauge® that can be positioned so the physician can accurately
colposcopically monitor the amount of tissue being excised. Excising too much
tissue can compromise fertility and result in premature birth. UTMD continues to
augment its specialty electrodes.  For example, the Company introduced
a patented conization electrode for deep endocervical disease called C-LETZ®,
designed to limit the removal of healthy tissue margins that might compromise
adequate cervical function.  UTMD also will continue to provide
adapters and other components which allow its market-leading specialty
electrodes to be used with other manufacturers’ electrosurgical
generators.  The FINESSE electrosurgical generator is the only
generator on the market that contains an integral smoke evacuator, required to
filter smoke and vapors that contain potentially hazardous particulate material
produced during electrosurgery.





As a result of the 2007 American
Society for Colposcopy and Cervical Pathology (ASCCP) revised guidelines for the
treatment of CIN, which advised greater monitoring of lower grade lesions in
lieu of surgical treatment, UTMD observed approximately a 10% decline in use of
LETZ electrodes from a consistent gynecology customer base.  The
effect of the new guidelines now seems to have stabilized.





FINESSE®
Generator; Specialty Loop, Ball, and Needle Electrodes; FILTRESSE® Evacuator;
Other Specialty Electrodes; Other Supplies and Gynecologic Tools.


UTMD has FDA clearance to market its
electrosurgical system and tools for use in general surgery applications,
including dermatology, plastic surgery and otolaryngology.  In 2002,
UTMD introduced a product line of ultra-fine tipped microdissection needles,
called OptiMicroTM Needles.  These electrosurgical needles are
particularly useful in small-scale plastic and reconstructive surgery
applications.  In 2009, UTMD added extended length OptiMicro needle
versions useful in certain head and neck procedures. FILTRESSE is a stand-alone
surgical smoke filtration system that combines high filtration efficiency, low
cost and convenient use in a surgical office setting. Other electrosurgery tools
and accessories include disposable electrosurgical pens, dispersive pads,
footswitches, filter packs, speculums, retractors, forceps, tenacula and
hooks.  UTMD acquired the distribution rights to a unique reusable
four-way expander system which facilitates access to, and visualization of, the
cervix, eliminating the need for less effective specula and lateral
retractors.  In 2007, UTMD developed OptiSpec®, a patented
ultra-bright light for cervical visualization without physician distraction
during exams, pap smears and other vaginal procedures requiring direct cervical
visualization without the use of a colposcope. In late 2009, UTMD entered into a
distribution agreement for the CompuMed anesthesia injection system for
providing computer-controlled, accurate, and pain-free injection of Lidocaine in
LETZ procedures.





EPITOME®


EPITOME is a patented electrosurgical
scalpel which delivers precise performance in incision and excision with
hemostasis while minimizing thermal side effects.  Where rapid yet
precise dissection of dense tissue is necessary, such as in mammaplasty or
abdominoplasty, UTMD believes that EPITOME has no close
substitute.  Furthermore, an independent study concludes that the
EPITOME scalpel provides a significant improvement over older devices in wound
healing and patient comfort.  EPITOME allows a rapid incision without
countertraction, yielding limited morbidity, less post-surgical pain and
cosmetically superior results.   EPITOME is useful where
minimization of thermal tissue injury is important but control of bleeding
needed.  A patented bendable version of EPITOME with a smaller active
electrode was introduced in 1998.  Designed to significantly reduce
the chance of tissue burns due to inadvertent electrode contact and where a
smaller, bent scalpel tip is needed, the bendable EPITOME is of particular
value, e.g., to thoracic surgeons in harvesting the internal mammary artery
during coronary artery bypass surgery, as well as to otolaryngologists for
tonsillectomies or uvulapalatalplasties.





LIBERTY®
System


LIBERTY is a device for the
conservative treatment and effective control of urinary incontinence in
women.  UTMD believes that LIBERTY is the easiest-to-use, most cost
effective incontinence treatment available that yields a therapeutic effect, not
just a cover-up. LIBERTY consists of a battery operated electrical stimulation
unit and an intravaginal electrode probe.  This physiotherapy
technique, which can be done in the privacy of the home, involves passive
strengthening of the periurethral muscles.  Pulsed, low voltage, high
frequency current is applied primarily to the pudendal neuromuscular tissue
causing the pelvic area muscles to contract, leading to better muscle
tone.  Because electrical stimulation has no known adverse side
effects, LIBERTY provides women suffering from mild to moderate incontinence an
effective, lower cost and lower risk alternative to more traumatic treatments
such as surgery and drug therapy.


5





PATHFINDER
PLUSTM


PATHFINDER PLUS is a proprietary
endoscopic irrigation device that allows a uro/gyn surgeon to precisely
irrigate, clearing the visual field, with the same hand that controls the
endoscope, eliminating the need for a separate assistant to irrigate without
visualization.  An example of a procedure where Pathfinder has found
success is ureteroscopic stone ablation.





ENDOCURETTETM


In cooperation with Mayo Clinic, UTMD
developed an advanced curette for uterine endometrial tissue sampling in the
doctor’s office.  The sampling procedure is intended primarily to rule
out precancer or cancerous change of the uterus in premenopausal women with
abnormal uterine bleeding, or women with postmenopausal bleeding.  The
device is part of a class of catheters designed to be used without dilitation of
the cervix and without general anesthetic.  The inherent weakness of
this type of device, which is related to its small size, is that it may not
remove enough tissue of the endometrium for an accurate histologic assessment,
in contrast to a more invasive D&C hospital procedure.  The
patented tip of the EndoCurette was designed to obtain a more thorough tissue
specimen without the need for dilitation, and without an increase in patient
discomfort.





TVUS/HSG-CathTM


In order to further assess persistent
abnormal or dysfunctional uterine bleeding and other suspected abnormalities of
the uterus, or as a next step after endometrial tissue sampling with an
EndoCurette, gynecologists are increasingly utilizing transvaginal ultrasound
imaging of the uterus.  UTMD’s TVUS/HSG-Cath was designed to provide
effective cervical occlusion that allows distention of the uterus to
differentiate anterior and posterior endometrium, among other irregularities,
together with minimal visual obstruction of the uterus near the internal
os.  In addition, the TVUS/HSG-Cath may be used in
hysterosalpingography radiographic procedures to assess the patency of fallopian
tubes.  A patent has been filed on the design of the TVUS/HSG-Cath,
which was released for marketing in October 2007.





LUMIN®


LUMIN® is a patented gynecological
tool developed by UTMD for reliably and safely manipulating the uterus in
laparoscopic procedures.  LUMIN combines the strength, range of motion
and versatility of the higher end reusable instruments with the lower cost and
cleanliness of the inexpensive less functional disposable instruments presently
on the market, while at the same time reducing the number of tools needed to
move and secure the uterus.





Blood
Pressure Monitoring:


DELTRAN®
Disposable Pressure Transducer (DPT)


In pressure monitoring, a transducer
is used to convert physiological (mechanical) pressure into an electrical signal
that is displayed on electronic monitoring equipment.  UTMD developed,
patented and is now distributing its disposable transducer as a stand-alone
product, and as a component in sterile blood pressure monitoring kits through
direct representatives and other medical companies in the U.S., as well as
independent distributors and other medical device companies
internationally.





The Company believes that the DELTRAN
DPT which it designed over twenty years ago (original patents have expired), and
currently manufactures, remains the standard in terms of accuracy, reliability
and ease of use.  UTMD has an automated assembly line which allows the
Company to effectively compete with larger suppliers on the basis of consistent
quality and low manufacturing costs.  Introduced in 1998, the DELTRAN
PLUS provides a closed system for blood sampling, without the use of needles,
reducing the risk of an unwanted infection for both the patient and the
practitioner.  In 2009, in conjunction with its other NICU devices,
UTMD continued to configure neonatal Deltran custom kits which satisfy the
special needs of conserving limited blood volume and protecting the neonate from
infection.


6





Pressure
Monitoring Accessories, Components and Other Molded Parts.


Components included in blood pressure
monitoring kit configurations include flush devices, stopcocks, fluid
administration sets, caps, pressure tubing, interface cables and
organizers.  The Company sells similar components designed for other
medical device company applications which incorporate UTMD’s technologies and
designs.  DELTA-CALTM is a calibration device used to check proper
functioning of an arterial pressure system.  In addition, UTMD sells
plastic molded parts on a subcontract basis to a number of medical and
non-medical device companies.  In addition, partly as a result of its
excellent quality system and ISO13485 certification, UTMD performs subcontract
assembly, testing and packaging of components that are proprietary to other
medical device firms.  UTMD believes that this practice helps better
utilize its investment in fixed plant and equipment, and spreads overhead costs
resulting in better profit margins on finished device sales.





MARKETING and
COMPETITION





UTMD divides its sales into three
categories: 1) “domestic direct sales” which are sales to U.S. end user
customers directly from UTMD or through medical supply distributors, 2)
“domestic OEM sales” which are component sales to other companies in the U.S.
where products are packaged and resold as part of another company’s finished
product offerings and 3) “international sales” which are finished device and
component sales to entities outside the U.S.





1)  Domestic direct
sales.


For domestic direct sales, which in
2009 represented 66% of total consolidated worldwide sales, marketing efforts
are complex and fragmented.  UTMD’s marketing focus is with clinicians
who take responsibility for obtaining optimal patient care outcomes, primarily
through clinical meetings and trade shows.  In competitive bidding
processes, UTMD works primarily with administrators who are responsible for
hospital purchasing decisions.





UTMD competes primarily on the basis
of improved patient safety and reliable device performance in the hands of a
trained clinician.  A number of UTMD’s devices are strong brands
because they are well-recognized by clinicians as clinically different and have
been in use for decades.  UTMD’s broad offering of finished devices is
comprised of dozens of specialty device types.  Although there may be
only a few competitors for each type, in the aggregate UTMD has dozens of U.S.
medical device competitors.  There are at least two competitors with
significant market share for each of UTMD’s device types.





As a general rule, because of UTMD’s
differences in design and manufacturing reliability, competitors’ devices
represent substitutes rather than equivalent devices.  The Company’s
primary marketing challenge is to keep its customers focused on those
differences and their important clinical benefits.  In recent years,
UTMD’s access to hospital clinicians has become increasingly restricted and the
involvement of clinicians in medical device purchasing decisions, which is
critical to the Company’s success, has declined.




2)  Domestic OEM
sales.


In 2009, UTMD sold components and
finished devices to 160 other companies in the U.S., representing about 6% of
total sales.  Ten percent of these customers represented 68% of UTMD’s
2009 OEM sales.  For over 30 years, the Company has utilized its
manufacturing capabilities and engineering know-how to produce high quality
components for other companies.  Because it is well-known in that
regard, UTMD does not actively market its OEM business.  UTMD’s
website, which lists its capabilities, is often the basis for contacts for new
OEM work.





Although there are hundreds of
manufacturers in the U.S. with similar manufacturing capabilities, UTMD’s
primary competition comes from East Europe, India and China device component
manufacturers which have much lower wage rate structures.  To the
extent that the U.S. Dollar gains strength in any period of time against foreign
currencies, UTMD’s ability to be cost-competitive with foreign manufacturers is
additionally diminished.





3)  International
sales.


With a few exceptions, UTMD’s
international sales are to other companies and distributors, not to clinical
users.  UTMD relies on those third party representatives to market its
products in their geographic territories.  In 2009, sales to 324
international customers represented 28% of total sales.


7





UTMD’s marketing efforts focus on
soliciting new distribution partners in geographic areas where it lacks adequate
representation.  UTMD’s website provides information that frequently
results in unsolicited contacts from foreign entities.  The Company
has thousands of competitors worldwide.  Because UTMD primarily
conducts its international business through third parties, it is not able to
identify which sales are for direct clinical users and which are
OEM.




DISTRIBUTION





An important success factor in the
current healthcare industry is access to customers.  Although the U.S.
hospital supplier environment has been consolidating as a result of group
purchasing organizations (GPOs), or their equivalents, the financial
relationships and true benefits for hospitals has come under increased scrutiny,
both by hospitals’ managements themselves and by the government.  As a
potential positive factor to UTMD’s future performance, the increased scrutiny
may lead to an understanding consistent with UTMD’s belief that hospitals are
not currently saving money under the GPO contracts.





In addition, the longer term overall
cost of care will continue to increase, with quality of care lower, as
innovative suppliers are excluded from participating in the marketplace as a
result of unnecessary regulatory and other administrative
burdens.  The length of time and number of administrative steps
required in evaluating new products for use in hospitals has grown substantially
in recent years.  As a potential negative factor to future
performance, as UTMD introduces new products it believes are safer and more
effective, it may find itself excluded from certain customers because of the
existence of long term supply agreements for existing products.  UTMD
may also be unable to establish viable relationships with other medical device
companies that do have access to users but lack an interest in the Company’s
approach or demand too great a financial or administrative burden.





In the U.S., UTMD sells its products
through its own directly employed sales force and through selective independent
manufacturer representatives.  The direct representatives concentrate
on applications for UTMD products where customer training and support may be
important.  As of February 2010, the direct sales force is comprised
both of “outside” representatives operating remotely in specific geographic
areas, and “inside” representatives who operate primarily by telephone from
corporate offices.  Direct representatives are trained to understand
the medical procedures being performed within UTMD’s clinical
focus.  Through the use of its one-on-one contacts with physicians and
other clinical practitioners directly involved in patient care, the direct sales
force positions UTMD to gain market leadership with solutions to clinical
problems.  In addition to its direct representatives, UTMD utilizes
third party consulting clinical specialists to augment its customer training
programs.





When hospital customers request it,
UTMD provides its products through national distribution companies, also known
as Med/Surg distributors.  Sales to Med/Surg distributors currently
comprise about 10% of total domestic direct sales.  In contrast,
thirteen years ago, national distributors and independent stocking distributors
in the U.S. represented more than 65% of UTMD’s direct domestic Ob/Gyn and
Neonatal products business.





In
addition to the above traditional sales approaches, UTMD encourages customers to
take advantage of fast and easy online ordering at https://storefront.utahmed.com.
UTMD introduced this advanced “portal” website in 2006. It provides a convenient
and secure method for placing orders, allows the customer to easily monitor the
status of orders and shipments, simplifies the reordering process and gives
quick access to account information.





Additionally, UTMD sells component
parts to other companies for use with their product lines.  This OEM
distribution channel effort is simply maximizing utilization of manufacturing
capabilities that are otherwise needed for UTMD's primary business, and does not
compete with or dilute UTMD’s direct distribution and marketing
programs.





Internationally, the Company sells its
products through over 300 regional distributors and OEMs (other medical device
manufacturers and/or distributors).  The international business is
driven by the initiative and resourcefulness of those independent
distributors.  UTMD’s Internet website www.utahmed.com
is a frequent conduit for international customer inquiries.


8





NEW PRODUCT
DEVELOPMENT





New product development has been a key
ingredient to UTMD’s market identity.  Product development takes three
interrelated forms: 1) improvements, enhancements and extensions of current
product lines in response to clinical needs or clinician requests, 2)
introduction of new or augmented devices that represent a significant
improvement in safety, effectiveness and/or cost of care, and 3) acquisitions of
products or technology from others.  Manufacturing process development
is an equally important aspect that cannot be separated from the successful
design and development of new products.





Because of UTMD’s reputation as a
focused product developer, its financial strength and its established clinician
user base, it enjoys a substantial inflow of new product development
ideas.  Internal development, joint development, product acquisitions
and licensing arrangements are all included as viable options in the
investigation of opportunities.  Only a small percentage of ideas
survive feasibility screening.  For internal development purposes,
projects are assigned to a project manager who assembles an interdisciplinary,
cross-functional development team.  The team’s objective is to have a
clinically acceptable, manufacturable and FDA released product ready for
marketing by a specific date.  Approximately ten projects on the
average, depending on the level of resources required, are underway at UTMD at
any given time.  More than 50% of assigned projects do not succeed in
attaining a product that meets all of the Company’s criteria.  In
particular, this includes a product that is highly reliable, easy to use,
cost-effective, safe, useful and differentiated from the competition. Once a
product is developed, tooled, fully tested and cleared for marketing by the FDA,
there remains a reasonable probability it cannot be successfully marketed for
any number of reasons, not the least of which is being beaten to the market by a
competitor with a better solution, or not having access to users because of
limitations in marketing and distribution resources or exclusionary contracts of
GPOs.





UTMD’s current product development
projects are in three areas of focus: 1) labor & delivery, 2) neonatal
intensive care, and 3) specialized procedures for the assessment and treatment
of cervical/uterine disease.  Internal product development expenses
are expected to be in the range of 1-2% of sales in 2010.  In 2009,
2008 and 2007 respectively, new product development expenses were $361 (1.4% of
sales), $359 (1.3% of sales) and $382 (1.3% of sales).





EMPLOYEES





At December 31, 2009, the Company had
165 employees, and an additional six contract employees.  The contract
employees represent UTMD’s desire to provide handicapped persons additional work
opportunities, hired through the Utah state-supported Work Activity
Center.  The average tenure of UTMD’s employees is over eleven years,
which conveys an important benefit due to the level of training required to
produce consistently high quality medical devices.  The Company's
continued success will depend to a large extent upon its ability to retain
skilled employees.  No assurances can be given that the Company will
be able to retain or attract such employees in the future, although management
is committed to providing an attractive environment in which reliable, creative
and high achieving people wish to work.





None of the Company's officers or
directors is bound by restrictive covenants from prior employers that limit
their ability to contribute to UTMD’s programs.  All professional
employees sign a code of conduct and a confidentiality and non-compete agreement
as a condition of employment, and as consideration for receipt of stock option
awards and participation in the annual sales and management bonus
program.  All employees participate in contemporaneous
performance-based bonus programs.  None of the Company's employees is
represented by labor unions or other collective bargaining groups.





PATENTS, TRADEMARKS AND
TECHNOLOGY LICENSES





The Company owns or exclusively
licenses twenty-one unexpired patents, has four patents pending and is the
licensee of certain other technology.  There can be no assurance,
however, that patents will be issued with respect to any pending applications,
that marketable products will result from the patents or that issued patents can
be successfully defended in a patent infringement situation.  The
Company also owns twenty-five U.S. registered trademarks which have achieved
brand recognition.





The ability of the Company to achieve
commercial success depends in part on the protection afforded by its patents and
trademarks.  However, UTMD believes that the protections afforded by
patents and trademarks are less important  to  UTMD’s
business, taken as a whole,  than a medical device’s incremental
clinical utility, which may be dominated by a number of other factors including
relative cost, ease of use, ease of training/adoption, perceived clinical value
of different design features, risk of use in applicable procedures, the
reliability of achieving a desired outcome in the hands of different users and
market access to potential users.  In cases where competitors
introduce products that may infringe on UTMD’s technology, the Company has an
obligation to its shareholders to defend its intangible property to the extent
that it can afford to do so, and that it is material to the Company’s
success.  The Company must also defend itself when competitors allege
that UTMD may be infringing their technology.


9





As a matter of policy, UTMD has
acquired and will continue to acquire the use of technology from third parties
that can be synergistically combined with UTMD proprietary product
ideas.  During 2009, ongoing royalties included in cost of goods sold
were $2.  Other royalties have been previously paid as a lump sum, or
were incorporated into the price of acquisitions or into the cost of purchased
components which practice certain patents of third parties.  Also as a
matter of policy, UTMD licenses its proprietary technology to others in
circumstances where licensing does not directly compete with UTMD's own
marketing initiatives.  UTMD’s future financial performance may also
depend on the marketing ability of other companies that license UTMD’s
technology.  During 2009 the Company did not receive royalty income,
compared to royalty income of $450 received in both 2008 and 2007. The patents
expired in late 2008 under which the $450 annual royalty income of the previous
years was received.





GOVERNMENT
REGULATION





UTMD's products and manufacturing
processes are subject to regulation by the U.S. Food & Drug Administration
(“FDA”), as well as other regulatory bodies globally.  The FDA has
authority to regulate the marketing, manufacturing, labeling, packaging and
distribution of medical devices in the U.S.  In addition, requirements
exist under other federal laws and under state, local and foreign statutes that
may apply to the manufacturing and marketing of the Company's medical
devices.





All manufacturers of medical devices
must register with the FDA and list all medical devices produced by
them.   In addition, prior to commercial distribution of some
devices for human use, a manufacturer must file a notice with the FDA, setting
forth certain information regarding the safety and effectiveness of the device
that is acceptable in content to the FDA.





Devices
which are classified in Class I are subject only to the general controls
concerning adulteration, misbranding, good manufacturing practices, record
keeping and reporting requirements.  Devices classified in Class II
must, in addition, comply with special controls or performance standards
promulgated by the FDA.





All of UTMD’s present products are
unclassified, Class I or Class II devices.  The Company is in
compliance with all applicable U.S. regulatory standards including CFR Part 820,
the FDA Quality System Regulation (QSR) effective in 1997, also known as cGMPs
(current good manufacturing practices).





In 1994, UTMD received certification
of its quality system under the ISO9001/EN46001 standards (“ISO” stands for
“International Organization of Standardization”) which it maintained until
December 2003.  In October 2003, UTMD’s Utah facility was certified
under the more stringent ISO13485 standard for medical devices. UTMD’s Ireland
facility was certified under the concomitant ISO13488 standard.  In
July 2006, both facility ISO certifications were upgraded to the even more
stringent ISO13485:2003 standards, which continue to be
maintained.  UTMD remains on a continuous periodic audit schedule by
its independent notified body in order to stay current with international
regulatory standards, and retain its certification. The most recent audit was
conducted in January 2010. UTMD has received CE Mark certifications
(demonstrates proof of compliance with the European Community’s ISO standards)
for essentially all of its products.  The U.S. FDA QSR was developed
in harmony with the ISO standards.




SOURCES AND AVAILABILITY OF
RAW MATERIALS





Most of the components which the
Company purchases from various vendors are readily available from a number of
sources.  Alternative sourcing of various components is continually
underway.  Vendors are qualified by Corporate Quality Assurance. The
Company has a vendor quality monitoring program that includes routinely checking
incoming material for conformance to specifications, as required per written
procedures.


10





EXPORTS





UTMD continues to regard the
international marketplace as an important element of its growth
strategy.   UTMD is keenly aware that not only are international
markets different from the U.S. market, but also that each country has its own
set of driving influences that affects the dynamics of the nature of care given
and medical devices used.  In 1996 UTMD completed construction of a
manufacturing facility in Athlone, County Westmeath, Ireland.  The
facility offers a number of advantages: 1) from a marketing point of view,
better response to European Union customers, including a better understanding of
customer needs, less costly distribution and duty-free access to 500 million
patients; 2) from a regulatory point of view, faster new product introductions;
and 3) from a manufacturing point of view, reduced dependence on one
manufacturing site and increased capacity for existing U.S.
facilities.





Revenues from customers outside the
U.S. in 2009 were $7,291 (28% of total sales), compared to $8,668 (31% of total
sales) in 2008 and $8,576 (30% of total sales) in 2007.  International
sales in 2009 declined $1,377 or 16% compared to 2008.  This was due
primarily to the 2009 decline of $1,588 in sales to its previously largest
international customer.





Blood pressure monitoring devices
represented 50% of 2009 international sales, compared to 58% in both 2008 and
2007.  International Ob/Gyn and neonatal product sales were $3,614 in
2009, compared to $3,612 in 2008 and $3,586 in 2007.  For financial
information by geographic area, please see notes 1, 5, 8 and 10 to the
Consolidated Financial Statements.





BACKLOG





“Backlog” is defined as orders
received and accepted by UTMD which have not shipped yet.  As a
supplier of primarily disposable hospital products, the nature of UTMD’s
business requires fast response to customer orders.  Virtually all
direct shipments to end users are accomplished within a few days of receipt of
customer purchase orders.  Consequently, UTMD’s backlog at any point
in time is comprised mainly of orders from OEM and international customers,
which purchase in larger quantities at less frequent
intervals.  Backlog shippable in less than 90 days was $589 as of
January 1, 2010, $685 as of January 1, 2009 and $823 as of January 1,
2008.  The lower backlog at the beginning of 2010 reflects a lack of
beginning backlog from UTMD’s largest international customer in
2008.





SEASONAL
ASPECTS





The Company's business is generally
not affected by seasonal factors.





PRODUCT LIABILITY RISK
MANAGEMENT





The risk of product liability lawsuits
is a negative factor in the medical device business because devices are
frequently used in inherently risky situations to help physicians achieve a more
positive outcome than what might otherwise be the case.  In any
lawsuit against a company where an individual plaintiff suffers permanent
physical injury, a possibility of a large award for damages exists whether or
not a causal relationship exists.  However, no such damages have been
awarded against UTMD in its 31 year history.





UTMD is self-insured for product
liability risk and reserves funds against its current performance on an ongoing
basis to provide for its defense should any lawsuits be filed.  The
best defense the Company believes that it has is the consistent conformance to
specifications of its proven safe and effective products.  Over the
time span of the last seventeen years, UTMD has been named as a defendant, along
with each attending physician and hospital, in four lawsuits which involved a
patient injury.  All four were related to operative vaginal deliveries
where a UTMD VAD birthing cup or hand pump was used by the
surgeon.  The VADS devices in all four cases did conform to
specifications.  UTMD was ultimately dismissed as a defendant in all
of the lawsuits, and legal costs were not material to
performance.  During the referenced seventeen year period of time, in
which more than 20 million UTMD finished devices were used, no other UTMD
product was the subject of a patient injury which resulted in a
lawsuit.  However, UTMD was named as the defendant in one other
lawsuit regarding the use of its endometrial biopsy device where there was no
evidence of patient injury. The lawsuit was settled for an immaterial amount to
avoid the diversion of management time and substantial costs of litigation, even
though UTMD was confident that the case was without merit.  In the
current tort system in the U.S., frivolous product liability cases do get filed
where attorneys calculate that a company will find it cheaper to settle for some
nominal amount in lieu of substantial defense costs of going to
court.


11





FORWARD LOOKING
INFORMATION





This report contains certain
forward-looking statements and information relating to the Company that are
based on the beliefs of management as well as assumptions made by management
based on information currently available.  When used in this document,
the words “anticipate,” “believe,” “project,” “estimate,” “expect,” “intend” and
similar expressions, as they relate to the Company or its management, are
intended to identify forward-looking statements.  Such statements
reflect the current view of the Company respecting future events and are subject
to certain risks, uncertainties and assumptions, including the risks and
uncertainties stated throughout the document.  Although the Company
has attempted to identify important factors that could cause the actual results
to differ materially, there may be other factors that cause the forward
statement not to come true as anticipated, believed, projected, expected, or
intended.  Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may differ materially from those described herein as anticipated, believed,
projected, estimated, expected or intended.  Financial estimates are
subject to change and are not intended to be relied upon as predictions of
future operating results, and the Company assumes no obligation to update or
disclose revisions to those estimates.





ITEM
1A – RISK FACTORS


Legislative healthcare
reform could add a substantial excise tax, increase administrative costs and
decrease revenues:
 The
healthcare “reform” initiatives of the current federal government administration
in the United States make the U.S. medical device marketplace unpredictable,
particularly for the thousands of small medical device manufacturers including
UTMD that do not have the overhead structure that the large companies can
afford.  To the extent that the government places additional burdens
on small medical device companies in the form of additional taxes or additional
bureaucratic paperwork, the result is likely to be negative for UTMD’s ability
to effectively compete and support continued investments in new product
development and marketing of specialty devices.
 
 Increasing regulatory
burdens may result in significant loss of revenue, unpredictable costs and loss
of management focus on helping the Company thrive:
 The
Company’s experience in 2001-2005, when the FDA sought to shut it down
highlights the ongoing risk of being subject to a regulatory environment which
can be arbitrary and capricious.  The risks associated with such a
circumstance relate not only to the substantial costs of litigation in millions
of dollars, but also loss of business, the diversion of attention of key
employees for an extended period of time from new product development and
routine quality control management activities, and a tremendous psychological
and emotional toll on employees.
 
 Since the FDA reserves to itself the
interpretation of which vague industry standards comprise law at any point in
time, it is impossible for any medical device manufacturer to ever be confident
that it is operating within the Agency’s version of the law.  The
result is that companies, including UTMD are considered guilty prior to proving
their innocence.  New premarketing submission rules may increase
development costs and result in delays to revenues from new or improved
products.
 
 The growth of Group
Purchasing Organizations adds non-productive costs, typically weakens the
Company’s marketing and sales efforts and may result in lower
revenues:
 GPOs,
theoretically acting as bargaining agents for member hospitals, but actually
collecting revenues from the companies that they are negotiating with, have made
a concerted effort to turn medical devices that convey special patient safety
advantages and better health outcomes, like UTMD’s, into commodities. GPOs have
been granted an antitrust exemption by the U.S. Congress. Otherwise, their
business model based on “kickbacks” would be a violation of
law.  These bureaucratic entities do not recognize the overall cost of
care as it relates to safety and effectiveness of devices, and they create a
substantial administrative burden that is primarily related to collection of
their administrative fees.
 
 As the healthcare industry
becomes increasingly bureaucratic it puts smaller companies like UTMD at a
competitive disadvantage:
 An aging
population and an extended economic recession are placing greater burdens on
healthcare systems, particularly hospitals.  The length of time and
number of administrative steps required in adopting new products for use in
hospitals has grown substantially in recent years.  Smaller companies
like UTMD typically do not have the administrative resources to deal with broad
new administrative requirements, resulting in either loss of revenue or
increased costs.  As UTMD introduces new products it believes are
safer and more effective, it may find itself excluded from certain customers
because of the existence of long term supply agreements for preexisting
products, particularly from competitors which offer hospitals a broader range of
products.  Restrictions used by hospital administrators to limit
clinician involvement in device purchasing decisions makes communicating UTMD’s
clinical advantages much more difficult.
 12




A product liability lawsuit
could result in significant legal expenses and a large award against the
Company:
 UTMD’s
devices are frequently used in inherently risky situations to help physicians
achieve a more positive outcome than what might otherwise be the
case.  In any lawsuit where an individual plaintiff suffers permanent
physical injury, the possibility of a large award for damages exists whether or
not a causal relationship exists.
 
 The Company’s reliance on
third parties to market its products overseas results in less predictable
international revenues:
 UTMD’s
international distributors have varying expertise in marketing and selling
specialty medical devices.  They also sell other devices that may
result in less focus on the Company’s products.
 
 The loss of one or more key
employees could negatively affect UTMD performance:
 In a
small company with limited resources, the distraction or loss of key personnel
at any point in time may be disruptive to performance.  The Company’s
benefits programs are key to recruiting and retaining talented
employees.  The rapid increase in UTMD’s employee healthcare plan
costs, for example, may cause the Company to have to reduce coverages which in
turn represents a risk to retaining key employees.





ITEM
1B – UNRESOLVED STAFF COMMENTS





None





ITEM
2 - PROPERTIES





Office
and Manufacturing Facilities.


At the beginning of 2010, the
Company's operations were located in a 92,000 square foot facility in Midvale,
Utah, a suburb of Salt Lake City, a 20,000 square foot facility in Redmond,
Oregon and a 77,000 square foot facility in Athlone, County Westmeath,
Ireland.  The Company is in the process of expanding its Midvale
facility by 10,000 square feet which will allow it to consolidate its Oregon
molding operations and let the lease on the Oregon facility expire on May 31,
2010. After consolidation, UTMD will own all of its property and facilities,
with the exception of a long-term lease with 22 years remaining on one section
of its Midvale parking lot.





UTMD is a vertically-integrated
manufacturing company.  Capabilities include silicone and
plastics-forming operations including injection molding, insert and
over-molding, thermoforming and extrusion; sensor production; manual and
automated assembly of mechanical, electrical and electronic components; parts
printing; various testing modalities; advanced packaging in clean room
conditions; and a machine shop for mold-making and fabrication of assembly tools
and fixtures.  Capabilities also include an R&D laboratory for
both electronic and chemical processes, software development resources,
communications and computer systems networked real time internationally, and
administrative offices.


13





ITEM
3 - LEGAL PROCEEDINGS





The Company may be a party from time
to time in litigation incidental to its business.  Presently, there is
no litigation for which the Company believes the outcome may be material to its
financial results.




ITEM
4 - RESERVED









14


PART II





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





Market
Information.


UTMD's common stock trades on the
NASDAQ Global Market (symbol:UTMD).  The following table sets forth
the high and low sales price information as reported by NASDAQ for the periods
indicated:





2009
            
            
            2008High
            
            
            Low
            
            
            High
            
            
            Low1st
      Quarter
            
            $
            24.90
            
            
            $
            21.31
            
            
            $
            32.35
            
            
            $
            27.132nd
      Quarter
            
            
            26.87
            
            
            
            20.14
            
            
            
            30.05
            
            
            
            26.803rd
      Quarter
            
            
            30.01
            
            
            
            26.11
            
            
            
            30.01
            
            
            
            24.964th
      Quarter
            
            
            30.21
            
            
            
            27.80
            
            
            
            29.77
            
            
            
            20.04





Stockholders.


The approximate number of beneficial
stockholders of UTMD’s common stock as of March 5, 2010 was 2,200.





Dividends.


The following sets forth cash
dividends declared or paid during the past two years:





Record Date
            
            
            Payable Date
            
            Per Share AmountDecember
      14, 2007
            
            
            January
      3, 2008
            
            $
            0.225March
      14, 2008
            
            
            April
      3, 2008
            
            
            0.225June
      16, 2008
            
            
            July
      3, 2008
            
            
            0.225September
      15, 2008
            
            
            October
      3, 2008
            
            
            0.225December
      16, 2008
            
            
            December
      30, 2008
            
            
            0.23March
      13, 2009
            
            
            April
      3, 2009
            
            
            0.23June
      16. 2009
            
            
            July
      6, 2009
            
            
            0.23September
      16, 2009
            
            
            October
      5, 2009
            
            
            0.23December
      16, 2009
            
            
            December
      30, 2009
            
            
            0.2352008
      total paid
            
            
            
            
            $
            1.132009
      total paid
            
            
            
            
            $
            0.925





Issuer
Purchases of Equity Securities.


UTMD did not purchase any of its own
securities during fourth quarter 2009.


15


ITEM
6 - SELECTED FINANCIAL DATA


Dollar
amounts are in thousands, except per share data.





The
following selected consolidated financial data of UTMD and its subsidiaries for
the five years ended December 31, 2009, are derived from the audited financial
statements and notes of UTMD and its subsidiaries, certain of which are included
in this report.  The selected consolidated financial data should be
read in conjunction with UTMD’s Consolidated Financial Statements and the notes
included elsewhere in this report.





Year
      Ended December 312009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Net
      Sales
            
            $
            25,916
            
            
            $
            27,782
            
            
            $
            28,502
            
            
            $
            28,753
            
            
            $
            27,692Net
      Income
            
            
            6,258
            
            
            
            7,205
            
            
            
            7,905
            
            
            
            8,168
            
            
            
            7,547Earnings
      Per Common Share (Diluted)
            
            
            1.72
            
            
            
            1.86
            
            
            
            1.98
            
            
            
            2.02
            
            
            
            1.80Total
      Assets
            
            
            41,754
            
            
            
            38,821
            
            
            
            45,986
            
            
            
            44,187
            
            
            
            41,642Working
      Capital
            
            
            24,472
            
            
            
            21,511
            
            
            
            26,767
            
            
            
            25,030
            
            
            
            22,230Long-term
      Debt
            
            
            1,403
            
            
            
            1,828
            
            
            
            3,689
            
            
            
            4,383
            
            
            
            4,883Cash
      Dividends Per Common Share
            
            
            0.925
            
            
            
            1.13
            
            
            
            0.87
            
            
            
            0.74
            
            
            
            0.61





Quarterly Data for 2009First Quarter
            
            
            Second Quarter
            
            
            Third Quarter
            
            
            Fourth QuarterNet
      Sales
            
            $
            6,445
            
            
            $
            6,305
            
            
            $
            6,673
            
            
            $
            6,493Gross
      Profit
            
            
            3,500
            
            
            
            3,335
            
            
            
            3,500
            
            
            
            3,455Net
      Income
            
            
            1,592
            
            
            
            1,504
            
            
            
            1,615
            
            
            
            1,547Earnings
      Per Common Share (Diluted)
            
            
            .44
            
            
            
            .42
            
            
            
            .44
            
            
            
            .42Quarterly Data for 2008First Quarter
            
            
            Second Quarter
            
            
            Third Quarter
            
            
            Fourth QuarterNet
      Sales
            
            $
            6,890
            
            
            $
            7,115
            
            
            $
            7,181
            
            
            $
            6,596Gross
      Profit
            
            
            3,750
            
            
            
            3,921
            
            
            
            3,937
            
            
            
            3,410Net
      Income
            
            
            1,891
            
            
            
            1,917
            
            
            
            1,820
            
            
            
            1,577Earnings
      Per Common Share (Diluted)
            
            
            .48
            
            
            
            .49
            
            
            
            .47
            
            
            
            .42




16


ITEM 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Dollar
amounts are in thousands except per-share amounts and where noted.





The
following comments should be read in conjunction with the accompanying financial
statements.





Overview


Despite a 7% decline in consolidated
sales and eps in 2009, UTMD continued excellent overall profitability. The
profitability allowed the Company to achieve its ROE objective, and continue
UTMD’s consistent long-term program of providing excellent shareholder returns
including payment of dividends and share repurchases.  Measures of the
Company’s liquidity and overall financial condition improved in 2009 on an
already strong condition at the end of 2008. For example, UTMD’s current ratio
(current assets to current liabilities) increased to 15, and its total debt
ratio (total liabilities to total assets) decreased to 9%.  Ending
days in accounts receivable were just 43, and A/R over 90 days from invoice date
were 2% of total receivables.




Consolidated global sales were down
$1,865.  Most of the decline was due to weaker international
business.  Whereas international sales increased at an annually
compounded rate of 9% for the previous four years, they were down 16% in
2009.  Sales in 2009 to UTMD’s largest international customer in 2008
were down $1,588, accounting for 85% of the net total sales
decline.  UTMD expects that a partial recovery in sales to this
international customer, based on orders already received in 2010, will allow
international sales to once again lead sales growth in
2010.  Notwithstanding, there are a number of significant risk factors
that may negatively impact UTMD’s international sales in 2010, with an
unpredictable magnitude: 1) the liquidity of UTMD’s trading partners, 2) the
strength and timing of economic recovery in overseas markets, 3) the value of
the U.S. Dollar in foreign exchange, 4) changes in U.S. government trade
policies and the resulting reactions of other governments, particularly if the
U.S. becomes more protectionist, and 5) changes in international regulatory
requirements and possible restrictions for medical devices, particularly in
China, among other factors.




UTMD’s Ireland subsidiary shipped 43% of
UTMD’s total international sales in 2009 compared to 46% in 2008. This
represented 12% of UTMD’s global sales in 2009, and created 4% of UTMD’s
consolidated earnings before income taxes (EBT).  This compares to 14%
of global sales and 8% of EBT in 2008.  After a year of coping with
excess resources, UTMD did reduce the size of its workforce in Ireland by 16%
near the end of 2009, which it believes, combined with higher sales in 2010,
will return UTMD Ireland profitability closer to 2008 results.




Domestic sales, comprised of domestic
OEM and domestic direct sales, declined $488 or about 3%.  The
domestic OEM sales were down because sales of molded components to customers
outside the medical device industry by UTMD’s Oregon facility were down
18%.  The Oregon OEM sales, which at about 1-2% of total sales have
been a small part of UTMD’s business, have been useful in covering the extra
overhead costs in Oregon.  UTMD’s Utah OEM sales in 2009 were up
4%.  The consolidation of the Oregon operations into Utah during the
first half of 2010 will lead to better U.S. manufacturing overhead absorption
and improved gross profit margins beginning later in
2010.   Domestic direct sales declined $461, also by
3%.  This was primarily due to a continued decline in sales of UTMD’s
flagship intrauterine pressure monitoring device used in L&D units of
hospitals, Intran
Plus.  Domestic Intran sales were down $494 or 10% compared to 2008.
There were three reasons for the decline: 1) lower utilization rates of IUPCs
which are used to actively manage vaginal births, as evidenced by higher
C-section rates in the U.S., 2) restrictive group purchasing organization (GPO)
contracts that require member hospitals to buy cheaper devices without regard
for physician preference or total costs of care including complications, and 3)
lower average selling prices for Intran Plus in response to a competitive
environment.  The last reason explained only a half percentage point
of the ten percent decline.




After noting that declining utilization
rates of specialty medical devices in U.S. hospitals may be a more permanent
phenomenon for the foreseeable future, UTMD also reduced its manufacturing
workforce in Utah by 6% in second half  2009. The financial benefit of
this Utah reduction began to be realized in gross profit margins in late 4Q
2009.  UTMD also increased its capital spending for manufacturing
tooling and equipment in 2009 by about $200 relative to 2008, which will help
lower manufacturing costs in 2010.


17




In response to restrictive GPO
practices, increasing hospital administration limitations on face-to-face
meetings with clinicians and changing medical device sourcing and ordering
practices, UTMD’s sales and marketing resources have been restructured to meet
the changing conditions.  As a result, operating expenses in 2009 were
less than 17% of sales, and will be similarly managed in 2010.





Net profits in 2009 were substantially
squeezed by $240 lower non-operating income compared to 2008, and a higher
income tax provision rate which was more than one and a half percentage points
of EBT (earnings before taxes) higher than in 2008.  The lower
non-operating income resulted primarily from lower interest rates on UTMD’s
excess cash deposits and lack of royalty income. The higher tax provision rate
was due primarily to a smaller portion of consolidated taxable income generated
in Ireland at lower income tax rates. Due to a slow economic recovery, UTMD
expects that its non-operating income may be even lower in 2010, but still
targets a net profit margin of about 24% of sales in 2010.





Productivity
of Assets and Working Capital.


a)  Assets.  Year-end
2009 total assets were $41,754 compared to $38,821 in 2008. The increase was due
primarily to a $3,231 increase in cash and investments provided by profitable
operations.  In 2009, UTMD repurchased 5,400 of its shares for $116
and paid $3,337 in dividends to shareholders.  In 2008, UTMD used its
cash to repurchase 320,900 of its shares for $7,792 and pay $4,329 in dividends
to shareholders.  2009 productivity of total assets (average total
asset turns = total sales divided by average total assets for the year) was 64%
compared to 66% in 2008.  Both years’ asset turns were diminished by
UTMD’s substantial cash-equivalent balances. Year-end 2009 and 2008 cash and
investment balances were $19,255 and $16,025, representing 46% and 42% of total
assets, respectively.  UTMD also used its cash generated in Ireland in
2009 to reduce the principle balance of the Ireland subsidiary loan by $425.
Excluding average cash and investment balances, average total asset turns were
1.1 in 2009 compared to 1.2 in 2008.  In 2010, total assets excluding
cash and investment balances are expected to remain less than annual sales,
which benefits return on average shareholders equity
(ROE).  Mitigating the increase in assets was a $361 decrease in
receivables due to lower sales activity and better A/R collections
performance.





Property, plant and equipment (PP&E)
assets are comprised of Utah, Oregon and Ireland manufacturing molds, production
tooling and equipment, test equipment, computer/communications equipment and
software and the Utah and Ireland facilities.  UTMD leases the Oregon
facility as a result of the 1997 CMI acquisition, and a portion of its Midvale,
Utah parking lot.  In 2009, net consolidated PP&E (depreciated
book value of all fixed assets) increased $6 as a result of $555 in
depreciation, capital expenditures of $466 and the effect of currency exchange
rates on PP&E in Ireland.  The net book value of PP&E in the
U.S. increased $21, and in Ireland decreased $15.  The year-end 2009
net book value (after accumulated depreciation) of consolidated PP&E was 32%
of actual acquisition cost.  Since UTMD’s PP&E is in good working
order and capable of supporting increased sales activity, the continued
productivity of fixed assets will remain a source of future
profitability.  In 2010, the Utah facility will be expanded to house
the transfer of Oregon equipment. As a result, new PP&E purchases are
expected to exceed depreciation of fixed assets by as much as $700.





Average 2009 inventory turns were 3.6
despite lower sales.  Net (after allowance for doubtful accounts)
year-end trade accounts receivable (A/R) balances decreased $292 or about 9%
while 2009 sales activity decreased 7%.  The resulting average days in
A/R on December 31, 2009 of 43 days, based on 4Q 2009 shipments, was down
significantly from 46 days at the end of 2008. This performance remained well
within management’s continuing objective of 55 days.  A/R over 90 days
from invoice date at year-end 2009 were 2% of total A/R, down from 3% at the end
of 2008.  The Company believes the older A/R will be collected or are
within its reserve balances for uncollectible accounts.





Working capital at year-end 2009 was
$24,472 compared to $21,511 at year-end 2008.  Both of those amounts
exceed UTMD’s working capital needs for internally financing growth in normal
operations. UTMD’s current ratio increased to 14.9 from 13.2 due to a $2,953
(13%) increase in current assets while current liabilities remained about the
same.  Cash and investments increased a combined $3,231after falling
$6,348 during 2008.  The primary difference was UTMD’s use of just
$116 in 2009 to repurchase its own shares, compared to $7,792 used during 2008
to repurchase shares.  Although the current ratio in 2010 may be
diminished by use of cash for share repurchases or an acquisition or other
substantial investment in PP&E, UTMD expects that current assets will
continue to be a healthy multiple of current liabilities.


18





Net (after accumulated amortization)
intangible assets, which are comprised of goodwill resulting from acquisitions
and the costs of obtaining patents and other intellectual property including
technology rights, were $7,388 at the end of 2009 compared to $7,415 at the end
of 2008. UTMD’s goodwill balance remained at $7,191. Under current GAAP,
goodwill is not expensed unless and until the market value of the acquired
entity becomes impaired. The three acquisitions of 1997, 1998 and 2004 continue
to be viable parts of UTMD’s overall business, representing 39% of total sales
in 2009 when including derivative new devices that ensued the acquisitions. UTMD
does not expect the current intangible value of goodwill associated with the
acquisitions to become impaired in 2010.  Purchases of other
intangibles of $8 in 2009 were offset by $34 in amortization expense. Net
intangible assets at the end of 2009 represented 18% of total assets compared to
19% at the end of 2008.





b)
Liabilities.  In 2009, UTMD’s total liabilities decreased $243
from the end of 2008.  The resulting 2009-ending total debt ratio was
9%.  Total liabilities decreased by 6% while total assets increased by
8%. The total debt ratio was 10% at the end of 2008. Current liabilities
remained about the same as at the end of 2008.  The Ireland subsidiary
note payable, which is payable in Euros, declined $426 in USD book value
compared to actual principal payments of $463.  The difference results
from currency exchange in the value of the USD compared to the Euro. In Euro
terms (all Euro amounts in this report are in thousands), the note payable
declined 22% from €1,485 at the end of 2008 to €1,158 at the end of
2009.  As a reminder to shareholders, the note was initiated in
December 2005 to finance repatriation of profits achieved in Ireland since 1996
through 2005 under The American Jobs Creation Act of 2004.  UTMD Ltd.
(Ireland) estimates that it will repay this note from profits generated by its
operations over the next three to four years.  In addition to
liabilities on the balance sheet, UTMD has operating lease and purchase
obligations described in note 7.






Results
of Operations.


a)    Revenues.  Global
consolidated sales in 2009 were $25,916, compared to $27,782 in 2008 and $28,502
in 2007.





Domestic sales were $18,625 in 2009,
compared to $19,113 in 2008 and $19,926 in 2007. UTMD divides its domestic sales
into two distribution categories: “direct sales” which are sales to end user
customers by UTMD’s direct sales force, independent commissioned sales reps,
specialty distributors and national hospital distribution companies, and “OEM
sales” which are component sales to other companies where products are packaged
and resold as part of another company’s finished product
offerings.  As a percentage of total domestic sales, direct domestic
sales were 92% in both 2009 and 2008, and 94% in 2007.  Therefore,
domestic OEM sales were 8% of total domestic sales in both 2009 and 2008, and 6%
in 2007.  Domestic direct sales represented 66% of global consolidated
sales in 2009, compared to 63% in 2008 and 66% in 2007.





International (foreign) sales in 2009
were $7,291 compared to $8,668 in 2008 and $8,576 in
2007.  International sales were 28% of global consolidated sales in
2009, 31% in 2008 and 30% in 2007.  Of the 2009 international sales,
42% were to customers in Europe compared to 55% in both 2008 and
2007.  Ireland operations (UTMD Ltd.) shipped 43% of international
sales (in USD terms) in 2009, compared to 46% in 2008 and 51% in
2007.  UTMD Ltd. trade shipments were down 16% in Euro terms, and down
21% in USD terms, in 2009 compared to 2008.





UTMD groups its sales into four general
product categories:  1) obstetrics, comprised of labor and delivery
management tools for monitoring fetal and maternal well-being, for reducing risk
in performing difficult delivery procedures and for improving clinician and
patient safety;  2) gynecology/ electrosurgery/ urology, comprised of
tools for gynecological procedures associated primarily with cervical/ uterine
disease including LETZ, endometrial sampling, transvaginal uterine sonography,
diagnostic laparoscopy, and other MIS procedures; specialty excision and
incision tools; conservative urinary incontinence therapy devices; and urology
tools;  3) neonatal critical care, comprised of devices that provide
developmentally-friendly care to the most critically ill babies, including
providing vascular access, enteral feeding, administering vital fluids,
maintaining a neutral thermal environment, providing protection and assisting in
specialized applications; and 4) blood pressure monitoring/ accessories/ other,
comprised of specialized components as well as molded parts sold on an OEM basis
to other companies.  In these four categories, UTMD’s primary revenue
contributors enjoy a significant market share and may have differentiated
product features protected by patents.


19





Global
revenues by product category:


2009
            
            
            %
            
            
            2008
            
            
            %
            
            
            2007
            
            
            %Obstetrics
            
            $
            6,543
            
            
            
            25
            
            
            $
            7,054
            
            
            
            25
            
            
            $
            8,473
            
            
            
            30Gynecology/
      Electrosurgery/ Urology
            
            
            6,220
            
            
            
            22
            
            
            
            6,157
            
            
            
            22
            
            
            
            6,143
            
            
            
            21Neonatal
            
            
            7,252
            
            
            
            27
            
            
            
            7,334
            
            
            
            27
            
            
            
            7,062
            
            
            
            25Blood
      Pressure Monitoring and Accessories*
            
            
            5,902
            
            
            
            26
            
            
            
            7,236
            
            
            
            26
            
            
            
            6,824
            
            
            
            24Total:
            
            $
            25,916
            
            
            
            100
            
            
            $
            27,782
            
            
            
            100
            
            
            $
            28,502
            
            
            
            100


*includes molded components sold to
OEM customers.





International
revenues by product category:


2009
            
            
            %
            
            
            2008
            
            
            %
            
            
            2007
            
            
            %Obstetrics
            
            $
            614
            
            
            
            7
            
            
            $
            572
            
            
            
            7
            
            
            $
            881
            
            
            
            10Gynecology/
      Electrosurgery/ Urology
            
            
            2,088
            
            
            
            25
            
            
            
            2,193
            
            
            
            25
            
            
            
            1,944
            
            
            
            23Neonatal
            
            
            912
            
            
            
            10
            
            
            
            847
            
            
            
            10
            
            
            
            761
            
            
            
            9Blood
      Pressure Monitoring and Accessories*
            
            
            3,677
            
            
            
            58
            
            
            
            5,056
            
            
            
            58
            
            
            
            4,990
            
            
            
            58Total:
            
            $
            7,291
            
            
            
            100
            
            
            $
            8,668
            
            
            
            100
            
            
            $
            8,576
            
            
            
            100


*includes molded components sold to
OEM customers.





As a
summary description of revenues in the above tables:





1.  Obstetrics.  The
$512 decline in total obstetrics (L&D) device sales in 2009 was primarily
the result of the restrictive effects of U.S. GPO administrative
agreements.  For example, GPO restrictions included a sole source contract
consummated by HealthTrust Purchasing Group (HPG) with a UTMD competitor for
IUPCs and VADS which took effect on September 1, 2007.  These
specialty catheters and surgical tools are clearly in the category of “clinician
preference products.”  The HPG sole source agreement violates the
mandate by the U.S. Senate Judiciary Antitrust Subcommittee in April 2002 that
GPOs only allow multi-source contracting for clinician-preference products, as
well as the ensuing “Healthcare Group Purchasing Industry Initiative” code of
ethics, of which HPG was a founding member. It also represented a violation of
HPG’s own code of ethics, which states in Section HPG.008, “No GPO should come
between hospital administration and their physicians when it comes to the choice
of medical devices needed to treat the patient.  To this end,
HealthTrust offers a complete line of contracts in these areas
[clinician-preference products] that provides substantial choice to our members
and their physicians.”  In the U.S., 2009 sales of Intran Plus
intrauterine pressure catheters (IUPCs) declined $494 and sales of CMI
vacuum-assisted delivery systems (VADS) declined $104. About 5% of the IUPC
decline resulted from lower prices.  The silver lining of this decline
is that the Company’s reliance on a single product is much less concentrated;
i.e., in 2009, U.S. IUPC sales were 16% of total sales compared to 2004 when
U.S. IUPC sales were 31% of total sales.





2.  Domestic gynecology/
electrosurgery/ urology (ES/gyn) product sales increased $168 (4%), while
International ES/gyn sales declined $105 (5%).  As a result of the
2007 American Society for Colposcopy and Cervical Pathology (ASCCP) revised
guidelines for the treatment of cervical intraepithelial neoplasia, which
advised greater monitoring of lower grade lesions in lieu of surgical treatment,
UTMD observed approximately a 10% decline in use of LETZ electrodes from a
consistent gynecology customer base.  The effect of the new guidelines
now seems to have stabilized.




3.  Neonatal critical care
device (NICU) sales increased $64 (8%) internationally and decreased $147 (2%)
in the U.S.  In the U.S., because products in this category are sold
to hospitals, sales are affected by GPO restrictions.  However,
because NICU devices are more diverse and lower volume than in L&D, and
because of the special nature of the patients, UTMD believes that clinicians
remain more heavily involved in product selection.  Therefore, U.S.
GPO administrative deals are less of a challenge in supplying specialty NICU
devices than for L&D.




4.  Blood pressure
monitoring and accessories (BPM).   U.S. BPM sales increased $44
(2%), while international BPM sales decreased $1,379 (27%). Sales in 2009 to
UTMD’s largest 2008 international customer were down by $1,588, representing
about 85% of UTMD’s total sales decline of $1,865.  Virtually all of
UTMD’s domestic OEM sales were included in the BPM category in
2009.  Domestic OEM sales decreased $38 (3%) compared to
2008.  This category includes molded components (some of which are not
related to medical devices) sold to other companies for use in their
products.  In contrast to the other product categories, international
sales of BPM devices comprise most (62% in 2009 and 70% in 2008) of UTMD’s BPM
sales.  UTMD’s BPM sales depend heavily on successful marketing by
international distributors and OEMs.  Due to a stronger US Dollar and
a general economic downturn, UTMD experienced slowing of international
distributor orders for BPM products in 2009.  Mainly because UTMD’s
largest 2008 international customer started ordering BPM kits again in late
2009, UTMD expects an increase in international BPM sales in
2010.


20





Looking forward to 2010, UTMD’s
improvement in domestic direct sales depends on its ability to obtain medical
staff involvement in purchasing decisions for UTMD’s “physician-preference”
products used in U.S. hospitals where administrators are making the product
decisions through the use of GPOs contracts awarded on bases which may not
adequately take into consideration the total cost of patient care, which
includes complication rates and longer term health outcomes.  An
important factor in UTMD’s ability to compete in this administratively
cumbersome environment is its continuing ability to develop devices that are
clearly differentiated on the basis of patient safety and better health
outcomes.  Excluding the possibility of acquisition of a new product
line with established sales, management projects overall revenues in 2010 about
the same as in 2009.  This assumes a continued decline in U.S.
hospital utilization rates of specialty medical devices and an increase in
international sales of about 3%.





b)  Gross
Profit.  UTMD’s 2009 gross profit, the surplus after
subtracting costs of manufacturing, inspecting, packaging, sterilizing and
shipping products from net revenues, was $13,789 compared to $15,018 in 2008 and
$15,788 in 2007.  Gross profit margins (GPMs), gross profits expressed
as a percentage of net sales, were 53.2% in 2009 compared to 54.1% in 2008 and
55.4% in 2007. The GPM in 2009 was lower for several reasons:


1)
Because many of UTMD’s manufacturing overhead expenses are relatively fixed in
order to preserve capabilities, the lower consolidated sales activity in 2009
had a higher overhead content.  UTMD did not reduce its experienced
workforce until the latter part of the year, hoping for an improvement in demand
by customers, particularly for Ireland and Oregon operations.  UTMD
maintains facilities and other manufacturing infrastructure well in excess of
its current needs, which will help improve GPM when sales do
increase.


2) The
Ireland subsidiary gross profits were disproportionately lower than total gross
profits because the largest loss of sales occurred in Ireland manufactured
devices. Adjustments in the workforce did not occur until December
2009.  Ireland subsidiary gross profits in Euros were €436 in 2009
compared to €821 in 2008 and €964 in 2007.  The associated GPMs were
19.5% in 2009, 30.9% in 2008 and 29.3% in 2007.


3)  Because
of competition and a number of long term fixed pricing agreements, UTMD had a
limited ability to increase its product prices in 2009, at the same time direct
labor and direct materials costs increased fairly substantially.





As a result of the transition expenses
of consolidating Oregon operations into Utah, continued pricing pressure by U.S.
hospitals and growth in sales coming primarily from lower margin international
business, UTMD does not expect to achieve expansion in its GPM until
2011.





UTMD utilizes OEM sales as a means to
help maximize utilization of its capabilities established to satisfy its direct
sales business.  As a general rule, prices for OEM sales expressed as
a multiple of direct variable manufacturing expenses are lower than for direct
sales because, in the OEM and international channels, UTMD’s business partners
incur significant expenses of sales and marketing.  Because of UTMD’s
small size and period-to-period fluctuations in OEM business activity,
allocations of fixed manufacturing overhead expenses cannot be meaningfully
allocated between direct and OEM sales. Therefore, UTMD does not report GPM by
sales channels.





c)     Operating
Income.  Operating income is the surplus after operating
expenses are subtracted from gross profits.  Operating expenses
include sales and marketing (S&M) expenses, product development (R&D)
expenses and general and administrative (G&A) expenses.  Combined
operating expenses were $4,357 in 2009, compared to $4,629 in 2008 and $5,032 in
2007.  The following table provides a comparison of operating expense
categories for the last three years.




21





2009
            
            
            2008
            
            
            2007R&D
      expenses
            
            $
            361
            
            
            $
            359
            
            
            $
            382S&M
      expenses
            
            
            1,584
            
            
            
            1,816
            
            
            
            2,075G&A
      – a) litigation expense provision
            
            
            60
            
            
            
            80
            
            
            
            127G&A
      – b) corporate legal expenses
            
            
            12
            
            
            
            48
            
            
            
            15G&A
      – c) stock option compensation expense
            
            
            98
            
            
            
            120
            
            
            
            95G&A
      – d) management bonus accrual
            
            
            299
            
            
            
            148
            
            
            
            378G&A
      – e) outside accounting audit/tax expenses
            
            
            123
            
            
            
            167
            
            
            
            134G&A
      – f) all other expenses
            
            
            1,820
            
            
            
            1,891
            
            
            
            1,826G&A
      expenses – total
            
            
            2,412
            
            
            
            2,454
            
            
            
            2,575Total
      operating expenses
            
            $
            4,357
            
            
            $
            4,629
            
            
            $
            5,032





Operating income in 2009 was $9,432
compared to $10,389 in 2008 and $10,756 in 2007.  UTMD’s operating
profit margin (operating income divided by total sales) was 36.4% in 2009,
compared to 37.4% in 2008 and 37.7% in 2007.  Looking forward to 2010,
UTMD projects an operating margin of about 36%, as it expects minor increases in
both revenues and operating expenses.





i)  S&M
expenses:  S&M expenses are the costs of communicating UTMD’s
differences and product advantages, providing training and other customer
service in support of the use of UTMD’s solutions, attending clinical meetings
and medical trade shows, processing orders, paying commissions to outside
representatives and funding GPO fees. Because UTMD sells internationally through
third party distributors, its S&M expenses are predominantly for U.S.
business activity where it sells directly to clinical users.  The
largest component of S&M expenses is the cost of directly employing inside
representatives and paying commissions to outside reps that solicit product
sales and provide customer support across the U.S.  The decline in
S&M expenses primarily reflects fewer inside direct sales
representatives.  As a percent of total sales, S&M operating
expenses were 6.1% in 2009, 6.5% in 2008 and 7.3% in 2007.  In 2010,
UTMD intends to hold the ratio of S&M expenses to total sales to about
6%.





ii)  R&D
expenses:  R&D expenses include the costs of investigating
clinical needs, developing innovative concepts, testing concepts for viability,
validating methods of manufacture, completing premarketing regulatory
documentation and other activities required for design control, responding to
customer requests for product enhancements, and assisting manufacturing
engineering on an ongoing basis in developing new processes or improving
existing processes.  As a percent of sales, R&D expenses were 1.4%
in 2009 compared to 1.3% in both 2008 and 2007.  UTMD will continue to
opportunistically invest in R&D.  In 2010, R&D expenses should
remain in the range of 1-2% of sales.





iii)  G&A
expenses:  G&A expenses include the “front office” functional
costs of executive management, finance and accounting, corporate information
systems, human resources, shareholder relations, corporate risk management,
protection of intellectual property and legal costs.  Aggregate
G&A expenses as a percent of sales were 9.3% in 2009, 8.8% in 2008 and 9.0%
in 2007. Except for the categories of G&A expenses isolated in the table
above, UTMD’s G&A expenses have remained consistent over the last three
years. The following lettered items refer to the same G&A subcategories in
the table above:





a)
            Absent
      unforeseen litigation, UTMD plans a lower litigation expense provision in
      2010.


b)
            The
      higher 2008 corporate legal expenses were essentially due to the legal
      costs associated with the filing of SEC Form S-3, Registration Statement
      Under the Securities Act of 1933 that year.  In 2010, UTMD
      expects routine expenses consistent with those in 2009 and
      2007.


c)
            Stock
      option expense in 2009 was calculated using a Black-Scholes pricing model
      for unvested options.   Please see Note 9 to “Notes to
      Consolidated Financial Statements” for further explanation.  In
      2010, UTMD expects option expense about $10 lower than in
      2009.


d)
            The
      main difference in 2008 management bonus accrual compared to 2009 and 2007
      was due to the fact that UTMD’s CEO did not receive a 2008 management
      bonus.  Accrued bonuses in 2010 will continue to depend both on
      UTMD’s overall performance and each individual’s
    performance.


e)
            UTMD’s
      personnel, fundamental business activities, internal control systems and
      financial reporting mechanisms have remained relatively unchanged over the
      last several years.  UTMD’s costs remain below these expenses
      incurred by most publicly-traded companies.  Management expects
      2010 audit costs will be about the same as 2009
  costs.


22





d)       Non-operating Income,
Non-operating Expense and EBT.  Non-operating income (NOI)
includes royalties from licensing UTMD’s technology, rent from leasing
underutilized property to others, income earned from investing the Company’s
excess cash and gains or losses from the sale of assets, offset by non-operating
expenses which include interest on the Ireland bank loan, bank service fees and
excise taxes.  NOI was $147 in 2009, compared to $388 in 2008 and
$1,283 in 2007.





UTMD expects total 2010 NOI will be
approximately $50.  That estimate does not include the possibility of
a failure of Citibank that would require recognition of a capital
loss.  The estimated 2010 NOI may also be lower if UTMD utilizes its
invested cash for an acquisition, unexpected litigation costs or substantial
share repurchases.





1)
Investment of excess cash.  Investment income (including gains and
losses on sales) in 2009 was $212, compared to $115 in 2008 and $1,022 in
2007.  In 2009, average interest rates were much lower than prior
years.  Capital gains (or losses) and dividends from investments in
common stocks were $6 in 2009, ($407) in 2008 and $20 in 2007.  The
Company holds investments in Citigroup (C) and General Electric (GE) common
stock which together were about $385 below their aggregate purchase price at the
end of 2009.  When purchased, these holdings at cost represented less
than 3% of UTMD’s total investment portfolio. At the end of 2009, they
represented less than one half percent of UTMD’s total investment portfolio.
Unless one or both of the companies fail, UTMD will not sell the holdings at
current prices, expecting that the current value is immaterial and they may
recover somewhat in value.  Therefore, UTMD does not expect an
associated NOI loss which impacts 2010 earnings. Currently, 99% of UTMD’s cash
investments are being held in interest bearing money market securities yielding
about 0.2%.





2) Royalties.  Annual
royalties received in 2009 were $0 compared to $450 in both 2008 and
2007.  The 2008 and 2007 royalties came from the license of patents
which expired during 2008.  Presently, there are no other patents
under which UTMD is receiving royalties from other parties.





3) Interest
Expense.  In 2009, UTMD paid $51 in interest expense on the Ireland
loan, compared to $198 in 2008 and $270 in 2007.  The interest expense
results from borrowing €4.5 million ($5,336) in December 2005 to allow the
repatriation of profits generated by UTMD’s Ireland subsidiary since inception
in 1996 through 2005.  Due to a lower loan balance as well as expected
continued low interest rates, UTMD estimates that its interest expense may be
about $10 lower in 2010.





4) Other
NOI.  Income received from renting underutilized warehouse space in
Ireland and parking lot space in Utah for a cell phone tower, offset by bank
fees and excise taxes, was ($14) in 2009, $21 in 2008 and $80 in
2007.  UTMD expects Other NOI will be about $6 in 2010, primarily
because of expected lower bank fees.





Earnings before income taxes (EBT)
result from adding UTMD’s non-operating income to its operating income.
Consolidated EBT was $9,580 in 2009, compared to $10,777 in 2008 and $12,038 in
2007.  EBT margin is EBT divided by total sales.  UTMD’s EBT
margin was 37.0% in 2009, 38.8% in 2008 and 42.2% in 2007.  The EBT of
UTMD Ltd. was €269 ($380) in 2009, €555 ($861) in 2008 and €734 ($1,006) in
2007. UTMD is targeting consolidated 2010 EBT of about $9,500, as operating
income is projected to be similar to 2009 and non-operating income lower,
resulting in an EBT margin between 36% and 37%.





e)  Net Income, EPS and
ROE.  Net income is EBT minus income taxes, often called the
“bottom line”.  Net income was $6,258 in 2009, $7,205 in 2008 and
$7,905 in 2007.   The effective consolidated corporate income tax
provision rate was 34.7%, 33.1% and 34.3% for the same periods
respectively.  Year to year fluctuations in the tax rate may result
from:  1) variations in profits of the Ireland subsidiary which is
taxed at a 10% rate on exported manufactured products and a 25% rate on rental
and other types of income; 2) special U.S. tax exclusions such as the
manufacturing profit deduction; 3) higher marginal tax rates for EBT above $10
million; and 4) other permanent factors such as R&D tax
credits.  Management expects the 2010 consolidated income tax
provision rate to be close to the 2009 rate.


23





UTMD’s net income expressed as a
percentage of sales was 24.1% in 2009, 25.9% in 2008 and 27.7% in
2007.  UTMD’s profitability has consistently ranked it in the top
performance tier of all U.S. publicly-traded companies, and has been a primary
driver for UTMD’s past excellent returns on shareholders’ equity
(ROE).





Earnings per share (EPS) is net income
divided by the number of shares of stock outstanding (diluted to take into
consideration stock option awards which are “in the money,” i.e., have exercise
prices below the applicable period’s weighted average market
value).  Diluted EPS were $1.724 in 2009, $1.858 in 2008 and $1.982 in
2007.  If UTMD achieves the projections above, EPS in 2010 will be
approximately the same as in 2009.





The 2009-ending weighted average number
of diluted common shares (the number used to calculate diluted EPS) were 3,630
(in thousands), compared to 3,878 shares in 2008 and 3,989 shares in
2007.  Dilution for “in the money” unexercised options for the year
2009 was 22 shares (in thousands), compared to 35 in 2008 and 62 in
2007.  Actual outstanding common shares as of December 31, 2009 were
3,611,700.





Return on shareholders’ equity (ROE) is
the portion of net income retained by UTMD (after payment of dividends) to
internally finance its growth, divided by the average accumulated shareholders’
equity during the applicable time period. ROE includes balance sheet measures as
well as income statement measures.  ROE for 2009 was 8% (17% before
dividends), compared to 10% excluding the fifth dividend payment in 2008, which
would normally have been paid in January 2009 (20% before dividends), in 2008
and 12% (21% before dividends) in 2007.  UTMD’s ROE is primarily
driven by its high net profit margin, which in 2009 declined to 24.1% from 25.9%
in 2008.  ROE was also reduced by a lower debt ratio as UTMD continued
to reduce its bank loan balance in Ireland, and by slightly lower total asset
turns. UTMD’s ROE (before dividends) has averaged 31% per year over the last 24
years.  This ratio determines how fast the Company can afford to grow
without diluting shareholder interest.  For example, a 30% ROE will
financially support 30% annual growth in revenues without having to issue more
stock.





Looking forward, unless UTMD utilizes
its cash to make an acquisition or repurchase shares, 2010 ROE will be lower
than 2009 because the 2010 net profit margin is projected to be slightly lower
while financial leverage and asset utilization remain about the
same.  Retaining a high cash balance which returns less than 1%
dilutes overall ROE.








Liquidity
and Capital Resources.


Cash
Flows.


Net cash provided by operating
activities, including adjustments for depreciation and other non-cash operating
expenses, along with changes in working capital and the tax benefit attributable
to exercise of employee incentive stock options, totaled $7,226 in 2009,
compared to $7,762 in 2008 and $7,474 in 2007.  Compared to 2008, net
cash provided by operating activities in 2009 was lower due to net income being
$947 lower than in 2008.  Mitigating that decrease was a $443 larger
increase in accrued expenses.  Other changes were generally consistent
with effective balance sheet management in the presence of lower sales
activity.





The Company’s use of cash for investing
activities was primarily as a result of purchases of liquid investments in an
effort to maximize returns on excess cash balances while maintaining safety and
liquidity.  UTMD expended $3,800 in 2009 on such purchases, compared
to $2,650 in 2008 and $2,000 in 2007.  In 2009, UTMD received $1,116
from selling short-term investments, compared to $7,792 in 2008 and $2,023 in
2007.  No acquisitions requiring investment of cash were made in any
of the three years.





In 2009, UTMD received $132 and issued
14,289 shares of stock upon the exercise of employee stock
options.  Employees exercised a total of 16,434 option shares in 2009,
with 2,145 shares immediately being retired as a result of optionees trading the
shares in payment of the exercise price of the options.  The Company
received a $14 tax benefit from option exercises in 2009.  UTMD
repurchased 5,367 shares of stock in the open market at a cost of $116 during
2009.  Option exercises in 2009 were at an average price of $11.30 per
share.  Share repurchases in the open market were at an average cost
of $21.58 per share, including commissions and fees.  In comparison,
in 2008 UTMD received $224 from issuing 18,369 shares of stock on the exercise
of employee stock options, including 1,800 shares retired upon optionees trading
those shares in payment of the stock option exercise price. In 2007, the Company
received $180 from issuing 27,519 shares of stock on the exercise of employee
and director stock options, including 7,543 shares retired upon optionees
trading those shares in payment of the stock option exercise price. UTMD
received a $42 tax benefit in 2008 from option exercises, and a benefit of $60
in 2007.


24





UTMD did not borrow during 2009, 2008 or
2007.  In December 2005, UTMD’s foreign subsidiary borrowed €4.5
million ($5,336) to allow repatriation (from Ireland to the U.S.) of profits
achieved since 1996, per The American Jobs Creation Act of 2004.  In
2008, the Bank of Ireland loan terms were modified to no longer require a
guarantee by UTMD’s line of credit in the U.S.  In 2009, UTMD made
repayments of $463 on the Ireland note, compared to $1,917 in 2008 and $1,239 in
2007.  Dividends paid to shareholders were higher in 2008 because UTMD
accelerated into December 2008 the dividend payment that normally would have
been made in 2009, resulting in five dividend payments in 2008.  A
similar acceleration was made at the end of 2009, which resulted in four
dividend payments in 2009.





Management believes that future income
from operations and effective management of working capital will provide the
liquidity needed to finance internal growth plans.  In an uncertain
economic environment, UTMD’s cash balances allow management to operate with the
long term best interest of shareholders in mind.  Planned 2010 capital
expenditures are expected to be higher than during the past three years as
UTMD’s Utah facility will be expanded to consolidate operations previously
located in Oregon.  In addition, UTMD may use cash in 2010 for
selective infusions of technological, marketing or product manufacturing rights
to broaden the Company's product offerings; for continued share repurchases when
the price of the stock is undervalued; and if available for a reasonable price,
acquisitions that may strategically fit UTMD’s business and are accretive to
performance.





In summary, management plans to utilize
cash not needed to support normal operations in one or a combination of the
following:  1) to invest in new facilities and equipment at an
opportune time that will enhance future profitability; 2) to make investments in
new technology and/or processes;  3) to acquire a product line that
will augment revenue growth and better utilize UTMD’s existing infrastructure;
and/or  4) to repurchase UTMD shares in the open
marketplace.





Management's
Outlook.


In summary, in 2010 UTMD plans
to


1)  work to retain its
significant global market shares of established key specialty
products,


2)  accelerate revenue
growth of newer products;


3)  develop
additional proprietary products helpful to clinicians through internal new
product development;


4)  continue
achieving excellent overall financial operating performance;


5)  look for accretive
acquisitions to augment sales growth;  and


6)  utilize current cash
balances in shareholders’ best long-term interest, including continued cash
dividends and open market share repurchases when the UTMD share price seems
undervalued.





The safety, reliability and
performance of UTMD’s medical devices are high and represent significant
clinical benefits while providing minimum total cost of care.  In the
U.S., UTMD will continue to leverage its reputation as an innovator which will
responsively take on challenges to work with clinicians who use its specialty
devices. Internationally, where UTMD must depend on the knowledge, focus,
relationships and energy of independent distributors, management will continue
to closely monitor performance and recruit needed business
partners.





UTMD will continue to focus on
differentiating itself, especially from commodity-oriented
competitors.  UTMD is small, but its employees are experienced and
diligent in their work.  UTMD’s passion is in providing innovative
clinical solutions that will help reduce health risks, particularly for women
and their babies.  The Company has a fundamental focus to do an
excellent job in meeting customers’ and patients’ needs, while providing
shareholders with excellent returns.





Despite UTMD’s decline in EPS over the
last three years, looking back ten years to the end of 1999, UTMD’s EPS have
more than doubled and the year-ending share price has more than
quadrupled.  Combining this performance with steadily growing
dividends since 2004, longer term UTMD shareholders have experienced excellent
returns.  In comparison, the NASDAQ Composite, S&P 500 Index and
DJIA indices all declined over that
same ten year time span.


25





In 2009, the year-ending share
price increased 34%, essentially regaining the decline which occurred in 2008,
primarily near the end of that year. UTMD also increased dividends/share by 2%.
This was accomplished in 2009 by UTMD continuing to achieve a high positive cash
flow.  UTMD’s balance sheet is strong enough to be able to finance a
substantial acquisition in 2010 without issuing stock, should an immediately
accretive one become available.  Shareholders may recall that UTMD
also has a “shelf” registration that gives it speed and flexibility in obtaining
additional financing should an acquisition that exceeds current cash
availability become available.  In considering acquisitions, UTMD
looks to acquire reasonably valued, cash flow positive companies with
established products or technologies that will enhance UTMD’s specialist focus,
but not significantly increase business risk and not dilute financial
performance.





Off
Balance Sheet Arrangements


None





Contractual
Obligations


The following is a summary of UTMD’s
significant contractual obligations and commitments as of December 31,
2009.  Long-term debt obligations are comprised solely of future
payments required to pay off the Ireland note:




Contractual
      Obligations and
              Commitments
            
            Total
            
            
            2010
            
            
            
            2011
      -
              2012
            
            
            
            2013
      -
              2014
            
            
            2015
      and
              thereafterLong-term
      debt obligations
            
            $
            1,769
            
            
            $
            295
            
            
            $
            590
            
            
            $
            590
            
            
            $
            295Operating
      lease obligations
            
            
            904
            
            
            
            71
            
            
            
            80
            
            
            
            80
            
            
            
            673Purchase
      obligations
            
            
            1,119
            
            
            
            1,088
            
            
            
            31
            
            
            
            -
            
            
            
            -Total
            
            $
            3,792
            
            
            $
            1,454
            
            
            $
            701
            
            
            $
            670
            
            
            $
            968




Critical
Accounting Policies and Estimates


The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities as well as the reported amounts of
revenues and expenses during the reporting period.





Management bases its estimates and
judgments on historical experience, current economic and industry conditions and
on various other factors that are believed to be reasonable under the
circumstances. This forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily available from other
sources. Management has identified the following as the Company’s most critical
accounting policies which require significant judgment and estimates. Although
management believes its estimates are reasonable, actual results may differ from
these estimates under different assumptions or conditions.


·
            Allowance
      for doubtful accounts: The majority of the Company’s receivables are with
      U.S. hospitals and medical device distributors.  Although the
      Company has historically not had significant write-offs of bad-debt, the
      possibility exists, particularly with foreign customers where collection
      efforts can be difficult or in the event of widespread U.S. hospital
      bankruptcies.


·
            Inventory
      valuation reserves:  The Company strives to maintain a good
      balance of inventory to 1) meets its customer’s needs and 2) optimize
      manufacturing lot sizes while 3) not tying-up an unnecessary amount of the
      Company’s capital increasing the possibility of, among other things,
      obsolescence.  The Company believes its method of reviewing
      actual and projected demand for its existing inventory allows it to arrive
      at a fair inventory valuation reserve. While the Company has historically
      not had significant inventory write-offs, the possibility exists that one
      or more of its products may become unexpectedly obsolete for which a
      reserve has not previously been created. The Company’s historical
      write-offs have not been materially different from its
      estimates.





Accounting
Policy Changes


In June 2009, the Financial Accounting
Standards Board (FASB) changed the hierarchy of U.S. generally accepted
accounting principles (“GAAP”) such that the newly released FASB Accounting
Standards Codification (“ASC”) will replace other sources of authoritative GAAP
with the exception of rules and interpretive releases of the Securities and
Exchange Commission, which will continue to be authoritative. The ASC is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009 and is not intended to significantly change
GAAP.


26





ITEM
7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The Company had manufacturing
operations, including related assets, in Ireland denominated in the Euro, and
sold products under agreements denominated in various Western European
currencies.  The Euro and other currencies have been and are subject
to exchange rate fluctuations that are beyond the control of
UTMD.  The exchange rate for the Euro was .6944, .7096 and .6786 per
U.S. Dollar as of December 31, 2009, 2008 and 2007,
respectively.  Please see note 1 in Item, 8, below under “Translation
of Foreign Currencies” for more information.  UTMD manages its foreign
currency risk without separate hedging transactions by converting currencies as
transactions occur.








ITEM
8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


Dollar
amounts are in thousands except per-share amounts and where noted.








TABLE
OF CONTENTS




Management’s
      Report on Internal Control Over Financial Reporting
            28Report
      of Independent Registered Public Accounting Firm on the Company’s Internal
      Control Over Financial Reporting
            29Report
      of Independent Registered Public Accounting Firm on Financial
      Statements
            30Consolidated
      Balance Sheet
            31Consolidated
      Statement of Income and Comprehensive Income
            32Consolidated
      Statement of Cash Flow
            33Consolidated
      Statement of Stockholders’ Equity
            34Notes
      to Consolidated Financial Statements
            35




27


MANAGEMENT’S
REPORT ON INTERNAL CONTROL


OVER
FINANCIAL REPORTING








Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
Company's internal control over financial reporting includes those policies and
procedures that:




·      pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company;


·      provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and


·      provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




As
required by Section 404 of the Sarbanes-Oxley Act of 2002, management
assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework.




Based on
its assessment and those criteria, management believes that the Company
maintained effective internal control over financial reporting as of
December 31, 2009.




The
Company's independent registered public accounting firm, Jones Simkins, P.C.,
has audited the Company's internal control over financial reporting as of
December 31, 2009, and its report is shown on the next page.










By: /s/ Kevin L.
Cornwell


Kevin L. Cornwell


Chief Executive Officer











By: /s/ Paul O.
Richins


Paul O. Richins


Principal Financial
Officer


28


REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


of Utah
Medical Products, Inc.





We have
audited Utah Medical Products, Inc.’s internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Utah Medical Products, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, Utah Medical Products, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the related
consolidated statements of income and comprehensive income, stockholders’
equity, and cash flows of Utah Medical Products, Inc., and our report dated
February 19, 2010 expressed an unqualified opinion.




/s/ Jones Simkins,
P.C.





JONES
SIMKINS, P.C.


Logan,
Utah


February
19, 2010


29




REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM










To the
Board of Directors and Stockholders


of Utah
Medical Products, Inc.





We have
audited the accompanying consolidated balance sheets of Utah Medical Products,
Inc. as of December 31, 2009 and 2008, and the related consolidated statements
of income and comprehensive income, stockholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2009. Utah Medical
Products, Inc.’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Utah Medical Products, Inc. as of
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Utah Medical Products, Inc.’s internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control-Integrated
Frameworkissued by theCommittee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February
19, 2010 expressed an unqualified opinion.





/s/ Jones Simkins,
P.C.


JONES
SIMKINS, P.C.


Logan,
Utah


February
19, 2010


30


UTAH MEDICAL PRODUCTS, INC.CONSOLIDATED BALANCE SHEETDecember 31, 2009 and 2008(In
      thousands)ASSETS
              
              2009
              
              
              2008Current
      assets:Cash
              
              $
              410
              
              
              $
              97Investments,
      available-for-sale (notes 3 and 4)
              
              
              18,845
              
              
              
              15,927Accounts
      and other receivables, net (note 2)
              
              
              3,157
              
              
              
              3,517Inventories
      (note 2)
              
              
              3,407
              
              
              
              3,275Prepaid
      expenses and other current assets
              
              
              222
              
              
              
              214Deferred
      income taxes (note 8)
              
              
              192
              
              
              
              248Total
      current assets
              
              
              26,233
              
              
              
              23,280Property
      and equipment, net (note 5)
              
              
              8,133
              
              
              
              8,127Goodwill
              
              
              7,191
              
              
              
              7,191Other
      intangible assets - net (note 2)
              
              
              197
              
              
              
              223Total
      assets
              
              $
              41,754
              
              
              $
              38,821LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              345
              
              
              $
              418Accrued
      expenses (note 2)
              
              
              1,152
              
              
              
              1,086Current
      portion of note payable (note 6)
              
              
              264
              
              
              
              265Total
      current liabilities
              
              
              1,761
              
              
              
              1,768Note
      payable (note 6)
              
              
              1,403
              
              
              
              1,828Deferred
      income taxes (note 8)
              
              
              608
              
              
              
              420Total
      liabilities
              
              
              3,773
              
              
              
              4,016Commitments
      and contingencies (notes 7 and 12)
              
              
              -
              
              
              
              -Stockholders'
      equity:Preferred
      stock, $.01 par value; 5,000 shares authorized, no shares issued
      and outstanding
              
              
              -
              
              
              
              -Common
      stock, $.01 par value; 50,000 shares authorized, issued 3,611
      shares in 2009 and 3,603 shares in 2008
              
              
              36
              
              
              
              36Accumulated
      other comprehensive income
              
              
              (994
              )
              
              
              (1,122
              )Retained
      earnings
              
              
              38,939
              
              
              
              35,892Total
      stockholders' equity
              
              
              37,981
              
              
              
              34,805Total
      liabilities and stockholders' equity
              
              $
              41,754
              
              
              $
              38,821


See
accompanying notes to financial statements.


31


UTAH MEDICAL PRODUCTS, INC.CONSOLIDATED STATEMENT OF
      INCOMEAND COMPREHENSIVE INCOMEYears ended December 31, 2009, 2008 and
      2007(In
      thousands, except per share amounts)2009
              
              
              2008
              
              
              2007Sales,
      net (notes 10 and 11)
              
              $
              25,916
              
              
              $
              27,782
              
              
              $
              28,502Cost
      of goods sold
              
              
              12,127
              
              
              
              12,764
              
              
              
              12,714Gross
      profit
              
              
              13,789
              
              
              
              15,018
              
              
              
              15,788Operating
      expense:Sales
      and marketing
              
              
              (1,584
              )
              
              
              (1,816
              )
              
              
              (2,075
              )Research
      and development
              
              
              (361
              )
              
              
              (359
              )
              
              
              (382
              )General
      and administrative
              
              
              (2,412
              )
              
              
              (2,454
              )
              
              
              (2,575
              )Operating
      income
              
              
              9,432
              
              
              
              10,389
              
              
              
              10,756Other
      income (expense):Dividend
      and interest income
              
              
              206
              
              
              
              543
              
              
              
              1,003Capital
      gains and (losses) on investments
              
              
              6
              
              
              
              (428
              )
              
              
              19Royalty
      income (note 12)
              
              
              -
              
              
              
              450
              
              
              
              450Interest
      expense
              
              
              (51
              )
              
              
              (198
              )
              
              
              (270
              )Other,
      net
              
              
              (14
              )
              
              
              21
              
              
              
              80Income
      before provision for income taxes
              
              
              9,580
              
              
              
              10,777
              
              
              
              12,038Provison
      for income taxes (note 8)
              
              
              3,322
              
              
              
              3,572
              
              
              
              4,134Net
      income
              
              $
              6,258
              
              
              $
              7,205
              
              
              $
              7,905Earnings
      per common share (basic) (note 1):
              
              $
              1.73
              
              
              $
              1.87
              
              
              $
              2.01Earnings
      per common share (diluted) (note 1):
              
              $
              1.72
              
              
              $
              1.86
              
              
              $
              1.98Other
      comprehensive income:Foreign
      currency translation net of taxes of$44, $(93) and $29
              
              $
              68
              
              
              $
              (146
              )
              
              $
              58Unrealized
      gain (loss) on investments net oftaxes of $10, $(60) and $(100)
              
              
              15
              
              
              
              (94
              )
              
              
              (156
              )Total
      comprehensive income
              
              $
              6,341
              
              
              $
              6,965
              
              
              $
              7,807





See
accompanying notes to financial statements.


32


UTAH MEDICAL PRODUCTS, INC.CONSOLIDATED STATEMENT OF CASH
      FLOWYears Ended December 31, 2009, 2008 and
      2007(In
      thousands)2009
              
              
              2008
              
              
              2007Cash flows from operating
      activities:Net
      income
              
              $
              6,258
              
              
              $
              7,205
              
              
              $
              7,905Adjustments
      to reconcile net income to netcash provided by operating activities:Depreciation
      and amortization
              
              
              588
              
              
              
              591
              
              
              
              597Gain
      on investments
              
              
              (212
              )
              
              
              (94
              )
              
              
              (992
              )Provision
      for (recovery of) losses on accounts receivable
              
              
              7
              
              
              
              (42
              )
              
              
              (30
              )(Gain)
      loss on disposal of assets
              
              
              1
              
              
              
              0
              
              
              
              3Deferred
      income taxes
              
              
              230
              
              
              
              (46
              )
              
              
              93Stock-based
      compensation expense
              
              
              98
              
              
              
              120
              
              
              
              95(Increase)
      decrease in:Accounts
      receivable
              
              
              290
              
              
              
              365
              
              
              
              (117
              )Accrued
      interest and other receivables
              
              
              69
              
              
              
              27
              
              
              
              64Inventories
              
              
              (83
              )
              
              
              (70
              )
              
              
              (80
              )Prepaid
      expenses and other current assets
              
              
              (10
              )
              
              
              60
              
              
              
              (11
              )Increase
      (decrease) in:Accounts
      payable
              
              
              (73
              )
              
              
              25
              
              
              
              (207
              )Accrued
      expenses
              
              
              63
              
              
              
              (380
              )
              
              
              154Net
      cash provided by operating activities
              
              
              7,226
              
              
              
              7,762
              
              
              
              7,474Cash flows from investing
      activities:Capital
      expenditures for:Property
      and equipment
              
              
              (466
              )
              
              
              (274
              )
              
              
              (307
              )Intangible
      assets
              
              
              (8
              )
              
              
              (13
              )
              
              
              (53
              )Purchases
      of investments
              
              
              (3,800
              )
              
              
              (2,650
              )
              
              
              (2,000
              )Proceeds
      from the sale of:Investments
              
              
              1,116
              
              
              
              7,792
              
              
              
              2,023Net
      cash provided by (used in) investing activities
              
              
              (3,158
              )
              
              
              4,856
              
              
              
              (337
              )Cash flows from financing
      activities:Proceeds
      from issuance of common stock - options
              
              
              132
              
              
              
              224
              
              
              
              180Common
      stock purchased and retired
              
              
              (116
              )
              
              
              (7,792
              )
              
              
              (2,023
              )Tax
      benefit attributable to exercise of stock options
              
              
              14
              
              
              
              42
              
              
              
              60Repayments
      of note payable
              
              
              (463
              )
              
              
              (1,917
              )
              
              
              (1,239
              )Dividends
      paid
              
              
              (3,337
              )
              
              
              (4,329
              )
              
              
              (3,423
              )Net
      cash used in financing activities
              
              
              (3,770
              )
              
              
              (13,772
              )
              
              
              (6,445
              )Effect
      of exchange rate changes on cash
              
              
              15
              
              
              
              1
              
              
              
              (52
              )Net increase (decrease) in cash and cash equivalents
              
              
              313
              
              
              
              (1,153
              )
              
              
              640Cash
      at beginning of year
              
              
              97
              
              
              
              1,251
              
              
              
              610Cash
      at end of year
              
              $
              410
              
              
              $
              97
              
              
              $
              1,251SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid during the year for:Income
      taxes
              
              $
              3,075
              
              
              $
              3,360
              
              
              $
              3,757Interest
              
              
              51
              
              
              
              198
              
              
              
              270


See
accompanying notes to financial statements.


33


UTAH MEDICAL PRODUCTS, INC.CONSOLIDATED STATEMENT OF STOCKHOLDERS'
      EQUITYYears Ended December 31, 2009, 2008 and
      2007(In
      thousands)AccumulatedAdditional
              
              
              Other
              
              
              
              
              
              TotalCommon
      Stock
              
              
              Paid-in
              
              
              Comprehensive
              
              
              Retained
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Capital
              
              
              Income
              
              
              Earnings
              
              
              EquityBalance
      at December 31, 2006
              
              
              3,944
              
              
              $
              39
              
              
              $
              -
              
              
              $
              (720
              )
              
              $
              36,796
              
              
              $
              36,115Shares
      issued upon exercise of employee
                stock
      options for cash
              
              
              35
              
              
              
              0
              
              
              
              431
              
              
              
              -
              
              
              
              -
              
              
              
              431Shares
      received and retired upon exercise
                of
      stock options
              
              
              (8
              )
              
              
              (0
              )
              
              
              (251
              )
              
              
              -
              
              
              
              -
              
              
              
              (252
              )Tax
      benefit attributable to appreciation
                of
      stock options
              
              
              -
              
              
              
              -
              
              
              
              60
              
              
              
              -
              
              
              
              -
              
              
              
              60Stock
      option compensation expense
              
              
              -
              
              
              
              -
              
              
              
              95
              
              
              
              -
              
              
              
              -
              
              
              
              95Common
      stock purchased and retired
              
              
              (66
              )
              
              
              (1
              )
              
              
              (335
              )
              
              
              -
              
              
              
              (1,688
              )
              
              
              (2,023
              )Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              87
              
              
              
              -
              
              
              
              87Unrealized
      holding loss from investments,
                available-for-sale,
      net of taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (156
              )
              
              
              -
              
              
              
              (156
              )Common
      stock dividends
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,474
              )
              
              
              (3,474
              )Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,905
              
              
              
              7,905Balance
      at December 31, 2007
              
              
              3,905
              
              
              $
              39
              
              
              $
              -
              
              
              $
              (789
              )
              
              $
              39,539
              
              
              $
              38,789Shares
      issued upon exercise of employee
                stock
      options for cash
              
              
              20
              
              
              
              0
              
              
              
              278
              
              
              
              -
              
              
              
              -
              
              
              
              278Shares
      received and retired upon exercise
                of
      stock options
              
              
              (2
              )
              
              
              (0
              )
              
              
              (54
              )
              
              
              -
              
              
              
              -
              
              
              
              (54
              )Tax
      benefit attributable to appreciation
                of
      stock options
              
              
              -
              
              
              
              -
              
              
              
              42
              
              
              
              -
              
              
              
              -
              
              
              
              42Stock
      option compensation expense
              
              
              -
              
              
              
              -
              
              
              
              120
              
              
              
              -
              
              
              
              -
              
              
              
              120Common
      stock purchased and retired
              
              
              (321
              )
              
              
              (3
              )
              
              
              (386
              )
              
              
              -
              
              
              
              (7,404
              )
              
              
              (7,792
              )Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (239
              )
              
              
              -
              
              
              
              (239
              )Unrealized
      holding loss from investments,
                available-for-sale,
      net of taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (94
              )
              
              
              -
              
              
              
              (94
              )Common
      stock dividends
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,449
              )
              
              
              (3,449
              )Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,205
              
              
              
              7,205Balance
      at December 31, 2008
              
              
              3,603
              
              
              $
              36
              
              
              $
              -
              
              
              $
              (1,122
              )
              
              $
              35,891
              
              
              $
              34,805Shares
      issued upon exercise of employee
                stock
      options for cash
              
              
              16
              
              
              
              0
              
              
              
              186
              
              
              
              -
              
              
              
              -
              
              
              
              186Shares
      received and retired upon exercise
                of
      stock options
              
              
              (2
              )
              
              
              (0
              )
              
              
              (54
              )
              
              
              -
              
              
              
              -
              
              
              
              (54
              )Tax
      benefit attributable to appreciation
                of
      stock options
              
              
              -
              
              
              
              -
              
              
              
              14
              
              
              
              -
              
              
              
              -
              
              
              
              14Stock
      option compensation expense
              
              
              -
              
              
              
              -
              
              
              
              98
              
              
              
              -
              
              
              
              -
              
              
              
              98Common
      stock purchased and retired
              
              
              (5
              )
              
              
              (0
              )
              
              
              (243
              )
              
              
              -
              
              
              
              127
              
              
              
              (116
              )Foreign
      currency translation adjustment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              112
              
              
              
              -
              
              
              
              112Unrealized
      holding gain from investments,
                available-for-sale,
      net of taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              15
              
              
              
              -
              
              
              
              15Common
      stock dividends
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,337
              )
              
              
              (3,337
              )Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,258
              
              
              
              6,258Balance
      at December 31, 2009
              
              
              3,612
              
              
              $
              36
              
              
              $
              -
              
              
              $
              (994
              )
              
              $
              38,939
              
              
              $
              37,981


See
accompanying notes to financial statements.


34


Dollar
amounts are in thousands except per-share amounts and where noted.





Note 1 – Summary of
Significant Accounting Policies





Organization





Utah
Medical Products, Inc. and its wholly owned subsidiaries, Utah Medical Products
Ltd., which operates a manufacturing facility in Ireland, and Columbia Medical,
Inc., (the Company) are in the primary business of producing specialized medical
devices for the healthcare industry.  The Company’s broad range of
products includes those used in critical care areas and the labor and delivery
departments of hospitals, as well as outpatient clinics and physicians’
offices.  Products are sold in both domestic U.S. and international
markets.





Use of Estimates in the
Preparation of Financial Statements





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Although actual results could differ
from those estimates, management believes it has considered and disclosed all
relevant information in making its estimates that materially affect reported
performance and current values.





Principles of
Consolidation





The
consolidated financial statements include those of the Company and its
subsidiaries.  All intercompany accounts and transactions have been
eliminated in consolidation.





Cash and Cash
Equivalents





For
purposes of the consolidated statement of cash flows, the Company considers cash
on deposit and short-term investments with original maturities of three months
or less to be cash and cash equivalents.





Investments





The
Company classifies its investments as “available for
sale.”  Securities classified as “available for sale” are carried in
the financial statements at fair value.  Realized gains and losses,
determined using the specific identification method, are included in operations;
unrealized holding gains and losses are reported as a separate component of
accumulated other comprehensive income.  Declines in fair value below
cost that are other than temporary are included in operations.  As of
December 31, 2009 the Company’s investments are in Fidelity Cash Reserves
(FDRXX), Fidelity Institutional Money Market (FMPXX), General Electric (GE), and
Citigroup (C).





Concentration of Credit
Risk





The
primary concentration of credit risk consists of trade
receivables.  In the normal course of business, the Company provides
credit terms to its customers.  Accordingly, the Company performs
ongoing credit evaluations of its customers and maintains allowances for
possible losses which, when realized, have been within the range of management's
expectations as reflected by its reserves.





The
Company's customer base consists of hospitals, medical product distributors,
physician practices and others directly related to healthcare providers, as well
as other manufacturing companies.  Although the Company is affected by
the well-being of the global healthcare industry, management does not believe
significant trade receivable credit risk exists at December 31, 2009 except
under an extreme global financial crisis.





The
Company maintains its cash in bank deposit accounts in addition to Fidelity
Investment accounts.  The Company has not experienced any losses in
such accounts and believes it is not exposed to a significant credit risk on
cash and cash equivalent balances unless the Fidelity mutual funds FDRXX or
FMPXX is at risk of “breaking the buck” and the Federal Reserve does not provide
support to prevent that from happening.




35


Note 1 – Summary of
Significant Accounting Policies (continued)





Accounts
Receivable





Accounts
receivable are amounts due on product sales and are
unsecured.  Accounts receivable are carried at their estimated
collectible amounts.  Credit is generally extended on a short-term
basis; thus accounts receivable do not bear interest although a finance charge
may be applied to such receivables that are past the due
date.  Accounts receivable are periodically evaluated for
collectibility based on past credit history of customers.  Provisions
for losses on accounts receivable are determined on the basis of loss
experience, known and inherent risk in the account balance and current economic
conditions (see note 2).





Inventories





Finished
products, work-in-process, raw materials and supplies inventories are stated at
the lower of cost (computed on a first-in, first-out method) or market (see note
2).





Property and
Equipment





Property
and equipment are stated at cost.  Depreciation and amortization are
computed using the straight-line and units-of-production methods over estimated
useful lives as follows:


Building
      and improvements
            
            15-40
      yearsFurniture,
      equipment and tooling
            
            3-10
      years





Long-Lived
Assets





The
Company evaluates its long-lived assets in accordance with Accounting Standards
Codification (ASC) 360, “Accounting for the Impairment of Long-Lived
Assets.”  Long-lived assets held and used by the Company are reviewed
for impairment whenever events or changes in circumstances indicate that their
net book value may not be recoverable.  When such factors and
circumstances exist, the Company compares the projected undiscounted future cash
flows associated with the related asset or group of assets over their estimated
useful lives against their respective carrying amounts.  Impairment,
if any, is based on the excess of the carrying amount over the fair value of
those assets and is recorded in the period in which the determination was
made.





Intangible
Assets





Costs
associated with the acquisition of patents, trademarks, license rights and
non-compete agreements are capitalized and are being amortized using the
straight-line method over periods ranging from 5 to 20 years. UTMD’s goodwill is
tested for impairment annually, in the fourth quarter of each year, using a fair
value measurement test, in accordance with ASC 350. UTMD would also perform an
impairment test, between annual tests, if circumstances changed that would more
than likely reduce the fair value of goodwill below its net book
value.  If UTMD determined that its goodwill were impaired, a second
step would be completed to measure the amount of the impairment loss. UTMD does
not expect its goodwill to become impaired in the foreseeable future (see note
2).





Loans to Related
Parties





As a
general policy, the Company does not make loans to related entities
including employees, directors, shareholders, suppliers or
customers.  In 2009, UTMD did extend trade accounts
receivable (A/R) payment terms to certain established customers on an interim
basis to assist them with staying in business in an exceptionally difficult
financial year worldwide.  However, UTMD was able to manage its A/R
balances to achieve an average aging of 43 days from date of invoice by the end
of the year, and A/R balances over 90 days from date of invoice to 2% of total
A/R.  Both of these measures are historically lower than normal.  As
another exception in 2009, the Company extended partial payment terms to an
OEM customer that convert to a three-year term loan of $70 on July 1,
2010.  The loan is secured by personal guarantees provided by the
principals of the customer. UTMD believes that this was a wise use of its
liquidity to build goodwill with a customer at an unusual time, which should
ultimately help grow UTMD's business.




36


Note 1 – Summary of
Significant Accounting Policies (continued)





Revenue
Recognition





The
Company recognizes revenue at the time of shipment as title generally passes to
the customer at the time of shipment. Revenue recognized by UTMD is based upon
documented arrangements and fixed contracts in which the selling price is fixed
prior to completion of an order. Revenue from product and service sales is
generally recognized at the time the product is shipped or service completed and
invoiced, and collectibility is reasonably assured.  There are
circumstances under which revenue may be recognized when product is not shipped,
which meet the criteria of SAB 104: the Company provides engineering services,
for example, design and production of manufacturing tooling that may be used in
subsequent UTMD manufacturing of custom components for other
companies.  This revenue is recognized when UTMD’s service has been
completed according to a fixed contractual agreement.





Income
Taxes





The
Company accounts for income taxes under ASC 740, “Accounting for Income Taxes,”
whereby deferred taxes are computed under the asset and liability
method.




The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, in Utah and in Ireland.  UTMD is no longer subject to
U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years before 2006.  In 2008, the Internal Revenue
Service examined the Company’s federal income tax returns for 2005 – 2006 and
proposed one adjustment related to the one-time tax deduction allowed by
Congress under The American Jobs Creation Act of 2004 (the Act) for repatriating
foreign subsidiary earnings in 2005.  The Company disagreed and still
believes that the unprecedented proposed adjustment clearly contradicted the
intent of the Act, but agreed under the Fast Track Settlement process of the IRS
conducted in March 2009 to 10% of the IRS proposed adjustment in order to avoid
unnecessary costs of tax court.  The resulting adjustment was
immaterial to results and included in the Company’s 2009 tax
provision.  There were no penalties associated with the
adjustment.





The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expenses and any related penalties in income taxes.  During
the year ended December 31, 2009 the Company recognized $10 in interest expense
related to the 2009 settlement noted above, compared to none in  2008
and 2007.  The Company did not have any related penalties in all three
years.





Legal
Costs





The
Company has been involved in lawsuits which are an expected consequence of its
operations and in the ordinary course of business.  The Company
maintains a reserve for legal costs which are probable and estimated based on
previous experience.  The reserve for legal costs at December 31, 2009
and 2008 was $45 and $80, respectively (see note 2).





Earnings per
Share





The
computation of basic earnings per common share is based on the weighted average
number of shares outstanding during each year.





The
computation of earnings per common share assuming dilution is based on the
weighted average number of shares outstanding during the year plus the weighted
average common stock equivalents which would arise from the exercise of stock
options outstanding using the treasury stock method and the average market price
per share during the year.





The
shares (in thousands) used in the computation of the Company’s basic and diluted
earnings per share are reconciled as follows:




2009
            
            
            2008
            
            
            2007Weighted
      average number of shares outstanding – basic
            
            
            3,607
            
            
            
            3,843
            
            
            
            3,927Dilutive
      effect of stock options
            
            
            23
            
            
            
            35
            
            
            
            62Weighted
      average number of shares outstanding, assuming dilution
            
            
            3,630
            
            
            
            3,878
            
            
            
            3,989




37


Note 1 – Summary of
Significant Accounting Policies (continued)





Stock-Based
Compensation





At
December 31, 2009, the Company has stock-based employee compensation plans,
which are described more fully in note 9.  The Company accounts for
stock compensation under ASC 718, Share-Based
Payment.  This statement requires the Company to recognize
compensation cost based on the grant date fair value of options granted to
employees and directors.  In 2009, the Company recognized $98 in
compensation cost compared to $120 in 2008 and $95 in 2007.





Translation of Foreign
Currencies





Assets
and liabilities of the Company’s foreign subsidiary are translated into U.S.
dollars at the applicable exchange rates at year-end.  Net gains or
losses resulting from the translation of the Company’s assets and liabilities
are reflected as a separate component of stockholders’ equity.  A
negative translation impact on stockholders’ equity reflects a current relative
U.S. Dollar value higher than at the point in time that assets were actually
acquired in a foreign currency.  A positive translation impact would
result from a U.S. dollar weaker in value than at the point in time foreign
assets were acquired.





Income
and expense items are translated at the weighted average rate of exchange (based
on when transactions actually occurred) during the year.





Note 2 – Detail of Certain
Balance Sheet Accounts





December 31,2009
            
            
            2008Accounts
      and other receivables:Accounts
      receivable
            
            $
            3,119
            
            
            $
            3,403Income
      tax receivable
            
            
            -
            
            
            
            139Accrued
      interest and other
            
            
            80
            
            
            
            9Less
      allowance for doubtful accounts
            
            
            (42
            )
            
            
            (34
            )$
            3,157
            
            
            $
            3,517Inventories:Finished
      products
            
            $
            1,391
            
            
            $
            1,353Work-in-process
            
            
            851
            
            
            
            817Raw
      materials
            
            
            1,165
            
            
            
            1,105$
            3,407
            
            
            $
            3,275Other
      intangible assets:Patents
            
            $
            1,968
            
            
            $
            1,961License
      rights
            
            
            293
            
            
            
            293Trademarks
            
            
            224
            
            
            
            224Other
            
            
            175
            
            
            
            1752,660
            
            
            
            2,653Accumulated
      amortization
            
            
            (2,463
            )
            
            
            (2,430
            )$
            197
            
            
            $
            223Accrued
      expenses:Income
      taxes payable
            
            $
            69
            
            
            $
            23Payroll
      and payroll taxes
            
            
            842
            
            
            
            765Reserve
      for litigation costs
            
            
            45
            
            
            
            80Other
            
            
            196
            
            
            
            218$
            1,152
            
            
            $
            1,086




38


Note 3 –
Investments





The
Company’s investments, classified as available-for-sale consist of the
following:





December 31,2009
              
              
              2008Investments,
      at cost
              
              $
              19,230
              
              
              $
              16,337Equity
      securities:-Unrealized
      holding gains
              
              
              -
              
              
              
              --Unrealized
      holding (losses)
              
              
              (385
              )
              
              
              (410
              )Investments,
      at fair value
              
              $
              18,845
              
              
              $
              15,927
  Changes
in the unrealized holding gain on investment securities available-for-sale and
reported as a separate component of accumulated other comprehensive income are
as follows:
 December 31,2009
              
              
              
              2008Balance,
      beginning of year
              
              $
              (250
              )
              
              $
              (156
              )Realized
      loss from securities included in beginning balance
              
              
              100
              
              
              
              186Gross
      unrealized holding gains (losses) in equity securities
              
              
              (75
              )
              
              
              (340
              )Deferred
      income taxes on unrealized holding loss
              
              
              (10
              )
              
              
              60Balance,
      end of year
              
              $
              (235
              )
              
              $
              (250
              )





During
2009, 2008 and 2007, UTMD had proceeds from sales of available-for-sale
securities of $1,116, $7,792 and $2,023, respectively.






Note 4 – Fair Value
Measurements





The
Company follows ASC 820, “Fair Value Measurements” to determine fair
value of its financial assets.  This standard is effective for fiscal
years beginning after November 15, 2008, and interim periods within those
fiscal years.  UTMD adopted the requirements of ASC 820 on
January 1, 2008.





The
following table provides financial assets carried at fair value measured as of
December 31, 2009:




Fair
      Value Measurements UsingDescription
            
            Total Fair
              Value at
              12/31/2009
            
            Quoted
      Prices in Active
              Markets
      for Identical
              Assets
              (Level 1)
            
            Significant
      Other
              Observable
      Inputs
              (Level 2)
            
            Significant
              Unobservable
              Inputs
              (Level 3 )Available-for-sale
      securities
            
            $
      18,845
            
            $
      18,845
            
            $  0
            
            $  0








Note 5 – Property and
Equipment





Property
and equipment consists of the following:


December 31,2009
            
            
            2008Land
            
            $
            1,115
            
            
            $
            1,105Buildings
      and improvements
            
            
            9,917
            
            
            
            9,644Furniture,
      equipment and tooling
            
            
            14,154
            
            
            
            14,549Construction-in-progress
            
            
            48
            
            
            
            7825,235
            
            
            
            25,376Accumulated
      depreciation and amortization
            
            
            (17,102
            )
            
            
            (17,249
            )$
            8,133
            
            
            $
            8,127


39


Note 5 – Property and
Equipment (continued)





Included
in the Company’s consolidated balance sheet are the assets of its manufacturing
facilities in Utah, Oregon and Ireland.  Property and equipment, by
location, are as follows:





December 31, 2009Utah
            
            
            Oregon
            
            
            Ireland
            
            
            TotalLand
            
            $
            621
            
            
            $
            -
            
            
            $
            494
            
            
            $
            1,115Building
      and improvements
            
            
            4,667
            
            
            
            32
            
            
            
            5,218
            
            
            
            9,917Furniture,
      equipment and tooling
            
            
            11,867
            
            
            
            1,296
            
            
            
            991
            
            
            
            14,154Construction-in-progress
            
            
            46
            
            
            
            2
            
            
            
            -
            
            
            
            48Total
            
            
            17,202
            
            
            
            1,330
            
            
            
            6,703
            
            
            
            25,235Accumulated
      depreciation
            
            
            (13,490
            )
            
            
            (1,295
            )
            
            
            (2,317
            )
            
            
            (17,102
            )Property
      and equipment, net
            
            $
            3,712
            
            
            $
            35
            
            
            $
            4,386
            
            
            $
            8,133December 31, 2008Utah
            
            
            Oregon
            
            
            Ireland
            
            
            TotalLand
            
            $
            621
            
            
            $
            -
            
            
            $
            484
            
            
            $
            1,105Building
      and improvements
            
            
            4,502
            
            
            
            32
            
            
            
            5,109
            
            
            
            9,644Furniture,
      equipment and tooling
            
            
            12,312
            
            
            
            1,287
            
            
            
            950
            
            
            
            14,549Construction-in-progress
            
            
            78
            
            
            
            -
            
            
            
            -
            
            
            
            78Total
            
            
            17,513
            
            
            
            1,319
            
            
            
            6,543
            
            
            
            25,376Accumulated
      depreciation
            
            
            (13,819
            )
            
            
            (1,288
            )
            
            
            (2,142
            )
            
            
            (17,249
            )Property
      and equipment, net
            
            $
            3,695
            
            
            $
            31
            
            
            $
            4,401
            
            
            $
            8,127








Note 6 – Long-term
Debt





In
December 2005, the Company borrowed €4.5 million ($5,336) from the Bank of
Ireland to finance repatriation of profits achieved since 1996 under The
American Jobs Creation Act of 2004.  The loan term is 10-years at an
interest rate of 1.10% plus the bank’s money market rate, which is a total of
the bank’s cost of funds and cost of liquidity.  The balance on the
note at December 31, 2009 was $1,668 (€1,158).





The
following table shows estimated minimum required amortization of the note during
the next five years using the December 31, 2009 interest rate of 1.97%, starting
with a December 31, 2009 balance of $1,668:





EndingYear
            
            Payments
            
            
            Interest
            
            
            Principal
            
            
            Balance2010
            
            $
            295
            
            
            $
            30
            
            
            $
            264
            
            
            $
            1,4032011
            
            
            295
            
            
            
            25
            
            
            
            270
            
            
            
            1,1332012
            
            
            295
            
            
            
            20
            
            
            
            275
            
            
            
            8582013
            
            
            295
            
            
            
            14
            
            
            
            281
            
            
            
            5782014
            
            
            295
            
            
            
            9
            
            
            
            286
            
            
            
            292Thereafter
            
            
            295
            
            
            
            3
            
            
            
            292
            
            
            
            -Total
            
            $
            1,769
            
            
            $
            102
            
            
            $
            1,668




40


Note 7 – Commitments and
Contingencies





Operating
Leases





The
Company has a lease agreement for land adjoining its Utah facility for a term of
forty years commencing on September 1, 1991.  On September 1, 2001 and
subsequent to each fifth lease year, the basic rental was and will be adjusted
for published changes in a price index.  The Company also leases its
CMI building in Oregon under a one-year non-cancelable operating lease that
expires on May 31, 2010.  Rent expense charged to operations under
these operating lease agreements was approximately $114, $112 and $112 for the
years ended December 31, 2009, 2008 and 2007, respectively.





Future
minimum lease payments under its lease obligations as of December 31, 2009 were
as follows:





Years ending December 31:
            
            Amount2010
            
            $
            712011
            
            
            402012
            
            
            402013
            
            
            402014
            
            
            40Thereafter
            
            
            673Total
      future minimum lease payments
            
            $
            904





Purchase
Obligations





The
Company has obligations to purchase raw materials for use in its manufacturing
operations.  The Company has the right to make changes in, among other
things, purchase quantities, delivery schedules and order
acceptance.





Product
Liability





The
Company is self-insured for product liability risk. “Product liability” is an
insurance industry term for the cost of legal defense and possible damages
awarded as a result of use of a company’s product during a procedure which
results in an injury of a patient.  The Company maintains a reserve
for product liability litigation and damages consistent with its previous
long-term experience.  Actual product liability litigation costs and
damages during the last three reporting years have been immaterial, which is
consistent with the Company’s overall history.





The
Company absorbs the costs of clinical training and trouble-shooting in its
on-going operating expenses.





Warranty
Reserve





The
Company’s published warranty is: “UTMD warrants its products to conform in all
material respects to all published product specifications in effect on the date
of shipment, and to be free from defects in material and workmanship for a
period of thirty (30) days for supplies, or twenty-four (24) months for
equipment, from date of shipment.  During the warranty period UTMD
shall, at its option, replace any products shown to UTMD's reasonable
satisfaction to be defective at no expense to the Purchaser or refund the
purchase price.”





UTMD
maintains a warranty reserve to provide for estimated costs which are likely to
occur. The amount of this reserve is adjusted, as required, to reflect its
actual experience. Based on its analysis of historical warranty claims and its
estimate that existing warranty obligations were immaterial, no warranty reserve
was made at December 31, 2009.  The following table summarizes changes
to UTMD’s warranty reserve during 2009:





Beginning
      balance, January 1, 2009
            
            $
            0Changes in warranty reserve during
      2009:Aggregate
      reductions for warranty repairs
            
            
            -Aggregate
      changes for warranties issued during reporting period
            
            
            -Aggregate
      changes in reserve related to preexisting warranties
            
            
            -Ending
      balance, December 31, 2009
            
            $
            0




41


Note 7 – Commitments and
Contingencies (continued)





Litigation





The
Company has been involved in lawsuits which are an expected consequence of its
operations and in the ordinary course of business.  There are no such
lawsuits currently pending.  The Company applies its accounting policy
to accrue legal costs that can be reasonably estimated.





Irish Development
Agency





In order
to satisfy requirements of the Irish Development Agency in assisting the
start-up of its Ireland subsidiary, the Company agreed to invest certain amounts
and maintain a certain capital structure in its Ireland
subsidiary.  The effect of these financial relationships and
commitments are reflected in the consolidated financial statements and do not
represent any significant credit risk that would affect future
liquidity.








Note 8 – Income
Taxes





Deferred
tax assets (liabilities) consist of the following temporary
differences:





December 31,2009
            
            
            2008Current
            
            
            Long-term
            
            
            Current
            
            
            Long-termInventory
      write-downs and differences due to UNICAP
            
            $
            74
            
            
            $
            -
            
            
            $
            75
            
            
            $
            -Allowance
      for doubtful accounts
            
            
            14
            
            
            
            -
            
            
            
            10
            
            
            
            -Accrued
      liabilities and reserves
            
            
            104
            
            
            
            -
            
            
            
            163
            
            
            
            -Other
            
            
            -
            
            
            
            (232
            )
            
            
            -
            
            
            
            (224
            )Depreciation
      and amortization
            
            
            -
            
            
            
            (527
            )
            
            
            -
            
            
            
            (356
            )Unrealized
      investment gains
            
            
            -
            
            
            
            150
            
            
            
            -
            
            
            
            160Deferred
      income taxes, net
            
            $
            192
            
            
            $
            (609
            )
            
            $
            248
            
            
            $
            (420
            )





The
components of income tax expense are as follows:





Years ended December 31,2009
            
            
            2008
            
            
            2007Current
            
            $
            3,087
            
            
            $
            3,463
            
            
            $
            3,914Deferred
            
            
            235
            
            
            
            109
            
            
            
            220Total
            
            $
            3,322
            
            
            $
            3,572
            
            
            $
            4,134





Income
tax expense differed from amounts computed by applying the statutory federal
rate to pretax income as follows:




Years ended December 31,2009
            
            
            2008
            
            
            2007Federal
      income tax expense at the statutory rate
            
            $
            3,257
            
            
            $
            3,664
            
            
            $
            4,093State
      income taxes
            
            
            316
            
            
            
            323
            
            
            
            397ETI,
      manufacturing deduction and tax credits
            
            
            (193
            )
            
            
            (206
            )
            
            
            (203
            )Other
            
            
            (58
            )
            
            
            (209
            )
            
            
            (153
            )Total
            
            $
            3,322
            
            
            $
            3,572
            
            
            $
            4,134





The
domestic and foreign components of income before income tax expense were as
follows:





Years ended December 31,2009
            
            
            2008
            
            
            2007Domestic
            
            $
            9,200
            
            
            $
            9,916
            
            
            $
            11,032Foreign
            
            
            380
            
            
            
            861
            
            
            
            1,006Total
            
            $
            9,580
            
            
            $
            10,777
            
            
            $
            12,038


42


Note 9 –
Options





The
Company has stock option plans which authorize the grant of stock options to
eligible employees, directors and other individuals to purchase up to an
aggregate of 898,390 shares of common stock, of which 241,711 are outstanding as
of December 31, 2009.  All options granted under the plans are granted
at current market value at the date of grant, and may be exercised between six
months and ten years following the date of grant.  The plans are
intended to advance the interest of the Company by attracting and ensuring
retention of competent directors, employees and executive personnel, and to
provide incentives to those individuals to devote their utmost efforts to the
advancement of shareholder value.  Changes in stock options were as
follows:





Price
      RangeShares
            
            
            Per Share2009Granted
            
            
            56,600
            
            
            $
            24.00
      -
            $
            24.00Expired
      or canceled
            
            
            6,712
            
            
            
            18.00
      -
            
            31.33Exercised
            
            
            16,434
            
            
            
            6.50
      -
            
            25.59Total
      outstanding at December 31
            
            
            241,711
            
            
            
            6.75
      -
            
            31.33Total
      exercisable at December 31
            
            
            167,501
            
            
            
            6.75
      -
            
            31.332008Granted
            
            
            26,100
            
            
            $
            28.13
      -
            $
            29.41Expired
      or canceled
            
            
            9,919
            
            
            
            18.00
      -
            
            31.33Exercised
            
            
            20,169
            
            
            
            6.50
      -
            
            25.59Total
      outstanding at December 31
            
            
            208,257
            
            
            
            6.50
      -
            
            31.33Total
      exercisable at December 31
            
            
            168,457
            
            
            
            6.50
      -
            
            31.332007Granted
            
            
            23,600
            
            
            $
            31.33
      -
            $
            31.33Expired
      or canceled
            
            
            4,237
            
            
            
            18.00
      -
            
            31.33Exercised
            
            
            35,062
            
            
            
            6.50
      -
            
            29.86Total
      outstanding at December 31
            
            
            212,245
            
            
            
            6.50
      -
            
            31.33Total
      exercisable at December 31
            
            
            171,618
            
            
            
            6.50
      -
            
            29.86





For the
years ended December 31, 2009, 2008 and 2007, the Company reduced current
income taxes payable and increased additional paid-in capital by $14, $42 and
$60, respectively, for the income tax benefit attributable to sale by optionees
of common stock received upon the exercise of stock options.





Stock-Based
Compensation





In 2009,
the Company recognized $98 in equity compensation cost, compared to $120 in 2008
and $95 in 2007.





The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:





Years ended December 31,2009
            
            
            2008
            
            
            2007Expected
      dividend amount per quarter
            
            $
            0.2466
            
            
            $
            0.2737
            
            
            $
            0.2638Expected
      stock price volatility
            
            
            21.6%
            
            
            
            16.3%
            
            
            
            17.9%Risk-free
      interest rate
            
            
            1.76%
            
            
            
            2.92%
            
            
            
            4.56%Expected
      life of options
            
            4.7
      years
            
            
            5.3
      years
            
            
            5.6
      years





The per
share weighted average fair value of options granted during 2009, 2008 and 2007
is $2.62, $2.91 and $5.10, respectively.


43


Note 9 – Options
(continued)




All UTMD
options vest over a four-year service period.  Expected dividend
amounts were estimated based on the actual cash dividend rate at the time the
options were granted and an estimate of future dividends based on past dividend
rate changes as well as management’s expectations of future dividend rates over
the expected holding period of the options.  Expected volatility is
based on UTMD’s historical volatility over recent periods of time and trends in
that volatility, giving more weight to recent periods.  Risk free
interest rates were estimated based on actual U.S. Treasury Securities Interest
rates as reported by the Federal Reserve Bank for periods of time equivalent to
the holding periods estimated for the options on the dates the options were
granted.  Expected term of options were estimated based on historical
holding periods for similar options previously granted by UTMD to employees and
directors.




The
following table summarizes information about stock options outstanding at
December 31, 2009:





Options Outstanding
            
            
            Options ExercisableWeightedAverageRemaining
            
            
            Weighted
            
            
            
            
            
            WeightedRange
      of
            
            
            
            
            
            Contractual
            
            
            Average
            
            
            
            
            
            AverageExercise
            
            
            Number
            
            
            Life
            
            
            Exercise
            
            
            Number
            
            
            ExercisePrices
            
            
            Outstanding
            
            
            (Years)
            
            
            Price
            
            
            Exercisable
            
            
            Price$
            6.75
      - 15.01
            
            
            
            21,221
            
            
            
            1.49
            
            
            $
            11.61
            
            
            
            21,221
            
            
            $
            11.6117.71
      - 24.02
            
            
            
            103,953
            
            
            
            6.74
            
            
            
            22.64
            
            
            
            49,553
            
            
            
            21.1525.59 - 31.33
            
            
            
            116,537
            
            
            
            5.46
            
            
            
            27.32
            
            
            
            96,727
            
            
            
            26.84$
            6.75 - 31.33
            
            
            
            241,711
            
            
            
            5.66
            
            
            $
            23.93
            
            
            
            167,501
            
            
            $
            23.23








Note 10 – Geographic Sales
Information





The
Company had sales in the following geographic areas:





United States
            
            
            Europe
            
            
            Other2009
            
            $
            18,626
            
            
            $
            3,030
            
            
            $
            4,2602008
            
            
            19,114
            
            
            
            4,779
            
            
            
            3,8892007
            
            
            19,926
            
            
            
            4,754
            
            
            
            3,822








Note 11 – Revenues by
Product Category





The
Company had revenues in the following product categories:





Product Category
            
            
            2009
            
            
            2008
            
            
            2007Obstetrics
            
            $
            6,543
            
            
            $
            7,054
            
            
            $
            8,473Gynecology/Electrosurgery/Urology
            
            
            6,220
            
            
            
            6,157
            
            
            
            6,143Neonatal
            
            
            7,252
            
            
            
            7,408
            
            
            
            7,062Blood
      Pressure Monitoring and Accessories
            
            
            5,902
            
            
            
            7,163
            
            
            
            6,824




44


Note 12 - Product Sale and
Purchase Commitments





The
Company has had license agreements for the rights to develop and market certain
products or technologies owned by unrelated parties.  The confidential
terms of such agreements are unique and varied, depending on many factors
relating to the value and stage of development of the technology
licensed.  Royalties on future product sales are a normal component of
such agreements and are included in the Company’s cost of goods sold on an
ongoing basis.





Prior to
2009, the Company received royalties as a result of a license agreement with an
unrelated company that allowed rights to the Company’s technology through the
life of the applicable patents.  At the start of 2010 there are no
patents under which UTMD is receiving royalties from other parties.








Note 13 – Employee Benefit
Plan





The
Company sponsors a contributory 401(k) savings plan for U.S. employees, and a
contributory retirement plan for Irish employees.  The Company’s
matching contribution is determined annually by the board of
directors.  Company contributions were approximately $106, $115 and
$107 for the years ended December 31, 2009, 2008 and 2007,
respectively.








Note 14 – Fair Value
Financial Instruments





None of
the Company’s financial instruments, which are current assets and liabilities
that could be readily traded, are held for trading purposes.  Detail
on investments is provided in note 3, above.  The Company estimates
that the fair value of all financial instruments at December 31, 2009 does not
differ materially from the aggregate carrying value of its financial instruments
recorded in the accompanying consolidated balance sheet.








Note 15 – Recent Accounting
Pronouncements








In June
2009, the FASB changed the hierarchy of U.S. generally accepted accounting
principles (“GAAP”) such that the newly released FASB Accounting Standards
Codification (“ASC”) will replace other sources of authoritative GAAP with the
exception of rules and interpretive releases of the Securities and Exchange
Commission, which will continue to be authoritative. The ASC is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009 and is not intended to significantly change
GAAP.








Note 16 – Subsequent
Events




The
Company evaluated its December 31, 2009 financial statements for subsequent
events through February 19, 2010, the date the financial statements were
available to be issued.  The Company is not aware of any subsequent
events which would require recognition or disclosure in the financial
statements.








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





None.








ITEM
9A – CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures.


UTMD Management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as defined in the Securities Exchange Act of 1934 Rule
13a-15(e).  UTMD’s Board of Directors, operating through its audit
committee, provides oversight to its financial reporting process.




45




During 2009, UTMD evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures. Based on that evaluation, UTMD’s Chief Executive Officer and
Principal Financial Officer concluded that, as of December 31, 2009, its
disclosure controls and procedures were effective.





Management’s
Report on Internal Control Over Financial Reporting.


Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, the Company has included, as part of this
Form 10-K, a report of management's assessment of the effectiveness of its
internal controls as of December 31, 2009.  Jones Simkins, P.C.,
the independent registered public accounting firm of the Company, has audited
the effectiveness of the Company's internal control over financial reporting.
Management's report, and the report of Jones Simkins, P.C. appear on
pages 28 and 29 of this Form 10-K under the captions
"Management's Report on Internal Control Over Financial Reporting" and "Report
of Independent Registered Public Accounting Firm" and are incorporated herein by
reference.





Changes
in Internal Control Over Financial Reporting.


There have been no changes in UTMD’s
internal control over financial reporting that materially affected, or were
reasonably likely to materially affect, the Company’s internal control over
financial reporting during the fourth quarter of the fiscal year ended December
31, 2009, and there were no material weaknesses.








ITEM
9B – OTHER INFORMATION





None.







46


PART III





ITEM
10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The information from the definitive
proxy statement of the registrant for the 2010 annual meeting of shareholders
under the captions,





·
            “PROPOSAL
      NO. 1. ELECTION OF DIRECTORS: General,” and “Directors and
      Nominees,”




·
            “SECURITY
      OWNERSHIP OF MANAGEMENT AND CERTAIN PERSONS,”
  and




·
            “EXECUTIVE
      OFFICER COMPENSATION: 2009 Director
  Compensation,”





is
incorporated herein by reference.





UTMD adopted a Code of Ethics for its
executive officers, including the Chief Executive Officer and outside directors,
in October 2003.  The Code of Ethics, along with UTMD’s Code of
Conduct, which covers all exempt employees (including all officers and outside
directors) and certain non-exempt employees, is posted on UTMD’s web site at
www.utahmed.com.  UTMD
intends to post on its website any waivers of or amendments to its Code of
Ethics.








ITEM
11 - EXECUTIVE COMPENSATION





The information from the definitive
proxy statement of the registrant for the 2010 annual meeting of shareholders
under the captions,





·
            “EXECUTIVE
      OFFICER COMPENSATION,”




·
            COMPENSATION
      DISCUSSION AND ANALYSIS,” and




·
            BOARD
      OF DIRECTORS AND OTHER BOARD COMMITTEE REPORTS: Compensation and Option
      Committee Interlocks and Insider Participation,” specifically excluding
      the “Report of the Compensation
Committee”





is
incorporated herein by reference.








ITEM
12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





The information from the definitive
proxy statement of the registrant for the 2010 annual meeting of shareholders
under the captions,





·
            “SECURITY
      OWNERSHIP OF MANAGEMENT AND CERTAIN PERSONS”
and




·
            “DISCLOSURE
      RESPECTING THE COMPANY’S EQUITY COMPENSATION
  PLANS”





is
incorporated herein by reference.




47


ITEM 13 - CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





The information from the definitive
proxy statement of the registrant for the 2010 annual meeting of shareholders
under the captions,





·
            “CERTAIN
      RELATIONSHIPS AND RELATED
TRANSACTIONS”




·
            “BOARD
      OF DIRECTORS AND OTHER BOARD COMMITTEE REPORTS: Director
      Independence”





is
incorporated herein by reference.





The information from the definitive
proxy statement of the registrant for the 2010 annual meeting of shareholders in
the first paragraph under the caption, “Report of the Audit Committee” is
incorporated herein by reference.








ITEM
14 – PRINCIPAL ACCOUNTING FEES AND SERVICES





The information from the definitive
proxy statement of the registrant for the 2010 annual meeting of shareholders
under the caption “PROPOSAL NO 2. RATIFICATION OF THE APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM: Fees billed by Jones Simkins P.C.,” “Audit
Committee Policy and Approval,” and “Auditor Independence” are incorporated
herein by reference.










48


PART IV





ITEM
15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES





(a)  The following documents
are filed as part of this report or incorporated herein by
reference.





1.     Financial
Statements.


(See Table of Contents to Item 8,
above.)





2.     Supplemental
Schedule.


Financial Statement Schedules are
omitted because they are inapplicable or the required information is otherwise
included in the accompanying Financial Statements and the notes
thereto.





3.     Exhibits.


Exhibit #
            SEC
              Reference#
            Title of Document
            Location1
            3
            Articles
      of Restatement of the Articles of Incorporation
            Incorporated
      by
              Reference
      (1)2
            3
            Articles
      of Correction to the Restated Articles of Incorporation
            Incorporated
      by
              Reference
      (1)3
            3
            Bylaws
            Incorporated
      by
              Reference
      (2)4
            4
            Rights
      Agreement dated as of July 30, 2004, between Utah Medical Products, Inc.,
      and Registrar and Transfer Company
            Incorporated
      by
              Reference
      (3)5
            4
            Designation
      of Rights, Privileges, and Preferences of Series “A” Preferred
      Stock
            Incorporated
      by
              Reference
      (2)6
            10
            Employment
      Agreement dated December 21, 1992 with Kevin L. Cornwell*
            Incorporated
      by
              Reference
      (4)7
            10
            Amendment,
      effective May 15, 1998, to Employment Agreement dated December 21, 1992
      with Kevin L. Cornwell*
            Incorporated
      by
              Reference
      (4)8
            10
            Utah
      Medical Products, Inc., 2003 Employees’ and Directors’ Incentive
      Plan*
            Incorporated
      by
              Reference
      (5)9
            10
            Loan
      Agreement, signed 6-December-2005 between Utah Medical Products Limited
      and Bank of Ireland
            Incorporated
      by
              Reference
      (6)10
            10
            Amendment
      to Loan Agreement, dated 12-March-2008 between Utah Medical Products
      Limited and Bank of Ireland
            Incorporated
      by
              Reference
      (7)11
            10
            Guarantee
      and Indemnity, dated 13-June-2008, by Utah Medical Products, Inc. to Bank
      of Ireland
            Incorporated
      by
              Reference
      (7)12
            10
            Summary
      of Officer and Director Compensation
            This
      Filing13
            21
            Subsidiaries
      of Utah Medical Products, Inc.
            Incorporated
      by
              Reference
      (8)14
            23
            Consent
      of Jones Simkins, P.C., Company’s independent auditors for the years ended
      December 31, 2009, December 31, 2008 and December 31, 2007
            This
      Filing15
            31
            Certification
      of CEO pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002
            This
      Filing16
            31
            Certification
      of Principal Financial Officer pursuant to Rule 13a-14(a) as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
            This
      Filing




49





Exhibit #
            SEC
              Reference #
            Title of Document
            Location17
            32
            Certification
      of CEO pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
            This
      Filing18
            32
            Certification
      of Principal Financial Officer pursuant to 18 U.S.C. §1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
            This
      Filing





*
Management contract of compensatory plan or arrangement required to be filed
pursuant to Item 14(c).





(1)
            Incorporated
      by reference from the Company’s annual report on form 10-K filed with the
      Commission for the year ended December 31, 2004.(2)
            Incorporated
      by reference from the Company’s registration statement on form S-8 filed
      with the Commission effective February 10, 1995.(3)
            Incorporated
      by reference from the Company’s report on form 8-K filed with the
      Commission on October 1, 2004.(4)
            Incorporated
      by reference from the Company’s annual report on form 10-K filed with the
      Commission for the year ended December 31, 2003.(5)
            Incorporated
      by reference from the Company’s annual report on form 10-K filed with the
      Commission for the year ended December 31, 2002.(6)
            Incorporated
      by reference from the Company’s report on form 8-K filed with the
      Commission on December 12, 2005.(7)
            Incorporated
      by reference form the Company’s annual report on form 10-K/A filed with
      the Commission for the year ended December 31, 2008.(8)
            Incorporated
      by reference from the Company’s annual report on form 10-K filed with the
      Commission for the year ended December 31,
1999.








50


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 this 8th day of
March, 2010.





UTAH
MEDICAL PRODUCTS, INC.





By:
            /s/ Kevin L.
      CornwellKevin
      L. CornwellChief
      Executive Officer








Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
this 8th day of March, 2010.








By:
            /s/ James H.
      BeesonJames
      H. Beeson, DirectorBy:
            /s/ Kevin L.
      CornwellKevin
      L. Cornwell, Chief Executive Officer & DirectorBy:
            /s/ Ernst G.
      HoyerErnst
      G. Hoyer, DirectorBy:
            /s/ Barbara A.
      PayneBarbara
      A. Payne, DirectorBy:
            /s/ Paul O.
      RichinsPaul
      O. Richins, Principal Financial and Accounting Officer &
      Director








51