UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-Q





x
            Quarterly
      Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the Quarterly Period Ended September 30,
  2008


or


o
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the Transition Period
    from    to





Commission
File Number 0-10763





Atrion
      Corporation(Exact
      Name of Registrant as Specified in its Charter)Delaware
                  
                  63-0821819(State
      or Other Jurisdiction of
                    Incorporation
      or Organization)
                  
                  (I.R.S.
      Employer
                    Identification
      No.)One Allentown Parkway, Allen,
      Texas  75002(Address
      of Principal Executive Offices)   (Zip
  Code)(972) 390-9800(Registrant’s
      Telephone Number, Including Area
Code)





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





Indicate
by check whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions
of “accelerated filer.” “large accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act (Check one):





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





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


o  
Yes                        
x   
No





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.





Title
      of Each Class
              
              Number
      of Shares Outstanding at
                October
      27, 2008Common
      stock, Par Value $0.10 per share
              
              1,966,885










ATRION
CORPORATION AND SUBSIDIARIES








TABLE OF
CONTENTS








PART I.    Financial
      Information
                      2Item
      1.
                      Financial StatementsConsolidated Statements of Income (Unaudited) For the Three
      and Nine months Ended September 30, 2008 and 2007
                      3Consolidated Balance Sheets (Unaudited) September 30, 2008 and
      December 31, 2007
                      4Consolidated Statements of Cash Flows (Unaudited) For the
      Nine months Ended September 30, 2008 and 2007
                      5Notes to Consolidated Financial Statements
      (Unaudited)
                      6Item
      2.
                      Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                      8Item 3.
                      Quantitative and Qualitative Disclosures About Market
      Risk
                      13Item
      4.
                      Controls and Procedures
                      13PART II.    Other
      Information
                      14Item
      1.
                      Legal Proceedings
                      14Item
      1A.
                      Risk Factors
                      14Item
      6.
                      Exhibits and Reports on Form 8-K
                      14SIGNATURES
                      15


1
 Table of Contents


PART I








FINANCIAL
INFORMATION


2
 Table of Contents


Item 1.  Financial Statements





ATRION CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


(Unaudited)




Three
      Months Ended
                        September 30,
                      
                      
                      Nine
      Months Ended
                        September 30,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007(in
      thousands, except per share amounts)Revenues
                      
                      $
                      23,461
                      
                      
                      $
                      21,315
                      
                      
                      $
                      72,305
                      
                      
                      $
                      67,552Cost
      of goods sold
                      
                      
                      13,221
                      
                      
                      
                      12,210
                      
                      
                      
                      40,279
                      
                      
                      
                      38,468Gross
      profit
                      
                      
                      10,240
                      
                      
                      
                      9,105
                      
                      
                      
                      32,026
                      
                      
                      
                      29,084Operating
      expenses:Selling
                      
                      
                      1,432
                      
                      
                      
                      1,494
                      
                      
                      
                      4,777
                      
                      
                      
                      4,818General
      and administrative
                      
                      
                      2,398
                      
                      
                      
                      2,595
                      
                      
                      
                      7,644
                      
                      
                      
                      7,682Dispute
      resolution
                      
                      
                      --
                      
                      
                      
                      (1,398
                      )
                      
                      
                      --
                      
                      
                      
                      (1,398
                      )Research
      and development
                      
                      
                      630
                      
                      
                      
                      619
                      
                      
                      
                      2,241
                      
                      
                      
                      2,0244,460
                      
                      
                      
                      3,310
                      
                      
                      
                      14,662
                      
                      
                      
                      13,126Operating
      income
                      
                      
                      5,780
                      
                      
                      
                      5,795
                      
                      
                      
                      17,364
                      
                      
                      
                      15,958Other
      income:Interest
      income
                      
                      
                      79
                      
                      
                      
                      10
                      
                      
                      
                      165
                      
                      
                      
                      30Interest
      expense
                      
                      
                      (1
                      )
                      
                      
                      (33
                      )
                      
                      
                      (1
                      )
                      
                      
                      (251
                      )Other
      income (expense), net
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1
                      
                      
                      
                      --78
                      
                      
                      
                      (23
                      )
                      
                      
                      165
                      
                      
                      
                      (221
                      )Income
      before provision for income taxes
                      
                      
                      5,858
                      
                      
                      
                      5,772
                      
                      
                      
                      17,529
                      
                      
                      
                      15,737Provision
      for income taxes
                      
                      
                      (1,866
                      )
                      
                      
                      (1,662
                      )
                      
                      
                      (5,746
                      )
                      
                      
                      (4,873
                      )Net
      income
                      
                      $
                      3,992
                      
                      
                      $
                      4,110
                      
                      
                      $
                      11,783
                      
                      
                      $
                      10,864Income
      per basic share
                      
                      $
                      2.04
                      
                      
                      $
                      2.17
                      
                      
                      $
                      6.04
                      
                      
                      $
                      5.77Weighted
      average basic shares outstanding
                      
                      
                      1,958
                      
                      
                      
                      1,895
                      
                      
                      
                      1,950
                      
                      
                      
                      1,883Income
      per diluted share
                      
                      $
                      1.99
                      
                      
                      $
                      2.07
                      
                      
                      $
                      5.88
                      
                      
                      $
                      5.49Weighted
      average diluted shares outstanding
                      
                      
                      2,005
                      
                      
                      
                      1,988
                      
                      
                      
                      2,005
                      
                      
                      
                      1,980Dividends
      per common share
                      
                      $
                      0.30
                      
                      
                      $
                      0.24
                      
                      
                      $
                      0.78
                      
                      
                      $
                      0.64




The
accompanying notes are an integral part of these statements.


3
 Table of Contents


ATRION CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Unaudited)






Assets
                        
                        September 30,
                          2008
                        
                        
                        December 31,
                          2007(in
      thousands, except per share amounts)Current
      assets:Cash
      and cash equivalents
                        $
                        13,845
                        
                        
                        $
                        3,531Accounts
      receivable
                        
                        
                        11,719
                        
                        
                        
                        9,601Inventories
                        
                        
                        21,373
                        
                        
                        
                        17,387Prepaid
      expenses
                        
                        
                        1,057
                        
                        
                        
                        1,483Other
                        
                        
                        607
                        
                        
                        
                        60748,601
                        
                        
                        
                        32,609Property,
      plant and equipment
                        
                        
                        93,681
                        
                        
                        
                        89,736Less
      accumulated depreciation and amortization
                        
                        
                        39,572
                        
                        
                        
                        35,68654,109
                        
                        
                        
                        54,050Other
      assets and deferred charges:Patents
                        
                        
                        1,783
                        
                        
                        
                        2,011Goodwill
                        
                        
                        9,730
                        
                        
                        
                        9,730Other
                        
                        
                        1,687
                        
                        
                        
                        91313,200
                        
                        
                        
                        12,654$
                        115,910
                        
                        
                        $
                        99,313Liabilities and Stockholders’
      EquityCurrent
      liabilities:Accounts
      payable and accrued liabilities
                        
                        $
                        6,898
                        
                        
                        $
                        6,349Accrued
      income and other taxes
                        
                        
                        996
                        
                        
                        
                        5157,894
                        
                        
                        
                        6,864Line
      of credit
                        
                        
                        3,000
                        
                        
                        
                        --Other
      non-current liabilities
                        
                        
                        7,596
                        
                        
                        
                        7,007Stockholders’
      equity:Common
      shares, par value $0.10 per share; authorized 10,000 shares, issued 3,420
      shares
                        
                        
                        342
                        
                        
                        
                        342Paid-in
      capital
                        
                        
                        18,968
                        
                        
                        
                        15,790Accumulated
      other comprehensive loss
                        
                        
                        (486
                        )
                        
                        
                        (486
                        )Retained
      earnings
                        
                        
                        114,263
                        
                        
                        
                        104,021Treasury
      shares,1,453 at September 30, 2008 and 1,509 at December 31, 2007, at
      cost
                        
                        
                        (35,667
                        )
                        
                        
                        (34,225
                        )Total
      stockholders’ equity
                        
                        
                        97,420
                        
                        
                        
                        85,442$
                        115,910
                        
                        
                        $
                        99,313




The
accompanying notes are an integral part of these financial
statements.


4
 Table of Contents


ATRION CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)







Nine
      months Ended
                                                                                                              September 30,2008
                                                                                                            
                                                                                                            
                                                                                                            2007(in
      thousands)Cash
      flows from operating activities:Net
      income
                                                                                                            
                                                                                                            $
                                                                                                            11,783
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            10,864Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                                                                                                            
                                                                                                            
                                                                                                            4,688
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            4,064Deferred
      income taxes
                                                                                                            
                                                                                                            
                                                                                                            722
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            933Stock-based
      compensation
                                                                                                            
                                                                                                            
                                                                                                            482
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            269Pension
      charge
                                                                                                            
                                                                                                            
                                                                                                            --
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            228Other
                                                                                                            
                                                                                                            
                                                                                                            37
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            3517,712
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            16,393Changes
      in operating assets and liabilities:Accounts
      receivable
                                                                                                            
                                                                                                            
                                                                                                            (2,118
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            148Inventories
                                                                                                            
                                                                                                            
                                                                                                            (3,986
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (612
                                                                                                            )Prepaid
      expenses
                                                                                                            
                                                                                                            
                                                                                                            427
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            501Other
      non-current assets
                                                                                                            
                                                                                                            
                                                                                                            (149
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            1,005Accounts
      payable and current liabilities
                                                                                                            
                                                                                                            
                                                                                                            549
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,259Accrued
      income and other taxes
                                                                                                            
                                                                                                            
                                                                                                            481
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,222Other
      non-current liabilities
                                                                                                            
                                                                                                            
                                                                                                            (133
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (1,614
                                                                                                            )12,783
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            18,302Cash
      flows from investing activities:Property,
      plant and equipment additions
                                                                                                            
                                                                                                            
                                                                                                            (4,556
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (6,021
                                                                                                            )Other
                                                                                                            
                                                                                                            
                                                                                                            (625
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            -(5,181
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (6,021
                                                                                                            )Cash
      flows from financing activities:Line
      of credit advances
                                                                                                            
                                                                                                            
                                                                                                            3,000
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            19,426Line
      of credit repayments
                                                                                                            
                                                                                                            
                                                                                                            --
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (30,825
                                                                                                            )Exercise
      of stock options
                                                                                                            
                                                                                                            
                                                                                                            525
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            588Shares
      tendered for employees’ taxes on stock-based compensation
                                                                                                            
                                                                                                            
                                                                                                            (913
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (47
                                                                                                            )Tax
      benefit related to stock options
                                                                                                            
                                                                                                            
                                                                                                            1,632
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            502Dividends
      paid
                                                                                                            
                                                                                                            
                                                                                                            (1,532
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            (1,213
                                                                                                            )2,712
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (11,569
                                                                                                            )Net
      change in cash and cash equivalents
                                                                                                            
                                                                                                            
                                                                                                            10,314
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            712Cash
      and cash equivalents at beginning of period
                                                                                                            
                                                                                                            
                                                                                                            3,531
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            333Cash
      and cash equivalents at end of period
                                                                                                            
                                                                                                            $
                                                                                                            13,845
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            1,045Cash
      paid for:Interest
      (net of capitalization)
                                                                                                            
                                                                                                            $
                                                                                                            --
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            309Income
      taxes
                                                                                                            
                                                                                                            $
                                                                                                            2,616
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            2,349




The
accompanying notes are an integral part of these financial
statements.


5
 Table of Contents


ATRION CORPORATION AND
  SUBSIDIARIES


NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)





(1)
            Basis
      of Presentation


In the
opinion of management, all adjustments necessary for a fair presentation of
results of operations for the periods presented have been included in the
accompanying unaudited consolidated financial statements of Atrion Corporation
and its subsidiaries (the “Company”). Such adjustments consist of normal
recurring items. The accompanying financial statements have been prepared in
accordance with the instructions to Form 10-Q and include the information and
notes required by such instructions. Accordingly, the consolidated financial
statements and notes thereto should be read in conjunction with the financial
statements and notes included in the Company’s 2007 Annual Report on Form
10-K.








(2)
            Inventories


Inventories
are stated at the lower of cost or market. Cost is determined by using the
first-in, first-out method. The following table details the major components of
inventories (in thousands):





September 30,
                                                                2008
                                                              
                                                              
                                                              December 31,
                                                                2007Raw
      materials
                                                              
                                                              $
                                                              8,965
                                                              
                                                              
                                                              $
                                                              7,452Work
      in process
                                                              
                                                              
                                                              5,005
                                                              
                                                              
                                                              
                                                              4,513Finished
      goods
                                                              
                                                              
                                                              7,403
                                                              
                                                              
                                                              
                                                              5,422Total
      inventories
                                                              
                                                              $
                                                              21,373
                                                              
                                                              
                                                              $
                                                              17,387





(3)
            Income
      per share


The
following is the computation for basic and diluted income per
share:





Three
      monthsended
                                                                                                                                                                    September 30,
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  Nine
      monthsended
                                                                                                                                                                    September 30,2008
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  2007
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  2008
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  2007(in
      thousands, except per share amounts)Net
      income
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  3,992
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  4,110
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  11,783
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  10,864Weighted
      average basic shares outstanding
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,958
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,895
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,950
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,883Add: Effect
      of dilutive securities
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  47
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  93
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  55
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  97Weighted
      average diluted shares outstanding
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  2,005
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,988
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  2,005
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,980Earnings
      per share:Basic
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  2.04
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  2.17
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  6.04
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  5.77Diluted
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  1.99
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  2.07
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  5.88
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  5.49





Outstanding
options, restricted stock, and deferred stock units that were not included in
the diluted income per share calculation because their effect would be
anti-dilutive totaled 20,336 for the three-month and the nine-month periods
ended September 30, 2008, respectively, and none for the same periods in
2007.


6
 Table of Contents


ATRION
      CORPORATION AND SUBSIDIARIES


NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)





(4)
            Pension
      Benefits


The
components of net periodic pension cost for the Atrion Corporation Cash Balance
Plan (the “Plan”) are as follows (in thousands):





Three
      Months ended September 30,
                          
                          
                          Nine
      Months ended
                            September 30,2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007Service
      cost
                          
                          $
                          --
                          
                          
                          $
                          65
                          
                          
                          $
                          --
                          
                          
                          $
                          195Interest
      cost
                          
                          
                          56
                          
                          
                          
                          80
                          
                          
                          
                          168
                          
                          
                          
                          240Expected
      return on assets
                          
                          
                          (55
                          )
                          
                          
                          (123
                          )
                          
                          
                          (165
                          )
                          
                          
                          (369
                          )Prior
      service cost amortization
                          
                          
                          --
                          
                          
                          
                          (9
                          )
                          
                          
                          --
                          
                          
                          
                          (27
                          )Net
      curtailment/settlement losses
                          
                          
                          
                          
                          
                          
                          310
                          
                          
                          
                          
                          
                          
                          
                          310Actuarial
      loss
                          
                          
                          8
                          
                          
                          
                          15
                          
                          
                          
                          24
                          
                          
                          
                          45Net
      periodic pension cost
                          
                          $
                          9
                          
                          
                          $
                          338
                          
                          
                          $
                          27
                          
                          
                          $
                          394





In
September 2007, the Company terminated the Plan. Participants accrued pension
benefits through December 31, 2007, but will not accrue any additional benefits
under the Plan after that date. However, participants will continue to earn
interest credits on their account balances until the Plan has settled all its
obligations with respect to termination. A curtailment gain of approximately
$361,000 was recorded in the third quarter of 2007. During September 2007 the
Plan settled its obligations to a certain group of participants whose employment
had been terminated by acquiring for them annuities from a life insurance
company. A settlement loss of approximately $671,000 was recorded in the third
quarter of 2007. The Company believes that the Plan is adequately funded to
cover its settlement obligations. The final pay out for the Plan termination
will likely occur in early 2009 after all regulatory approvals are
received.





During
the third quarter of 2007 the Company also terminated and settled its
obligations under two nonqualified retirement plans by making additional
contributions of $280,000 to the trusts for such plans and then distributing all
trust assets to the plan participants. A settlement loss of approximately
$19,000 was recorded in the third quarter of 2007 with respect to these
plans.





(5)
            Recent
      Accounting Pronouncements





From time
to time, new accounting pronouncements applicable to the Company are issued by
the Financial Accounting Standards Board (FASB) or other standards setting
bodies, which the Company will adopt as of the specified effective date. Unless
otherwise discussed, the Company believes the impact of recently issued
standards that are not yet effective will not have a material impact on its
consolidated financial statements upon adoption.


7
 Table of Contents


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





Overview





The
Company designs, develops, manufactures, sells and distributes products and
components, primarily for the medical and healthcare industry. The Company
markets components to other equipment manufacturers for incorporation in their
products and sells finished devices to physicians, hospitals, clinics and other
treatment centers. The Company’s medical products primarily serve the fluid
delivery, cardiovascular, and ophthalmology markets. The Company’s other medical
and non-medical products include instrumentation and disposables used in
dialysis, contract manufacturing and valves and inflation devices used in marine
and aviation safety products.




The
Company's products are used in a wide variety of applications by numerous
customers. The Company encounters competition in all of its markets and competes
primarily on the basis of product quality, price, engineering, customer service
and delivery time.




The
Company's strategy is to provide a broad selection of products in the areas of
its expertise. Research and development efforts are focused on improving current
products and developing highly-engineered products that meet customer needs and
have the potential for broad market applications and significant sales. Proposed
new products may be subject to regulatory clearance or approval prior to
commercialization and the time period for introducing a new product to the
marketplace can be unpredictable. The Company also focuses on controlling costs
by investing in modern manufacturing technologies and controlling purchasing
processes. The Company has been successful in consistently generating cash from
operations and has used that cash to reduce indebtedness, to fund capital
expenditures, to repurchase stock and to pay dividends.




The
Company's strategic objective is to further enhance its position in its served
markets by:




·
            Focusing
      on customer needs;


·
            Expanding
      existing product lines and developing new
  products;


·
            Maintaining
      a culture of controlling cost; and


·
            Preserving
      and fostering a collaborative, entrepreneurial management
      structure.





For the
three months ended September 30, 2008, the Company reported revenues of $23.5
million, operating income of $5.8 million and net income of $4.0
million.  Revenues were up 10 percent, operating income remained at
the same level, and net income was down 3 percent compared to the three months
ended September 30, 2007. For the nine months ended September 30, 2008, the
Company reported revenues of $72.3 million, operating income of $17.4 million
and net income of $11.8 million, up 7 percent, 9 percent and 8 percent,
respectively, from the nine months ended September 30, 2007.


8
 Table of Contents


Results
for the three months ended September 30, 2008





Consolidated
net income totaled $4.0 million, or $2.04 per basic and $1.99 per diluted share,
in the third quarter of 2008. This is compared with consolidated net income of
$4.1 million, or $2.17 per basic and $2.07 per diluted share, in the third
quarter of 2007. The income per basic share computations are based on weighted
average basic shares outstanding of 1,957,943 in the 2008 period and 1,894,622
in the 2007 period. The income per diluted share computations are based on
weighted average diluted shares outstanding of 2,005,295 in the 2008 period and
1,988,150 in the 2007 period.





Consolidated
revenues of $23.5 million for the third quarter of 2008 were 10 percent higher
than revenues of $21.3 million for the third quarter of 2007. These increases
were generally attributable to higher sales volumes.





Revenues
by product line were as follows (in thousands):





Three
      Months ended
                      September 30,2008
                    
                    
                    2007Fluid
      Delivery
                    
                    $
                    7,999
                    
                    
                    $
                    7,236Cardiovascular
                    
                    
                    7,019
                    
                    
                    
                    5,867Ophthalmology
                    
                    
                    3,733
                    
                    
                    
                    4,230Other
                    
                    
                    4,710
                    
                    
                    
                    3,982Total
                    
                    $
                    23,461
                    
                    
                    $
                    21,315





Cost of
goods sold of $13.2 million for the third quarter of 2008 was 8 percent
higher than in the comparable 2007 period. Increased sales volume, increased raw
materials costs, and increased manufacturing overhead costs were the primary
contributors to the increase in cost of goods sold for the third quarter of
2008.





Gross
profit of $10.2 million in the third quarter of 2008 was $1.1 million, or 12
percent, higher than in the comparable 2007 period. The Company’s gross profit
percentage in the third quarter of 2008 was 43.6 percent of revenues compared
with 42.7 percent of revenues in the third quarter of 2007. The increase in
gross profit percentage in the 2008 period compared to the 2007 period was
primarily related to improved product mix and improved manufacturing
efficiencies.





The
Company’s third quarter 2008 operating expenses of $4.5 million were $1.2
million higher than the operating expenses for the third quarter of 2007. This
increase was primarily due to the recordation in the third quarter of 2007 of a
special $1.4 million benefit, net of expenses, related to a dispute settlement.
This benefit was reflected in that quarter as a decrease in operating expenses.
A third quarter 2008 $11,000 increase in Research and Development (R&D)
expenses was offset by a $62,000 decrease in selling (Selling) expenses and a
$197,000 decrease in General and Administrative (G&A) expenses. The increase
in R&D costs was primarily related to increased compensation and outside
services partially offset by decreased prototype expenses and new product
testing costs. The decrease in Selling expenses for the third quarter of 2008
was primarily related to decreased promotion and advertising expenses, and
outside services. The decrease in G&A expenses for the third quarter of 2008
was principally attributable to the recordation of a $329,000 charge in the
third quarter of 2007 related to the termination of certain pension plans which
was partially offset by increased compensation and outside services in the third
quarter of 2008.


9
 Table of Contents


Operating
income in the third quarter of 2008 decreased by $15,000 from operating income
in the quarter ended September 30, 2007. Operating income was 24.6 percent of
revenues in the third quarter of 2008 compared to 27.2 percent of revenues in
the third quarter of 2007. The decrease in operating income for the third
quarter of 2008 as compared to the third quarter of 2007 was primarily due to
the recordation of the $1.4 million special item in the third quarter of
2007.





Income
tax expense for the third quarter of 2008 was $1.9 million compared to income
tax expense of $1.7 million for the same period in the prior year. The effective
tax rate for the third quarter of 2008 was 31.9 percent compared with 28.8
percent for the third quarter of 2007. The higher effective income tax rate for
the third quarter of 2008 was primarily the result of a favorable adjustment for
unrecognized tax benefits in the third quarter of 2007 under FASB Interpretation
No. 48 (“FIN 48”).





Results
for the nine months ended September 30, 2008





Consolidated
net income totaled $11.8 million, or $6.04 per basic and $5.88 per diluted
share, in the first nine months of 2008. This is compared with consolidated net
income of $10.9 million, or $5.77 per basic and $5.49 per diluted share, in the
first nine months of 2007. The income per basic share computations are based on
weighted average basic shares outstanding of 1,950,181 in the 2008 period and
1,883,444 in the 2007 period. The income per diluted share computations are
based on weighted average diluted shares outstanding of 2,004,517 in the 2008
period and 1,980,385 in the 2007 period.





Consolidated
revenues of $72.3 million for the first nine months of 2008 were 7 percent
higher than revenues of $67.6 million for the first nine months of 2007. These
increases were generally attributable to higher sales volumes.





Revenues
by product line were as follows (in thousands):





Nine
      Months ended
                      September 30,2008
                    
                    
                    2007Fluid
      Delivery
                    
                    $
                    24,896
                    
                    
                    $
                    21,984Cardiovascular
                    
                    
                    21,602
                    
                    
                    
                    17,928Ophthalmology
                    
                    
                    11,101
                    
                    
                    
                    13,748Other
                    
                    
                    14,706
                    
                    
                    
                    13,892Total
                    
                    $
                    72,305
                    
                    
                    $
                    67,552





Cost of
goods sold of $40.3 million for the first nine months of 2008 was 5 percent
higher than in the comparable 2007 period. Increased sales volume, increased raw
material costs, and increased manufacturing overhead costs were the primary
contributors to the increase in cost of goods sold for the first nine months of
2008.


10
 Table of Contents


Gross
profit of $32.0 million in the first nine months of 2008 was $2.9 million, or 10
percent, higher than in the comparable 2007 period. The Company’s gross profit
percentage in the first nine months of 2008 was 44.3 percent of revenues
compared with 43.1 percent of revenues in the first nine months of 2007. The
increase in gross profit percentage in the 2008 period compared to the 2007
period was primarily related to improved product mix and improved manufacturing
efficiencies.





The
Company’s first nine months 2008 operating expenses of $14.7 million were $1.6
million higher than the operating expenses for the first nine months of 2007.
This increase was primarily due to the recordation in the 2007 period of a
special $1.4 million benefit, net of expenses, related to a dispute settlement.
This benefit was reflected in the 2007 period as a decrease in operating
expenses. The 2008 increase was also attributed to a $217,000 increase in
R&D expenses, which was offset in part by a $38,000 decrease in G&A
expenses and a $41,000 decrease in Selling expenses. The increase in R&D
costs was primarily related to increased compensation and benefits expenses,
increased travel and outside services. The decrease in G&A expenses for the
first nine months of 2008 was principally attributable to the recordation of a
$329,000 charge in 2007 related to the termination of certain pension plans
which was partially offset by increased compensation and outside services in
2008. The decrease in Selling expenses for the first nine months of 2008 was
primarily related to lower promotion and advertising, outside services and
compensation and benefits expenses partially offset by increased travel and
entertainment expenses.





Operating
income in the first nine months of 2008 increased $1.4 million to $17.4 million,
a 9 percent increase over operating income in the nine months ended September
30, 2007. Operating income was 24.0 percent of revenues in the first nine months
of 2008 compared to 23.6 percent of revenues in the first nine months of 2007.
The previously mentioned increase in gross profit, which was partially offset by
the increase in operating expenses, was the major contributor to the operating
income improvement in the first nine months of 2008.





Income
tax expense for the first nine months of 2008 was $5.7 million compared to
income tax expense of $4.9 million for the same period in the prior year. The
effective tax rate for the first nine months of 2008 was 32.8 percent compared
with 31.0 percent for the first nine months of 2007. The higher effective income
tax rate for the first nine months of 2008 is primarily the result of a
favorable adjustment for unrecognized tax benefits in the third quarter of 2007
under FIN 48.




Liquidity
and Capital Resources


At
September 30, 2008, the Company had cash and cash equivalents of $13.8 million
compared with $3.5 million at December 31, 2007. The Company had outstanding
borrowings of $3.0 million under its $25.0 million revolving credit facility
(“Credit Facility”) at September 30, 2008 and no outstanding borrowings at
December 31, 2007. During the third quarter of 2008, the Credit Facility, which
was scheduled to expire November 12, 2009, was extended until November 12, 2012.
At September 30, 2008, the Company was in compliance with all financial
covenants.


11
 Table of Contents


As of
September 30, 2008, the Company had working capital of $40.7 million, including
$13.8 million in cash and cash equivalents. The $15.0 million increase in
working capital during the first nine months of 2008 was primarily related to
increases in cash and cash equivalents, accounts receivable, and inventories
partially offset by increases in accrued income and other taxes. The increase in
cash and cash equivalents was primarily related to the the generation of cash
from operations. The increase in accounts receivable during the first nine
months of 2008 was primarily related to the increase in revenues for the third
quarter of 2008 as compared to the fourth quarter of 2007. The change in
inventories is related to increased stocking levels necessary to support current
operations. In addition, the Company began a program to purchase critical raw
material in large volumes to hedge against future price increases and take
advantage of volume discounts. The increase in accrued income and other taxes is
primarily related to federal income taxes and local property taxes. Cash flows
from operating activities generated $12.8 million for the nine months ended
September 30, 2008 as compared to $18.3 million for the nine months ended
September 30, 2007. The 2008 decrease was primarily attributable to increased
inventory and accounts receivable as compared to the 2007 period. During the
first nine months of 2008, the Company expended $4.6 million for the addition of
property and equipment. During the first nine months of 2008, the Company paid
dividends of $1.5 million.





The
Company believes that its existing cash and cash equivalents, cash flows from
operations, borrowings available under the Company’s credit facility,
supplemented, if necessary, with equity or debt financing, which the Company
believes would be available, will be sufficient to fund the Company’s cash
requirements for the foreseeable future. The Company further believes that the
current lack of liquidity in the credit and capital markets will not have a
material impact on the Company’s liquidity, cash flow, financial flexibility or
its ability to fund its operations.





Forward-Looking
Statements


The
statements in this Management’s Discussion and Analysis that are forward-looking
are based upon current expectations, and actual results may differ materially.
Therefore, the inclusion of such forward-looking information should not be
regarded as a representation by the Company that the objectives or plans of the
Company would be achieved. Such statements include, but are not limited to, the
Company’s expectations regarding future liquidity and capital resources. Words
such as “anticipates,” “believes,” “expects,” “estimated” and variations of such
words and similar expressions are intended to identify such forward-looking
statements. Forward-looking statements contained herein involve numerous risks
and uncertainties, and there are a number of factors that could cause actual
results or future events to differ materially, including, but not limited to,
the following: changing economic, market and business conditions; acts of war or
terrorism; the effects of governmental regulation; the impact of
competition and new technologies; slower-than-anticipated introduction of new
products or implementation of marketing strategies; implementation of new
manufacturing processes or implementation of new information systems; the
Company’s ability to protect its intellectual property; changes in the prices of
raw materials; changes in product mix; intellectual property and
product  liability claims and product recalls; the ability to attract
and retain qualified personnel; and the loss of, or any material reduction in
sales to, any significant customers. In addition, assumptions relating to
budgeting, marketing, product development and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
review which may cause the Company to alter its marketing, capital expenditures
or other budgets, which in turn may affect the Company’s results of operations
and financial condition.


12
 Table of Contents


Item 3.
            Quantitative
      and Qualitative Disclosures About Market
Risk





For the
quarter ended September 30, 2008, the Company did not experience any material
changes in market risk exposures that affect the quantitative and qualitative
disclosures presented in the Company’s 2007 Annual Report on Form
10-K.





Item 4.
            Controls
      and Procedures





The
Company’s management, with the participation of the Company’s Chief Executive
Officer and its Chief Financial Officer, evaluated the Company’s disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of September 30, 2008. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company’s
disclosure controls and procedures are effective. There were no changes in the
Company’s internal control over financial reporting for the quarter ended
September 30, 2008 that have materially affected or are reasonably likely to
materially affect the Company’s internal control over financial
reporting.


13
 Table of Contents


PART II





OTHER
INFORMATION




Item 1.
            Legal
      Proceedings





From time
to time, the Company may be involved in claims or litigation that arise in the
normal course of business. The Company is not currently a party to any legal
proceedings which, if decided adversely, would have a material adverse effect on
the Company’s business, financial condition, or results of
operations.





Item 1A.
            Risk
      Factors




There
were no material changes to Risk Factors disclosed in our annual report on Form
10-K for the year ended December 31, 2007.





Item 6.
            Exhibits
      and Reports on Form 8-K





(a)
            Exhibits





31.1
                Sarbanes-Oxley
      Act Section 302 Certification of Chief Executive
Officer31.2
                Sarbanes-Oxley
      Act Section 302 Certification of Chief Financial
  Officer
  32.1
                Certification
      Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of
      The Sarbanes – Oxley Act Of
2002
 
 32.2
                Certification
      Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of
      The Sarbanes – Oxley Act Of
2002


(b)
            Reports
      on Form 8-K




On August
8, 2008, the Company filed a report on Form 8-K with the SEC regarding the
public dissemination of a press release announcing its financial results for the
first quarter ended June 30, 2008 (Item 12).





On
September 12, 2008, the Company filed a report on Form 8-K with the SEC
regarding the approval of a revised Code of Business Conduct.


14
 Table of Contents


SIGNATURES








Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.








Atrion
Corporation


(Registrant)








Date:  November
      7, 2008
                            /s/EmileA.BattatEmile A. BattatChairman
      andChief
      Executive OfficerDate:  November
      7, 2008
                            /s/ JefferyStricklandJeffery
      StricklandVice
      President andChief
      Financial Officer




15