UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2009.

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

For the transition period from to

Commission File Number: 1-11388

PLC SYSTEMS INC.

(Exact Name of Registrant as Specified in Its Charter)

Yukon Territory, Canada		04-3153858
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

10 Forge Park, Franklin, Massachusetts		02038
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (508) 541-8800

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

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

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x
(Do not check if a smaller reporting company)

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

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

Class		Outstanding at May 8, 2009
Common Stock, no par value		30,351,092

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Part I. Financial Information

Item 1. Financial Statements

PLC SYSTEMS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	March 31, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	4,319		$	5,026
Accounts receivable, net of allowance of $21 and $20 at March 31, 2009 and December 31, 2008, respectively	534			802
Inventories, net	1,030			1,136
Prepaid expenses and other current assets	531			598
Total current assets	6,414			7,562
Equipment, furniture and leasehold improvements, net	134			160
Other assets	190			191
Total assets	$	6,738		$	7,913

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	177		$	296
Accrued compensation	465			525
Accrued other	174			138
Deferred revenue	1,961			2,405
Total current liabilities	2,777			3,364
Deferred revenue	1,085			1,358
Commitments and contingencies
Stockholders’ equity:
Preferred stock, no par value, unlimited shares authorized, none issued and outstanding	—			—
Common stock, no par value, unlimited shares authorized, 30,351 shares issued and outstanding as of both March 31, 2009 and December 31, 2008	93,893			93,893
Additional paid in capital	528			474
Accumulated deficit	(91,196		)	(90,838		)
Accumulated other comprehensive loss	(349		)	(338		)
Total stockholders’ equity	2,876			3,191
Total liabilities and stockholders’ equity	$	6,738		$	7,913

The accompanying notes are an integral part of the condensed consolidated financial statements.

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PLC SYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2009			2008
Revenues:
Product sales	$	1,259		$	806
Service fees	308			362
Total revenues	1,567			1,168

Cost of revenues:
Product sales	411			220
Service fees	201			185
Total cost of revenues	612			405
Gross profit	955			763

Operating expenses:
Selling, general and administrative	1,085			970
Research and development	229			608
Total operating expenses	1,314			1,578
Loss from operations	(359		)	(815		)
Other income, net	1			53
Net loss	$	(358	)	$	(762	)
Basic and diluted loss per share	$	(0.01	)	$	(0.03	)
Weighted average shares outstanding:
Basic and diluted	30,351			30,329

The accompanying notes are an integral part of the condensed consolidated financial statements.

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PLC SYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2009			2008
Operating activities:
Net loss	$	(358	)	$	(762	)

Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation and amortization	27			25
Compensation expense from stock options	54			49
Change in assets and liabilities:
Accounts receivable	270			302
Inventory	107			(581		)
Prepaid expenses and other assets	67			(37		)
Accounts payable	(119		)	58
Deferred revenue	(716		)	(159		)
Accrued liabilities	(24		)	(100		)
Net cash used for operating activities	(692		)	(1,205		)

Investing activities:
Purchase of equipment	—			(27		)
Net cash used for investing activities	—			(27		)

Effect of exchange rate changes on cash and cash equivalents	(15		)	12
Net decrease in cash and cash equivalents	(707		)	(1,220		)
Cash and cash equivalents at beginning of period	5,026			8,060
Cash and cash equivalents at end of period	$	4,319		$	6,840

The accompanying notes are an integral part of the condensed consolidated financial statements.

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PLC SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

1. Business

PLC Systems Inc. (“PLC” or the “Company”) is a medical device company specializing in innovative technologies for the cardiac and vascular markets. The Company pioneered and manufactures the CO2 Heart Laser System (the “Heart Laser System”) that cardiac surgeons use to perform carbon dioxide (CO2) transmyocardial revascularization, or TMR, to alleviate symptoms of severe angina. The Company also manufactures CO2 surgical laser tubes and provides contract assembly services on general purpose CO2 lasers, which it sells to a single customer on an original equipment manufacturer (“OEM”) basis.

On March 20, 2007, the Company entered into a distribution agreement with Novadaq Corp. (“Novadaq”), a subsidiary of Novadaq Technologies Inc., pursuant to which the Company appointed Novadaq as its exclusive distributor in the United States for its TMR business. The agreement amended and restated the exclusive distribution agreement between the Company and Edwards Lifesciences LLC (“Edwards”), which had been assigned by Edwards to Novadaq on the same date. The agreement with Novadaq reflects substantially the same roles, responsibilities and financial terms as the previous agreement with Edwards.

In addition, the Company has begun initial commercialization in the European Union (“EU”) of its newest product, RenalGuard®. RenalGuard is designed to reduce the potentially toxic effects that contrast media can have on the kidneys when it is administered to patients during certain medical imaging procedures. It is believed that allowing contrast media to dwell in the kidneys can lead to contrast-induced nephropathy (“CIN”), a potentially deadly form of acute kidney injury. By inducing and maintaining a high urine flow rate before, during and after these medical imaging procedures, the Company believes the incidence rates of CIN in at-risk patients can be reduced. RenalGuard facilitates this increased urine clearance, enabling the body to more rapidly void the contrast media, thereby reducing its overall resident time and toxic effects in the kidney.

The Company has received full U.S. Food and Drug Administration (“FDA”) approval to conduct a pivotal human clinical trial of RenalGuard evaluating its safety and effectiveness in preventing CIN. This trial is required to support a pre-market approval application which must be approved by the FDA before the Company can market RenalGuard in the U.S. The Company does not intend to commence this pivotal study until it is able to secure sufficient additional capital to complete the study.

The Company is also supporting an investigator-sponsored randomized controlled trial utilizing RenalGuard that is being conducted at the Centro Cardiologico Monzino-University of Milan (“CCM”) in Milan, Italy. The CCM trial is designed to determine the effectiveness of RenalGuard in preventing CIN in at-risk patients. The Company hopes that the data from the CCM clinical trial will enable it to raise the additional capital necessary to both start and complete the U.S. pivotal study.

RenalGuard is currently approved for sale in the EU as a general fluid balancing device. The RenalGuard SystemTM consists of a proprietary, closed loop, software-controlled console

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and accompanying single-use sets that can be used by physicians and nurses to manage patient fluid levels. RenalGuard operates by first collecting and measuring patient urine outputs and then, in real-time, precisely matching those urine outputs with a prescribed replacement fluid by means of intravenous infusion. With its automated matched fluid replacement capability, RenalGuard is intended to minimize the risk to patients of over- or under-hydration while also eliminating to a large degree what can otherwise be an intensive and time consuming manual fluid balancing task for physicians and nurses.

The Company is establishing a distribution network in the EU with the intent to market RenalGuard for general fluid balancing applications.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. Inventories

Inventories are stated at the lower of cost (computed on a first-in, first-out method) or market value and include allocations of labor and overhead. As of March 31, 2009 and December 31, 2008, inventories consisted of the following (in thousands):

	March 31, 2009		December 31, 2008
Raw materials	$	403	$	573
Work in progress	102		154
Finished goods	525		409
	$	1,030	$	1,136

At March 31, 2009 and December 31, 2008, inventories are stated net of a specific obsolescence allowance of $800,000 and $808,000, respectively.

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4. Stock-Based Compensation

Stock Option Plans

In May 2005, the Company’s shareholders approved the 2005 Stock Incentive Plan (the “2005 Plan”). The 2005 Plan has replaced the 1997 Executive Stock Option Plan, 2000 Equity Incentive Plan, 2000 Non-Statutory Stock Option Plan and 2000 Non-Qualified Performance and Retention Equity Plan (collectively, the “Previous Plans”), under which no further awards can be granted.

On June 18, 2008, the Company’s shareholders approved an amendment increasing the number of shares of common stock authorized for issuance under the 2005 Plan by an additional 2,000,000 shares. The number of stock options that may be granted under the 2005 Plan is now equal to 4,156,175 shares of common stock (subject to adjustment in the event of stock splits and other similar events), plus such number of shares as may become available under the Previous Plans after the date of the adoption of the 2005 Plan, which may not exceed 2,535,492 additional shares. Incentive stock options are issuable only to employees of the Company, while non-qualified stock options may be issued to non-employee directors, consultants and others, as well as to employees. The options granted under the Previous Plans and the 2005 Plan become exercisable either immediately upon grant, or ratably over one to four years from the date of grant, and expire ten years from the date of grant. Under the 2005 Plan, the per share exercise price of incentive stock options may not be less than the fair market value of the common stock on the date the option is granted. The 2005 Plan provides that the Company may not grant non-qualified stock options at an exercise price less than 85% of the fair market value of the Company’s common stock.

The Company grants stock options to its non-employee directors. Generally, new non-employee directors receive an initial grant of an option to purchase 30,000 shares of the Company’s common stock that vests in installments over three years. Once the initial grant has fully vested, non-employee directors (other than the Chairman of the Board) receive an annual grant of an option to purchase 15,000 shares of the Company’s common stock that generally vests in four equal quarterly installments. The Chairman of the Board receives an annual grant of an option to purchase 30,000 shares of the Company’s common stock that generally vests in four equal quarterly installments. All such options have an exercise price equal to the fair market value of the Company’s common stock on the date of grant.

Options granted during 2008 vest ratably annually over a three year period for employees and ratably quarterly over a one year period for non-employee directors. There were no stock options granted during the three months ended March 31, 2009.

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The following is a summary of option activity under all plans (in thousands, except per option data):

	Number of Options		Weighted Average Exercise Price		Average Remaining Contractual Life (Years)
Outstanding, December 31, 2008	5,499		$	0.69	5.43
Granted	—		—
Exercised	—		—
Forfeited	(88	)	0.53
Expired	(35	)	3.29
Outstanding, March 31, 2009	5,376		$	0.70	5.30
Exercisable, March 31, 2009	4,525		$	0.70	4.53

The following table summarizes unvested option activity during the three months ended March 31, 2009:

	Number of Options		Weighted Average Grant Date Fair Value
	(In thousands, except weighted average data)

Unvested, December 31, 2008	968		$	0.35
Granted	—		—
Vested	(29	)	0.28
Forfeited	(88	)	0.36
Unvested, March 31, 2009	851		0.36

SFAS No. 123(R)

The Company records stock based compensation pursuant to Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-based Payment”. The Company recorded compensation expense of $54,000 and $49,000 in the three months ended March 31, 2009 and 2008, respectively. As of March 31, 2009, the Company had $182,000 of total unrecognized compensation cost related to its unvested options, which is expected to be recognized over a weighted average period of 1.2 years.

There were no options granted in the three months ended March 31, 2009 or 2008.

The expected life was calculated in 2008 using the simplified method. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the expected term period. Expected volatility is based exclusively on historical volatility data of the Company’s common stock. The Company estimates an expected forfeiture rate based on its historical forfeiture activity. Actual results, and future changes in estimates, may differ substantially from the Company’s current estimates.

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Stock Purchase Plan

The Company has a 2000 Employee Stock Purchase Plan (the “Purchase Plan”) for all eligible employees whereby shares of the Company’s common stock may be purchased at six-month intervals at 95% of the average of the closing bid and ask prices of the Company’s common stock on the over-the-counter market on the last business day of the relevant plan period. Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period, subject to certain additional limitations. Under the Purchase Plan, employees of the Company purchased 21,612 shares of common stock in 2008 at an average price of $0.08 per share. There was no purchase activity in the three months ended March 31, 2009. At March 31, 2009, 294,461 shares were reserved for future issuance under the Purchase Plan.

5. Revenue Recognition

The Company records revenue from the sale of TMR kits at the time of shipment to Novadaq. TMR kit revenues include the amount invoiced to Novadaq for kits shipped pursuant to purchase orders received, as well as an amortized portion of deferred revenue related to a payment of $4,533,333 from Edwards, the Company’s previous exclusive U.S. TMR distributor, received in February 2004. This payment was made in exchange for a reduction in the prospective purchase price the Company receives upon a sale of the kits. The Company is amortizing this payment into its Consolidated Statements of Operations as revenue over a seven year period (culminating in 2010) under the units-of-revenue method as prescribed by Emerging Issues Task Force 88-18, “Sales of Future Revenue”. The Company determined that a seven year timeframe was the most appropriate amortization period based on a valuation model it used to assess the economic fairness of the payment. Factors the Company considered in developing this valuation model included the estimated foregone revenues over a seven year period resulting from the reduction in the prospective purchase price payable to the Company, a discount rate deemed appropriate to this transaction and an estimate of the remaining economic useful life of the current TMR kit design, without any benefit being given to potential future product improvements the Company may make. The Company reviews annually, and adjusts if necessary, the prospective revenue amortization rate for kits based on its best estimate of the total number of kits likely remaining to be shipped to hospital customers by Novadaq through 2010. The Company recorded amortization of $269,000 and $180,000 in the three months ended March 31, 2009 and 2008, respectively, which is included in revenues in the Consolidated Statements of Operations.

TMR lasers are billed to Novadaq in accordance with purchase orders that the Company receives. Invoiced TMR lasers are recorded as other current assets and deferred revenue on the Company’s Consolidated Balance Sheet until such time as the laser is shipped to a hospital, at which time the Company records revenue and cost of revenue.

Under the terms of the Novadaq TMR distribution agreement, once Novadaq has recovered a prescribed amount of revenue from a hospital for the use or purchase of a TMR laser, any additional revenues earned by Novadaq are shared with the Company pursuant to a formula established in the distribution agreement. The Company only records its share of such additional revenue, if any, at the time the revenue is earned.

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The Company records all other product revenue, including sales of TMR lasers and kits to international customers, sales of RenalGuard consoles and single-use sets and OEM sales of surgical tubes and general purpose CO2 lasers, at the time of shipment.

Revenues from service and maintenance contracts are recognized ratably over the life of the contract.

Installation revenues related to a TMR laser transaction are recorded as a component of service fees when the laser is installed.

6. Loss per Share

In the three months ended March 31, 2009 and 2008, basic and diluted loss per share have been computed using only the weighted average number of common shares outstanding during the period without giving effect to any potential future issuances of common stock related to stock option programs, since their inclusion would be antidilutive.

For the three months ended March 31, 2009 and 2008, 5,376,000 and 5,298,000 shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the effect would have been antidilutive. The following table sets forth the computation of basic and diluted loss per share:

	Three Months Ended March 31,
	2009			2008

Basic and diluted:
Net loss	$	(358	)	$	(762	)
Weighted average shares outstanding	30,351			30,329
Basic and diluted loss per share	$	(0.01	)	$	(0.03	)

7. Comprehensive Loss

Total comprehensive loss for the three months ended March 31, 2009 and 2008 amounted to $368,000 and $758,000, respectively. Comprehensive loss is comprised of net loss plus the increase/decrease in currency translation adjustment.

8. Warranty and Preventative Maintenance Costs

The Company warranties its products against manufacturing defects under normal use and service during the warranty period. The Company obtains similar warranties from a majority of its suppliers, including those who supply critical Heart Laser System components. In addition, under the terms of its TMR distribution agreement with Novadaq, the Company is able to bill Novadaq for actual warranty costs, including preventative maintenance services, up to a specified amount during the warranty period.

The Company evaluates the estimated future unrecoverable costs of warranty and preventative maintenance services for its installed base of lasers and RenalGuard consoles and single-use sets on a quarterly basis and adjusts its warranty reserve accordingly. The Company

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considers all available evidence, including historical experience and information obtained from supplier audits.

Changes in the warranty accrual were as follows (in thousands):

	Three Months Ended March 31,
	2009		2008
Balance, beginning of period	$	10	$	60
Change in liability for warranties	20		—
Balance, end of period	$	30	$	60

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

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements containing terms such as “believes”, “plans”, “expects”, “anticipates”, “intends”, “estimates” and similar expressions reflect uncertainty and are forward-looking statements. Forward-looking statements are based upon current plans and expectations and involve known and unknown important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Such important factors and uncertainties include, but are not limited to:

· We expect to incur significant net losses in future quarters, at least through 2010;

· We may be unable to raise needed capital to implement our business plan and/or continue our operations in the future;

· We may never be able to commence our U.S. pivotal clinical trial to study RenalGuard to determine if it is safe and effective in preventing CIN;

· We may never be successful in obtaining pre-market approval from the FDA to market RenalGuard in the U.S.;

· We may never be successful in establishing a broad distribution channel for RenalGuard in the EU, and any distribution channel we may establish may never generate sufficient sales for us to attain profitability;

· Our ability to effectively market RenalGuard in the EU is largely dependent on obtaining favorable results from an outside sponsored clinical trial of RenalGuard underway at the Centro Cardiologico Monzino — University of Milan (CCM); however, we have no assurance that the CCM trial will ever produce clinically significant or meaningful results or that it will be completed in a timely fashion or at all;

· Our RenalGuard System has only had limited testing in a clinical setting and we may need to modify it substantially in the future for it to be commercially acceptable;

· Any potential future modifications required to make RenalGuard commercially acceptable may result in substantial additional costs and/or market introduction delays;

· We are currently dependent on one principal product line, the Heart Laser System, and one principal customer, Novadaq, to generate revenues for us; and

· We believe it is unlikely that we will be able to grow our TMR revenues in the near term and we additionally believe it is likely that over time our TMR revenues will decline,

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making our future prospects highly dependent upon the successful commercialization of RenalGuard.

Overview

On November 7, 2008, our common stock was delisted from the NYSE Alternext Market (formerly the American Stock Exchange). Our common stock is now quoted on both the OTC Bulletin Board and the Pink Sheets under the symbol “PLCSF”.

We are a medical device company specializing in innovative technologies for the cardiac and vascular markets. We pioneered and manufacture the Heart Laser System that cardiac surgeons use to perform TMR to alleviate symptoms of severe angina. We also manufacture CO2 surgical laser tubes and provide contract assembly services on general purpose CO2 lasers.

In addition, we have begun initial commercialization in the EU of our newest product, RenalGuard. RenalGuard is designed to reduce the potentially toxic effects that contrast media can have on the kidneys when it is administered to patients during certain medical imaging procedures. It is believed that allowing contrast media to dwell in the kidneys can lead to CIN, a potentially deadly form of acute kidney injury. By inducing and maintaining a high urine flow rate before, during and after these medical imaging procedures, we believe the incidence rates of CIN in at-risk patients can be reduced. RenalGuard facilitates this increased urine clearance, enabling the body to more rapidly void the contrast media, thereby reducing its overall resident time and toxic effects in the kidney.

In the U.S., we received full FDA approval to conduct our first human clinical trial utilizing RenalGuard under an investigational device exemption (“IDE”). This pilot clinical trial was designed to evaluate the safety of RenalGuard and its ability to accurately measure and balance fluid inputs and outputs on patients undergoing a catheterization imaging procedure where contrast media would be administered. In February 2008, we submitted an IDE supplement to the FDA seeking approval to move from our pilot study to a pivotal clinical trial to study the safety and effectiveness of RenalGuard in the prevention of CIN. In March 2008, the FDA granted us conditional approval to begin this pivotal study; however, in July 2008, we announced we were deferring commencement of this study until such time as we could successfully raise additional capital necessary to complete the study. We subsequently received full approval from the FDA to commence our pivotal study under a trial design that would enroll 406 patients at up to 30 sites in the U.S.

We are also supporting an investigator-sponsored randomized controlled trial utilizing RenalGuard that is being conducted at the CCM in Milan, Italy; it is designed to determine the effectiveness of RenalGuard in preventing CIN in at-risk patients. We hope that the data from the clinical trial in Italy will enable us to raise the additional capital necessary to both start and complete the U.S. pivotal study.

RenalGuard is currently approved for sale in the EU as a general fluid balancing device. The RenalGuard System consists of a proprietary, closed loop, software-controlled console and accompanying single-use sets that can be used by physicians and nurses to manage patient fluid levels. RenalGuard operates by first collecting and measuring patient urine outputs and then, in real-time, precisely matching those urine outputs with a prescribed replacement fluid by means of intravenous infusion. With its automated matched fluid replacement capability, RenalGuard is

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intended to minimize the risk to patients of over- or under-hydration while also eliminating to a large degree what can otherwise be an intensive and time consuming manual fluid balancing task for physicians and nurses. We are establishing a distribution network in the EU with the intent to market RenalGuard for general fluid balancing applications.

Our U.S. distributor for the Heart Laser System (Novadaq currently and Edwards prior to March 20, 2007) is our largest customer, accounting for 56% of our total revenues in the three months ended March 31, 2009 and 74% in the year ended December 31, 2008, respectively. We expect a high level of sales concentration to continue in the near future with Novadaq as our largest customer because it holds the exclusive U.S. distribution rights for our TMR products.

Approximately 75% of our revenues in the three months ended March 31, 2009 and 85% in the year ended December 31, 2008 came from the sale and service of TMR lasers and related disposable kits. We believe that the number of opportunities for new TMR laser sales to U.S. hospital customers, and specifically sales opportunities for our HL2 laser, will continue to be limited in future quarters as a result of (1) a diminishing number of available hospitals that have not already implemented a TMR program that are still likely to do so in the future, and (2) continuing financial pressures that hospitals face, in particular for the funding of new capital equipment purchases, in light of both the current tight global credit markets and the ongoing trend of cutbacks in both Medicare and private insurance reimbursement rates for a majority of medical procedures. In addition, we have seen a recent downward trend in the price at which new TMR lasers are being sold in the U.S. market as competition for the remaining available customers increases. As such, we expect that our U.S. TMR revenues in future quarters will continue to be mostly dependent upon the sale of TMR kits and service revenues.

Our management reviews a number of key performance indicators to assist in determining how to allocate resources and run our day-to-day operations. These indicators include (1) actual prior quarterly sales trends, (2) projected U.S. TMR laser and kit sales for the next four quarters, as provided by Novadaq in a rolling 12 month sales forecast, (3) projected future sales of OEM surgical tubes and laser assembly services as well as RenalGuard consoles and single-use sets, (4) research and development progress as measured against internal project plan objectives, (5) budget to actual financial expenditure results, (6) inventory levels (both our own and our distributors’), and (7) short term and long term projected cash flows of the business.

Critical Accounting Policies and Estimates

Our financial statements are based upon the application of significant accounting policies, many of which require us to make significant estimates and assumptions (see Note 2 to the Consolidated Financial Statements). We believe that the following are some of the more material judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.

Inventories

Inventories are stated at the lower of cost (computed on a first-in, first-out method) or market value and include allocations of labor and overhead. A specific obsolescence allowance is provided for slow moving, excess and obsolete inventory based on our best estimate of the net realizable value of inventory on hand taking into consideration factors such as (1) actual trailing 12 month sales, (2) expected future product line demand, based in part upon sales forecast input

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received from Novadaq and our other customers, and (3) service part stocking levels which, in management’s best judgment, are advisable to maintain in order to meet warranty, service contract and time and material spare part demands. Historically, we have found our reserves to be adequate.

Accounts Receivable

Accounts receivable is stated at the amount we expect to collect from the outstanding balances. We continuously monitor collections from customers, and we maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that we have identified. Historically, we have not experienced significant losses related to our accounts receivable. Collateral is not generally required. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.

Research and Development

Research and development costs are expensed as incurred.

Warranty and Preventative Maintenance Costs

We warranty our products against manufacturing defects under normal use and service during the warranty period. We obtain similar warranties from a majority of our suppliers, including those who supply critical Heart Laser System components. In addition, under the terms of our TMR distribution agreement with Novadaq, we are able to bill Novadaq for actual warranty costs, including preventative maintenance services, up to a specified amount during the warranty period.

We evaluate the estimated future unrecoverable costs of warranty and preventative maintenance services for our installed base of lasers and RenalGuard consoles and single-use sets on a quarterly basis and adjust our warranty reserve accordingly. We consider all available evidence, including historical experience and information obtained from supplier audits.

Revenue Recognition

We record revenue from the sale of TMR kits at the time of shipment to Novadaq. TMR kit revenues include the amount invoiced to Novadaq for kits shipped pursuant to purchase orders received, as well as an amortized portion of deferred revenue related to a payment of $4,533,333 from Edwards, our previous exclusive U.S. TMR distributor, received in February 2004. This payment was made in exchange for a reduction in the prospective purchase price we receive upon a sale of the kits. We are amortizing this payment into our Consolidated Statements of Operations as revenue over a seven year period (culminating in 2010) under the units-of-revenue method as prescribed by Emerging Issues Task Force 88-18, “Sales of Future Revenue”. We determined that a seven year timeframe was the most appropriate amortization period based on a valuation model we used to assess the economic fairness of the payment. Factors we considered in developing this valuation model included the estimated foregone revenues over a seven year period resulting from the reduction in the prospective purchase price payable to us, a discount rate deemed appropriate to this transaction and an estimate of the remaining economic useful life of the current TMR kit design, without any benefit being given to potential future

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product improvements we may make. We review annually, and adjust if necessary, the prospective revenue amortization rate for kits based on our best estimate of the total number of kits likely remaining to be shipped to hospital customers by Novadaq through 2010. We recorded amortization of $269,000 and $180,000 in the three months ended March 31, 2009 and 2008, respectively, which is included in revenues in our Consolidated Statements of Operations.

TMR lasers are billed to Novadaq in accordance with purchase orders that we receive. Invoiced TMR lasers are recorded as other current assets and deferred revenue on our Consolidated Balance Sheet until such time as the laser is shipped to a hospital, at which time we record revenue and cost of revenue.

Under the terms of the TMR distribution agreement, once Novadaq has recovered a prescribed amount of revenue from a hospital for the use or purchase of a TMR laser, any additional revenues earned by Novadaq are shared with us pursuant to a formula established in the distribution agreement. We only record our share of such additional revenue, if any, at the time the revenue is earned.

We record all other product revenue, including sales of TMR lasers and kits to international customers, sales of RenalGuard consoles and single-use sets and OEM sales of surgical tubes and general purpose CO2 lasers, at the time of shipment.

Revenues from service and maintenance contracts are recognized ratably over the life of the contract.

Installation revenues related to a TMR laser transaction are recorded as a component of service fees when the laser is installed.

Results of Operations

Results for the three months ended March 31, 2009 and 2008 and the related percent of revenues were as follows:

	Three Months Ended March 31,
	2009					2008
	$			%		$			%
	(dollars in thousands)
Total revenues	$	1,567		100	%	$	1,168		100	%
Total cost of revenues	612			39		405			35
Gross profit	955			61		763			65
Selling, general & administrative	1,085			69		970			83
Research & development	229			15		608			52
Total operating expenses	1,314			84		1,578			135
Loss from operations	(359		)	(23	)	(815		)	(70	)
Other income	1			—		53			5
Net loss	$	(358	)	(23	)%	$	(762	)	(65	)%

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	Three Months Ended March 31,						Increase (decrease)
	2009			2008			over 2008
	$			$			$			%
	(dollars in thousands)
Product sales	$	1,259		$	806		$	453		56	%
Service fees	308			362			(54		)	(15	)
Total revenues	1,567			1,168			399			34
Product cost of sales	411			220			191			87
Service fees cost of sales	201			185			16			9
Total cost of revenues	612			405			207			51
Gross profit	955			763			192			25
Selling, general & administrative expenses	1,085			970			115			12
Research & development expenses	229			608			(379		)	(62	)
Total operating expenses	1,314			1,578			(264		)	(17	)
Loss from operations	(359		)	(815		)	456			56
Other income	1			53			(52		)	(98	)
Net loss	$	(358	)	$	(762	)	$	404		53	%

Product Sales

Disposable TMR kit revenues, the largest component of product sales in the three months ended March 31, 2009, increased by $67,000, or 12%, as compared to the three months ended March 31, 2008. Domestic TMR kit revenues increased $72,000 as a result of $89,000 in increased disposable revenue amortization and $18,000 attributable to an increase in the average selling price of TMR kits, offset by a $35,000 revenue decrease attributable to a lower volume of TMR kits sold to Novadaq. International kit revenues decreased by $5,000 in the three months ended March 31, 2009 as compared to the three months ended March 31, 2008.

TMR laser revenues increased $120,000, or 95%, in the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. International TMR laser revenues increased $220,000 due to the sale of one new Heart Laser System for $246,000, offset in part by a decrease in other international TMR laser revenues of $26,000. Domestic TMR laser revenues decreased by $100,000 as a result of no new Heart Laser Systems being shipped domestically this quarter.

Other product sales increased $266,000, or 218%, in the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. International other product sales increased $302,000 as a result of the sale of certain third party equipment we were required to supply along with the international Heart Laser System that we recorded as revenue in the first quarter of 2009. OEM manufacturing contract assembly product revenues increased $35,000, while international RenalGuard revenues decreased by $71,000.

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Service Fee Revenues

Service fees decreased $54,000, or 15%, in the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. Domestic service fees decreased $53,000 as a result of lower billable service calls, offset in part by increased spare part sales and higher extended service contract revenues. International service fees decreased $1,000.

Gross Profit

Gross profit was $955,000, or 61% of total revenues, in the three months ended March 31, 2009 as compared with gross profit of $763,000, or 65% of total revenues, in the three months ended March 31, 2008. The increase in gross profit dollars is due to (1) the international sale of a Heart Laser System and other third party equipment as discussed above, (2) higher TMR disposable kit amortization and (3) an increase in the domestic average selling price of TMR kits. These increases were offset in part by (1) the decrease in RenalGuard sales, (2) a decrease in service fees, (3) a lower volume of TMR kits sold to Novadaq and (4) higher unabsorbed period overhead costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenditures increased 12% in the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. The increase was due to higher sales expenses associated with the sale of the Heart Laser System and third party equipment we supplied during the first quarter of 2009, which together totaled $269,000. This increase was offset in part by lower compensation related costs.

Research and Development Expenses

Research and development expenditures decreased 62% in the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. The decrease was due to (1) lower RenalGuard clinical trial costs resulting from the suspension of the U.S. pivotal study and (2) reduced RenalGuard product development expenditures.

Other Income

Other income decreased $52,000, or 98%, in the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. This decrease is a result of lower interest income due to lower average investable balances and lower interest rates on those investable balances.

Net Loss

In the three months ended March 31, 2009, our net loss decreased $404,000, or 53%, due to (1) lower operating expenses and (2) higher gross margin dollars, offset in part by lower interest income.

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Kit Shipments

We generally view disposable kit shipments to end users as an important metric in evaluating our business, although we believe that specific short-term factors not indicative of long-term trends can sometimes affect shipments of disposable kits in any given quarter. Domestic kit shipments referenced in the table below relate to sales by Novadaq to hospital end users. International kit shipments relate to sales by us directly to our international distributors or hospital end users.

Disposable kit shipments to end users were as follows:

	Three Months Ended March 31,
	2009	2008	% Increase (Decrease) Over 2008
Domestic (by U.S. Distributor)	332	375	(11	)
International	15	15	—
Total	347	390	(11	)

Because a significant number of the total TMR procedures performed each year by cardiac surgeons are done in combination with open-heart bypass surgery, we believe any future growth in the number of TMR procedures will be partly dependent upon the number of bypass surgeries performed in the future, which we believe have the potential to grow modestly over the next few years.

Liquidity and Capital Resources

Cash and cash equivalents totaled $4,319,000 as of March 31, 2009, a decrease of $707,000 from $5,026,000 as of December 31, 2008. We have no debt obligations. We believe that our existing cash resources will meet our working capital requirements through at least the next 12 months.

Cash used for operating activities in the three months ended March 31, 2009 was $692,000 due to our net loss, partially offset by non-cash depreciation and amortization and compensation related to stock options. The effect of exchange rate changes resulted in a $15,000 use of cash.

In the near term we do not expect that our TMR-related revenues will change significantly. Therefore we will be largely dependent upon our ability to increase our revenues through the sale of our RenalGuard product into international markets. Should sales of RenalGuard not increase sufficiently, our liquidity and capital resources will be negatively impacted.

Additionally, unanticipated decreases in operating revenues, increases in expenses or changes or delays in third-party reimbursement to healthcare providers using our TMR products would adversely impact our cash position and require further cost reductions or the need to obtain additional capital.

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We believe if we have sufficient cash to continue our operations that we will incur losses at least through 2010. In addition, we cannot be certain that we will be able to raise the additional capital necessary to start and complete the pivotal clinical trial in the U.S. that is necessary to obtain regulatory approval to market RenalGuard in the U.S., or that future sales, if any, of RenalGuard will justify these investments. There can be no assurance that the future capital we will need to implement our business plan will be available on terms and conditions acceptable to us, especially considering the current uncertainty in the global credit markets. Should additional financing not be available on terms and conditions acceptable to us, or if we are unable to sufficiently increase sales of our products, we will need to further curtail our TMR and RenalGuard programs and take additional actions that will adversely impact our ability to continue to realize assets and satisfy liabilities in the normal course of business. The consolidated financial statements set forth in this report do not include any adjustments to reflect the possible future effects of these uncertainties.

Off-Balance Sheet Arrangements

None.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Pursuant to Item 305(e) of Regulation S-K, we are not required to provide this information because we are a smaller reporting company.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2009. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation of our disclosure controls and procedures as of March 31, 2009, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2009 that

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has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1A. Risk Factors

Pursuant to the instructions to Item 1A. of Form 10-Q, we are not required to provide this information because we are a smaller reporting company.

Item 6. Exhibits

Exhibit Number		Description of Document

31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	PLC SYSTEMS INC.

Date: May 14, 2009	By:	/s/ James G. Thomasch
		James G. Thomasch
		Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer)

Date:	May 14, 2009	/s/ Mark R. Tauscher
		Mark R. Tauscher
		President and Chief Executive Officer
		(Principal Executive Officer)

Date:	May 14, 2009	/s/ James G. Thomasch
		James G. Thomasch
		Chief Financial Officer
		(Principal Financial Officer)

Date: May 14, 2009	By:	/s/ Mark R. Tauscher
		Mark R. Tauscher
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: May 14, 2009	By:	/s/ James G. Thomasch
		James G. Thomasch
		Chief Financial Officer
		(Principal Financial Officer)

Part I.	Financial Information:

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets (unaudited)	3

		Condensed Consolidated Statements of Operations (unaudited)	4

		Condensed Consolidated Statements of Cash Flows (unaudited)	5

		Notes to Condensed Consolidated Financial Statements (unaudited)	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20

	Item 4T.	Controls and Procedures	20

Part II.	Other Information:

	Item 1A.	Risk Factors	21

	Item 6.	Exhibits	21