Cardiodynamics International Corp - Quarterly Report (10-Q)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended May 31, 2008

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period from to

Commission File Number: 000-11868

C ARDIO D YNAMICS INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)


California		95-3533362
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

6175 Nancy Ridge Drive, Suite 300, San Diego, California		92121
(Address of principal executive offices)		(Zip Code)

(858) 535-0202

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) 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 ¨

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

Large accelerated filer ¨ Accelerated Filer ¨ Non-accelerated filer ¨ Smaller reporting company x

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

As of July 11, 2008, 7,243,119 shares of common stock and no shares of preferred stock were outstanding.

C ARDIO D YNAMICS I NTERNATIONAL C ORPORATION AND S UBSIDIARY

FORM 10-Q

TABLE OF CONTENTS


		Page No.
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets at May 31, 2008 (unaudited) and November 30, 2007	3

	Consolidated Statements of Operations for the three and six months ended May 31, 2008 and May 31, 2007 (unaudited)	4

	Consolidated Statements of Cash Flows for the six months ended May 31, 2008 and May 31, 2007 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4.	Controls and Procedures	35

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Submission of Matters to a Vote of Security Holders	36

Item 5.	Other Information	36

Item 6.	Exhibits	36

Signatures		37

C ARDIO D YNAMICS I NTERNATIONAL C ORPORATION AND S UBSIDIARY

Consolidated Balance Sheets

(In thousands)


	May 31, 2008			November 30, 2007
	*(Unaudited)*
Assets
Current assets:
Cash and cash equivalents	$	6,466		$	7,896
Cash and cash equivalents - restricted		470			466
Accounts receivable, net of allowances and sales returns of $1,157 at May 31, 2008 and $1,105 at November 30, 2007		3,797			4,475
Inventory, net		1,196			1,670
Current portion of long-term and installment receivables		278			340
Other current assets		265			317

Total current assets		12,472			15,164
Long-term receivables, net		246			309
Property, plant and equipment, net		1,965			1,882
Intangible assets, net		120			179
Goodwill		2,417			2,303
Other assets		30			30

Total assets	$	17,250		$	19,867

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts Payable	$	1,222		$	1,330
Accrued expenses and other current liabilities		430			573
Accrued compensation		1,647			1,532
Income taxes payable		578			164
Current portion of deferred revenue		144			201
Current portion of deferred rent		142			135
Current portion of deferred acquisition payments		225			210
Provision for warranty repairs - current		174			164
Current portion of long-term debt, net of discount		3,493			32
Customer deposits		72			1,279

Total current liabilities		8,127			5,620

Long-term portion of deferred revenue		166			51
Long-term portion of deferred rent		88			161
Long-term portion of deferred acquisition payments		—			210
Provision for warranty repairs - long-term		278			277
Long-term debt, less current portion, net of discount		402			3,619

Total long-term liabilities		934			4,318

Total liabilities		9,061			9,938

Minority interest		495			407
Commitments and contingencies (Note 12)		—			—
Shareholders’ equity:
Preferred stock, 2,571 shares authorized, no shares issued or outstanding at May 31, 2008 or November 30, 2007		—			—
Common stock, no par value, 14,286 shares authorized, 7,193 and 7,045 shares issued and outstanding at May 31, 2008 and November 30, 2007, respectively		64,815			64,634
Accumulated other comprehensive income		915			704
Accumulated deficit		(58,036	)		(55,816	)

Total shareholders’ equity		7,694			9,522

Total liabilities and shareholders’ equity	$	17,250		$	19,867

See accompanying notes to consolidated financial statements.

C ARDIO D YNAMICS I NTERNATIONAL C ORPORATION AND S UBSIDIARY

Consolidated Statements of Operations

(Unaudited - in thousands, except per share data)


	Three Months Ended May 31,						Six Months Ended May 31,
	2008			2007			2008			2007
Net sales	$	6,180		$	5,380		$	11,942		$	10,107
Cost of sales		1,772			1,966			3,547			3,186

Gross margin		4,408			3,414			8,395			6,921

Operating expenses:
Research and development		370			454			684			897
Selling and marketing		3,721			3,680			7,443			7,124
General and administrative		761			720			1,532			1,665
Amortization of intangible assets		32			30			64			85

Total operating expenses		4,884			4,884			9,723			9,771

Loss from operations		(476	)		(1,470	)		(1,328	)		(2,850	)

Other income (expense):
Interest income		62			52			140			123
Interest expense		(241	)		(269	)		(475	)		(535	)
Foreign currency loss		(13	)		(29	)		(24	)		(37	)
Other, net		—			5			1			1

Other expense, net		(192	)		(241	)		(358	)		(448	)

Loss before taxes and minority interest		(668	)		(1,711	)		(1,686	)		(3,298	)
Minority interest in income of subsidiary		(11	)		(21	)		(145	)		(35	)
Income tax provision		(53	)		(196	)		(516	)		(250	)

Loss from continuing operations		(732	)		(1,928	)		(2,347	)		(3,583	)
Income (loss) from discontinued operations, net of income tax		—			(11,102	)		127			(11,109	)

Net loss	$	(732	)	$	(13,030	)	$	(2,220	)	$	(14,692	)

Basic and diluted per share amounts:
Loss from continuing operations	$	(0.10	)	$	(0.28	)	$	(0.33	)	$	(0.51	)

Income (loss) from discontinued operations	$	—		$	(1.58	)	$	0.02		$	(1.59	)

Net loss per share	$	(0.10	)	$	(1.86	)	$	(0.31	)	$	(2.10	)

Weighted-average number of shares used in per share calculation:
Basic and diluted		7,193			7,005			7,150			6,990

See accompanying notes to consolidated financial statements.

C ARDIO D YNAMICS I NTERNATIONAL C ORPORATION AND S UBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited - in thousands)


	Six Months Ended May 31,
	2008			2007
Cash flows from operating activities:
Net loss	$	(2,220	)	$	(14,692	)
(Income) loss from discontinued operations, net of income tax		(127	)		11,109
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Minority interest in income of subsidiary		134			35
Depreciation		244			166
Amortization of intangible assets		64			85
Accretion of discount on convertible notes		244			210
Provision for warranty repairs		49			86
Provision for doubtful accounts and sales returns		443			467
Reduction in doubtful long-term receivables		(21	)		(40	)
Stock-based compensation expense		181			185
Other non-cash items, net		(64	)		63
Changes in operating assets and liabilities
Accounts receivable		247			752
Inventory		232			(96	)
Long-term and installment receivables		146			345
Other assets		56			41
Accounts payable		(108	)		(483	)
Accrued expenses and other current liabilities		(56	)		181
Accrued compensation		105			(31	)
Income taxes payable		389			29
Deferred revenue		58			30
Deferred rent		(66	)		(52	)
Customer deposits		(1,208	)		5

Net cash used in continuing operations		(1,278	)		(1,605	)
Net cash provided by discontinued operations		—			1,619

Net cash (used in) provided by operating activities		(1,278	)		14

Cash flows from investing activities:
Maturities of short-term investments		—			1,510
Purchases of property, plant and equipment		(35	)		(37	)

Net cash (used in) provided by investing activities - continuing operations		(35	)		1,473
Investing cash used in discontinued operations		—			(266	)

Net cash (used in) provided by investing activities		(35	)		1,207

Cash flows from financing activities:
Restricted cash		(4	)		—
Repayment of debt		(20	)		(178	)
Payment of deferred acquisition costs		(195	)		(160	)

Net cash used in financing activities - continuing operations		(219	)		(338	)
Financing cash used in discontinued operations		—			(30	)

Net cash used in financing activities		(219	)		(368	)

Effect of exchange rate changes on cash and cash equivalents		102			12

Net (decrease) increase in cash and cash equivalents		(1,430	)		865
Cash and cash equivalents at beginning of period		7,896			2,368

Cash and cash equivalents at end of period	$	6,466		$	3,233

Supplemental disclosures of cash flow information:
Interest paid	$	241		$	388

Income taxes paid	$	76		$	176

See accompanying notes to consolidated financial statements.

C ARDIO D YNAMICS I NTERNATIONAL C ORPORATION AND S UBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

1.	General

Description of Business

CardioDynamics International Corporation (“CardioDynamics” or “the Company”) is an innovator of an important medical technology called Impedance Cardiography (“ICG”). The Company develops, manufactures and markets noninvasive ICG diagnostic and monitoring devices and proprietary ICG sensors. The Company was incorporated as a California corporation in June 1980 and changed its name to CardioDynamics International Corporation in October 1993.

Basis of Presentation

The information contained in this report is unaudited, but in the Company’s opinion reflects all adjustments including normal recurring adjustments necessary to present fairly the financial position and results of operations and cash flows for the interim periods presented. The consolidated balance sheet as of November 30, 2007 is derived from the November 30, 2007 audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, (“SEC”). All significant intercompany balances and transactions have been eliminated in consolidation.

On May 8, 2008, our shareholder’s approved a one-for-seven reverse stock split, which became effective on May 9, 2008. All references to share and per-share data for all periods presented have been adjusted to give effect to this reverse split.

On August 31, 2007, CardioDynamics sold its Vermed subsidiary based in Bellows Falls, Vermont, to Medical Device Partners, Inc. (“MDP”), an entity formed by certain management team members of Vermed, for a cash purchase price of approximately $8,000,000. The prior year results of Vermed are reported as discontinued operations within the Consolidated Statements of Operations and Cash Flows.

These consolidated financial statements should be read in conjunction with the financial statements and notes that go along with the Company’s audited financial statements, as well as other financial information for the fiscal year ended November 30, 2007 as presented in the Company’s Annual Report on Form 10-K. The consolidated results of operations for the three and six months ended May 31, 2008 and cash flows for the six months ended May 31, 2008 are not necessarily indicative of the results that may be expected for the full fiscal year ending November 30, 2008.

Recent Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”), which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS No. 162 is effective 60 days following the SEC’s

approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of this Standard is not expected to have a material impact on the results of operations or financial position of the Company.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used in measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. On February 12, 2008, the FASB issued FASB Staff Position (FSP) No. SFAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP SFAS 157-2”). FSP SFAS 157-2 amends SFAS No. 157, to delay the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for the items that are recognized or disclosed at fair value in the financial statements on a recurring basis. For items within its scope, FSP SFAS 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We are required to adopt the pronouncement in our first quarter of our fiscal 2009. We have not determined the impact, if any, the adoption of this FSP will have on our financial position and results of operations.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1 (FSP). The FSP specifies that issuers of convertible debt instruments that permit or require the issuer to pay cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The Company will need to apply the guidance retrospectively to all past periods presented, even to instruments that have matured, converted, or otherwise been extinguished as of the effective date. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We have not determined the impact, if any, the adoption of APB 14-1 will have on our financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”), which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS 161 is effective for the Company beginning in fiscal 2010. The adoption of this Standard is not expected to have a material impact on the results of operations or financial position.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS 141 (revised 2007) is effective for acquisitions occurring in fiscal years beginning after December 15, 2008 and is required to be adopted by the Company in its first quarter of fiscal 2009. The Company believes that the adoption of SFAS 141 (revised 2007) would have an impact on the accounting for any future acquisition, if one were to occur.

In December 2007, the FASB issued SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements, ” an amendment of ARB 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS 160 is effective for fiscal years beginning after December 15, 2008 and requires retrospective application of its presentation requirements. It is required to be adopted by the Company in its first quarter of fiscal 2009. The Company has not determined the impact, if any, the adoption of SFAS 160 will have on its financial position and results of operations, but does not expect that the impact would be material.

Stock-Based Compensation

The Company applies the fair value provisions of Accounting for Stock-Based Compensation (“SFAS 123”) (revised 2004), Share-Based Payment (“SFAS 123R”), using the modified prospective transition method.

In 2004, the shareholders approved the 2004 Stock Incentive Plan (the 2004 Plan) which replaced the 1995 Stock Option/Issuance Plan (the 1995 Plan). Although the 1995 plan remains in effect for outstanding options, no new options may be granted under this plan. Awards under these plans typically vest over periods of up to four years. In addition, in 1998, Michael K. Perry was granted stock options outside of the Option Plans at the adjusted closing market price on the date of grant of $11.38 per share. The options vested over four years and at May 31, 2008, 86,143 of the options are outstanding and exercisable. These options expire on October 15, 2008.

For the three months ended May 31, 2008 and 2007, total stock-based compensation expense included in the consolidated statements of operations, including discontinued operations, was $97,000 and $98,000, respectively. For the six months ended May 31, 2008 and 2007, total stock-based compensation expense included in the consolidated statements of operations, including discontinued operations, was $181,000 and $199,000, respectively, as follows (in thousands):


	Three Months Ended May 31,				Six Months Ended May 31,
	2008		2007		2008		2007
Cost of sales	$	3	$	3	$	7	$	5
Research and development		10		6		17		12
Selling and marketing		16		25		25		50
General and administrative		68		56		132		118

		97		90		181		185
Income from discontinued operations, net of income tax		—		8		—		14

Total stock based compensation expense	$	97	$	98	$	181	$	199

The Company has a 100% valuation allowance recorded against its deferred tax assets; therefore, the stock-based compensation has no tax effect on the consolidated statements of operations.

The variables used to measure fair value and the weighted-average fair value of options granted, using the Black-Scholes option pricing model, are as follows:


	Three Months Ended May 31,						Six Months Ended May 31,
	2008			2007			2008			2007
Weighted-average fair value of options granted	$	1.15		$	3.62		$	1.53		$	4.58
Expected volatility		66.1	%		63.9	%		64.2	%		65.0	%
Dividend yield		0	%		0	%		0	%		0	%
Risk-free interest rate		2.9	%		4.6	%		2.9	%		4.7	%
Expected term in years		5.8			5.8			5.8			5.8
Expected forfeiture rate		7.1	%		9.6	%		8.5	%		8.8	%

Expected Volatility - The volatility factor is based on the Company’s historical stock price fluctuations for a period matching the expected life of the options.

Dividend Yield - The Company has not, and does not intend to, pay dividends.

Risk-free Interest Rate - The Company applies the risk-free interest rate based on the U.S. Treasury yield in effect at the time of the grant.

Expected Term in Years - The expected term is based upon management’s consideration of the historical life of options, the vesting period of the option granted and the contractual period of the option granted.

Expected Forfeitures (unvested shares) and Expirations (vested shares) - Stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, reduced for estimated forfeitures. SFAS 123R requires forfeitures, including expirations, to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. The expected forfeiture rates for the three months ended May 31, 2008 and 2007 were 7.1% and 9.6%, respectively. The expected forfeiture rates for the six months ended May 31, 2008 and 2007 were 8.5% and 8.8%, respectively.

Stock based compensation charges are recognized using the straight-line method over the requisite service period.

The following is a summary of stock option activity under the Option Plans as of May 31, 2008 and changes during the six months ended May 31, 2008:


	Number of options		Weighted-average exercise price
Options outstanding at November 30, 2007	565,692		$	22.56
Granted	110,356			2.57
Exercised	—			—
Forfeited (unvested shares)	(19,023	)		4.80
Expired (vested shares)	(73,874	)		20.73

Options outstanding at May 31, 2008	583,151		$	19.59

The following table summarizes information about stock options outstanding and exercisable under the Option Plans at May 31, 2008:


	Options Outstanding				Options Exercisable
Range of exercise prices	Number outstanding	Weighted- average remaining contractual life	Weighted- average exercise price		Number exercisable	Weighted- average exercise price
$0.00 - 5.00	128,557	9.6	$	2.82	12,542	$	3.42
5.01 - 10.00	133,930	6.8		8.12	105,402		8.18
10.01 - 15.00	19,503	4.1		12.41	18,884		12.45
15.01 - 20.00	31,419	2.0		16.75	31,419		16.75
20.01 - 25.00	58,128	3.7		21.62	58,128		21.62
25.01 - 30.00	34,002	3.1		28.15	34,002		28.15
30.01 - 40.00	73,935	4.9		34.46	73,935		34.46
40.01 - 50.00	101,723	3.7		42.57	101,723		42.57
50.01 - 60.00	1,528	1.9		55.02	1,528		55.02
60.01 - 83.13	426	1.8		70.04	426		70.04

	583,151	5.7	$	19.59	437,989	$	24.82

The aggregate intrinsic value of options outstanding and exercisable at May 31, 2008 was less than $1,000. The aggregate intrinsic value represents the total intrinsic value based on the Company’s ending stock price of $1.81 on May 31, 2008. The weighted-average remaining contractual term for exercisable options is 4.7 years. There were no stock option exercises for the six months ended May 31, 2008.

A summary of the Company’s unvested stock options as of May 31, 2008 and changes during the six months ended May 31, 2008, were as follows:


	Number of options		Weighted-average grant date fair value
Unvested stock options at November 30, 2007	74,706		$	4.00
Granted	110,356			1.53
Vested	(20,877	)		3.66
Forfeited	(19,023	)		2.95

Unvested stock options at May 31, 2008	145,162		$	2.31

On January 24, 2007, the Company granted 6,000 shares of restricted stock to its non-employee Directors under the 2004 Plan, in lieu of stock options and cash compensation, at a grant date fair value of $49,000 ($8.12 per share). These shares vest in six equal monthly installments, beginning on January 24, 2007. On August 28, 2007, the Company granted 21,429 shares of restricted stock to its non-employee Directors under the 2004 Plan, in lieu of cash compensation, at a grant date fair value of $63,000 ($2.94 per share). These shares vest in twelve equal monthly installments, beginning on September 28, 2007.

On January 24, 2007, the Company granted 47,857 restricted shares to its Executive Officers under the 2004 Plan at a grant date fair value of $389,000 ($8.12 per share). These restricted shares vest in two equal installments on January 24, 2009 and on January 24, 2012. On January 23, 2008, the Company granted 147,853 restricted shares to its Executive Officers under the 2004 Plan at a grant date fair value of $383,000 ($2.59 per share). These restricted shares vest in two equal installments on January 23, 2010 and on January 23, 2013.

A summary of the Company’s unvested restricted stock grants as of May 31, 2008 and changes during the six months ended May 31, 2008, were as follows:


	Number of shares		Weighted-average grant date fair value
Unvested restricted stock grants at November 30, 2007	58,209		$	6.69
Granted	147,853			2.59
Vested	(10,710	)		2.94
Forfeited	—			—

Unvested restricted stock grants at May 31, 2008	195,352		$	3.79

The fair value of restricted stock grants is based upon the closing stock price of the Company’s common shares on the date of the grant.

As of May 31, 2008, there was $703,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Company’s stock compensation plans. The cost is expected to be recognized over a weighted-average period of 1.5 years.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is calculated by including the additional shares of common stock issuable upon exercise of outstanding options, warrants and other potentially convertible instruments that are not antidilutive in the weighted-average share calculation. The following potentially dilutive instruments were not included in the diluted per share calculation for the three and six months ended May 31, 2008 and 2007, respectively, as their effect was antidilutive (in thousands):


	Three Months Ended May 31,		Six Months Ended May 31,
	2008	2007	2008	2007
Stock options	664	731	662	717
Restricted stock	—	—	—	—
Convertible notes	652	652	652	652

Total	1,316	1,383	1,314	1,369

2.	Geographic and Customer Information

Significant Customers

For the three months ended May 31, 2008, the Company did not have any individual customer or distributor that accounted for 10% or more of total net sales. During the six months ended May 31, 2008, the Company had one individual customer that exceeded 10% of total net sales. The net revenues from this Eastern European hospital purchaser totaled $1,345,000. For the three and six months ended May 31, 2007, the Company did not have any individual customer or distributor that accounted for 10% or more of total net sales.

Geographic Information

Net sales for domestic and international customers, based upon customer location, for the three and six months ended May 31, 2008 and 2007, respectively, were as follows (in thousands) :


	Three Months Ended May 31,				Six Months Ended May 31,
	2008		2007		2008		2007
United Sates	$	5,398	$	4,673	$	8,815	$	8,895
International		782		707		3,127		1,212

Total consolidated net sales	$	6,180	$	5,380	$	11,942	$	10,107

Net long-lived assets by geographic area at May 31, 2008 and November 30, 2007 were as follows (in thousands) :


	May 31, 2008		November 30, 2007
United States	$	911	$	867
Europe		3,591		3,497

Net long-lived assets ⁽¹⁾	$	4,502	$	4,364

(1)

Net long-lived assets include property, plant and equipment, goodwill and intangible assets.

3.	Long-Term Receivables

The Company primarily relies on third party financing and normal trade accounts receivable terms for its domestic equipment sales, however, the Company has, on occasion provided its customers in-house financing with maturities ranging from 24 to 60 months. When collectability is reasonably assured, revenue is recorded on these contracts at the time of sale based on the present value of the minimum payments using market interest rates or the rate implicit in the financing arrangement and interest income is deferred and recognized on a monthly basis over the term of the contract. For the three months ended May 31, 2008 and 2007, revenue from long term financing sales accounted for approximately 1.3% and 1.5% of total net sales, respectively. For the six months ended May 31, 2008 and 2007, revenue from long term financing sales accounted for approximately 1.0% and 2.2% of total net sales, respectively. The long-term receivables resulting from internal financing are collateralized by the individual BioZ ^® systems sold.

Long-term receivables consist of the following at May 31, 2008 and November 30, 2007 (in thousands):


	May 31, 2008			November 30, 2007
Long-term receivables, net of deferred interest	$	590		$	731
Less allowance for doubtful long-term receivables		(88	)		(110	)

		502			621
Less current portion of long-term receivables		(256	)		(312	)

Long-term receivables, net	$	246		$	309

4.	Property, Plant and Equipment

Property, plant and equipment consisted of the following (in thousands):


	Estimated Useful Life *(in years)*	May 31, 2008			November 30, 2007
Land	—	$	109		$	104
Buildings and improvements	5 -35		1,693			1,646
Computer software and equipment	3 - 5		1,032			1,042
Manufacturing, lab equipment and fixtures	3 -20		438			435
Office furniture and equipment	3 - 8		343			342
Sales equipment and exhibit booth	2 - 5		883			639
Auto	5		23			23

			4,521			4,231
Accumulated depreciation			(2,556	)		(2,349	)

Property, plant and equipment, net		$	1,965		$	1,882

At May 31, 2008 and November 30, 2007, the Company had $840,000 and $597,000, respectively, of demonstration units which had previously been classified as inventory and are now classified within sales equipment. The demonstration units are depreciated on a straight-line basis over the estimated remaining useful life of the assets of between 2 to 5 years.

5.	Goodwill and Intangible Assets

The Company accounts for goodwill under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets . Goodwill is not subject to amortization, but is tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. Goodwill is considered to be impaired if the Company determines that the carrying value of the reporting unit exceeds its fair value. Identifiable intangible assets with finite lives are subject to amortization and any impairment is determined in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets .

In the fourth quarter of 2007, the Company performed its annual impairment review of goodwill and intangible assets. Based on this analysis, there was no impairment of goodwill or intangible assets at November 30, 2007. In addition to the annual review, an interim review is required if an event occurs or if circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The goodwill at May 31, 2008 and November 30, 2007 relates to our Medis subsidiary. Goodwill is recorded on the books of our subsidiary, therefore exchange rate fluctuations will effect enterprise value from period to period.

The Company recorded $64,000 and $85,000 of amortization expense relating to continuing operations during the six months ended May 31, 2008 and 2007, respectively. Estimated remaining amortization expense for the years ending November 30 is as follows:


2008	$	61,000
2009	$	41,000
2010	$	8,000
2011	$	6,000
2012	$	4,000

Identifiable intangible assets consist of the following (in thousands):


	Estimated Life *(in years)*	May 31, 2008							November 30, 2007
	Estimated Life *(in years)*	Estimated Cost		Accumulated Amortization			Net		Estimated Cost		Accumulated Amortization			Net
Developed technology	4 to 5	$	507	$	(426	)	$	81	$	483	$	(355	)	$	128
Patents	5		155		(116	)		39		155		(104	)		51

		$	662	$	(542	)	$	120	$	638	$	(459	)	$	179

6.	Guarantees

Product Warranties

The Company warrants that its stand-alone BioZ Systems will be free from defects for a period of 60 months (BioZ Dx ^® ) and 12 months (BioZ Monitors) from the date of shipment on each new system sold in the United States, 12 months on factory certified/refurbished or demonstration systems and 13 months on systems sold by CardioDynamics or Medis internationally. Additional years of warranty may be purchased on the BioZ Systems. Options and accessories purchased with the system are covered for a period of 90 days. The Company records a provision for warranty repairs on all systems sold, which is included in cost of sales in the consolidated statements of operations and is recorded in the same period the related revenue is recognized.

The warranty provision is calculated using historical data to estimate the percentage of systems that will require repairs during the warranty period and the average cost to repair a system. This financial model is then used to estimate future probable expenses related to warranty and the required warranty provision. The estimates used in this model are reviewed and updated as actual warranty expenditures change over the product’s life cycle. If actual warranty expenditures differ substantially from the Company’s estimates, revisions to the warranty provision would be required.

The following table summarizes information related to the Company’s warranty provision for the six months ended May 31, 2008 and the year ended November 30, 2007 (in thousands):


	Six Months Ended May 31, 2008			Year Ended November 30, 2007
Beginning balance	$	441		$	402
Provision for warranties issued		36			149
Warranty expenditures incurred		(30	)		(100	)
Adjustments and expirations		5			(10	)

Ending balance	$	452		$	441

Reimbursement

In 2007, the Company expanded a previous sales promotion which provides customers under the program a limited guarantee that Medicare reimbursement would not be rescinded within the guarantee period of up to five years. No liability has been established as the need for ultimate payment under this program is considered to be remote.

7.	Financing Agreements

In 2004, the Company issued letters of credit relating to the acquisition of Medis to secure the deferred acquisition payments due to the minority shareholders of Medis to be paid annually over five years through 2009. The Company had outstanding letters of credit at May 31, 2008 of $472,000 (€304,000), which includes imputed interest through April 2009. The deferred acquisition payments and related accrued interest is segregated and classified as current and long-term liabilities in the consolidated balance sheet. The letters of credit, due to expire in June 2008 and June 2009, are secured by a certificate of deposit in the face amount of $470,000 which is included on the balance sheet under “Cash and cash equivalents – restricted.”

Also in connection with the acquisition of Medis in 2004, the Company assumed two bank loans with the Sparkasse Arnstadt-Ilmenau bank. Under the terms of the loan agreement, the loans are secured by a pledge of the building with a carrying value of €760,000 ($1,180,000) as of May 31, 2008. One of the loans bears interest at a fixed rate of 5.3% through July 30, 2011 and then the bank has the option to adjust the rate. The other loan bears a fixed rate of 6.1% through July 30, 2011 and then the bank has the right to adjust the rate. Both loans mature on August 31, 2021 (see Note 8).

8.	Long-term Debt

On April 11, 2006, the Company issued $5.25 million of subordinated convertible debt securities (“Convertible Notes”). The three-year Convertible Notes, originally due in 2009, bear interest at an annual rate of 8%, and are convertible into common stock at a post-split price of $8.05 per share. In connection with the sale of the Convertible Notes, the Company entered into a securities purchase agreement with the purchasers of the Convertible Notes. Pursuant to the terms of the securities purchase agreement, the Company filed a registration statement on Form S-3, which became effective on May 31, 2006, and has kept such registration statement effective beyond the April 11, 2008 date specified in the agreement.

The Convertible Notes were assessed under SFAS 133 and management determined that the conversion option represented an embedded derivative liability. Under the terms of the Convertible Notes, the conversion price of the debt can be adjusted if the Company subsequently issues common stock at a lower price. The Company evaluated the capital resource options available to the

Company under various performance scenarios and determined that it could be possible, although unlikely, that it would not be within management’s control to prevent the issuance of additional shares at a price that was sufficiently low so that the conversion adjustment would require the Company to deliver more shares than are authorized. Accordingly, the Company bifurcated the embedded conversion option and accounted for it as a derivative liability. In accordance with SFAS 133, embedded derivative instruments, unless certain conditions are met, require revaluation at the end of each reporting period. In accordance with this standard the embedded conversion option of the Convertible Notes was revalued each period end using a binomial option pricing model. The change in fair value was reflected as a gain or loss each period. The primary factor impacting the fair value was the market value of the Company’s common shares.

The proceeds received on issuance of the convertible debt were first allocated to the fair value of the bifurcated embedded derivative instruments included in the Convertible Notes, with the remaining proceeds allocated to the notes payable, resulting in the notes payable being recorded at a significant discount from their face amount as shown in the table below.

This discount, together with the stated interest on the notes payable, is accreted using the effective interest method over the term of the notes payable (in thousands):


Proceeds received on the issuance of convertible debt	$	5,250
Fair value of conversion option		(2,417	)

Notes payable – convertible notes at carrying value at inception	$	2,833

On November 29, 2006, the Company entered into an amendment with the holders of the Convertible Notes. The amendment extended the term of the Convertible Notes from April 11, 2009 to April 11, 2011, however it also added a put option under which the holders may elect to be repaid up to the full $5.25 million, plus accrued interest on April 11, 2009, and eliminated certain language that previously resulted in the inability to fix the number of shares issuable upon conversion causing the embedded conversion feature to be subject to SFAS 133. As a result of this amendment, the requirement to classify the embedded conversion option as a derivative liability was eliminated and the derivative liability was reclassified to shareholders’ equity.

The following table discloses the change in fair value of the embedded conversion option from inception through the date of modification (in thousands):


Fair value of conversion option at inception	$	2,417
Changes in fair value through August 31, 2006		(1,464	)
Change in fair value as a result of modification		274

Fair value of conversion option at November 29, 2006 reclassified to shareholders’ equity	$	1,227

The Company evaluated the amendments under Emerging Issues Task Force (“EITF”) 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments, which requires that a substantial modification of terms be accounted for and reported in the same manner as an extinguishment. A substantial modification of a debt instrument is deemed to have been accomplished if the present value of the cash flows (including fair value of an embedded conversion option upon modification of a convertible debt instrument) under the terms of the new debt instrument is at least 10 percent different than the present value of the remaining cash flows under the terms of the original instrument. In addition, EITF 96-19 specifically requires that if the debt instrument is puttable, then the cash flow analysis is to be performed assuming exercise and non-exercise of the put option and that the assumption that generates the smaller change would be used as the basis for the 10% threshold.

The Company performed the debt modification/extinguishment present value of the remaining cash flow calculations in accordance with EITF 96-19 and, because of the three-year put option, the amendments did not result in a greater than 10% change in the carrying value of the original debt instrument immediately prior to the modification and therefore debt extinguishment accounting does not apply. Accordingly, a new effective interest rate was determined as of the amendment date, based on the carrying amount of the original debt instrument and the revised cash flows. As a result of the modification, the change in fair value of the embedded conversion option of $449,000 was recorded as an additional discount on the Convertible Notes. The remaining discount will be accreted using the effective interest method up to the face value over the new extended term of the notes payable.

The Company recorded accretion of $244,000 and $210,000 for the six months ended May 31, 2008 and 2007, respectively, related to the Convertible Notes. For each of the six months ended May 31, 2008 and 2007, interest expense on the Convertible Notes was $211,000 and $209,000, respectively.

The amount recorded on the balance sheet at May 31, 2008 has been calculated as follows (in thousands):


Convertible notes at carrying value at November 30, 2007	$	3,217
Accretion expense		244

Convertible notes carrying value at May 31, 2008	$	3,461

Long-term debt consists of the following (in thousands):


	May 31, 2008			November 30, 2007
Subordinated convertible notes at 8.0%	$	5,250		$	5,250
Discount on convertible notes		(1,789	)		(2,033	)
Secured bank loans payable to Sparkasse Arnstadt-Ilmenau at 5.3% and 6.1% (matures in 2021) (See Note 7)		413			405
Capital leases		21			29

Long-term debt		3,895			3,651
Less current portion		(3,493	)		(32	)

Long-term debt, less current portion	$	402		$	3,619

Future maturities of long-term debt at May 31, 2008 are as follows (in thousands):


Years Ending November 30,	Gross Maturities		Imputed Interest on Minimum Lease Payment Under Capital Leases			Net Long-Term Debt
2008 ^(a)	$	20	$	(1	)	$	19
2009 ^(b)		38		(1	)		37
2010		23		—			23
2011 ^(b)		5,273		—			5,273
2012		23		—			23
Thereafter		309		—			309

Total	$	5,686	$	(2	)	$	5,684

(a)

For the remaining six months of Fiscal 2008.

(b)

The holders of the $5.25 million Convertible Notes have the option to be repaid on April 11, 2009.

9.	Other Comprehensive Loss

Other comprehensive loss, net of taxes, consists of the following (in thousands):


	Three months ended May 31,						Six months ended May 31,
	2008			2007			2008			2007
Net loss as reported	$	(732	)	$	(13,030	)	$	(2,220	)	$	(14,692	)
Foreign currency translation adjustments		130			87			212			63

Total other comprehensive loss	$	(602	)	$	(12,943	)	$	(2,008	)	$	(14,629	)

10.

Taxes

Effective at the beginning of the first quarter of fiscal 2008, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “ Accounting for Income Taxes .” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

The Company has not recognized any tax benefits, but if it does, its policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated condensed statements of income. As of the date of adoption of FIN 48, the Company had accrued $40,000 for the potential payment of non-income based taxes, interest and penalties relating to individual states and cities in which the Company has not previously filed tax returns. Upon adoption of FIN 48, no additional liabilities were recognized.

The Company files U.S. federal, U.S. state, and foreign tax returns. The Company currently does not have any audits pending, but is subject to tax examinations for years beginning with 2004 for federal and state tax returns, except in certain limited circumstances. While the final resolution of tax audits, if any, is uncertain, we believe that the ultimate disposition of any audit would not have a material adverse impact on the Company’s consolidated financial position, liquidity or results of operations.

11.

Income (Loss) from Discontinued Operations, Net of Income Tax

On June 25, 2007, CardioDynamics entered into an Agreement pursuant to which CardioDynamics would sell its Vermed subsidiary based in Bellows Falls, Vermont to MDP, an entity formed by certain management team members of Vermed, for a cash purchase price of approximately $8,000,000. The transaction was approved by CardioDynamics’ shareholders and the sale was completed on August 31, 2007. As part of the sale, the Company simultaneously entered into a five-year ICG sensor manufacturing and product pricing agreement with Vermed. Pricing is not considered beneficial or detrimental to the Company. The prior year results of the ECG segment are reported as discontinued operations within the Consolidated Statements of Operations and Consolidated Statements of Cash Flows.

The following table summarizes the financial activities for our discontinued operations during the three and six months ended May 31, 2008 and 2007, respectively (unaudited - in thousands):


	Three Months Ended May 31,					Six Months Ended May 31,
	2008		2007			2008			2007
Net sales	$	—	$	2,710		$	—		$	5,194
Cost of sales		—		1,795			—			3,533

Gross margin		—		915			—			1,661
Operating expenses:
Research and development		—		86			—			177
Selling and marketing		—		352			—			646
General and administrative		—		186			(127	)		459
Amortization of intangible assets		—		96			—			193
Impairment of intangible assets		—		11,300			—			11,300

Total operating expenses (income)		—		12,020			(127	)		12,775

Income (loss) from operations		—		(11,105	)		127			(11,114	)

Other income		—		3			—			5

Income (loss) from discontinued operations, net of income tax	$	—	$	(11,102	)	$	127		$	(11,109	)

12.

Commitments and Contingencies

Letters of Credit

In 2004, the Company issued letters of credit relating to the acquisition of Medis to secure the deferred acquisition payments due to the minority shareholders of Medis to be paid annually over five years through 2009. The Company had outstanding letters of credit at May 31, 2008 of $472,000 (€304,000), which includes imputed interest through April 2009. The deferred acquisition payments and related accrued interest is segregated and classified as current and long-term liabilities in the consolidated balance sheet. The letters of credit due to expire in June 2008 and June 2009 are secured by a certificates of deposit of $470,000 which is included on the balance sheet under “Cash and cash equivalents – restricted.”

Operating Leases

In March 2005, the Company amended the operating lease for its 33,000 square-foot facility in San Diego, California, to extend the term of the lease to December 31, 2009, and to provide for an additional $197,000 of tenant improvement allowance for building improvements. The lease payment on the original 18,000 square-feet of the facility were $20,000 per month through July 31, 2007, and increased to $22,000 per month through July 31, 2008 with annual increases of 3% each anniversary thereafter. The lease payments on the 15,000 square-foot expansion space commenced on November 1, 2004, at $7,000 per month and then increased to $14,000 per month on November 1, 2005 with a 3% annual increase on each anniversary thereafter. The total future lease commitments on the amended lease through December 31, 2009, approximate $928,000.

The lease terms provide for rent incentives and escalations for which the Company has recorded a deferred rent liability which is recognized evenly over the lease period. The difference between the base rent paid, which also includes triple net costs, and the straight-line rent expense, as well as rent incentives is $230,000 as of May 31, 2008 and is recorded as deferred rent.

In November 2006, the Company entered into a sublease agreement which commenced on January 1, 2007 for a portion of its San Diego facility. The terms of the sublease provide for the use of 6,000 square feet of general office space for a period of 24 months at a rate of $10,000 per month commencing in the third month and increasing to $10,500 in month 13. The sublease provides for one 13-month extension option at $11,000 per month.

Change of Control Agreements

The Company has Change of Control Agreements (the “Agreement”) with certain members of management. Under the Agreements, each individual is entitled to certain benefits if the Company terminates his or her employment without cause, or if an involuntary termination occurs, within 24 months after a change of control. The maximum contingent payments under the Agreements, as of May 31, 2008, were $2,266,000.

Legal Proceedings

The Company is from time to time subject to legal proceedings and claims, which arise in the ordinary course of our business. Management believes that resolution of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. This filing includes statements regarding our plans, goals, strategies, intent, beliefs or current expectations. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished. Sentences in this document containing verbs such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.) constitute forward-looking statements that involve risks and uncertainties. Items contemplating or making assumptions about actual or potential future sales, market size, collaborations, trends or operating results also constitute such forward-looking statements.

Although forward-looking statements in this Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in, or anticipated by, the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed in our Annual Report on Form 10-K for the year ended November 30, 2007. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Report. Readers are urged to carefully review and consider the various disclosures made in our Annual Report on Form 10-K for the year ended November 30, 2007 in which we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and cash flows.

The following discussion should be read along with the Financial Statements and Notes to our audited financial statements for the fiscal year ended November 30, 2007, as well as interim unaudited financial information for the current fiscal year.

OPERATING SEGMENTS AND RECLASSIFICATIONS

For the past three years, our business has had two operating segments, the impedance cardiography (“ICG”) segment and the electrocardiography (“ECG”) segment. On August 31, 2007, we sold our ECG segment (Vermed) based in Bellows Falls, Vermont to Medical Device Partners, Inc (“MDP”). The sale of Vermed allows us to focus our resources on our proprietary ICG business, which we believe holds the highest growth potential, while maintaining a long-term relationship with MDP for ICG sensors. The results of the ECG segment are reported as “discontinued operations” within the Consolidated Statements of Operations and Consolidated Statements of Cash Flows.

RESULTS OF OPERATIONS

(Quarters referred to herein are fiscal quarters ended May 31, 2008 and May 31, 2007)

Overview

CardioDynamics is the innovator and market leader of an important medical technology called impedance cardiography. We develop, manufacture and market noninvasive ICG devices, and proprietary ICG sensors. Unlike some other traditional cardiac function monitoring technologies, our monitors are noninvasive (without cutting into the body). Our BioZ ICG Systems obtain data in a safe, efficient, and cost-effective manner not previously available in the physician office and hospital setting.

Just as electrocardiography noninvasively measures the heart’s electrical function, ICG makes it possible to noninvasively measure the heart’s mechanical function. Our ICG devices measure 12 hemodynamic (blood flow) parameters which describe the blood flow the heart pumps, the resistance from the blood vessels that the heart is pumping against, the strength of heart contraction, and the amount of fluid in the chest.

Our lead products, the BioZ Dx, BioZ ICG Monitor and the BioZ ICG Module for GE Healthcare patient monitoring systems, have received FDA 510(k) clearance and carry the CE Mark, which is a required certification of environmental and safety compliance by the European Community for sale of electronic equipment.

The aging of the worldwide population along with continued cost containment pressures on healthcare systems and the desire of clinicians and administrators to use less invasive (or noninvasive) procedures are important trends that are helping drive adoption of our BioZ ICG Systems. These trends are likely to continue into the foreseeable future and should provide continued growth prospects for our Company.

There is often a slow adoption of new technologies in the healthcare industry, even technologies that ultimately become widely accepted. Conducting clinical trials, making physicians aware of the availability and clinical benefits of a new technology, changing physician habits, and securing adequate reimbursement levels are all factors that tend to affect the adoption rate of medical technologies. We have invested, and continue to invest, a significant amount of our resources in clinical trials, which, if results prove successful, should contribute to further physician acceptance and market adoption of our technology. As with all clinical trials, there is no assurance of achieving the desired positive outcome.

We have developed strategic partnerships to increase the presence and adoption of ICG technology. Our principal strategic partners include GE Healthcare, Philips and Mindray, all of which are among the premier medical technology companies in the world and have a substantial installed base of medical devices. We are currently selling the BioZ ICG Module through GE Healthcare and Mindray and co-developed the BioZ Dx with Philips, the latest generation ICG monitor. These strategic relationships further validate the importance of our technology to the clinical community and provide additional distribution channels for our systems. We intend to seek additional strategic partnerships over time to accelerate the validation, distribution, and adoption of our technology.

We believe that the greatest risks in executing our business plan in the near term include: an adverse change in U.S. reimbursement policies for our technology, negative clinical trial results, competition from emerging ICG companies or other new technologies that could yield similar or superior clinical outcomes at reduced cost, and the inability to hire, train, and retain the necessary sales and clinical personnel to meet our growth objectives. Our management team devotes a considerable amount of time mitigating these and other risks to the greatest extent possible. Please refer to Part I, Item 1A of our Annual Report on Form 10-K for the year ended November 30, 2007 for addition information regarding the risks we face.

Following is a summary of several key financial results in our second quarter of 2008 as compared with the second quarter of 2007, as well as some important milestones we achieved during the second quarter :

•

Net sales increased 15% to $6.2 million, up from $5.4 million

•

ICG sensor revenue increased 1% to $1.7 million, or 28% of net sales

•

ICG monitor sales totaled 217 units, up 11% from 196 ICG monitors sold in the second quarter of 2007

•

Gross profit margin was 71%, up from 63% in the second quarter of 2007

•

Loss from operations was reduced 68% to $476,000 from $1,470,000

•

Net loss was $732,000, or $0.10 per share, down from $13.0 million, or $1.86 per share, (including discontinued operations)

•

Cash, equivalents and short-term investments of $6.9 million at May 31, 2008, up from $2.7 million at May 31, 2007

•

Net operating cash used in continuing operations was $490,000, down 43% from $860,000

Additional key operating milestones for the second quarter of 2008:

•

Released significant ICG study demonstrating nearly three times the national average blood pressure control rates at the American Society for Hypertension Annual Scientific meeting

•

Over 8,200 ICG monitors and modules sold to date, up 12% from 7,300 one year ago

•

Shareholders approved one-for-seven reverse stock split and we regained compliance with Nasdaq listing requirements

Operating Segments

For the past three years, our business has had two operating segments, the ICG segment and the ECG segment. However, on August 31, 2007, we sold our ECG segment (Vermed) based in Bellows Falls, Vermont, to MDP. The sale of Vermed allows us to focus resources on our proprietary ICG business, which we believe holds the highest growth potential, while maintaining a long-term supply relationship with MDP for ICG sensors. Upon the completion of the sale of Vermed, we now report as one operating segment, as defined in Financial Accounting Standards Board No. 131, and the results of the ECG segment are reported as discontinued operations within the Consolidated Statements of Operations and Consolidated Statements of Cash Flows.

The ICG business consists primarily of the development, manufacture and sales of our BioZ Dx, BioZ and Niccomo ICG Monitors, BioZ ICG Module and associated BioZtect sensors. These devices use ICG technology to noninvasively measure the heart’s mechanical function. These products are used principally by physicians to assess, diagnose, and treat cardiovascular disease and are sold to physicians, hospitals, researchers, and international distributors throughout the world.

We derive most of our revenue from the sale of our ICG devices but also sell the associated disposable ICG sensors, which are consumed each time an ICG test is performed. For the three months ending May 31, 2008, 28% of our revenue came from our disposable ICG sensors. ICG sensor revenue, as a percentage of net sales, has grown from 6% in 2000, to a high of 31% in 2007. We have now shipped nearly 6.7 million ICG sensor sets to customers since introducing the BioZ ICG Monitor in 1998. We employ a workforce of clinical application specialists (“CAS”) who are responsible for interacting with and training our customers on the use of the BioZ ICG Systems.

In January 2004, the Center for Medicare & Medicaid Services (“CMS”) issued an updated national coverage determination for ICG. Of the six indications previously covered, five were substantially unchanged. One indication, “suspected or known cardiovascular disease,” was revised to specifically allow CMS contractor discretion in the coverage of resistant hypertension. Resistant hypertension is defined by CMS to include patients with uncontrolled blood pressure on three or more anti-hypertensive medications, including a diuretic. This change served to significantly reduce the number of patients within this indication eligible for CMS reimbursement for ICG monitoring which in turn negatively impacted our sales of ICG Monitors and sensors.

In March 2006, we published the results of our multi-center CONTROL study in a leading hypertension journal, Hypertension , which showed that clinician use of BioZ technology helped patients reach targeted blood pressure levels twice as effectively as standard clinical practice. Based on the results of this study, CMS opened a reconsideration review in response to our request to evaluate whether to broaden ICG hypertension coverage.

In November 2006, CMS announced that their hypertension reimbursement policy for ICG would remain unchanged and CMS local contractors would continue to have the discretion whether or not to cover ICG for hypertension. Some private insurers cover the BioZ ICG test, including Aetna, Humana, and Blue Cross Blue Shield as well as others (in select states). We continue to have active discussions with local Medicare contractors and private insurers in an effort to maintain and expand local reimbursement coverage for ICG.

Net Sales – Net sales for the three months ended May 31, 2008 were $6,180,000, up 15% from $5,380,000 for the three months ended May 31, 2007. ICG device sales increased 11% to 217 units, up from a total of 196 units in second quarter of 2007. Of the 217 ICG units sold, 80 were ICG Modules and 137 were stand-alone ICG monitors, including 108 BioZ Dx systems, 14 BioZ monitors, and 15 Medis ICG monitors. In addition to our unit sales growth, we experienced an 8% increase in the average unit sales price of our domestic ICG Monitors compared with the second quarter of 2007. This increase in average unit selling price is principally due to a proportionately greater number of our higher priced BioZ Dx systems placed during the second quarter of 2008, as compared to the second quarter of 2007.

Net sales for the six months ended May 31, 2008 were $11,942,000, up 18% from $10,107,000 for the six months ended May 31, 2007. The sales growth for the six months ended May 31, 2008, was primarily driven by record sales from our Medis subsidiary, which accounted for $2,578,000 of sales in the first half of 2008, up from $932,000 in the first half of 2007. Total ICG device sales increased 45% to 483 units, up from a total of 334 units in first six months of 2007. Of the 483 ICG units sold, 132 were ICG Modules and 351 were stand-alone ICG monitors, including 170 BioZ Dx systems, 20 BioZ monitors, and 161 Medis ICG monitors.

Net sales for the three months ended May 31, 2008 by our domestic direct sales force, which targets physician offices and hospitals, increased 17% to $5,282,000, from $4,532,000 in the same quarter last year. Sales headcount totaled 70 associates at May 31, 2008, including 38 U.S. territory managers and 24 clinical application specialists, up from 68 sales associates at May 31, 2007.

For the three months ended May 31, 2008, international and new market sales increased by $75,000 or 11% to $782,000 from $707,000 in the same period last year, primarily due to increased new market revenue from pharmaceutical companies. For the six months ended May 31, 2008, international and new market sales increased by $1,915,000 or 158% to $3,127,000 from $1,212,000 during the first six months of 2007. The increase during the first six months of 2008 was primarily due to fulfillment of a large order for Niccomo ICG Monitors from an Eastern European hospital purchaser shipped by our Medis subsidiary in the first quarter of 2008. Additionally, the Instituto de Salud del Estado de Mexico, the hospital network of the state of Mexico within the country of Mexico, also purchased over $200,000 of Niccomo monitors during the first quarter of 2008.

Each time our BioZ ICG products are used, disposable sets of four BioZtect sensors are required. This recurring ICG sensor revenue increased 1% in the three months ended May 31, 2008 to $1,711,000, representing 28% of consolidated net sales, up from $1,691,000 or 31% of consolidated net sales in the same quarter last year. For the six months ended May 31, 2008, sensor revenue also increased 1%, to $3,212,000, representing 27% of consolidated net sales, up from $3,179,000, or 31% of consolidated net sales, in the same period last year.

Continued sensor revenue growth in the future, to some degree, will be based upon the success of our CAS team’s focused customer service efforts and increased use of the BioZ Assessment Process (“BAP”), which assists physician offices in appropriately identifying patients who are symptomatic and for whom the physician would benefit by having BioZ data for clinical assessment. To date, there are approximately 2,800 offices that have initiated the BAP into assessment of patients. We believe that successful integration of BAP into physician practices will result in proper utilization and sensor revenue growth. In addition, we offer a Discount Sensor Program to our domestic outpatient customers, which includes considerable discounts and a fixed price on sensor purchases in exchange for minimum monthly sensor purchase commitments.

Included in ICG net sales is revenue derived from extended warranty contracts, spare parts, accessories, freight and non-warranty repairs of our BioZ Systems of $177,000 and $205,000 for the three months ended May 31, 2008 and 2007, respectively. For the six months ended May 31, 2008 and 2007, revenue derived from extended warranty contracts, spare parts, accessories, freight and non-warranty repairs of our BioZ Systems was $282,000 and $334,000, respectively.

Stock-Based Compensation Expense – Stock-based compensation expense for the three months ended May 31, 2008 was $97,000, as compared with $90,000 for the three months ended May 31, 2007. Stock-based compensation expense for the six months ended May 31, 2008 was $181,000, as compared with $185,000 for the six months ended May 31, 2007. Note 1 to the Consolidated Financial Statements breaks out the individual operating expense line item amounts.

Gross Margin – Gross margin for the three months ended May 31, 2008 and 2007 was $4,408,000 and $3,414,000, respectively, an increase of $994,000 or 29%. The second quarter 2008 increase was the result of higher sales volume. As a percentage of net sales, gross margin in the second quarter of 2008 was 71%, up from 63% from the same quarter last year. The increased percentage during the second quarter of 2008 was a result of 10% higher net average unit selling prices and lower expenses related to provision for excess, slow moving or obsolete inventory. Obsolescence expense was $57,000 for the three months ended May 31, 2008, as compared to $221,000 for the same period a year ago. Gross margins were also positively impacted by a $134,000 reduction in allocated indirect manufacturing costs as a result of improved manufacturing efficiencies.

Gross margin for the six months ended May 31, 2008 and 2007 was $8,395,000 and $6,921,000, respectively, an increase of $1,474,000 or 21%. As a percentage of net sales, gross margin in the first six months of 2008 was 70%, up from 68% from the same period last year. The increase during the first six months of 2008 was principally a result of lower material overhead rates resulting from a $268,000 reduction in allocated indirect manufacturing costs and an 11% increase in the average BioZ unit sales price. This was partially offset by a $67,000 increase in expenses related to provisions for excess, slow moving or obsolete inventory.

Research and Development Expenses – We invested $370,000 and $454,000 in research and development for the three months ended May 31, 2008 and 2007, respectively. For the six months ended May 31, 2008 and 2007, we invested $684,000 and $897,000, respectively, in research and development. The reductions in the 2008 periods are primarily due to lower personnel and related expenses as part of our ongoing cost containment focus in support of our plan to regain profitability.

Selling and Marketing Expenses – Selling and marketing expenses increased by $41,000 or 1% to $3,721,000 during the three months ended May 31, 2008, as compared with $3,680,000 in the comparable quarter last year. The second quarter increase is primarily due to $60,000 of depreciation related to long-term demonstration equipment capitalized after the second quarter of 2007, $94,000 of bad debt expense write-off’s, and $136,000 higher shared services department allocations. These increases were mostly offset by $90,000 of lower clinical study costs, $68,000 of lower personnel and related costs and $43,000 of lower product marketing expenses.

Selling and marketing expenses for the six months ended May 31, 2008, were $7,443,000, an increase of $319,000 or 4%, as compared to $7,124,000 during the six months ended May 31, 2008. The increase during the six months ended May 31, 2008, is primarily due to $148,000 of increased commissions, as a result of higher sales levels, $120,000 of depreciation related to long-term demonstration equipment and $142,000 of higher shared services department allocations. These were partially offset by $93,000 of lower clinical study costs and $77,000 of lower product marketing expenses.

As a percentage of net sales, selling and marketing expenses decreased to 60% for the three months ended May 31, 2008, as compared with 68% for the same quarter last year. For the six months ended May 31, 2008, selling and marketing expenses, as a percentage of net sales, decreased to 62%, as compared with 70% for the six months ended May 31, 2007. The decreased percentage of selling and marketing expenses to net sales in the current three and six month periods is due primarily to increased productivity of our domestic sales force and a large sale to an Eastern European hospital purchaser, which had lower incremental selling costs associated with the transaction, during the first quarter of 2008.

General and Administrative Expenses – General and administrative expenses for the second quarter of 2008 were $761,000, up $41,000 or 6% from $720,000 for the same quarter last year. The increase in the current quarter is primarily due to $73,000 of incremental bad debt expense provision and $52,000 of higher investor relations expenses, principally relating to our one-for-seven reverse stock split and related efforts directed at retaining our Nasdaq listing. These were partially offset by $74,000 of lower personnel and related expenses. As a percentage of net sales, general and administrative expenses for the quarter ended May 31, 2008 were 12%, down from 13% for the quarter ended May 31, 2007.

General and administrative expenses for the first six months of 2008 were $1,532,000, down $133,000, or 8%, from $1,665,000 for the same quarter last year. The decrease in the first half of 2008 is due to lower personnel and related costs and lower accounting fees, principally because we are temporarily exempt from being required to obtain a third party audit of our internal controls over financial reporting during the fiscal 2008 period. As a percentage of net sales, general and administrative expenses for the six months ended May 31, 2008 and 2007, were 13% and 16%, respectively.

Amortization of Intangible Assets – For the three months ended May 31, 2008, amortization expense was $32,000, compared with $30,000 for the same period in fiscal 2007. For the six months ended May 31, 2008, amortization expense was $64,000, down from $85,000 in the first six months of 2007. The decrease in the first six months of 2008 was principally due to a one time acceleration of previously capitalized patent fees, recorded in the first quarter of 2007.

Other Income (Expense) – Interest income during the three months ended May 31, 2008 and 2007 was $62,000 and $52,000, respectively. Interest income during the six months ended May 31, 2008 and 2007 was $140,000 and $123,000, respectively. The increase in interest income during each of the 2008 periods is due to higher average cash balances. These higher average cash balances have been partially offset by lower interest rates and fewer internally financed receivables in 2008.

Interest expense was $241,000 and $269,000 in the quarters ended May 31, 2008 and 2007, respectively. For the six month periods ended May 31, 2008 and 2007, interest expense was $475,000 and $535,000, respectively. The reduction in interest expense during 2008 is principally due to the retirement of our bank debt on August 31, 2007, partially offset by higher additional accretion under the effective interest method on our convertible notes.

Foreign currency translation losses for the quarter ended May 31, 2008, were $13,000, down from $29,000 for the quarter ended May 31, 2007. For the first half of 2008, foreign currency translation losses were $24,000, down from $37,000 for the same period in 2007. Foreign currency translation losses are a result of the quarterly revaluation of the Medis deferred acquisition liability, which is denominated in Euros, at the current foreign exchange rates in effect on the last day of each reporting period.

Minority Interest in Income of Subsidiary – For the three months ended May 31, 2008 we recorded minority interest in the income of our Medis subsidiary, which represents the 20% minority share retained by the sellers, of $11,000, as compared with $21,000 for the three months ended May 31, 2007. For the six months ended May 31, 2008, we recorded minority interest in the income of our Medis subsidiary of $145,000, as compared to $35,000 for the six months ended May 31, 2007. The increase during the first six months of 2008 is the result of the significantly higher income earned during the period by our Medis subsidiary, largely related to the large Eastern European hospital and Mexico shipments recorded during the first quarter of 2008.

Income Tax Provision – For the quarter ended May 31, 2008, we recorded a tax provision of $53,000, down from $196,000 for the same quarter in 2007. In each of the reported periods, the tax provisions are based on estimated foreign taxes and estimated minimum U.S. income and franchise taxes. The second quarter of 2007 includes a $120,000 tax provision related to the deferred tax liability created by tax amortization associated with the goodwill of our former Vermed subsidiary. Since we have a 100% valuation allowance against our deferred tax assets, we do not recognize an income tax benefit against consolidated pre-tax losses. However, because foreign income is not shielded by our deferred tax assets, we record a tax provision based on estimated foreign taxes resulting from the income earned by our Medis subsidiary during the period.

For the six months ended May 31, 2008, we recorded a tax provision of $516,000, as compared with $250,000 for the six months ended May 31, 2007. In each of the six month periods, the tax provision is based upon estimated foreign taxes and estimated minimum U.S. income and franchise taxes. The increase during the first six months of 2008 is the result of the significantly higher income earned during the period by our Medis subsidiary on large Eastern European hospital and Mexico shipments recorded during the first quarter of 2008. The second quarter of 2007, also includes $120,000 of tax provision related to the deferred tax liability created by tax amortization associated with goodwill of our former Vermed subsidiary. This provision was reversed upon the close of the sale of Vermed at the end of our fiscal third quarter ending August 31, 2007.

Income (Loss) from Discontinued Operations, Net of Income Tax – In last year’s quarter ended May 31, 2007, we recorded a loss from discontinued operations, net of tax of $11,102,000. The loss during the period primarily related to an $11.3 million charge to write down the goodwill of our former Vermed subsidiary. There was no discontinued operations activity during the quarter ended May 31, 2008, as we did not incur any expenses relating to the completion of the disposition of this subsidiary.

For the six months ended May 31, 2008, we recorded income from discontinued operations, net of tax of $127,000, compared with a loss from discontinued operations, net of tax of $11,109,000 in the same period last year. The income reported during the first six months of 2008 is due to the release of estimated previously accrued expenses related to the sale of our former Vermed subsidiary since we do not expect to incur any additional expenses associated with the disposition of this subsidiary.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in continuing operations for the six months ended May 31, 2008 was $1,278,000, down from $1,605,000 in the same period last year. Including discontinued operations, net cash provided by operating activities was $14,000 during the first six months of 2007. From an operating cash flow perspective, our net loss of $1,328,000 in the first six months of 2008 included non-cash charges, including provision of $443,000 for doubtful accounts receivable, $244,000 for depreciation, $244,000 for accretion of discount on convertible notes and $181,000 for stock-based compensation expense, none of which effect cash flow. The largest use of operating cash in the first half of 2008, is related to a prepaid customer deposit received in the fourth quarter of 2007, associated with a large sale to an Eastern European hospital purchaser that shipped in the first quarter of 2008. Going forward, operating cash use is projected to continue in the near term, but return to positive operating cash flow by the fourth quarter of 2008.

In the first six months of 2008, net cash used in investing activities from continuing operations was $35,000, down from net cash provided by investing activities from continuing operations $1,473,000 in the same period in 2007. Investing cash provided by continuing operations during the first six months of 2007, was principally due to the maturity of certificates of deposit of $1,510,000. The cash use in the first six months of 2008 was for purchases of property, plant and equipment totaling $35,000, as compared with $37,000 during the first six months of 2007. Most of the purchases in both periods relate to computer equipment. As we replace and upgrade our existing computer hardware and software and add additional sales personnel, we expect to continue to invest in new computer equipment in future periods, however, we believe that purchases of property, plant and equipment in future periods will not materially increase.

Net cash used in financing activities during the first six months of 2008 was $219,000, down from $368,000 in the first six months of 2007. The principal difference between the periods was payments made on our former bank debt during the 2007 period. This bank debt was repaid from the proceeds of the sale of Vermed and subsequently terminated on August 31, 2007.

On April 11, 2006, we issued $5.25 million of Convertible Notes to our largest institutional shareholder. The Convertible Notes, originally due in 2009, are convertible into common stock at $8.05 per share. The Convertible Notes were determined to contain an embedded derivative liability because the conversion price of the debt could be adjusted if we issued common stock at a lower price. We evaluated the capital resource options available to the Company under various performance scenarios and determined that it could be possible, although unlikely, that it would not be within management’s control to prevent the issuance of additional shares at a price that was sufficiently low so that the conversion adjustment would require us to deliver more shares than are authorized. Under the rules, this required us to bifurcate the embedded conversion option and account for it as a derivative instrument liability. The proceeds received on issuance of the Convertible Notes were allocated to the fair value of the bifurcated embedded derivative instrument included in the Convertible Notes, with the remaining proceeds allocated to the notes payable, resulting in the Convertible Notes being recorded at a significant discount from their face amount.

On November 29, 2006, we entered into an amendment with the holders of the Convertible Notes. The amendment extended the term of the Convertible Notes to April 2011, added a put option under which the holders may elect to be repaid in April 2009, and eliminated the embedded derivative instrument by revising the anti-dilution language. As a result of this amendment, the requirement to classify the embedded conversion option as a derivative liability was eliminated and the derivative liability was reclassified to shareholders’ equity. The holders of the Convertible Notes are required to notify us in writing no later than January 11, 2009, in order to exercise their put option to be repaid on April 11, 2009. As a result of this possible election, we have classified the Convertible Notes, net of the remaining discount, as a current liability on our balance sheet. If all of the holders of the Convertible Notes elect to be repaid on April 11, 2009, we would be responsible for the repayment of $5.25 million, plus accrued interest up to the repayment date and the remaining discount would be amortized, on a pro-rata basis, between the time of the notification and the repayment date of April 11, 2009.

In 2004, we issued letters of credit relating to the acquisition of Medis to secure the deferred acquisition payments due to the minority shareholders of Medis to be paid annually over five years through 2009. As of May 31, 2008, our outstanding letters of credit totaled $472,000 (€304,000), which are secured by certificates of deposit.

At May 31, 2008, we have net operating loss carryforwards of approximately $52 million for federal income tax purposes that begin to expire in 2011. The Tax Reform Act of 1986 contains provisions that limit the amount of federal net operating loss carryforwards that can be used in any given year in the event of specified occurrences, including significant ownership changes. In 2004, we retained independent tax specialists to perform an analysis to determine the applicable annual limitation applied to the utilization of the net operating loss carryforwards due to ownership changes as defined in Internal Revenue Code (IRC) Section 382 that may have occurred. As a result of this study, and management’s consideration of subsequent share ownership activity, we do not believe that the ownership change limitations would impair our ability to use our net operating losses against our current forecasted taxable income.

In March of 2008, our Board of Directors approved a resolution proposing a reverse split of one-for-seven shares of our common stock and reduce proportionately the number of authorized shares of our common and preferred stock. The Board of Directors authorized the reverse stock split to reduce the number of outstanding shares with the expectation that each share will trade at a higher price. In April 2007, we received a Nasdaq Staff Deficiency Letter from the Listing Qualifications Department indicating that our common stock failed to comply with the minimum bid price requirement set forth in Nasdaq Marketplace Rule 4450(a)(5). The letter was issued in accordance with standard Nasdaq procedures because our common stock closed below $1.00 per share for 30 consecutive trading days. We were afforded 180 calendar days to regain compliance with the minimum bid requirement. Because our stock did not exceed the $1.00 minimum bid price for at least 10 consecutive business days within that 180 day period, we elected to transfer our common stock from the Nasdaq Global Market to the Nasdaq Capital Market in October 2007. At that time, we were granted a second 180 calendar days, or through mid-April 2008, to regain compliance while listed on the Nasdaq Capital Market. On May 8, 2008, the shareholders approved the one-for-seven reverse stock split. On May 9, 2008, our common stock began trading on a split-adjusted basis and has, since then, traded in excess of the $1.00 minimum bid price. On May 23, 2008, the Company received notification from Nasdaq that it had regained compliance with the listing requirements.

We believe that over the next 12 months, our current cash and cash equivalent balances will be sufficient to support our ongoing operating plans, fund our anticipated capital expenditures and to meet our working capital requirements even if the holders of our $5.25 million convertible notes elect to exercise their April 2009 early repayment option. While we believe that we are adequately capitalized, our long-term liquidity will depend to some extent on our ability to commercialize the BioZ and other products and whether the holders of our $5.25 million convertible notes elect to exercise their April 2009 early repayment option provided under the terms of the notes. Therefore, we may attempt to raise additional funds through public or private financing, bank loans, collaborative relationships, dispositions or other arrangements. In addition, we may seek ways to maximize shareholder value including appropriate acquisition, restructuring or divestiture opportunities. As we consider opportunities to acquire or make investments in other technologies, products and businesses, we may choose to finance such acquisitions or investments by incurring debt or issuing equity securities.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”), which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental

entities that are presented in conformity with U.S. GAAP. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of this Standard is not expected to have a material impact on our results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”), which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS 161 is effective for the Company beginning in fiscal 2010. The adoption of this Standard is not expected to have a material impact on our results of operations or financial position.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS 141 (revised 2007) is effective for acquisitions occurring in fiscal years beginning after December 15, 2008 and is required to be adopted by the Company in its first quarter of fiscal 2009. We believe that the adoption of SFAS 141 (revised 2007) would have an impact on the accounting for any future acquisition, if one were to occur.

In December 2007, the FASB issued SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements, ” an amendment of ARB 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS 160 is effective for fiscal years beginning after December 15, 2008 and requires retrospective application of its presentation requirements. It is required to be adopted by the Company in our first quarter of fiscal 2009. We have not determined the impact, if any, the adoption of SFAS 160 will have on our financial position and results of operations, but do not expect that the impact would be material.

OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to off-balance sheet arrangements other than operating leases, and have not engaged in trading activities involving non-exchange traded contracts, and we are not a party to any transaction with persons or activities that derive benefits from their non-independent relationships with us.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The methods, estimates, and judgments we use in applying our most critical accounting policies have a significant impact on the results that we report in our consolidated financial statements. The SEC considers an entity’s most critical accounting policies to be those policies that are both most important to the portrayal of a company’s financial condition and results of operations, and those that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain at the time of the estimation. We believe the following critical accounting policies require significant judgments and estimates used in the preparation of our consolidated financial statements and this discussion and analysis of our financial condition and results of operations:

Revenue Recognition

We recognize revenue from the sale of products to end-users, distributors and strategic partners when persuasive evidence of a sale exists, the product is complete, tested and has been shipped which coincides with transfer of title and risk of loss, the sales price is fixed and determinable, collection of the resulting receivable is reasonably assured, there are no material contingencies and we do not have significant obligations for future performance.

Provisions for estimated future product returns and allowances are recorded in the period of the sale based on the historical and anticipated future rate of returns. On occasion, we offer customers a limited Medicare reimbursement guarantee under which we would be responsible for the remaining unbilled payments. However, we believe the probability of payment is remote and thus recognize full revenue on the sale. Revenue is recorded net of any discounts or trade-in allowances given to the buyer.

We also occasionally sell products under long-term financing arrangements, and when collectability is reasonably assured, we recognize the present value of the minimum payments as revenue, based on the interest rate implicit in the financing agreement. Deferred interest income is recognized on a monthly basis over the term of the financing arrangement. For the three months ended May 31, 2008 and 2007, revenue from long term financing sales accounted for approximately 1.3% and 1.5% of total net sales. For the six months ended May 31, 2008 and 2007, revenue from long term financing sales accounted for approximately 1.0% and 2.2% of total net sales. Revenue for separately priced extended warranty contracts is recognized ratably over the life of the contract. Amounts received for warranty contracts that have not yet been earned, are recorded as deferred revenue. For the six months ended May 31, 2008 and 2007, revenue from extended warranty contracts accounted for approximately 0.7% and 1.0% of total net sales.

Provisions for estimated future product returns and allowances are recorded in the period of the sale based on the historical and anticipated future rate of returns. The Company records shipping and handling costs charged to customers as revenue and shipping and handling costs to cost of sales as incurred. Revenue is reduced for any discounts or trade in allowances given to the buyer.

Fair Value of Financial Instruments

The carrying amounts of financial instruments such as cash and cash equivalents, restricted cash, accounts receivable, other current assets, accounts payable, accrued expenses and other current liabilities and accrued compensation, are reasonable estimates of their fair value because of the short-term nature of these financial instruments. The fair value of each long-term receivable was estimated by discounting the future cash flows based on the interest rate implicit in the financing agreement. Long-term receivable financing arrangements include a market rate of interest and the carrying value approximates fair value. Long-term debt, which is based on borrowing rates currently available to the Company for loans with similar terms and maturities, is reported at its carrying value, which we believe approximates the fair value.

Accounts Receivable

We provide allowances against trade receivables and notes receivable for estimated losses resulting from customers’ inability to pay. The adequacy of this allowance is determined by regularly reviewing specific account payment history and circumstances, the accounts receivable aging, note receivable payments, and historical write-off rates. If customer payment timeframes were to deteriorate, additional allowances for doubtful accounts would be required. Also included in the allowance for doubtful accounts is an estimate of potential future product returns related to product sales. We analyze the rate of historical returns when evaluating the adequacy for product returns which is recorded as a reduction of current period revenue.

Inventory

Inventory is stated at the lower of cost (first-in, first-out method) or market. We evaluate inventory on hand against historical and planned usage to determine appropriate provisions for obsolete, slow-moving and sales demonstration inventory. Inventory includes material, labor and overhead costs.

Goodwill

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is tested for impairment annually or more frequently if an event or circumstances indicates that impairment has occurred. We perform impairment reviews at the reporting unit level and use both a discounted cash flow model, based on management’s judgment and assumptions, and a market capitalization

model, comparing to other similar public company revenues and enterprise values, to determine the estimated fair value of our Medis reporting unit. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the estimated fair value of the reporting unit.

Goodwill is recorded on the books of our Medis subsidiary, therefore exchange rate fluctuations will affect enterprise value from period to period. Impairment testing indicated that the estimated fair value of our Medis subsidiary exceeded its corresponding carrying amount, as such, no impairment exists as of May 31, 2008 and November 30, 2007.

Warranty Cost

We record a provision for warranty repairs on all BioZ systems sold, which is included in cost of sales in the consolidated statements of operations and is recorded in the same period the related revenue is recognized. The warranty provision is calculated using historical data to determine the percentage of systems that may require repairs during the warranty period and the average parts cost to repair a system. This financial model is then used to calculate the future probable expenses related to warranty and the required warranty provision. The historical data used in this model are reviewed and updated as circumstances change over the product’s life cycle. If actual warranty expenditures differ substantially from our estimates, revisions to the warranty provision would be required. Actual warranty expenditures are recorded against the warranty provision as they are incurred.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and certain changes in equity that are excluded from net income (loss). It includes net income (loss), unrealized gains and losses on short-term investments and foreign currency translation adjustments. Short-term investments securities generally consist of certificates of deposit, investments in debt instruments of financial institutions and corporations with strong credit ratings, and in U.S. government obligations.

Foreign Currency Translation

Foreign currency translation adjustments are a result of translating assets and liabilities of our foreign subsidiary from its functional currency into the reporting currency, U.S. dollars, using the period-end exchange rate. The average exchange rate of each reporting period is used to translate revenue and expenses. The cumulative translation adjustments are included in accumulated other comprehensive income reported as a separate component of shareholders’ equity.

We have a payable relating to the Medis acquisition that is denominated in a foreign currency. This payable is reported as deferred acquisition payments in the consolidated balance sheet. The carrying amount of this payable is recorded at net present value and is subject to changes in currency exchange rates and the unrealized gains or losses are included in the determination of net income (loss) in the consolidated statements of operations as foreign currency (income) loss.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have, within 90 days of the date of this report, reviewed the Company’s process of gathering, analyzing and disclosing information that is required to be disclosed in its periodic reports (and information that, while not required to be disclosed, may bear upon the decision of management as to what information is required to be disclosed) under the Securities Exchange Act of 1934, including information pertaining to the condition of, and material developments with respect to, the Company’s business, operations and finances.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the date of this report, the Company’s disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

We have made no changes in our internal control over financial reporting in connection with our quarter ended May 31, 2008 internal control testing and evaluation that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

Reference is made to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cautionary Statement Regarding Forward-Looking Statements,” in Part I, Item 2 of this report. You should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended November 30, 2007, which could materially affect our business, financial condition or future results.

The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

At the 2008 Annual Meeting of Shareholders held on May 8, 2008, the shareholders voted on the following proposals. Each such proposal was approved.

Proposal 1 : To elect a Board of Directors for the following year. The balloting for the directors was as follows:


	Votes For	Votes Against/ Withheld	Votes Abstained/ Non-Votes
James C. Gilstrap	40,878,369	5,841,406	0
Robert W. Keith	41,023,358	5,696,417	0
Richard O. Martin	40,994,410	5,725,365	0
B. Lynne Parshall	41,018,525	5,701,250	0
Michael K. Perry	40,804,237	5,915,538	0
Jay A. Warren	41,013,217	5,706,558	0

Proposal 2 : To approve an amendment to our articles of incorporation to give effect to a one-for-seven reverse stock split of our common stock and to reduce proportionately the number of authorized shares. Of the shares voted, 40,496,710 shares were voted in favor of the ratification, 6,068,500 shares were voted against ratification, 154,563 shares abstained from voting and there were no broker non-votes.

Proposal 3 : To ratify the Audit Committee’s selection of BDO Seidman, LLP as the Company’s independent registered public accounting firm for the fiscal year ending November 30, 2008. Of the shares voted, 42,952,165 shares were voted in favor of the ratification, 532,430 shares were voted against ratification, 3,235,175 shares abstained from voting and there were no broker non-votes.

Item 5.

Other Information

None.

Item 6.

Exhibits


Exhibit		Title

31.1		Certification of CEO pursuant Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of CFO pursuant Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of CEO pursuant Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of CFO pursuant Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


	CardioDynamics International Corporation

Date: July 15, 2008	By:	/s/ Michael K. Perry
	Michael K. Perry
	Chief Executive Officer (Principal Executive Officer)

Date: July 15, 2008	By:	/s/ Stephen P. Loomis
	Stephen P. Loomis
	Vice President, Finance and Chief Financial Officer
	(Principal Financial and Accounting Officer)