Electromed, Inc. (Form: S-1, Received: 05/03/2010 15:19:39)

Payable by Us

No Exercise

Full Exercise


As filed with the Securities and Exchange Commission on May 3, 2010

		Registration No. 333-_____

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


ELECTROMED, INC.

(Exact name of registrant as specified in its charter)


Minnesota	3845	41-1732920
(State or other jurisdiction of	(Primary Standard Industrial	(I.R.S. Employer
incorporation or organization)	Classification Code Number)	Identification No.)



500 Sixth Avenue NW
New Prague, Minnesota 56071
(952) 758-9299
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


Robert D. Hansen
Co-Founder, Chairman and Chief Executive Officer
500 Sixth Avenue NW
New Prague, Minnesota 56071
(952) 758-9299
(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:


	Melodie R. Rose Ryan C. Brauer Fredrikson & Byron, P.A. 200 South Sixth Street Suite 4000 Minneapolis, MN 55402-1425 (612) 492-7000		W. Morgan Burns Erik J. Romslo Faegre & Benson LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402-1425 (612) 766-7000

	Jule Hannaford Kelly, Hannaford & Battles P.A. 900 Baker Building 706 Second Avenue South Minneapolis, MN 55402-1425 (612) 341-0881

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o

If this Form is a post effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 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 (do not check if a smaller reporting company)		Smaller reporting company x

CALCULATION OF REGISTRATION FEE


Title of Each Class of Securities to be	Proposed Maximum Aggregate	Amount of
Registered	Offering Price ^(1)(2)(3)	Registration Fee
Common Stock, $0.01 par value	$13,800,000	$984

(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number of shares being registered and the proposed maximum offering price per share are not included in this table.

(2) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act.

(3) Includes shares of common stock issuable upon exercise of the underwriter’s over-allotment option to purchase additional common stock.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


The information in this prospectus is not complete and may be changed. We may not sell these securities until our registration statement filed with the Securities and Exchange Commission is effective. The prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED MAY 3, 2010



	Shares

	Common Stock

	$ per share

Electromed, Inc. is offering shares of common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $ and $ per share. We intend to apply to have our common stock approved for listing on the Nasdaq Capital Market under the symbol “ELMD.” There is no guarantee the Nasdaq Capital Market will accept our application and no guarantee that our common stock will be listed on the Nasdaq Capital Market.



	Per Share	Total
Initial public offering price	$	$
Underwriting discount	$	$
Proceeds, before expenses, to Electromed, Inc.	$	$

The underwriter has a 45-day option to purchase up to additional shares of common stock from us at the initial public offering price less the underwriting discount to cover over-allotments, if any.

This investment involves risk. See “Risk Factors” beginning on page 8.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

(LOGO)

The date of this prospectus is , 2010.

TABLE OF CONTENTS


		PAGE

SUMMARY		1
THE OFFERING		5
SUMMARY FINANCIAL DATA		6
RISK FACTORS		8
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS		26
USE OF PROCEEDS		27
DIVIDEND POLICY		27
CAPITALIZATION		28
DILUTION		29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		30
BUSINESS		39
MANAGEMENT		62
EXECUTIVE COMPENSATION		65
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS		70
PRINCIPAL SHAREHOLDERS AND MANAGEMENT SHAREHOLDINGS		71
DESCRIPTION OF CAPITAL STOCK		72
SHARES ELIGIBLE FOR FUTURE SALE		75
UNDERWRITING		77
LEGAL MATTERS		80
EXPERTS		80
WHERE YOU CAN FIND MORE INFORMATION		80
INDEX TO FINANCIAL STATEMENTS		F-1

You should rely only on the information contained in this prospectus. We have not, and the underwriter has not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover of this prospectus, but the information may have changed since that date.

All trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

We obtained industry and market data used throughout this prospectus through our research, surveys and studies conducted by third parties and industry and general publications. We have not independently verified market and industry data from third-party sources. While we believe internal company surveys are reliable and market definitions are appropriate, neither these surveys nor these definitions have been verified by any independent sources.

S UMMARY

This summary highlights information contained elsewhere in this prospectus. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes thereto accompanying this prospectus, before making an investment in our common stock. Except where the context otherwise requires, in this prospectus, the terms “Company,” “we,” “our,” and “us” refer to Electromed, Inc. and our wholly-owned subsidiary, Electromed Financial, LLC.

Our Company

Electromed, Inc. manufactures, markets and sells products that provide airway clearance therapy, including the SmartVest® Airway Clearance System (“SmartVest System”) and related products, to patients with compromised pulmonary function. The SmartVest System generates High Frequency Chest Wall Oscillation (“HFCWO”), a technique for airway clearance therapy, also known as High Frequency Chest Compression. The SmartVest System has been approved by the FDA to treat the condition of excess lung secretions. Consequently, it may be prescribed to patients suffering from cystic fibrosis, chronic obstructive pulmonary disease, muscular dystrophy, post-surgical airway complications and a variety of other diseases and conditions associated with impaired lung and airway capacity. By clearing airways, patients are able to rid their lungs of retained secretions and are therefore less likely to develop lung infections such as pneumonia. The SmartVest System is a doctor-prescribed therapy and, depending on the circumstances of the patient, its cost to an individual is generally reimbursable by Medicare, Medicaid and private insurance, or a combination of the three.

Our Markets

We manufacture and sell products primarily for the home health care market, and we have recently begun to sell our products for use in hospitals, which we refer to as “institutional sales.” We have been successful in marketing the SmartVest System, along with its predecessor product, the MedPulse Respiratory Vest System®, to patients with cystic fibrosis and other conditions that compromise pulmonary function, and have also been successful in securing reimbursement from major private insurance providers, HMOs, state Medicaid systems, and the federal Medicare system. We believe we have established a solid foundation of product quality and customer service from which to expand our existing markets and enter progressively larger markets for HFCWO.

We market our products for use by a broad patient population, including those suffering from chronic obstructive pulmonary disease, post-surgical and intensive care patients at risk of developing pneumonia, patients with end-stage neuromuscular disease, and ventilator-dependent patients. While HFCWO is a well-accepted treatment for bronchiectasis, neuromuscular conditions and cystic fibrosis, its uses are not limited to such conditions. Physicians may prescribe HFCWO treatments for any patient the doctor believes may benefit from improved airway clearance therapy, such as amyotrophic lateral sclerosis (Lou Gehrig’s disease), spinal injuries, post-polio syndrome, and other conditions that affect a patient’s lung function. We believe the treatments are cost-effective because they reduce a patient’s risk of secondary complications and lower respiratory infections that are likely to occur when excess secretions are present.

HFCWO Therapy

HFCWO was first developed for human use at the University of Minnesota. The goal in developing HFCWO was to provide more effective mucus clearance in a process that could be performed independently of a caregiver. For patients with a chronic pulmonary condition, many hours per day may be dedicated to treatment. HFCWO clears secretions by mimicking the actions of a normal human cough. A vest is worn over the torso that repeatedly compresses and releases the chest at frequencies from 5 to 20 cycles per second. Each compression (or oscillation) produces a pulsation through the lungs that shears the secretions from the sides of the airways and propels them toward the mouth where they can be removed by normal coughing. Unlike traditional chest physio-therapy, which must be performed on the patient while he or she is placed in a series of often uncomfortable positions, HFCWO delivered by the SmartVest System treats all lobes of the lung simultaneously and can be performed with the patient sitting upright. The treatment can be self-administered, relieving a caregiver of participation in the therapy, and eliminating the attendant cost of an in-home care provider.

Our goal is to make HFCWO treatments as comfortable and convenient as possible so our patients can better tolerate their airway clearance therapy regimen and have their treatments performed as readily as possible. We believe HFCWO therapy is cost-effective because regular treatments have been shown to reduce lung infections and other complications associated with impaired mucus transport, the most common of which is pneumonia. This reduces the need for and duration of hospital stays and medications resulting from secondary complications such as pneumonia, which may become serious and even life-threatening.

Our Business Strengths

We believe that we have numerous business strengths, including our intellectual property, the competitive advantages of the SmartVest System, our industry contacts, a highly-trained and motivated sales staff (nearly all of whom are respiratory therapists), and our engineering and manufacturing talent.

Our intellectual property represents one of our most significant business strengths because it allowed us to pioneer an HFCWO device with a single-hose and flow-through system, resulting in key competitive advantages. We currently hold 17 issued U.S. patents and 5 issued foreign patents covering the SmartVest System and its underlying technology. As of March 31, 2010, we had submitted approximately 35 additional U.S. and foreign patent applications, which are in varying stages of prosecution. These patents and patent applications offer coverage in the field of air pressure pulse delivery to a human in support of airway clearance. We intend to continue to expand our intellectual property portfolio as our business grows.

We believe the SmartVest System offers competitive advantages that result in improved patient comfort and satisfaction. Unlike other HFCWO products that are primarily dependent upon a two-hose, closed-loop system for attaining consistent air pulse transmission to the vest and lungs, the SmartVest System relies on a single-hose, flow-through system. We believe a single-hose, flow-through system provides greater ease of use and patient comfort. For example, the single-hose system delivers pulse therapy upward and inward from the base of the SmartVest across the entire circumference of the patient’s torso, rather than initiating the pulse from the chest area, which may be wounded from surgery or otherwise sensitive. The flow-through system allows the therapy garment of the SmartVest System to maintain consistent pressure pulses during the patient’s breathing cycle by continuously loading and releasing air through a patented grid. Additional benefits are described in detail below in the section entitled “Business—Business Strengths—Competitive Advantages of SmartVest System.”

Our management team has significant business experience and has developed strong industry relationships through maintaining active memberships in numerous professional organizations and frequently attending, sponsoring, and participating in medical conferences. We believe these investments of time and capital have increased the visibility of the SmartVest System and established a favorable reputation for Electromed. In addition to relationships developed at the management level, our staff and contractors, who often play a key role in the education of current and potential customers, have developed trusted relationships across the U.S. with physicians and other caregivers.

Nearly all of our sales representatives, or Clinical Area Managers, are respiratory therapists. Many of these individuals have over 20 years of experience in the field of respiratory care, and their relationships and experience are of great worth to us. In addition, more than 30% of our full-time employees, including our entire Patient Services Department, are respiratory therapists. These individuals interact with clinics, patients, patient families, and respiratory therapist trainers to provide a consistent base of service and support. We believe this network is a key factor in our ability to gain patients and secure reimbursement.

Another significant business strength is the valuable know-how of our Engineering and Manufacturing Departments. The experience of the individuals in these departments helps ensure the efficient production of high-quality products. These efficiencies in turn allow us to offer our products at competitive prices and respond quickly to increases in demand for our products.

Our Growth Strategy

We intend to take the following steps to achieve growth:


	•	Expand and reposition our sales staff within the U.S. We select experienced medical professionals, usually respiratory therapists, to represent our products in the field. Our sales representatives, which we identify as Clinical Area Managers (“CAMs”), are employed full-time by Electromed, are assigned an exclusive territory, and under the supervision of a regional manager, serve discrete geographic areas of the U.S. They are equipped with demonstration models, and, where appropriate, arrange for such models to be accessed by patients through a demonstration program to physicians, clinics, and hospitals. We believe this approach is an effective sales model and ensures that patients, physicians, clinics, and hospitals receive reliable and correct training for our products. We intend to recruit additional CAMs and expect that doing so will increase our domestic sales. As we gain sales and industry contacts within each territory, we intend to continue to actively monitor sales opportunities by repositioning certain of our current CAMs to serve smaller geographic areas. In addition, in June 2008, we entered into a relationship with a consultant to assist with obtaining contracts with hospital buying groups. We have renewed this contract on an annual basis and we anticipate that the agreement will continue to be renewed in successive one-year terms or that the relationship will otherwise be continued.

	•	Establish and strengthen sales relationships in Europe and Asia. Internationally, we have made sales in more than ten countries. We are actively identifying distributors and other sales opportunities. Our historical practice and continued intent includes developing long-term relationships with distributors who possess the knowledge, experience, and financial maturity to serve pulmonary patients and reliably satisfy payment obligations. Our agreements typically require the distributor to meet particular sales thresholds on an annual basis. We believe that growing our distributor relationships in Europe and Asia will generate revenue growth because it will allow us to establish our SmartVest System as the preferred airway clearance therapy product in regions where HFCWO therapy is not yet widely used. Attention is given to a distributor candidate’s knowledge and experience in serving respiratory physicians and patients in the host country. We then designate members of our regulatory staff to actively monitor the distributor’s conformity with all applicable regulations and good practices in the host country. We support our distributors by providing advertising materials and direct training opportunities at our headquarters.

	•	Maintain leadership in product innovation. We have pursued our goal of continuous improvement through an active research and product development program, and plan to develop and introduce future advancements in HFCWO products for patient use. Each product will be designed to provide compact, portable, and user-friendly features. In addition, we expect to continue enhancing our Single Patient Use Vest™ and SmartVest Wrap®, which we market to hospitals and health care providers.

Risk Factors

Our business is subject to a number of risks discussed under the heading “Risk Factors” and elsewhere in this prospectus. The principal risks facing our business include, among others, risks relating to: our dependence on sales of the SmartVest System and its ancillary products; implementation of our business strategy; market opportunities; product development; competition; our dependence on our direct sales force and third-party distributors; regulatory compliance; health care reimbursement procedures and limits; our need for capital and ability to comply with debt covenants; and our ability to protect our intellectual property and defend against infringement claims. There are also several risks relating to this offering and the ownership of our common stock. You should carefully consider these factors, as well as all of the other information set forth in this prospectus.

Corporate Information

Electromed, Inc. was incorporated in Minnesota in 1992. Our corporate headquarters are located at 500 Sixth Avenue NW, New Prague, Minnesota 56071. Our telephone number is (952) 758-9299. Our websites can be found at www.electromed.com and www.smartvest.com. The information on our websites is not part of this prospectus.

T HE OFFERING


Common stock offered by us		shares

Common stock to be outstanding after this offering		shares

Over-allotment option		The underwriter has a 45-day option to purchase up to additional shares of common stock from us.

Initial public offering price		per share

Use of proceeds		We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $ million (or approximately $ million if the underwriter exercises in full its option to purchase additional shares to cover overallotments, if any).

		We intend to use the net proceeds from this offering to add employees to our Reimbursement, Patient Services and Administrative Departments; to add members to our sales force and further develop our focus on institutional sales; for research and development; and for general corporate purposes, including to satisfy working capital needs. We may also use a portion of our net proceeds from this offering to reduce existing indebtedness. See “Use of Proceeds” for additional information.

Proposed Nasdaq Capital Market symbol		ELMD

Unless otherwise indicated, the number of shares of our common stock that will be outstanding immediately after this offering is based on 6,075,885 shares outstanding as of December 31, 2009, and excludes 599,567 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2009.

Except as otherwise noted, all information in this prospectus assumes:


	•	an initial public offering price of $ per share, the mid-point of the range set forth on the cover of this prospectus; and

	•	no exercise of the underwriter’s over-allotment option.

S UMMARY FINANCIAL DATA

The following tables set forth, for the periods and dates indicated, our summary financial data. The summary financial data as of and for our fiscal years ended June 30, 2009 and 2008 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary financial data as of and for the six months ended December 31, 2009 and 2008 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for those periods. The results included here and elsewhere in this prospectus are not necessarily indicative of future performance.


	Years ended June 30,						Six months ended December 31,
	2009			2008			2009			2008
	(dollars in thousands, except share and per share data)						(Unaudited) (dollars in thousands, except share and per share data)
Consolidated Statements of Operations Data:
Net revenue	$	12,999		$	8,752		$	6,451		$	6,119
Cost of revenues		3,340			2,147			1,661			1,443
Gross profit		9,659			6,605			4,790			4,676
Operating expenses		7,203			6,271			4,025			3,486
Operating income		2,456			334			766			1,190
Interest income (expense)		(270	)		(477	)		(122	)		(129	)
Net income before income taxes		2,185			(143	)		644			1,061
Income tax (expense) benefit		(830	)		427			(260	)		(400	)
Net income		1,355			284			384			661
Income attributable to noncontrolling interest		(22	)		(16	)		(13	)		(10	)
NET INCOME ATTRIBUTABLE TO ELECTROMED, INC.	$	1,333		$	268		$	371		$	651

Earnings per share attributable to Electromed, Inc. common shareholders
Basic	$	0.22		$	0.05		$	0.06		$	0.11
Diluted		0.22			0.04			0.06			0.11
Weighted-average Electromed, Inc. common shares outstanding
Basic		5,980,383			5,430,486			6,059,158			5,937,474
Diluted		6,013,458			6,447,538			6,100,334			5,994,632


	June 30,				December 31
	2009		2008		Actual		Pro Forma ⁽¹⁾
	(dollars in thousands)				(Unaudited) (dollars in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	362	$	1,442	$	350	$
Inventories		1,179		850		1,307
Accounts Receivable		6,348		3,929		6,709
Current assets		8,413		6,545		9,025
Total assets		11,461		9,396		12,430
Current liabilities		2,098		2,627		3,486
Total liabilities		5,402		5,355		5,825
Total stockholders’ equity		6,059		4,041		6,605

(1)

As adjusted to reflect the sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the range on the front cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease, respectively, cash and cash equivalents, current assets, total assets and total stockholders’ equity by $ million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

R ISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all the other information contained in this prospectus before you decide to buy our common stock. If any of the following risks related to our business actually occurs, our business, financial condition and operating results would be adversely affected. The market price of our common stock could decline due to any of these risks and uncertainties related to our business, or related to an investment in our common stock, and you may lose part or all of your investment.

Risks Related to Our Business

Our SmartVest System and its ancillary products generate all of our net revenue. If sales of this family of products were to decline, our net revenue and results of operations would be adversely affected.

Our success is substantially dependent on the sale of the SmartVest® Airway Clearance System (“SmartVest System”). The SmartVest System and its ancillary products represented 100% of our net revenue for the fiscal year ended June 30, 2009, and we anticipate it will continue to account for a substantial portion of our net revenue for the foreseeable future. If sales of the SmartVest System were to decline in any of our key markets because of decreased demand, adverse regulatory actions, patent or trademark infringement claims, failure to protect our intellectual property, manufacturing problems or delays, pricing pressures, competitive factors or any other reason, our net revenue would be significantly impacted, which would negatively affect our business, financial condition and results of operations and may affect our ability to continue operations.

If we do not successfully implement our business strategy, our business and results of operations will be adversely affected.

We may not be able to successfully implement our business strategy. Any such failure may adversely affect our business and results of operations. For example, to implement our business strategy we need to, among other things, develop and introduce new generations of HFCWO products, achieve lower manufacturing costs through design improvements, educate health care professionals and patients about the clinical and cost benefits of our institutional and home health care SmartVest System, obtain regulatory approval and reimbursement codes for new or significantly modified products and applications and maintain effective marketing and sales efforts domestically and internationally.

We rely on a direct sales force in the U.S. that consists primarily of respiratory therapists and, in June 2008 initiated an independent contractor relationship with a consultant to assist with our marketing efforts to hospital buying groups. There is no assurance that these approaches will improve our sales. Further, using a direct sales force of medical professionals may be less cost-effective than using a third-party distributor or hiring salespeople without health care credentials. In addition, our direct sales model may be ineffective if we are unable to hire and retain qualified salespeople and if our sales force fails to establish relationships with physicians or comply with regulatory requirements. We are also seeking to increase our international sales, including by establishing and strengthening international sales relationships through agreements with third parties, and there is no guarantee we will be successful in doing so. Moreover, even if we successfully implement our business strategy, we may not have positive operating results. We may decide to alter or discontinue aspects of our business strategy and may adopt different strategies due to business or competitive factors.

The market opportunities that we currently focus on or expect to develop for our products may not remain or become as large as we expect or may not develop at all.

The growth of our business is dependent, in large part, upon the development of market opportunities for our SmartVest System. The market opportunities that we expect to exist may not develop as expected, or at all. For example, a substantial percentage of our products are sold to assist patients with cystic fibrosis (“CF”). If a cure is discovered for CF or other pulmonary conditions for which our products are currently prescribed, our sales would decrease and our operating results would be negatively affected. Moreover, even if our current patient market

remains consistent and new market opportunities develop as expected, new technologies and products introduced by our competitors may significantly limit our ability to capitalize on any such market opportunity. Our failure to maintain our current market or capitalize on our expected market opportunities would adversely effect our growth.

If we are unable to successfully develop and market new generations of HFCWO products or market our existing products to a broad patient population, we will not remain competitive.

Our future success and our ability to increase net revenue and earnings depend, in part, on our ability to develop and market new generations of HFCWO products and market our existing products to a broad patient population. However, we may not be able to, among other things:


	•	successfully develop or market new products or enhance existing products;

	•	educate health care professionals and patients about the benefits of HFCWO treatments for patients with a broad range of pulmonary disorders;

	•	manufacture, market and distribute existing and future products in a cost-effective manner; or

	•	obtain required regulatory clearances and approvals for new products or significant modifications to existing products.

Our failure to do any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. In addition, if any of our current or future products contain undetected errors or design defects or do not work as expected for expanded patient populations, our ability to market these products could be substantially impeded, resulting in lost net revenue, potential damage to our reputation and delays in obtaining market acceptance of these products. We cannot assure you that we will continue to successfully develop and market new or enhanced products or new applications for our existing products.

Moreover, extensions to our current line of products, including new or enhanced products or new applications for our existing products, would require us to obtain new 510(k) clearance or, depending upon the new technology or indications, premarket approval from the FDA before such products or applications could be marketed in the U.S. In seeking FDA clearance, we may be required to prove the safety and efficacy of the new or modified products by clinical trials. We may be unable to do so, and in such circumstances our products would not receive regulatory approval. In addition, these clinical trials typically last several years, and during that time competing products, procedures or therapies may be introduced that are less expensive and/or more effective than our products and thus render our products obsolete. If we do not continue to expand our product portfolio on a timely basis or if those products and applications do not receive regulatory and market acceptance or become obsolete, we will not grow our business as we currently expect.

If we fail to educate physicians and patients as to the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our products, our sales will not grow.

Because certain of the pulmonary conditions that can be treated by our devices can also be treated by surgery, drugs or other medical devices and therapies, some of which have a longer history of use and are more widely used by the medical community, acceptance of our SmartVest System depends, in large part, on our ability to educate the medical community and patients as to the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our products compared to alternative products, procedures and therapies. Physicians may be reluctant to change their medical treatment practices for a number of reasons, including:


	•	lack of experience with new products;

	•	lack of evidence supporting additional patient benefits;

	•	perceived liability risks generally associated with the use of new products; and

	•	costs associated with the purchase of new products and equipment.

Convincing patients, physicians and other caregivers to dedicate the time and energy necessary to properly train to use new devices is challenging, and we may not be successful in these efforts. Accordingly, even if our devices are superior to alternative treatments, our success will depend on our ability to gain and maintain market acceptance for our devices. If we fail to do so, our sales will not grow and our business, financial condition and results of operations will be adversely affected.

Continued acceptance of our SmartVest System also depends on our ability to offer exceptional customer service and training opportunities to purchasers. We have developed a network of 300 respiratory therapists and nurses who provide in-home training on a non-exclusive basis. If we are unable to maintain this network, our ability to provide timely training and orientation would be impaired. Inability to achieve timely training would be noted by the prescribing physician, which could adversely affect our standing with such physicians and discourage them from prescribing our products. Moreover, if we are unable to provide proper training, patients or physicians may misuse or ineffectively use the SmartVest System, which may result in unsatisfactory patient outcomes and negative publicity.

We operate in a very competitive environment.

The medical device industry is highly competitive. We face direct competition from Hill-Rom Holdings, Inc. and Respiratory Technologies, Inc., and face indirect competition from several companies that offer alternative products for airway clearance. Certain of our competitors have substantially greater capital resources, larger customer bases, broader product lines, larger sales forces, greater marketing and management resources, larger research and development staffs and larger facilities than ours and have more established reputations with our target customers, as well as global distribution channels that may be more effective than ours.

The medical device industry is characterized by rapid change resulting from technological advances and scientific discoveries. Our competitors may develop and offer technologies and products that are more effective, have better features, are easier to use, less expensive or more readily accepted by the marketplace than ours. Their products could make our technology and products obsolete or noncompetitive. Our competitors may also be able to achieve more efficient manufacturing and distribution operations than we may be able to and may offer lower prices than we could offer profitably. We may decide to alter or discontinue aspects of our business and may adopt different strategies due to business or competitive factors or factors currently unforeseen, such as the introduction by our competitors of new products or new medical technologies that would make our products obsolete or uncompetitive.

In addition, consolidation in the medical device industry could make the competitive environment more difficult. The industry has recently experienced some consolidation, and there is a risk that larger companies will enter our markets.

Our business, financial condition and results of operations may be adversely affected by the performance of third-party distributors and consultants and our ability to maintain these relationships on terms that are favorable to us.

We frequently use third-party distributors to sell our medical devices outside the U.S., and use a consultant to establish relationships with hospital buying groups within the U.S. Our distributors operate independently of us, and we have limited control over their operations, which exposes us to significant risks. Distributors may not commit the necessary resources to market and sell our products and may also market and sell competitive products. In addition, our international distributors may not comply with the laws and regulatory requirements in their local jurisdictions, which may limit their ability to market or sell our products. If current or future distributors do not perform adequately, or if we are unable to locate competent distributors in particular countries and secure their services on favorable terms, or at all, we may be unable to increase or maintain our level of net revenue in these markets or enter new markets, and we may not realize our expected international growth.

We rely to some degree upon third parties to augment our product development and manufacturing processes. For example, we rely on third parties to supply certain components for our products, and third parties also assist with our product development and prototype testing activities. To the extent any of these parties fail to deliver

their components and other services in a timely manner or within required specifications or pricing, we could be adversely affected and would need to replace these important relationships. We have established most of these relationships over a period of more than five years.

To successfully market and sell our products internationally, we must address additional risks associated with operations in foreign countries.

We believe that a significant portion of our future business will come from international sales through increased penetration in countries where we currently sell our products, combined with expansion into new international markets. We frequently use third party distributors to sell our products internationally. Our success internationally is subject to a number of risks, including:


	•	difficulties in penetrating foreign markets in which HFCWO is not a prevalent form of treatment or our competitors’ products are more established;

	•	intense competition, including competition with products that are not available in the U.S. which may claim to offer benefits similar to or better than the SmartVest System;

	•	maintaining existing and obtaining new foreign certification and regulatory clearances and approvals;

	•	difficulties in managing international operations;

	•	difficulties identifying effective distributors and managing distributor relationships;

	•	export restrictions, trade regulations and foreign tax laws;

	•	reduced or no protection for intellectual property rights in some countries;

	•	fluctuating foreign currency exchange rates; and

	•	political and economic instability, including occasional disruptions in overseas financial markets.

In addition, foreign sales subject us to numerous stringent U.S. and foreign laws, including the Foreign Corrupt Practices Act, or FCPA, and comparable foreign laws and regulations which prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. and other business entities for the purpose of obtaining or retaining business. The FCPA also requires companies with stock registered with the Securities and Exchange Commission, or SEC, to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and that improper payments are not made to foreign officials. We cannot assure you that our internal accounting controls will be sufficient to protect against unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors, which could constitute a violation by us of various laws including the FCPA, even though such parties are not always subject to our control. Safeguards that we implement to discourage these practices may prove to be ineffective and violations of the FCPA and other laws may result in severe criminal or civil sanctions, or other liabilities or proceedings against us, including class action lawsuits and enforcement actions from the SEC, Department of Justice and overseas regulators, which could adversely affect our reputation, business, financial condition and results of operations. Any of these factors, or any other international factors, could impair our ability to effectively sell our products outside of the United States, causing our revenue to be lower than expected and harming our results of operations. There can be no assurance that we can successfully manage these risks or avoid their effects.

Our ability to operate our company effectively could be impaired if we lose members of our senior management team or other key personnel.

We depend on the continued service of key managerial, engineering and manufacturing personnel, as well as our ability to continue to attract and retain highly qualified personnel. We compete for such personnel with other companies, academic institutions, government entities and other organizations. Any loss or interruption of the services of our key personnel could significantly reduce our ability to effectively manage our operations and meet our strategic objectives, because we may be unable to find an appropriate replacement, if necessary.

We conduct substantially all of our operations at our facilities located in New Prague, Minnesota, and any fire, explosion, violent weather conditions or other unanticipated events affecting our facilities could adversely affect our business, financial condition and results of operations.

We conduct all of our manufacturing and research and development activities, as well as most of our sales, warehousing and administrative activities, at our facilities in New Prague, Minnesota. Our facilities are subject to the risk of catastrophic loss due to unanticipated events, such as fires, explosions or violent weather conditions. These facilities and the manufacturing equipment that we use to produce our products would be difficult to replace or repair and could require substantial lead-time to do so. For example, if we were unable to utilize our existing manufacturing facility, the use of any new facility would need to be approved by the FDA, which would result in significant production delays. We may also in the future experience plant shutdowns or periods of reduced production as a result of regulatory issues, equipment failure or delays in deliveries. Any disruption or other unanticipated events affecting our facilities and therefore our sales, manufacturing, warehousing, research and development and administrative activities would adversely affect our business, financial condition and results of operations. We carry insurance for damage to our property and the disruption of our business. Such insurance coverage, however, may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

Any failure of our management information systems could harm our business and results of operations.

Our business’s rapid growth may continue to place a significant strain on our managerial, operational and financial resources and systems. We depend on our management information systems to actively manage our controlled regulatory and manufacturing documents. We also depend on our enterprise resource planning system to actively manage our invoicing, manufacturing and inventory planning, clinical trial information and quality compliance. We must continually assess the necessity for any upgrades to our information systems. We may not be able to successfully implement any such upgrade. The inability of our management information systems to operate as we anticipate could damage our reputation with our customers, disrupt our business or result in, among other things, decreased net revenue and increased overhead costs. As a result, any such failure could harm our business, financial condition and results of operations.

We may need to raise additional capital in the future, which may not be available to us on acceptable terms, or at all.

We may require significant additional debt and equity financing in order to implement our business strategy. In particular, our capital requirements depend on many factors, including the amount of expenditures on research and development and intellectual property, new product development and the cash required to service our debt. To the extent that our existing or future capital is insufficient to meet these requirements and cover any losses, we will need to refinance all or a portion of our existing debt, raise additional funds through financings or curtail our growth, reduce our costs or sell certain of our assets. Our ability to raise additional capital will likely depend on, among others, our performance, our prospects, our level of indebtedness and market conditions. Any additional equity or debt financing, if available at all, may be on terms that are not favorable to us. The recent global economic crisis and related tightening of credit markets has made it more difficult and more expensive to raise additional capital. If we are unable to access additional capital on terms acceptable to us, we may not be able to fully implement our business strategy, which may limit the future growth and development of our business. Equity financings could result in dilution to our shareholders, and equity or debt securities issued in future financings may have rights, preferences and privileges that are senior to those of our common stock. If our need for capital arises because of significant losses, the occurrence of these losses may make it more difficult for us to raise the necessary capital.

Risks Relating to Regulation

Demand for our products may decrease if reimbursement by governmental or other third-party payers is reduced or unavailable in the future.

Demand for our products is partially dependent on whether the patient or hospital will receive reimbursement from various third-party payers, such as governmental programs ( e.g. , Medicare and Medicaid), private insurance plans and managed-care plans. The ability of our customers to obtain appropriate reimbursement for their products and services from government and third-party payers is critical to our success. The availability of reimbursement affects which products customers purchase and the prices they are willing to pay. Reimbursement varies from country to country and can significantly impact the acceptance of new products. The SmartVest System currently qualifies for reimbursement under Medicare, Medicaid and private insurance programs in the U.S. and several foreign countries. Congress recently passed, and on March 23, 2010, President Obama signed into law, the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education and Reconciliation Act of 2010 (collectively, the “health care reform laws”), which cause substantial changes to the existing system for paying for health care in the U.S. While the health care reform laws do not directly prohibit or reduce reimbursement for our products, the laws grant various governmental agencies the authority to monitor health care reimbursement by governmental payers and implement cost-containment measures in order to reduce the overall cost of health care items and services over the next ten years. If legislative or administrative changes to U.S. or international reimbursement practices reduce reimbursement for our products, or if future products that we develop do not ultimately qualify for reimbursement, we may experience an adverse impact on demand for such products and the prices that customers are willing to pay for them. This, in turn, would adversely affect our business, financial condition and results of operations.

Our products could be subject to exclusion from Medicare, Medicaid and other government programs if we do not comply with all applicable standards for reimbursement.

In order to continue receiving reimbursement under Medicare and Medicaid, we must show on a periodic basis that we comply with numerous Medicare supplier standards. These standards generally relate to our methods for filling orders, overseeing delivery of equipment, responding to questions and complaints, maintaining and repairing rental equipment, complying with state and federal licensure and regulatory requirements, honoring product warranties, maintaining a physical address, and maintaining appropriate liability insurance. If we fail to meet required standards, whether intentionally or unintentionally, our ability to obtain reimbursements on a timely basis could be impaired. Delays in reimbursement could result in significant financial shortfalls. In 2009, we were alerted to unintentional noncompliance with state licensure requirements in two states. Consequently, between October 4, 2009 and December 1, 2009, our Medicare reimbursement payments were suspended. This matter was promptly addressed and rectified by management and did not result in a loss of revenue since all Medicare claims were recovered following reinstatement. Although we believe we have procedures in place to ensure ongoing future compliance with all applicable standards, we can provide no assurance that such procedures will be adequate or that we will be able to continuously maintain our eligibility for reimbursement in the future.

Health care legislative or administrative changes may result in cost-containment measures that restrict third-party payer reimbursement practices or otherwise put downward pressure on the price of our products.

Major third-party payers for hospital services in the United States and abroad continue to work to contain health care costs. The introduction of cost-containment incentives, combined with closer scrutiny of health care expenditures by governmental agencies, private health insurers and employers, has resulted in increased discounts and contractual adjustments to hospital charges for services performed and products used. The focus on reducing health care costs will likely become even more prevalent in the U.S. due to the health care reform laws’ extension of medical benefits to those who currently lack insurance coverage, as such measures will be funded, in part, through cost-containment efforts. In addition, in many foreign countries where our products are sold, prices are set in accordance with local regulations and also subject to pressure from cost saving measures. While some of these savings may come from realizing greater efficiencies in delivering care, improving the effectiveness of preventive care and enhancing the overall quality of care, much of the cost savings may come from reducing the cost of care.

Cost of care could be reduced by lowering the level of reimbursement for medical services or products (including products manufactured and marketed by us), or by restricting coverage (and, thereby, utilization) of medical services or products. If payers reduce the amount of reimbursement for a product, it may cause groups or individuals prescribing the product to discontinue use of the type of treatment offered by the product, to substitute lower cost products or to seek additional price related concessions. In either case, a reduction in the utilization of, or reimbursement for, our products could have a materially adverse impact on our financial performance. Hospitals or physicians may also respond to such cost-containment pressures by substituting products or other treatments that physicians view as more cost-effective, which would further reduce demand for our products.

In addition, the Medicare Modernization Act of 2003 included a number of changes in the Medicare payment methodology and conditions for coverage of durable medical equipment, including proposed competitive bidding requirements for certain types of durable medical equipment, and the health care reform laws expand the competitive bidding program to a greater geographical area. If competitive bidding requirements become applicable to HFCWO devices, Medicare would no longer provide reimbursement under its fee schedule amount in designated competitive bidding regions. Instead, only those suppliers selected through competitive bidding process within each designated region would be eligible to have their products reimbursed by Medicare. HFCWO devices were not included in the initial round of items subject to bidding; however, there is no assurance they will not be included in the future. Inclusion of HFCWO products in Medicare competitive bidding or other Medicare reimbursement or coverage reductions could result in our SmartVest System being sold in lesser quantities or for a lower price, or Medicare reimbursement coverage being discontinued altogether. Any of these developments could have a material adverse effect on our results of operations. In addition, if we are not selected to participate in the competitive bidding program in a particular region, it could have a material adverse effect on our sales and profitability.

There is substantial uncertainty regarding how the health care reform laws in the U.S. and legislation abroad will affect reimbursement for our products, if at all. This uncertainty limits our ability to forecast changes that may occur in the future and to manage our business accordingly.

Our financial performance may be adversely affected by medical device tax provisions in the health care reform laws.

The U.S. health care reform laws impose an excise tax on medical device manufacturers in order to offset, in part, the government’s cost of insuring additional individuals. Beginning in 2013, a new section of the tax code will establish an excise tax on all sales of medical devices equal to 2.3% of the price of the device. If efforts to repeal this tax are not successful, and if our products are subject to such tax, the additional expense would adversely affect our profitability and financial condition.

Our business may be adversely affected if consolidation in the health care industry leads to demand for price concessions or if we are excluded from being a supplier by a group purchasing organization or similar entity.

Independent of health care reform initiatives, we have experienced and expect to experience pricing pressures on our current products and pipeline products from initiatives aimed at reducing health care costs by governmental and private third-party payers, the increasing influence of health maintenance organizations, and regulatory proposals, both in the United States and in foreign markets. As a result of cost-containment efforts, there has been a consolidation trend in the health care industry to create larger companies, including hospitals, with greater market power. As the health care industry consolidates, competition to provide products and services to industry participants has become and will continue to become more intense. This has resulted and will likely continue to result in greater pricing pressures and the exclusion of certain suppliers from important markets as group purchasing organizations, independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions. If a group purchasing organization excludes us from being one of their suppliers, our long-term net revenue could be adversely impacted. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide health care industry, which may exert further downward pressure on the prices of our products.

If we fail to comply with the U.S. Federal Anti-Kickback Statute or similar state and foreign anti-fraud laws, we could be subject to criminal and civil penalties and exclusion from Medicare, Medicaid and other governmental programs.

A provision of the U.S. Social Security Act, commonly referred to as the U.S. Federal Anti-Kickback Statute, prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of items or services payable by Medicare, Medicaid or any other federal health care program. The Federal Anti-Kickback Statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. In addition, most of the states in which our products are sold in the United States have adopted laws similar to the Federal Anti-Kickback Statute, and some of these laws are even broader than the Federal Anti-Kickback Statute in that their prohibitions are not limited to items or services paid for by a federal health care program but, instead, apply regardless of the source of payment. A number of states also regulate and require extensive disclosures of financial relationships between device manufacturers and physicians and other health care providers. Violations of the Federal Anti-Kickback Statute or such similar state laws may result in substantial civil or criminal penalties and exclusion from participation in federal or state health care programs. In addition, many foreign governments have equivalent statutes with similar penalties.

The Federal Anti-Kickback Statute has increasingly been used as a basis for claims under the Federal False Claims Act, which imposes liability for the submission of false or fraudulent claims to the federal government. Both the Department of Justice and private whistleblowers, who are permitted to bring claims on behalf of the federal government, have successfully alleged that violations of the Federal Anti-Kickback Statute cause claims to Medicare or Medicaid to be false and fraudulent on the theory that the Anti-Kickback violation precludes the party submitting the claim from truthfully asserting compliance with all applicable laws, which is a condition of payment. Medical device manufacturers have been subjected to substantial monetary sanctions as a result of False Claims Act cases.

All of our financial relationships with health care providers and others who provide products or services to federal health care program beneficiaries are potentially governed by the Federal Anti-Kickback Statute and similar state and foreign laws. We believe our operations are in material compliance with the Federal Anti-Kickback Statute, False Claims Act, and similar state and foreign laws. However, we cannot assure you that we will not be subject to investigations or litigation alleging violations of these laws, which could be time-consuming and costly to us, could divert management’s attention from operating our business and could prevent health care providers from purchasing our products, all of which could have a material adverse effect on our business. In addition, if our arrangements were found to violate the Federal Anti-Kickback Statute, False Claims Act, or similar state or foreign laws, it could have a material adverse effect on our business and results of operations.

Our business will be subject to heightened scrutiny by governmental agencies because of new fraud detection and prevention oversight measures that are part of the health care reform laws.

The new health care reform laws include a number of changes to federal law and enforcement activities intended to detect and prevent fraud by medical device manufacturers and other health care providers. For example, beginning in 2013 our business will be subject to new regulations on transparency and disclosure, particularly relating to company ownership, finances and transactions with health care providers such as hospitals and physicians. Our disclosures under these regulations will be available for public inspection. As a Medicare supplier, we may also be subject to screening requirements, such as licensure checks, unscheduled and unannounced site visits, database checks and other screening measures if certain government agencies determine there to be a risk of fraud, waste or abuse by suppliers of medical devices. These screening procedures will not apply until 2012, unless we are required to revalidate our Medicare enrollment before that time. Additionally, we may be required to implement more aggressive compliance and ethics programs and adopt stricter standards for doing business with government health care programs as a condition of our enrollment in programs such as Medicare and Medicaid. The specific requirements of the new compliance and ethics programs have yet to be determined. We will likely have to devote significant resources, including management attention and financial resources, to ensure compliance with the government’s new fraud-fighting initiatives. Although these new oversight measures are not effective immediately, we must begin implementing policies now in order to ensure that we satisfy our obligations as of the effective date. If we fail to meet the new fraud prevention and detection standards, we may be excluded from participating in government health care programs such as Medicare and Medicaid. If we are unable to participate in government reimbursement programs, there will be a material adverse effect on our business and results of operations.

Our business will be harmed if we fail to obtain necessary clearances or approvals to market our medical devices.

Our products are classified as medical devices and are subject to extensive regulation in the United States by the FDA and other federal, state and local authorities. Similar regulatory review, clearance and approval processes also exist in foreign countries in which our products are marketed. These regulations relate to product design, development, testing, manufacturing, labeling, sale, promotion, distribution, import, export and shipping.

Although our SmartVest System has received FDA clearance under the premarket notification (510(k) clearance process), we would not be permitted to market a new medical device, or a new use of, or claim for, or significant modification to, our existing HFCWO products in the United States, without first obtaining either approval of a Premarket Approval Application (“PMA”) or 510(k) clearance from the FDA or demonstrating that an exemption applies. The PMA approval process, commonly used for riskier devices such as those which support or sustain life, requires an applicant to demonstrate the safety and efficacy of the device based, in part, on data obtained in clinical trials. The PMA approval process and clinical trials can be expensive and lengthy and entail significant user fees. In the 510(k) clearance process, the FDA must determine that the proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and efficacy, in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence. The PMA approval pathway is much more costly and uncertain than the 510(k) clearance process. It generally takes from one to three years, or even longer, from the time the PMA is submitted to the FDA until an approval is obtained. The 510(k) clearance process usually takes from three to 12 months, but it can take longer.

In many of the foreign regions in which we market our products, such as Europe, we are subject to regulations substantially similar to those of the FDA, although these foreign regulatory requirements may vary widely from country to country. In Europe, only medical devices which bear a CE Mark may be marketed. In addition, were we to convert into direct sales forces in foreign regions, we could be subject to additional regulations in these markets.

There is no guarantee that the FDA will grant 510(k) clearance or PMA approval to new or modified products that we develop in the future. Delays in receipt or failures to receive desired marketing clearances or approvals from the FDA or other federal, state or foreign regulatory authorities may adversely affect our ability to market our products and may have a significant adverse effect on our overall business. Moreover, the value of existing clearances or approvals can be eroded if safety or efficacy problems develop.

Modifications to our products may require new regulatory approvals or clearances or may require us to recall or cease marketing our modified products until approvals or clearances are obtained.

Modifications to our products may require new approvals or clearances in the United States and abroad, such as PMA approvals or 510(k) clearances in the United States and CE Marks in Europe. The FDA requires device manufacturers to initially make a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification does not significantly affect safety or efficacy or does not represent a major change in its intended use, so that no new U.S. or foreign approval or clearance is necessary. We have made modifications that we determined do not require approval or clearance. However, the FDA and foreign authorities can review a manufacturer’s decision, including any of our decisions, and may disagree. If the FDA or other foreign authority disagrees and requires new approvals or clearances for the modifications, we may be required to recall and to stop marketing our products as modified, which could require us to redesign our products and harm our operating results. In these circumstances, we may also be subject to significant enforcement actions.

If we determine that a modification to an FDA-cleared device could significantly affect its safety or efficacy, or would constitute a major change in its intended use, then we must obtain a new PMA or PMA supplement approval or 510(k) clearance. Where we determine that modifications to our products require a new PMA or PMA supplemental approval or 510(k) clearance, we may not be able to obtain those additional approvals or clearances for the modifications or additional indications in a timely manner, or at all. For those products sold in Europe, we must notify our European Union Notified Body if significant changes are made to the products or if there are substantial changes to our quality assurance systems affecting those products. Delays in obtaining required future approvals or clearances would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.

We may fail to comply with continuing post-market regulatory requirements of the FDA and other federal, state or foreign authorities and become subject to substantial penalties, or our products may subsequently prove to be unsafe, forcing us to recall or withdraw such products from the market.

Even after product clearance or approval, we must comply with continuing regulation by the FDA and other federal, state or foreign authorities, including the FDA’s Quality System Regulation requirements, which obligate manufacturers to adhere to stringent design, testing, control, documentation and other quality assurance procedures during the design and manufacture of a device. We are also subject to medical device reporting regulations in the United States and abroad. For example, we are required to report to the FDA if our products may have caused or contributed to a death or serious injury or malfunction in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. We must report corrections to the FDA where the correction was initiated to reduce a risk to health posed by the device or to remedy a violation of the U.S. Food, Drug, and Cosmetic Act caused by the device that may present a risk to health, and we must maintain records of other corrections. The FDA closely regulates promotion and advertising, and our promotional and advertising activities may come under scrutiny. If any medical device reports we file with the FDA regarding death, serious injuries or malfunctions indicate or suggest that one of our products presents an unacceptable risk to patients, including when used off-label by physicians, we may be forced to recall our product or withdraw it from the market.

Any failure to comply with continuing regulation by the FDA or other federal, state or foreign authorities could result in enforcement action that may include regulatory letters requesting compliance action, suspension or withdrawal of regulatory clearances or approvals, product recall, modification or termination of product marketing, entering into a consent decree, seizure and detention of products, paying significant fines and penalties, criminal prosecution and similar actions that could limit product sales, delay product shipment and harm our profitability. Any of these actions could materially harm our business, financial condition and results of operations.

The possibility of non-compliance with manufacturing regulations raises uncertainties with respect to our ability to manufacture our products. Our failure to meet strict regulatory requirements could require us to pay fines, incur other costs or even close our facilities.

The FDA and other federal, state and foreign regulatory authorities require that our products be manufactured according to rigorous standards, including, but not limited to, Quality System Regulations, Good Manufacturing Practices and International Standards Organization, or ISO, standards. These federal, state and foreign regulatory authorities conduct periodic audits of our facilities and our processes to monitor our compliance with applicable regulatory standards. If a regulatory authority finds that we fail to comply with the appropriate regulatory standards, it may require product validation, new processes and procedures or shutdown of our manufacturing operations. It may impose fines on us or delay or withdraw clearances or other regulatory approvals. If a regulatory authority determines that our non-compliance is severe, it may impose other penalties including limiting our ability to secure approvals or clearances for new products. In addition, many of the improvements we make to our manufacturing process must first be approved or cleared by the FDA and other federal, state and foreign regulatory authorities. Our failure to obtain the necessary approvals and clearances may limit our ability to improve the way in which we manufacture our products.

Risks Relating to Our Intellectual Property and Potential Litigation

We have been and may in the future become subject to claims that our products violate the patent or intellectual property rights of others, which could be costly and disruptive to us.

We operate in an industry that is susceptible to significant patent litigation, and in recent years, it has been common for companies in the medical device industry to aggressively challenge the rights of other companies to prevent the marketing of new or existing devices. As a result, we or our products may become subject to patent infringement claims or litigation. Further, one or more of our patents or applications may become subject to interference proceedings declared by the U.S. Patent and Trademark Office, or USPTO, or the foreign equivalents thereof to determine the priority of claims to inventions. The defense of intellectual property suits, USPTO interference proceedings or the foreign equivalents thereof, as well as related legal and administrative proceedings, are both costly and time consuming and may divert management’s attention from other business concerns. An adverse determination in litigation or interference proceedings to which we may become a party could, among other things:


	•	subject us to significant liabilities to third parties, including treble damages;

	•	require disputed rights to be licensed from a third party for royalties that may be substantial;

	•	require us to cease using such technology; or

	•	prohibit us from selling certain of our products.

Any of these outcomes could have a material adverse effect on our business, financial condition and results of operations.

Hill-Rom Services, Inc., Advanced Respiratory, Inc. (“ARI”), Hill-Rom Company, Inc. and Hill-Rom Services Pte. Ltd. (collectively, “Hill-Rom”), subsidiaries of Hill-Rom Holdings, Inc., brought an action on August 21, 2009, against us in the Southern District of Indiana alleging that our use of the term “SmartVest,” for which we had been granted trademark protection, infringes on its alleged trademarks “The Vest” and “Vest.” We have answered the allegations and brought counter-claims against Hill-Rom alleging, among other things, defamation and libel. Litigation is inherently unpredictable and risky and an adverse result could have a material adverse effect on our results of operations or financial position. If Hill-Rom is successful in its claim, we may be required to discontinue use of the SmartVest trademark, which would negatively impact product recognition and may result in higher marketing expenses. In addition, the costs associated with defending our trademark currently impacts our working capital. This and any other litigation may impact our results of operations in the future. For additional information about previous and pending litigation, see “Business—Legal Proceedings.”

We may initiate patent and trademark litigation claims in the U.S. and foreign jurisdictions in the future to protect our intellectual property. If we are unsuccessful in these claims, our business, financial condition and results of operations could be adversely affected.

We may initiate litigation to assert claims of infringement, enforce our patents and trademarks, protect our trade secrets and know-how, or determine the enforceability, scope and validity of the proprietary rights of others. Any lawsuits that we initiate could be expensive, time consuming and divert management’s attention from other business concerns. Furthermore, litigation may provoke third parties to assert claims against us and may put our patents and trademarks at risk of being invalidated or interpreted narrowly and our patent applications at risk of not being issued. Further, we may not prevail in lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.

If our patents and other intellectual property rights do not adequately protect our products, we may lose market share to our competitors and be unable to operate our business profitably.

Patents and other proprietary rights are essential to our business, and our ability to compete effectively with other companies depends on the proprietary nature of our technologies. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop, maintain and strengthen our competitive position. We pursue a policy of generally obtaining patent protection in both the United States and key foreign countries for patentable subject matter in our proprietary devices and also attempt to review third-party patents and patent applications to the extent publicly available to develop an effective patent strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor the patent claims of others. Our patent portfolio includes 17 issued U.S. patents and 5 issued foreign patents, the first of which expires in the United States in July 2013 and in Canada in August 2016, and, as of March 31, 2010, we had approximately 35 pending U.S. and foreign patent applications. We cannot assure you that any pending or future patent applications will result in issued patents, that any current or future patents issued or licensed to us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide a competitive advantage to us or prevent competitors from entering markets which we currently serve. Any required license may not be available to us on acceptable terms, if at all. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technologies as we do. Furthermore, we may have to take legal action in the future to protect our trade secrets or know-how, or to defend them against claimed infringement of the rights of others. Any legal action of that type could be costly and time-consuming to us, and we cannot assure you that such actions will be successful. The invalidation of key patents or proprietary rights which we own or unsuccessful outcomes in lawsuits to protect our intellectual property may have a material adverse effect on our business, financial condition and results of operations.

The laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. If we cannot adequately protect our intellectual property rights in these foreign countries, our competitors may be able to compete more directly with us, which could adversely affect our competitive position and, as a result, our business, financial condition and results of operations.

Risks Relating to Our Debt

Our debt may adversely affect our financial condition and operating activities.

As of December 31, 2009, we had total outstanding debt of approximately $3,880,000, including obligations under term debt and a revolving line of credit with U.S. Bank, National Association (“U.S. Bank”) and capital lease arrangements, and the ability to incur additional indebtedness under our revolving line of credit with U.S. Bank. As of December 31, 2009, we owed approximately $1,268,000 on our revolving line of credit and the total outstanding principal and interest thereunder is due on November 30, 2010, if the line of credit is not renewed.

Based on our current level of indebtedness and interest rates applicable as of December 31, 2009, and after giving effect to this offering and the anticipated application of the net proceeds therefrom, we expect our annual interest expense to be approximately $ for the year ending June 30, 2010. Any significant increase in the

amount of debt or any decline in the amount of cash available to make interest payments may require us to divert funds identified for other purposes for debt service and could impair our liquidity position.

Our indebtedness has other significant consequences to you, including:


	•	requiring us to use a portion of our cash flow from operations to pay interest and principal on our debt, thereby reducing the availability of our cash flow to fund working capital, sales and marketing efforts, research and development, including clinical trials, acquisitions and other general corporate purposes;

	•	limiting our ability to obtain additional financing in the future for working capital, sales and marketing efforts, research and development, including clinical trials, acquisitions and other general corporate purposes;

	•	subjecting us to the risk of interest rate increases on our indebtedness with variable interest rates;

	•	subjecting us to the possibility of an event of default under the financial and operating covenants contained in the agreements governing our indebtedness; and

	•	limiting our ability to adjust to rapidly changing market conditions, reducing our ability to withstand competitive pressures and making us more vulnerable to a downturn in general economic conditions than our competitors with less debt.

Our inability to generate sufficient cash flow may require us to seek additional financing.

If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to refinance all or a portion of our existing debt, sell assets, borrow more money or raise capital through sales of our equity securities. If these or other kinds of additional financing become necessary, we cannot assure you that we could arrange such financing on terms that are acceptable to us, or at all.

We may incur additional indebtedness from time to time to finance research and development, including clinical trials, acquisitions, investments or strategic alliances or for other purposes.

We may incur substantial additional indebtedness in the future. Although the agreement governing our credit facility contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. For example, as of December 31, 2009, we had $1,259,000 of available borrowings under our revolving line of credit and we are permitted to incur up to an additional $2.5 million of subordinated debt. If we incur additional debt above the levels currently in effect, the risks associated with our leverage would increase.

We are subject to restrictive debt covenants, which may restrict our operational flexibility.

The agreement governing our credit facility contains various financial and operating covenants, including, among other things, restrictions on our ability to change the nature of our business, incur additional indebtedness, pay dividends on and redeem any capital stock or other equity, make other restricted payments, grant liens, enter into certain related-party transactions, sell our assets or enter into consolidations, mergers and transfers of all or substantially all of our assets, or change our management team. The agreement also requires us to maintain particular amounts of key-man and property insurance coverage, deliver financial statements, maintain specified financial ratios and satisfy financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will continue to meet those ratios and tests. A breach of any of these covenants, ratios, tests or restrictions could result in an event of default under our notes. Agreements governing any additional indebtedness we incur in the future may contain similar or more stringent covenants. Covenants in our existing or future debt agreements could limit our ability to take actions that we believe are in our best interests. If an event of default exists under our current credit facility or any additional indebtedness we incur in the future, the lenders under such agreements could elect to declare all amounts outstanding thereunder to be immediately due and payable. If any such lender accelerates the payment of one of our indebtednesses, we cannot assure you that our assets would be sufficient to repay in full that indebtedness and our other indebtedness that would become due as a result of any acceleration.

Our obligations under our credit facility are secured by substantially all of our assets.

Our obligations under our credit facility are secured by liens on substantially all of our assets and guaranteed by our wholly-owned subsidiary, Electromed Financial, LLC. If we become insolvent or are liquidated, or if repayment of any of our outstanding loans is accelerated and we cannot repay such indebtedness, the lenders will be entitled to exercise the remedies available to a secured lender under applicable law and the applicable agreements and instruments, including the right to foreclose on substantially all of our assets and those of our subsidiary.

Risks Relating to this Offering and Ownership of Our Common Stock

Because there has not been a public market for our common stock and our stock price may be volatile, you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, you could not buy or sell our common stock publicly. We cannot predict the extent to which investors’ interests will lead to an active trading market for our common stock or whether the market price of our common stock will be volatile following this offering. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for our common stock was determined by negotiations between the underwriter and us and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common stock at prices equal to or greater than the price you paid in this offering. In addition, the stock markets have been extremely volatile. In addition to the factors discussed elsewhere in this section, the following factors, most of which are outside of our control, could cause the market price of our common stock to decrease significantly from the price you pay in this offering:


	•	variations in our quarterly operating results;

	•	decreases in market valuations of similar companies; and

	•	fluctuations in stock market prices and volumes.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable research or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. Equity research analysts may elect not to provide research coverage of our common stock, which may adversely affect the market price of our common stock. If equity research analysts do provide research coverage of our common stock, the price of our common stock could decline if one or more of these analysts downgrade our common stock or if they issue other unfavorable commentary about us or our business. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

Future sales of our common stock by our existing shareholders could cause our stock price to decline.

If our shareholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that our shareholders might sell shares of our common stock could also depress the market price of our common stock. Our directors, executive officers, and shareholders prior to this offering are subject to lock-up agreements that restrict their ability to transfer their shares of our common stock for a period of time following this offering. In addition, as of December 31, 2009 we had granted warrants to purchase 599,567 shares of common stock, which shares will be subject to restrictions on transfer when they are issued. The market price of shares of our common stock may decrease significantly when the restrictions on resale by our existing shareholders lapse and our shareholders and warrant holders are able to sell shares of our common stock into the market. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities, and may cause you to lose part or all of your investment in our shares of common stock.

We have broad discretion in the use of the proceeds of this offering and may apply the proceeds in ways with which you do not agree.

We intend to use the net proceeds from this offering to add employees to our Reimbursement, Patient Services and Administrative Departments; to add members to our sales force and further develop our focus on institutional sales; for research and development; and for general corporate purposes, including to satisfy working capital needs. We may also use a portion of our net proceeds from this offering to reduce existing indebtedness. We have not, however, determined the exact allocation of these net proceeds among the various uses described in this prospectus. Our management will have broad discretion over the use and investment of these net proceeds, and, accordingly, you will have to rely upon the judgment of our management with respect to our use of these net proceeds, with only limited information concerning management’s specific intentions. You will not have the opportunity, as part of your investment decision, to assess whether we use the net proceeds from this offering appropriately. We may place the net proceeds in investments that do not produce income or that lose value, which may cause our stock price to decline.

Our directors and executive officers will continue to have substantial control over us after this offering and could limit your ability to influence the outcome of key transactions, including changes of control.

We anticipate that our executive officers and directors and entities affiliated with them will, in the aggregate, beneficially own approximately of our outstanding common stock following the completion of this offering, assuming the underwriter does not exercise its over-allotment option. Our executive officers, directors and affiliated entities, if acting together, would be able to control or influence significantly all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other significant corporate transactions. These shareholders may have interests that differ from yours, and they may vote in a way with which you disagree and that may be adverse to your interests. The concentration of ownership of our common stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareholders of an opportunity to receive a premium for their common stock as part of a sale of our company and may affect the market price of our common stock. This concentration of ownership of our common stock may also have the effect of influencing the completion of a change in control that may not necessarily be in the best interests of all of our shareholders.

Various factors may inhibit a takeover that shareholders consider favorable.

Upon the closing of this offering, provisions of our Articles of Incorporation and Bylaws, applicable provisions of Minnesota law and various other factors may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which shareholders might otherwise receive a premium for their shares, or transactions that our shareholders might otherwise deem to be in their best interests. The factors that may discourage takeover attempts or make them more difficult include:


	•	Articles of Incorporation and Bylaws : Our Articles of Incorporation and Bylaws permit our Board of Directors to issue up to 10,000,000 shares of common stock, and to authorize from among such shares, one or more classes or series, with the rights, preferences and limitations as they may designate, including the right to approve an acquisition or other change in our control; provide that the authorized number of directors may be increased by resolution of the Board of Directors between regular meetings of shareholders; provide that all vacancies other than those resulting from a newly created directorship, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; require that any action to be taken by our stockholders by written action be unanimous; and do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose).


	•	Minnesota Business Corporation Act : Certain provisions of the Minnesota Business Corporation Act could discourage business combinations and acquisitions of controlling blocks of our shares. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

	•	Issuance of Warrants : We have issued warrants to purchase common stock to certain lenders that will require us, in the event of a reorganization, reclassification, merger, consolidation, or sale of substantially all of the assets of the Company, to ensure these persons are able to receive the kind and amount of securities or assets upon exercise that they would have been entitled to receive if they exercised immediately prior to the transaction. These payments may have the effect of increasing the costs of acquiring Electromed, thereby discouraging future takeover attempts.

	•	Employment Agreements : We have employment agreements with each of our executive officers which will remain in effect following the offering and contain severance provisions that are triggered if the executive resigns following a change in control of the Company or is terminated without cause. These agreements may have the effect of increasing the costs of acquiring Electromed, thereby discouraging future takeover attempts.

	•	For a more detailed description of the potential anti-takeover effect of provisions in our governing documents and the Minnesota Business Corporation Act, please see “Description of Capital Stock — Anti-Takeover Provisions.”

You will experience immediate and substantial dilution in the net tangible book value of the common stock you purchase in this offering.

If you purchase shares of our common stock in this offering, you will experience immediate dilution of $ per share (assuming an offering price of $ per share), because the price that you pay will be substantially greater than the adjusted net tangible book value per share of common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the price of the shares being sold in this offering when they purchased their shares of our capital stock. In addition, if outstanding warrants to purchase our common stock are exercised, you will experience additional dilution. See “Dilution.”

We can issue shares of preferred stock without shareholder approval, which could adversely affect the rights of common shareholders.

Our Articles of Incorporation permit us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of stock and to issue such stock without approval from our shareholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. In addition, we could issue preferred stock to prevent a change in control of our company, depriving common shareholders of an opportunity to sell their stock at a price in excess of the prevailing market price.

As a result of our becoming a public company, we will become subject to additional reporting and corporate governance requirements that will require additional management time, resources and expense.

Since our inception in 1992, we have operated our business as a private company. In connection with this offering, we will become obligated to file with the U.S. Securities and Exchange Commission annual and quarterly information and other reports that are specified in the U.S. Securities Exchange Act of 1934. We will also become subject to other reporting and corporate governance requirements, including requirements of the Nasdaq Capital Market and the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations promulgated thereunder, all of which will impose significant compliance and reporting obligations upon us. In particular, we will be required to do the following:


	•	create or expand the roles and duties of our Board of Directors, our Board committees and management;

	•	institute a more comprehensive compliance function;

	•	prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

	•	evaluate, test and implement internal controls over financial reporting to enable management to report on, and our independent registered public accounting firm to make any required attestations to, such internal controls as required by Section 404 of the Sarbanes-Oxley Act;

	•	involve to a greater degree outside counsel and accountants in the activities listed above; and

	•	establish new internal policies, such as those relating to disclosure controls and procedures and insider trading.

Complying with these rules and regulations may significantly increase our legal, accounting, reporting, compliance and other expenses, make some activities more time-consuming and costly, and divert our management’s attention away from the operation of our businesses. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, we may experience more difficulty attracting and retaining qualified individuals to serve on our Board of Directors or as executive officers. We cannot predict or estimate the amount of additional costs we may incur as a result of these requirements or the timing of such costs. Furthermore, our current management does not have prior experience in running a public company. The costs of becoming public and the diversion of management’s time and attention may have a material adverse effect on our business, financial condition and results of operations.

Additionally, we may not be successful in complying with these obligations. Failure to comply with the additional reporting and corporate governance requirements could lead to fines imposed on us, suspension or delisting from the Nasdaq Capital Market, deregistration under the Exchange Act and, in the most egregious cases, criminal sanctions could be imposed.

Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.

As a newly public reporting company, we are in a continuing process of developing, establishing, and maintaining internal controls and procedures that will allow our management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting if and when required to do so under Section 404 of the Sarbanes-Oxley Act of 2002. Our management will be required to report on our internal controls over financial reporting under Section 404 commencing in fiscal year 2011. If we fail to achieve and maintain the adequacy of our internal controls, we would not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404.

In connection with its audit of our financial statements for the years ended June 30, 2009 and 2008, our independent registered public accounting firm identified a material weakness in our internal controls over financial reporting. The material weakness resulted from certain issues surrounding the monitoring of accounting recognition matters and the accounting for revenue recognition, share-based transactions and income taxes, among certain other items that resulted in significant adjustments to our financial statements. The issues that resulted from these weaknesses were properly addressed before the completion of our consolidated financial statements. Our board of directors and management have developed a plan to address this material weakness, which involves adding financial personnel with training and experience in accounting and financial reporting, and relying more heavily on outside accounting consultants. We have added a senior staff accountant and intend to implement additional remedial measures.

We cannot provide assurance that the measures we have taken to date or any future measures will adequately remediate the material weakness identified by our independent registered public accounting firm. In addition, we cannot be certain that additional material weaknesses in our internal controls will not be discovered in the future. Any failure to remediate the material weakness identified above, or to implement improved controls, or difficulties encountered in the implementation of controls, could affect our ability to comply with Section 404. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal control over financial reporting (if required), we may be unable to report our financial results accurately or in a timely manner and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations.

We do not intend to declare dividends on our stock after this offering.

We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends on our common stock will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions and other factors deemed relevant by our Board of Directors. Therefore, you should not expect to receive dividend income from shares of our common stock.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These forward-looking statements include, among others, statements related to our business and growth strategy, our business strengths and competitive advantages, our intent to increase international sales and distribution, our expectation that our products will be prescribed for an increasing number of conditions, our plan to continue to increase investment in research and development, our intent to continue improvement of our product offerings through innovation, our belief that we will continue to expand our intellectual property portfolio, and our anticipated revenues and capital requirements. These statements involve known and unknown risks, uncertainties and other factors that may cause our results or our industry’s actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information.

Important factors that could cause the foregoing forward-looking statements to differ from management’s current expectations include, but are not limited to:


•	our dependence on sales of the SmartVest System and ancillary products;

•	our ability to educate physicians and patients about the advantages of our products;

•	the competitive nature of our market;

•	the risks associated with expansion into international markets;

•	changes to Medicare, Medicaid, or private insurance reimbursement policies;

•	changes to health care laws;

•	changes affecting the medical device industry;

•	our need to maintain regulatory compliance and to gain future regulatory approvals and clearances;

•	our ability to protect our intellectual property;

•	the outcome of current and future litigation;

•	general economic and business conditions; and

•	the other risks described under “Risk Factors” in this prospectus.

You should read these risk factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. We cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. You should read this prospectus completely. Other than as required by law, we undertake no obligation to update these forward-looking statements, even though our situation may change in the future.

USE OF PROCEEDS

We estimate that the net proceeds from our sale of shares of common stock in this offering will be approximately $ million, or approximately $ million if the underwriter exercises its over-allotment option in full. This estimate is based upon an assumed initial public offering price of $ per share, the mid-point of our filing range, less estimated underwriting discounts and commissions and offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease, respectively, the net proceeds to us from this offering by $ million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We may also use a portion of our net proceeds from this offering to reduce existing indebtedness under our credit facility with U.S. Bank, National Association (“U.S. Bank”), which we entered into in December 2009 for the purpose of refinancing existing indebtedness and for general corporate purposes. As of December 31, 2009, we had total outstanding debt of approximately $3,755,000 under the U.S. Bank credit facility, consisting of the following: approximately $1,268,000 principal balance under a revolving line of credit that bears interest at a rate of LIBOR plus 2.75% and is scheduled to mature on November 30, 2010, if not renewed; approximately $973,000 principal balance under a term loan that bears interest at a rate of 4.28% and is scheduled to mature on December 9, 2012; and approximately $1,514,000 principal balance under a term loan that bears interest at a rate of 5.79% and is scheduled to mature on December 9, 2014.

We have not determined the exact allocation of net proceeds among the various uses described in this prospectus. Proceeds will be used in management’s discretion. We reserve the right to modify the use of proceeds for other purposes in the event of changes in our business plan. Pending the uses described above, we intend to invest the net proceeds of this offering in short- to medium-term, investment-grade, interest-bearing securities.

DIVIDEND POLICY

We have not historically paid any dividends on our common stock. Following the completion of this offering, we intend to retain our future earnings, if any, to finance the expansion and growth of our business. We do not expect to pay cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, outstanding indebtedness and plans for expansion and restrictions imposed by lenders, if any. Currently, the agreement governing our credit facility restricts our ability to pay cash dividends.

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2009


	•	on an actual basis; and

	•	on a pro forma basis to reflect the sale of shares of common stock in this offering at an assumed initial public offering price of $ (the mid-point of the initial public offering price range), after deducting estimated underwriting discounts and commissions and offering expenses and the application of the net proceeds from our sale of common stock in this offering.

You should read this information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.


	As of December 31, 2009 (Unaudited)
	Actual			Pro Forma ⁽¹⁾
	(dollars in thousands)
Cash and cash equivalents	$	350		$
Current maturities of long-term debt	$	384		$	—
Revolving line of credit	$	1,268		$	—
Long-term debt, less current maturities	$	2,227		$
Electromed, Inc. stockholders’ equity:
Common stock, $0.01 par value, 10,000,000 shares authorized, 6,075,885 shares issued and outstanding, actual; shares authorized, issued and outstanding, pro forma	$	61		$
Additional paid-in capital		6,375
Retained earnings		253
Common stock subscriptions receivable for shares outstanding		(84	)
Total Electromed, Inc. stockholders’ equity		6,604
Noncontrolling interest		1
Total stockholders’ equity		6,605
Total capitalization	$	8,832		$

(1)

A $1.00 increase or decrease in the assumed initial public offering price would result in an approximately $ million increase or decrease, respectively, in pro forma additional paid-in capital, pro forma total stockholders’ equity and pro forma total capitalization, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The information set forth in the table excludes 599,567 shares of common stock issuable upon exercise of outstanding warrants with a weighted-average exercise price of $3.27 per share.

DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the adjusted net tangible book value per share of our common stock immediately after completion of this offering. Our net tangible book value as of , 2010, was $ , or $ per share of common stock. Net tangible book value per share is equal to our total tangible assets (total assets less intangible assets) less our total liabilities divided by the number of shares of common stock outstanding.

After giving effect to our sale of shares at an assumed initial public offering price of $ per share (the mid-point of the initial public offering price range), deducting estimated underwriting discounts and commissions and offering expenses, and applying the net proceeds from this sale, the pro forma as adjusted net tangible book value of our common stock, as of , would have been approximately $ , or $ per share. This amount represents an immediate increase in net tangible book value to our existing shareholders of $ per share and an immediate dilution to new investors of $ per share. The following table illustrates this per share dilution:


Assumed initial public offering price per share		$
Net tangible book value per share as of , before giving effect to this offering		$
Increase per share attributable to new investors		$
Pro forma net tangible book value per share after this offering
Dilution per share to new investors in this offering		$

A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease, respectively, our pro forma net tangible book value by $ million, the pro forma net tangible book value per share by $ per share and the dilution per share to investors in this offering by $ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriter exercises its over-allotment option in full, there will be an increase in pro forma net tangible book value to existing shareholders of $ per share and an immediate dilution in pro forma net tangible book value to new investors of $ per share.

The following table summarizes, as of , on a pro forma basis, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by our existing shareholders and by new investors, based upon an assumed initial public offering price of $ per share (the mid-point of the initial public offering price range) and before deducting estimated underwriting discounts and commissions and offering expenses payable by us.


	Shares Purchased				Total Consideration				Average Price Per Share
	Number	Percent			Amount	Percent			Average Price Per Share
Existing shareholders				%	$			%	$
New investors				%	$			%	$
Total			100	%	$		100	%

A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease, respectively, total consideration paid by new investors and total consideration paid by all stockholders by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The discussion and tables above assume no exercise of outstanding warrants to purchase common stock. As of , there were shares of common stock issuable upon the exercise of outstanding warrants having a weighted average exercise price of $ per share. To the extent the warrants are exercised, there will be further dilution to investors purchasing common stock in this offering.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the accompanying notes included elsewhere in this prospectus. The forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations and intentions with respect to our future development plans, capital resources and requirements, results of operations, and future business performance. Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in “Risk Factors” and “Information Regarding Forward-Looking Statements” included elsewhere in this prospectus.

Overview

Electromed, Inc. was incorporated in 1992. We are engaged in the business of providing innovative airway clearance products applying High Frequency Chest Wall Oscillation (“HFCWO”) technologies in pulmonary care for patients of all ages.

We manufacture, market and sell products that provide HFCWO, including the SmartVest® Airway Clearance System (“SmartVest System”) and related products, to patients with compromised pulmonary function. Our products are sold for both the home health care market and the institutional market for use by patients in hospitals, which we refer to as “institutional sales.” For approximately ten years, we have marketed the SmartVest System and its predecessor products to patients suffering from cystic fibrosis, chronic obstructive pulmonary disease (“COPD”), bronchiectasis and repeated episodes of pneumonia. Additionally, we offer our products to a patient population that includes post-surgical and intensive care patients at risk of developing pneumonia, patients with end-stage neuromuscular disease, and ventilator-dependent patients. Our goal is to be a consistent innovator in providing HFCWO to patients with compromised pulmonary function.

Because sale of the SmartVest System is by physician’s prescription only, we focus our marketing efforts on physicians as well as directly to patients. In addition to distributors overseas, we have established our own domestic sales force, nearly all of whom are respiratory therapists, who we believe are able to provide superior support and training to our customers. In addition, we have non-exclusive independent contractor arrangements with over 300 respiratory therapists and health care professionals who also provide education and training to our customers. Further, although the reimbursement process is subject to many contingencies, the SmartVest System is often eligible for reimbursement from major private insurance providers, HMOs, state Medicaid systems, and the federal Medicare system, which is an important consideration for patients considering an HFCWO course of therapy. We believe that our SmartVest System has created a solid foundation to support our entry into larger markets for airway clearance therapy.

The SmartVest System may be reimbursed under the Medicare-assigned billing code for High Frequency Chest Wall Oscillation devices if the patient has cystic fibrosis, bronchiectasis (including chronic bronchitis or COPD that has resulted in a diagnosis of bronchiectasis), or any one of certain enumerated neuro-muscular diseases, and can demonstrate that another less expensive physical or mechanical treatment did not adequately mobilize retained secretions. The amount of reimbursement a provider or individual receives under Medicare and Medicaid is based on the Medicare Physician Fee Schedule values for the SmartVest System, which generally depend on the relative value units (“RVUs”) assigned to it, multiplied by a conversion factor. Many private payers also base their payment rates based on the RVUs adopted by Centers for Medicare and Medicaid Services. Private payers consider a variety of sources, including Medicare, as guidelines in setting their coverage policies and payment amounts.

We have been generating revenue from the sale of our SmartVest System or its predecessor products since 2000 and have generated net income since the fiscal year ended June 30, 2006. For the fiscal year ended June 30, 2009, we generated revenue of approximately $12,999,000 and net income of approximately $1,333,000. Our sales growth rate for the first six months of fiscal 2010 was approximately 5.4% compared to 48.5% experienced during the 2009 fiscal year. Management believes the decrease in sales growth during the first six months of fiscal 2010 was impacted to a certain degree by a temporary suspension of Medicare reimbursement, which was fully resolved effective December 1, 2009, as well as a trademark lawsuit, both of which required the attention of management, thereby diverting their operational focus during the second fiscal quarter of 2010.

Critical Accounting Policies and Estimates

During the preparation of our consolidated financial statements, we are required to make estimates, assumptions and judgments that affect reported amounts. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. We update these estimates, assumptions and judgments as appropriate, which in most cases is at least quarterly. We use our technical accounting knowledge, cumulative business experience, judgment and other factors in the selection and application of our accounting policies. While we believe the estimates, assumptions and judgments we use in preparing our consolidated financial statements are appropriate, they are subject to factors and uncertainties regarding their outcome and therefore, actual results may materially differ from these estimates. We believe the following are our primary critical accounting policies and estimates:

Revenue Recognition and Allowance for Doubtful Accounts

Revenues from direct patient sales are recorded at amounts estimated to be received under reimbursement arrangements with third-party payers, including private insurers, prepaid health plans, Medicare and Medicaid. Due to the nature of the industry and the reimbursement environment in which we operate, certain estimates are required to record net revenues at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payers may result in adjustments to amounts originally billed. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review.

We record an estimate of such potential future adjustments, including potential sales returns, as a reduction of net revenues in the same period revenue is recognized. We estimate this sales discount based on historical collection and sales allowance experience with direct patient sales. We periodically review and make changes to the estimation process by considering any changes in recent collection or sales allowance experience. Other than the installment sales as discussed below, the Company receives payment of the vast majority of accounts receivables within one year. However, in some instances, payment for direct patient sales can be delayed or interrupted resulting in a small portion of collections occurring later than one year.

Certain third-party reimbursement agencies pay the Company on a monthly installment basis, which can span over several years. Payment can at times be further delayed or adjusted if, among other things, the insured individual changes insurance providers or no longer requires treatment. Due to the inherent uncertainty of collectability with these installment sales, the Company uses the installment method of revenue recognition for these sales, and accordingly, does not record accounts receivable or revenue at the time of product shipment. Under the installment method, the Company defers and amortizes the costs associated with the sale and, as each installment is received, that amount is recognized as revenue. Deferred costs associated with the sale are amortized to cost of revenue ratably over the estimated period in which collections are scheduled to occur.

Accounts receivable are carried at amounts estimated to be received under reimbursement arrangements with third-party payers. Accounts receivable are also net of an allowance for doubtful accounts, which are accounts from which payment is not expected to be received although service was provided and revenue was earned. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history. Receivable are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received.

Valuation of Long-lived and Intangible Assets

Long-lived assets, such as property and equipment and finite-life intangible assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. In evaluating recoverability, the following factors, among others, are considered: a significant change in the circumstances used to determine the amortization period, an adverse change in legal factors or in the business climate, a transition to a new product or service strategy, a significant change in customer base, and a realization of failed marketing efforts. The recoverability of an asset is measured by a comparison of the unamortized balance of the asset to future undiscounted cash flows. If we believe the unamortized balance is unrecoverable, we would

recognize an impairment charge necessary to reduce the unamortized balance to the estimated fair value of the asset. The amount of such impairment would be charged to operations at the time of determination.

Property and equipment are stated at cost less accumulated depreciation. We use the straight-line method for depreciating property and equipment over their estimated useful lives, which range from 3 to 39 years. Our finite-life intangibles consist of patents and trademarks and their carrying costs include the original cost of obtaining the patents, periodic renewal fees, and other costs associated with maintaining and defending patent and trademark rights. Patents and trademarks are amortized over their estimated useful lives, generally 15 and 12 years using the straight-line method. During the six-month period ended December 31, 2009 we incurred legal defense costs associated with a trademark infringement lawsuit filed against us (see Note 9 to the consolidated financial statements included in this prospectus). Such legal defense costs are being capitalized and amortized over the remaining useful life of the trademark. We expect future amortization expense to increase as we incur additional costs associated with our patents and trademarks, including the trademark defense costs.

Allowance for Excess and Slow-moving Inventory

An allowance for potentially slow-moving or excess inventories is made based on our analysis of inventory levels on hand and comparing it to expected future production requirements, sales forecasts and current estimated market values.

Income Taxes

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We provide a valuation allowance for deferred tax assets if we determine, based on the weight of available evidence, that it is more likely than not that some or all of the deferred tax assets will not be realized. During the year ended June 30, 2008, we eliminated the $526,000 valuation allowance that had been established in previous periods as we began to recognize sufficient amounts of taxable income in which to fully utilize our deferred tax assets.

Warranty Reserve

We provide a limited warranty on products sold. We estimate, based upon a review of historical warranty claim experience, the costs that may be incurred under our warranty policies and record a liability in the amount of such estimate at the time a product is sold. The warranty cost is based upon future product performance and durability, and is estimated largely based upon historical experience. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liability and make adjustments to the accrual as claim data and historical experience warrant.

Share-Based Compensation

Share-based payment awards consist of warrants issued to employees for services, and to nonemployees in lieu of payment for products or services. Compensation expense is estimated using the Black-Scholes pricing model at the date of grant and the portion of the award that is ultimately expected to vest is recognized on a straight-line basis over the requisite service or vesting period of the award. In determining the fair value of our share-based payment awards, we make various assumptions when using the Black-Scholes pricing model including expected risk free interest rate, stock price volatility, life and forfeitures.

Results of Operations

Six Months Ended December 31, 2009 Compared to Six Months Ended December 31, 2008

Revenues

Revenue results for the six month periods are summarized in the table below (dollar amounts in thousands).


	Six Months Ended Dec. 31,		Increase (Decrease)

	2009	2008

Total Revenue	$6,451	$6,119	$332	5.4%

Home Care Revenue	$5,981	$5,582	$399	7.1%

International Revenue	$275	$250	$25	10.0%

Government/Institutional Revenue	$195	$287	($92)	(32.1%)

Home Care Revenue . Home care revenue increased primarily from an increase in the number of SmartVest Systems sold. We attribute this increase in revenue primarily to an increase in productivity by our existing sales staff as they continued to expand and strengthen their relationships with our customers. In addition, in October 2008, Medicare expanded its coverage for HFCWO therapy to include 33 neuro-muscular diseases. This expansion of coverage contributed to an increase in Medicare referrals, which we believe resulted in increased home care revenue in the first six months of fiscal 2010 over the comparable period in fiscal 2009.

International Revenue . International revenue increased by 10.0% as we continued our efforts to penetrate international markets.

Government/Institutional Revenue . We believe the decrease in Government/Institutional revenue was a result of budget decreases for capital equipment expenditures in institutions during the comparable periods.

Gross Profit

Gross profit for the first six months of fiscal 2010 increased to approximately $4,790,000, or 74% of net revenues, compared to approximately $4,676,000, or 76% of net revenues, for the same period of fiscal 2009, which primarily resulted from the increase in sales volume.

Operating expenses

Selling, general and administrative expenses . Our selling, general and administrative expenses rose by 15%, or approximately $478,000, to approximately $3,774,000 in the six months ended December 31, 2009, compared to approximately $3,296,000 in the same period in the prior year. Professional fees increased by $172,000 due to increased utilization of a third-party marketing organization and an independent contractor used to procure group purchasing contracts from hospitals and other institutions. General and administrative payroll increased by

$170,000, reflecting an increase in the number of employees, non-cash compensation from warrants vesting during the period, and increased bonus expense recognized and payable upon higher calendar-year sales levels.

Research and development expenses . Our research and development expenses increased by 32%, or approximately $61,000, to approximately $251,000 in the first six months of fiscal 2010 as compared to approximately $190,000 in the same period in fiscal 2009. The increase was related to a new research project undertaken during fiscal 2010, the purpose of which is to further enhance the quality and depth of our product line.

Interest expense

Interest expense decreased to approximately $122,000 in the first six months of fiscal 2010, compared to approximately $129,000 in the same period in fiscal 2009. The decrease was due to lower average debt outstanding in connection with payments on term loans.

Income tax expense

Income tax expense decreased $140,000 to $260,000 compared to $400,000 in the same period in fiscal 2009. The decrease was primarily the result of a decrease in net income before income taxes. Our effective tax rate increased from 37.7% to 40.4%, primarily due to an increase in non-deductible expenses.

Fiscal Year Ended June 30, 2009 Compared to Fiscal Year Ended June 30, 2008

Revenue

Revenue results for the twelve month periods are summarized in the table below (dollar amounts in thousands).


	Twelve Months Ended June 30,		Increase (Decrease)


	2009	2008
	2009	2008
Total Revenue	$12,999	$8,752	$4,246	48.5%
Home Care Revenue	$11,651	$7,855	$3,788	47.8%
International Revenue	$919	$727	$192	26.4%
Government/Institutional Revenue	$429	$140	$289	206.4%

Home Care Revenue . Our revenue increase in fiscal 2009 was a direct result of an increase in the number of SmartVest Systems sold. Contributing to this increase in revenue were increases in productivity from our sales staff as they continued to expand and strengthen their relationships with our customers. In addition, in October 2008, Medicare expanded its coverage for HFCWO therapy to include 33 neuro-muscular diseases. This expansion of coverage contributed to an increase in Medicare referrals, which we believe resulted in increased home care revenue in fiscal 2009 over fiscal 2008.

International Revenue . International revenue increased by 26.4% as we continued our efforts to penetrate international markets by adding additional distributors in more foreign countries.

Government/Institutional Revenue . Government revenue increased to approximately $116,000 in fiscal 2009, compared to approximately $45,000 in fiscal 2008, reflecting the existence of a new Veterans Administration contract for the full year of fiscal 2009, compared to four months in fiscal 2008. Institutional revenue rose by approximately $218,000 to approximately $313,000. Instrumental to this increase was the introduction of our SmartVest Wrap in March of 2008. Revenue from the SmartVest Wrap increased to approximately $90,000 in fiscal

2009, compared to approximately $14,000 in fiscal 2008. In addition to the increase in revenue, we believe the SmartVest Wrap, along with our Single Patient Use Vest, provide synergies with our home care SmartVest System, because they introduce the hospital patient to our product line.

Gross Profit

Gross profit increased to $9,659,000, or 74% of net revenues, for the fiscal year ended June 30, 2009, from approximately $6,605,000, or 75% of net revenues, for the fiscal year ended June 30, 2008. The increase in gross profit resulted primarily from increased net revenue.

Operating expenses

Selling, general and administrative expenses. Selling, general and administrative expenses for the fiscal year ended June 30, 2009 were approximately $6,845,000, compared to $6,000,000 for the same period in the prior year. The primary reason for the increase was an increase in headcount and other resources necessary to service the increased sales activity. Payroll and compensation related expenses increased by 38%, or $858,000, to $3,126,000 in fiscal 2009, compared to $2,268,000 in fiscal 2008. Commissions expense to outside representatives decreased by $949,000 in fiscal 2009, to $206,000, compared to $1,155,000 in fiscal 2008, due to the expiration and non-renewal of a contract with an outside sales representative organization. Advertising, marketing and trade show costs for the fiscal year ended June 30, 2009 increased to $642,000 from $454,000 in fiscal 2008, which increase primarily resulted from more trade shows attended and increased advertising. Selling expenses related to travel and entertainment and patient training increased by approximately $139,000 and $115,000, respectively, over fiscal 2008, because of increased sales activity. General office expenses and health insurance premiums increased by approximately $135,000 and $102,000, respectively, over fiscal 2008, due primarily to more employees and costs needed to service the higher volume of revenue. We recognized $153,000 of stock-based compensation expense for the fiscal year ended June 30, 2009 compared to $68,000 for the fiscal year ended June 30, 2008.

Research and development expenses . Research and development expenses were approximately $358,000 and $271,000 for the fiscal years ended June 30, 2009 and 2008, respectively. The increase was related to a new research project in fiscal 2009, which has continued into fiscal 2010, the purpose of which is to further enhance the quality and depth of our product line.

Interest expense

Interest expense decreased to approximately $270,000 in fiscal 2009, compared to $477,000 in fiscal 2008. The decrease was primarily due to a decrease in average debt outstanding due to payments on term loans and the elimination of our convertible debt through a combination of partially refinancing with a new term loan and converting approximately $1,165,000 to equity.

Income tax expense

Income tax expense was approximately $830,000 in fiscal 2009, compared to an income tax benefit of $427,000 in the 2008 fiscal year. During the fiscal year ended June 30, 2008, as a result of achieving a level of sustained profitability, we eliminated the valuation allowance on our deferred tax assets that had been established in previous periods. As a result of eliminating the valuation allowance, we recorded an income tax benefit in fiscal 2008. In fiscal 2009, our income tax expense was the result of increased profitability and resulted in an effective income tax rate of approximately 38%.

Liquidity and Capital Resources

Sources of Liquidity

Our primary sources of future liquidity are existing cash, including anticipated proceeds of this offering to the extent such proceeds are not used to repay indebtedness, cash flow from operations and available borrowings under our line of credit. We expect that ongoing requirements for debt service and capital expenditures will be

funded from these sources, including the anticipated proceeds of this offering. See “Use of Proceeds” for a more detailed description of our plans for the use of the proceeds from this offering.

We currently have a credit facility with U.S. Bank, National Association (“U.S. Bank”) that provides for a $3,500,000 revolving line of credit and $2,520,000 in term debt. The operating line of credit has an interest rate of LIBOR plus 2.75%. A $1,520,000 term loan bears interest at 5.79% (“Term Loan A”). The remaining $1,000,000 term loan bears interest at 4.28% (“Term Loan B”). The operating line of credit requires monthly payments of interest due and has a maturity date of November 30, 2010, which we expect will be renewed. Term Loan A requires monthly payments of principal and interest of approximately $10,700 and has a maturity date of December 9, 2014. Term Loan B requires monthly payments of principal and interest of approximately $29,600 and has a maturity date of December 9, 2012. Our obligations under the U.S. Bank credit facility are secured by substantially all of our assets and guaranteed by our wholly-owned subsidiary, Electromed Financial, LLC. As of December 31, 2009, we had $1,268,000 outstanding on the operating line of credit and $2,487,000 outstanding on the term debt for a total outstanding under the U.S. Bank credit facility of $3,755,000. As of December 31, 2009, we had $1,259,000 available to borrow under our line of credit. The agreement governing the credit facility contains certain covenants that restrict our ability to, among other things, incur indebtedness or liens, change Chief Executive Officer or Chief Financial Officer, merge or consolidate with any person, or sell, lease, assign, transfer or otherwise dispose of any assets other than in the ordinary course of business. The agreement also contains financial covenants that require maintenance of certain fixed charge and cash flow leverage ratios.

Adequacy of Capital Resources

Our primary uses of cash have been to fund the purchase of components for use in our products, meet debt service requirements, purchase equipment and fund operating activities and working capital. The primary factors affecting our ability to generate cash and to meet existing, known or reasonably likely cash requirements are any future need for capital equipment, cash for legal fees associated with the defense of our trademark, possible cash payments as required under our employment agreements with certain of our officers, and our operating performance as impacted by general economic conditions and financial, competitive, industry and other factors as identified in the “Risk Factors” section of this prospectus.

For fiscal 2009 and fiscal 2008, we spent approximately $649,000 and $566,000 on property and equipment, respectively. We expect our equipment expenditures for fiscal 2010 to be lower than in fiscal 2009. The actual amount of our fiscal 2010 equipment expenditures will depend upon factors such as general economic conditions, growth prospects for our industry and our competitive factors. We currently expect to finance equipment purchases with borrowings under our credit facility, the anticipated proceeds of this offering and cash flow from operations. We may need to incur additional debt if we have an unforeseen need for additional capital equipment or if our operating performance does not generate adequate cash flow.

For the six months ended December 31, 2009, we incurred and capitalized approximately $469,000 of legal defense costs associated with our trademark lawsuit. For additional information, see “Business—Legal Proceedings.” Although we cannot predict the ultimate costs or outcome of this lawsuit, we anticipate such costs will continue at a similar level for the remainder of fiscal 2010.

In connection with the employment agreements we entered into with our Chief Executive Officer and Chief Financial Officer on January 1, 2010, we may be required to make cash payments to these officers if they resign following a change in control or are terminated at any time without cause. With respect to a resignation upon a change in control, the amount of the severance payment would be equal to two times the annual base salary then in effect. With respect to a termination without cause, the amount of the severance payment would be equal to the base salary of the executive then in effect. In each instance, the executive would also be entitled to a pro rata portion of any earned but unpaid incentive compensation at the time of termination, the severance would be payable in a lump sum within 60 days of the separation event, and the executive would, in order to receive the severance and continued benefits, be required to sign a release of claims against us, return all property owned by Electromed and agree not to disparage us. See “Executive Compensation.”

Based on our current operational performance, we believe our cash flow from operations, available cash and available borrowings under the existing credit facility will adequately provide our liquidity needs for, at a

minimum, the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available under the U.S. Bank credit facility in amounts sufficient to support our long-term growth objectives, as our ability to do so will be impacted by general economic conditions and financial, competitive, industry and other factors, some of which are beyond our immediate control. If we are unable to generate sufficient cash flow from operations, obtain sufficient future borrowings or obtain the anticipated proceeds of this offering to finance long-term product development, sales, and other goals, we may be required to seek one or more alternatives such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. We cannot assure you that we will be able to succeed with any of these alternatives on commercially reasonable terms, if at all. In addition, if we pursue strategic acquisitions or new product development, we may require additional equity or debt financing in connection therewith, and we cannot assure you that we will succeed in obtaining this financing on favorable terms or at all. If we incur additional indebtedness for any reason, this may place increased demands on our cash flow from operations to service the resulting increased debt. Our existing credit agreement contains covenants that may restrict our ability to adopt any of these alternatives. Any non-compliance by us with the terms of our credit agreement could result in an event of default which, if not cured, could result in the acceleration of our debt.

Cash Flows

Cash Flows from Operating Activities

For the six months ended December 31, 2009, our net cash provided by operating activities was approximately $78,000. Cash flows provided by operations were primarily a result of net income, offset by approximately $361,000, $129,000 and $124,000 increases in accounts receivable, inventories and other current assets, respectively. For the six months ended December 31, 2008, net cash used by operating activities was approximately $1,106,000. Cash flows used by operations were primarily a result of an increase in accounts receivable of approximately $1,401,000 and a decrease in accounts payable and accrued liabilities of approximately $784,000.

For the fiscal year ended June 30, 2009, our net cash used by operating activities was approximately $1,158,000. Our cash flows used by operations were primarily the result of a decrease in accounts payable and accrued liabilities of approximately $571,000 and an increase in accounts receivable of approximately $2,419,000, driven by the increase in sales and timing differences associated with collection of those sales, offset by net income adjusted for noncash expenses. For the fiscal year ended June 30, 2008, operating activities provided net cash flow of $243,000. Cash flows from operations in that fiscal year were primarily the result of temporary increases in accounts payable and accrued liabilities of approximately $813,000, partially offset by an increase in accounts receivable of approximately $630,000.

Cash Flows from Investing Activities

For the six months ended December 31, 2009 and 2008, cash used in investing activities was $499,000 and $490,000, respectively. During the six months ended December 31, 2009, we paid approximately $407,000 in costs related to defending our SmartVest trademark. During the six months ended December 31, 2008, cash used in investing activities related primarily to the purchase of fixtures and equipment for our new manufacturing building.

For the fiscal year ended June 30, 2009, cash used for investing activities was $712,000. Cash of approximately $649,000 was used for expanding and equipping our new manufacturing building and approximately $62,000 was used for payment of patent costs. For the fiscal year ended June 30, 2008, cash used for investing activities was $646,000. Cash of approximately $566,000 was used for expanding and equipping our new manufacturing building. Payment of patent costs totaled approximately $46,000 and we paid deferred financing fees of $34,000.

Cash Flows From Financing Activities

For the six months ended December 31, 2009, cash provided by financing activities was approximately $409,000. Short- and long-term borrowings during the period, which includes borrowings under our U.S. Bank credit facility and capital lease arrangements, were approximately $3,788,000. The proceeds from the U.S. Bank credit facility were primarily used to pay off the principal balance of existing debt. Proceeds from the issuance of common stock were approximately $73,000.

For the six months ended December 31, 2008, cash provided by financing activities was approximately $733,000. Long-term borrowings were approximately $901,000 and proceeds from the sale of common stock were approximately $239,000. Offsetting the cash provided by financing activities were principal payments on long-term debt of approximately $452,000.

For the fiscal year ended June 30, 2009, cash provided by financing activities was approximately $790,000. Cash provided by financing activities was primarily from long-term borrowings of approximately $1,027,000 and proceeds from the issuance of common stock of approximately $364,000. Partially offsetting the cash provided by financing activities were principal payments on long-term debt of $641,000.

For the fiscal year ended June 30, 2008, cash provided by financing activities was approximately $877,000. Cash provided by financing activities was primarily from long-term borrowings of approximately $2,210,000 and proceeds from the issuance of common stock of approximately $689,000. Partially offsetting the cash provided by financing activities were principal payments on long-term debt of approximately $2,005,000.

Certain Information Concerning Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

New Accounting Pronouncements

For recently issued accounting pronouncements, see Note 1 to the Consolidated Financial Statements included in this prospectus.

BUSINESS

Overview

Our Company

Electromed, Inc. was founded by Mr. Robert Hansen and Mr. Craig Hansen and incorporated in Minnesota in 1992. We hold numerous patents, which cover our innovative means of administering High Frequency Chest Wall Oscillation, or HFCWO, airway clearance therapy. We believe our system provides improved ease of use, comfort and control at a cost that is comparable to current alternatives.

Electromed has established itself as a leader in developing innovative airway clearance therapy products for use by patients with compromised pulmonary function. Our goal has been to make the HFCWO airway clearance treatments as comfortable and convenient as possible so our patients can more easily tolerate their regimen and be able to perform their treatments as readily as possible. We created and introduced a portable, programmable, and multi-positional airway clearance machine which employs HFCWO. For the past ten years, our primary product, the SmartVest® Airway Clearance System (“SmartVest System”), along with its predecessor product, the MedPulse Respiratory Vest System®, have been providing daily respiratory therapy to patients in the U.S.

In order to maintain and expand our position in the market for airway clearance therapy products, we have assembled an experienced team of employees with expertise in health care, product development, manufacturing, marketing, sales, and financial management. For example, more than 30% of our employees are respiratory therapists. In addition, we engage over 300 respiratory therapists and health professionals on a non-exclusive independent contractor basis to educate and train customers on the SmartVest System. Our team also includes several consultants who advise us on quality assurance, product development, and financing, and who keep us apprised of industry developments and opportunities in Europe.

We manufacture and sell products for use by chronically-ill patients who face health risks due to pneumonia and mucus accumulation in the lungs, particularly patients with cystic fibrosis, chronic obstructive pulmonary disease (“COPD”), bronchiectasis, and neuro-muscular disorders. The purpose of our primary product, the SmartVest System, is to loosen, mobilize, and release respiratory secretions from the lungs. Our products are primarily used in the home health care market, and we have recently begun to sell our products for use in hospitals, which we refer to as “institutional sales.”

The SmartVest System features a programmable electro-mechanical pulse generator and a pneumatic therapy garment, which together provide safe, comfortable, and effective airway clearance therapy. We believe that the lightweight, portable design allows patients greater freedom to travel and enjoy activities of daily living, resulting in enhanced quality of life for patients using our SmartVest System. A broad range of vest sizes for children and adults allow for tailored fit and function. User-friendly controls allow children to administer their own daily therapy under adult supervision.

For approximately ten years, we have marketed the SmartVest System and predecessor models to patients suffering with cystic fibrosis (“CF”). CF is a genetic disease in which normal mucus becomes thick and sticky, eventually restricting the function of the lungs, pancreas, and liver. Cystic fibrosis patients require daily respiratory therapy. This was traditionally provided by a respiratory therapist, parent or family member who must “clap” or pound on a patient’s chest and back to loosen secretions that build up in the respiratory tract. Severe build-up can result in lung infections, scarring and ultimately death due to the patient’s inability to absorb oxygen.

HFCWO Therapy

In 1989, the University of Minnesota School of Medicine developed a new airway clearance tharapy to be applied to CF patients, known as High Frequency Chest Wall Oscillation. HFCWO clears secretions by mimicking the actions of a normal human cough. A vest is worn over the torso that repeatedly compresses and releases the chest at frequencies from 5 to 20 cycles per second. Each compression (or oscillation) produces pulsations within the lungs that shears secretions from the surfaces of the airways and propels them toward the mouth where they can be removed by normal coughing. Unlike traditional chest physio-therapy, which must be performed on the patient while he or she is placed in a series of often uncomfortable positions, HFCWO can be performed with the patient sitting upright.

Studies show that HFCWO therapy is as effective an airway clearance method for patients who have cystic fibrosis or other forms of compromised pulmonary function as traditional chest physio-therapy administered by a respiratory therapist. However, HFCWO can be self-administered, relieving a caregiver of participation in the therapy, and eliminating the attendant cost of an in-home care provider. We believe the treatments are cost-effective primarily because they reduce a patient’s risk of respiratory infections and other secondary complications that are associated with impaired mucus transport. Secondary complications, such as pneumonia, may be serious and even life-threatening. According to information gathered by the U.S. Department of Health and Human Services in 2006, the average hospital cost attributable to a pneumonia patient was $22,597.

Market Overview

Our SmartVest System is currently prescribed to patients who suffer from CF, COPD, bronchiectasis, neuro-muscular disorders, post-surgical complications, or other conditions involving excess secretion and impaired mucus transport. When we entered the market in 2000, we focused on providing our product to CF patients because we felt those individuals could greatly benefit from treatment from our HFCWO system and it was the indication most likely to qualify for reimbursement at that time. During our 2009 fiscal year, sales to CF patients comprised approximately 30% of our net revenue, although overlap in patient populations makes it difficult to attribute revenue to any particular condition with certainty. We expect that the CF patient population will remain an important customer population in the future. However, we believe that our greatest opportunities for growth are in emerging areas of application, such as COPD, bronchiectasis, neuro-muscular disorders, and acute care. The combined patient population of addressable pulmonary conditions has been estimated in the millions. We also believe that international populations present a key market opportunity, as HFCWO is not yet a prevalent form of therapy outside of the U.S.

We market our HFCWO products to a broad patient population. Points of contact are home health care use, hospitals, clinics, and pulmonary rehabilitation centers, both domestically and internationally. Our products are used by patients suffering from COPD and CF, post-surgical and intensive care patients at risk of developing pneumonia, patients with neuro-muscular disease, and ventilator-dependent patients. While HFCWO is a well-accepted treatment for bronchiectasis, neuromuscular conditions, and cystic fibrosis, its uses are not limited to such conditions. It may be prescribed by physicians for any patient the doctor believes may benefit from improved airway clearance therapy, such as amyotrophic lateral sclerosis (Lou Gehrig’s disease), spinal injuries, post-polio syndrome, and other conditions that affect a patient’s lung function.

Our Products

We manufacture and sell products for both the home health care market and the institutional or hospital market. For patients with a chronic pulmonary condition, many hours per day may be dedicated to a variety of treatments. The SmartVest System provides effective airway clearance therapy in a comfortable and portable design which allows patients greater independence and speed of treatment. Building from a foundation of product quality, as well as our dedication to customer service, our goal is to be a consistent innovator in providing airway clearance therapy to patients with compromised pulmonary function.

We provide our products to a patient population that includes not only CF and COPD patients, but also patients in post-surgical recovery, intensive care patients at risk of developing pneumonia, patients with neuro-muscular disease, and ventilator-dependent patients. Our products have been cleared for market by the FDA. All U.S. Durable Medical Equipment Medicare Administrative Contractors (“DME MACs”) have authorized payment through Medicare Part B for patients with cystic fibrosis, bronchiectasis, where documented, and neuro-muscular diseases or other conditions that would result in excess secretions.

We believe Electromed is well-positioned to experience significant growth. We intend to achieve growth through expanding and repositioning our sales staff within the U.S., establishing and strengthening our sales relationships in Europe and Asia, and maintaining our leadership in product innovation. Management believes it has the engineering talent to help lead our innovation in this field. We intend to use a portion of the net proceeds from this offering to add members to our sales force and further develop our institutional sales focus. See “Use of Proceeds” for additional information.

Our payment terms allow patients to acquire the SmartVest System in accordance with reimbursement procedures typically used under Medicare. The amount we receive for any single unit is based on reimbursement schedules and may vary based on a number of factors, including Medicare and third-party reimbursement processes and policies.

The SmartVest System

The SmartVest System consists of a pneumatic therapy garment, an electronic pulse generator for creating and controlling force pulses, and a single hose which extends the force pulses from the generator to the pneumatic vest. The SmartVest System is a portable airway clearance therapy system that gives the patient direct control over the most difficult and time-consuming aspects of respiratory therapy, and provides caregivers an easier and more reproducible means of administering therapy to invalid or bedridden patients. The SmartVest System also has other appealing practical features, including improved ease of use and a non-clinical appearance. We believe these attributes particularly appeal to children, teenagers and young adults who represent the majority of the cystic fibrosis patient population. Our system allows the patient to be relatively mobile while therapy is being given, unlike manual chest physical therapy in which the patient must remain in a fixed position.

We believe the SmartVest System’s therapy garment is unique in its:


	•	Design : We have pioneered a vest design that provides consistent and controlled pulse pressure that is distributed throughout the vest and treats the entire front and back thoracic cavity. The vest is low profile, featuring a soft, breathable fabric. Some competitive models have reduced weight and size of their vests by reducing coverage area of the chest and applying pressure to the chest only. We do not endorse or employ a partial coverage vest, and all of our products offer 360-degree coverage. Our vest uses a flow-through system design, which improves patient comfort by providing a continuous accommodation grid of air release holes in the vest air bladder, allowing air releases to automatically adjust. This can prevent lags in pulse pressure accommodation as compared to a closed-loop system, in which electronic signal generators must continuously send changes in air fill instruction to the air pump. We believe heightened patient comfort is realized because of our flow-through design.

	•	Size and Ease of Use : The SmartVest System is available in eight sizes to accommodate children and adults. The simple design of Velcro and overlap closure system creates a broad size adjustment range to insure a properly tailored fit. It also makes the vest easier to clean and disinfect than some competitors’ products, which often use straps and buckles. The patented design includes a removable bladder, permitting the therapy garment to be easily washed and dried. This feature also helps improve infection control efforts.

	•	Material : An attractive washable nylon shell with quick fit Velcro provides an appealing non-clinical look and feel, which we believe enhances self-esteem and patient compliance.

	•	Modular Assembly : The vest’s modular assembly allows the custom modification of the manifold to enhance pulsation and avoid local areas of sensitivity such as incisions and catheters.


	The SmartVest System’s electronic pulse generator features the following important aspects:

	•	Portable Design : The pulse generator for the SmartVest System is streamlined and fits into a roller bag for easy transport. The vest and hose are carried in a small companion bag. The unit is relatively lightweight and can be readily carried or rolled by an individual. The system complies with airline carry-on size limits and can be carried onto an airplane or stowed in the trunk of a car, allowing patients greater freedom to travel.

	•	Single-Hose System : When the SmartVest System is in use, a single hose delivers the pulsation to the vest, which we believe provides therapy in a more comfortable and unobtrusive manner than a two-hose system. In addition to facilitating patient comfort, the single-hose system provides effective treatment by simplifying delivery of the air pulse energy to the lungs. The pulse is delivered evenly from the base of the SmartVest therapy garment, extending the force pulses upward and inward in strong but smooth cycles of 360-degree latitudes, which delivers simultaneous treatment to the patient’s chest and back and all lobes of the lungs.

	•	Programmable Pulse Generation : The SmartVest System uses a pulse generator with an internal programmable memory feature to generate a pneumatic pulse electronically. The pulse frequency can be adjusted from 5 to 20 cycles per second, which accommodates the required therapeutic range. The range can be preset, by programmable controls, to assure patient safety and specific treatment requirements. For example, the unit can be programmed to deliver a varying pulse frequency during the course of a treatment session without requiring manually directed changes. We believe this feature adds convenience and enhances patient compliance with treatment protocol choices. For more information about the complexity of treatments typically offered to patients with chronic pulmonary dysfunction, please refer to the information under the heading “Customers.”

	•	Power Supply : The SmartVest System also includes a power supply suitable for use in international markets, such that voltage and amperage are accommodated automatically.

Other Products

In order to maintain and expand our position in the airway clearance therapy industry, we plan to develop and introduce future advancements in HFCWO products. Our goal is to provide effective treatment while improving the quality of life for patients who suffer from chronic pulmonary conditions resulting in impaired airway clearance. Therefore, we plan to make each product progressively more compact, portable, and user-friendly. Our goal is to seek improvements in design that will result in a relatively lower manufacturing cost for each subsequent generation of the SmartVest System.

We market our Single Patient Use Vest (“SPUV”)™ and SmartVest Wrap® to health care providers, particularly those working in intensive care units. Hospitals issue the SPUV or SmartVest Wrap to one patient for the duration of his or her stay. Both products facilitate continuity of care because they introduce the patient to our product line and may encourage use of the home care SmartVest System, which can be provided to the chronic condition patient upon discharge. Both products provide full coverage pulsation. The SPUV is a full-sized vest that is often used for patients undergoing institutional treatment who are already accustomed to using a SmartVest System. The SmartVest Wrap, which we introduced in 2007, is lightweight, convenient, and well-suited for patients recovering from surgery and short-term illnesses. We believe that the design of the SmartVest Wrap makes it easy for the health care professional to operate. In addition, we believe that our ability to provide a relatively more comfortable therapy alternative to patients results in a higher likelihood of patient cooperation and consistent use.

We have designed a mobile pedestal, which we manufacture and provide with sales of our institutional models of the SmartVest System. The mobile pedestal allows for easy transport within the medical facility. This unit includes a pneumatic feature, permitting ease of movement in raising and lowering the vertical position of the generator.

Business Strengths

Intellectual Property

Our intellectual property represents one of our most significant business strengths. It allowed us to pioneer an HFCWO device with a single-hose and flow-through system design, leading to the competitive advantages described below. We currently hold 17 issued U.S. patents and 5 issued foreign patents covering the SmartVest System and its underlying technology. As of March 31, 2010, we had approximately 35 additional U.S. and foreign patent applications pending. These patents and patent applications offer coverage in the field of air pressure pulse delivery to a human in support of airway clearance. These patents and patent applications are described in more detail below, under the heading “Intellectual Property.”

Competitive Advantages of SmartVest System

We believe that the SmartVest System offers competitive advantages in improved patient comfort and satisfaction. Unlike our competitors’ products, which are primarily dependent upon a two-hose, closed-loop system for attaining consistent air pulse transmission to the vest and lungs, the SmartVest System relies on a single-hose, flow-through system. We believe a single-hose, flow-through system provides the following benefits:


	•	The single-hose system simplifies delivery of the air pulse energy to the lungs. The pulse is delivered evenly from the base of our vest, extending the force pulses upward and inward in strong but smooth cycles of 360-degree latitudes, which delivers simultaneous treatment to the patient’s chest and back and all lobes of the lungs. In addition, the single hose is less obtrusive than a two-hose system and is longer than the hoses used by many competing products, allowing the patient greater comfort during the course of treatment.

	•	The flow-through system design provides a continuous accommodation grid of air release holes in the vest air bladder. No matter what resistance a patient’s chest may be creating in normal aspiration (breathing), air release adjusts accordingly in the bladder. This can prevent lags in pulse pressure accommodation as compared to a closed-loop system, in which electronic signal generators must continuously send changes in air fill instruction to the air pump. We believe greater patient comfort is realized in our flow-through system design.

Industry Contacts

Our management team has significant business experience and has developed industry relationships, including memberships in the American Association of Respiratory Care, Capital Focus (an association of respiratory care professionals), Cystic Fibrosis Centers established and recognized by the Cystic Fibrosis Foundation, the European Respiratory Society, and numerous regional and state organizations who serve the professional interests of respiratory care professionals across the U.S. We have also, for more than ten years, attended, sponsored, and participated in numerous medical conferences in the U.S., Europe, and Asia. We believe these investments of time and capital have increased visibility of the SmartVest System and established a favorable reputation and perception of Electromed. In addition, participation in industry conferences allows us to educate and train health care professionals on the SmartVest System.

In addition to relationships developed at the management level, our staff and contractors, who often play a key role in the education of current and potential customers, have developed trusted relationships across the U.S. with physicians and other caregivers over the course of their careers. Over 30% of our full-time employees, including our entire Patient Services Department and nearly all of our sales representatives, are respiratory therapists. Many of these individuals have over 20 years of experience in the field of respiratory care, and their relationships and experience are of great worth to us. These individuals maintain a dialogue with clinics, patients, patient families, and respiratory therapist trainers to ensure that our products are being properly operated and are performing effectively. Additionally, our sales representatives participate in various events, such as “family days” held by the Cystic Fibrosis Foundation for cystic fibrosis patients, at which they have an opportunity to demonstrate the effectiveness of the SmartVest System and further develop relationships with patients, patient

families, physicians and hospitals. We believe that the relationships and reputation for service that our staff and contractors have developed are key factors in our ability to gain patients and secure reimbursement.

Engineering and Manufacturing Departments

Another significant business strength is the valuable know-how of our Engineering and Manufacturing Departments. The experience of the individuals in these departments helps ensure the efficient production of high-quality products. In order to foster continued success, we provide attractive salaries and benefits to all employees and conduct performance evaluations based on our ongoing review of the engineering and manufacturing processes. We believe this gives our team members an incentive to maintain specific manufacturing and quality standards. In addition, we have established a network of vendors who permit us to integrate all assembly and quality assurance on a single campus. We believe that our efficient product development and manufacturing processes create a business strength because they allow us to offer our products at competitive prices and respond quickly to increases in demand.

Growth Strategy

We believe we are poised for significant sales and earnings growth, predicated on the following objectives:


	•	Expanding and repositioning our sales staff within the U.S. We select experienced medical professionals, usually respiratory therapists, to represent our products in the field. Our sales representatives, which we identify as Clinical Area Managers (“CAMs”), are employed full-time by Electromed, are assigned an exclusive territory, and under the supervision of a regional manager, serve discrete geographic areas of the U.S. They are equipped with demonstration models, and, where appropriate, arrange for such models to be accessed by patients through a demonstration program to physicians, clinics, and hospitals. We believe this approach is an effective sales model and ensures that patients, physicians, clinics, and hospitals receive reliable and correct training for our products. We intend to recruit additional CAMs and expect that doing so will increase our domestic sales. As we gain sales and industry contacts within each territory, we intend to continue to actively monitor sales opportunities by repositioning certain of our current CAMs to serve smaller geographic areas. In addition, in June 2008, we entered into a relationship with a consultant to assist with obtaining contracts with hospital buying groups. We have renewed this contract on an annual basis and we anticipate that the agreement will continue to be renewed in successive one-year terms or that the relationship will otherwise be continued.

	•	Establishing and strengthening sales relationships in Europe and Asia. Internationally, we have made sales in more than ten countries. We are actively identifying distributors and other sales opportunities. Our historical practice and continued intent includes developing long-term relationships with distributors who possess the knowledge, experience, and financial maturity to serve pulmonary patients and reliably satisfy payment obligations. Our agreements typically require the distributor to meet particular sales thresholds on an annual basis. We believe that expanding our distributor relationships in Europe and Asia will generate revenue growth because it will allow us to establish our SmartVest System as the preferred airway clearance therapy product in regions where HFCWO therapy is not yet widely used. Attention is given to a distributor candidate’s knowledge and experience in serving respiratory physicians and patients in the host country. We then designate members of our regulatory staff to actively monitor the distributor’s conformity with all applicable regulations and good practices in the host country. We support our distributors by providing advertising materials and direct training opportunities at our headquarters.

	•	Maintaining leadership in product innovation. We have pursued our goal of continuous improvement through an active research and product development program, and plan to develop and introduce future advancements in HFCWO products for patient use. Each product will be designed to provide compact, portable, and user-friendly features. In addition, we expect to continue enhancing our Single Patient Use Vest and SmartVest Wrap, which we market to hospitals and health care providers.

Our Markets

Because sale of the SmartVest System is by physician’s prescription only, we market to health care professionals, such as doctors, nurses, respiratory therapists, and clinic coordinators. However, with respect to both our in-home and institutional products, the health care professionals’ decisions may be based on preferences expressed by patients. Therefore, we believe that it is also important to market our products to patients and caregivers. In addition, because the availability of reimbursement is an important consideration for health care professionals and patients, we must also prove the effectiveness of our product to public and private insurance providers.

Our SmartVest System is primarily prescribed for patients with cystic fibrosis, chronic obstructive pulmonary disease, and bronchiectasis. While HFCWO is an accepted standard of care for conditions such as bronchiectasis, neuromuscular conditions, and cystic fibrosis, indications for HFCWO are not disease-specific and may be prescribed by physicians for any patient the doctor believes may benefit from improved airway clearance therapy. Individual assessment of each patient by their physician is appropriate prior to HFCWO prescription. HFCWO therapy has been shown to reduce:


	•	the incidence of serious and life-threatening episodes of pneumonia;

	•	the cost of medications and hospitalizations; and

	•	the need for persistent treatment by respiratory therapists.

When we entered the market in 2000, we focused on providing our product to CF patients because we believed those individuals could greatly benefit from treatment with HFCWO therapy and it was the indication most likely to qualify for reimbursement at that time. During our 2009 fiscal year, sales to CF patients comprised approximately 30% of our net revenue, although overlap in patient populations makes it difficult to attribute revenue to any particular condition with certainty. We expect that the CF patient population will remain an important customer segment in the future. However, throughout our history, we have sought to continuously expand our product offerings to a broader patient population, which now includes post-surgical and intensive care patients at risk of developing pneumonia, patients with end-stage neuromuscular disease, and ventilator-dependent patients.

We believe that our greatest opportunities for growth are in emerging areas of application, such as COPD, bronchiectasis, neuro-muscular disorders, and acute care. Clinical studies suggest that HFCWO could have significant benefits for other conditions that result in excess secretion or an impaired ability to cough or otherwise clear the airways, including a number of genetic disorders, such as pseudohypoaldosteronism and Kartagener Syndrome, a wide range of neuro-muscular/neuro-motor disorders, including multiple sclerosis, cerebral palsy, spina bifida, quadriplegia, and traumatic head and spinal cord injuries, and a wide range of pulmonary conditions. We estimate that the number of U.S. patients who have been diagnosed with conditions that may benefit from HFCWO treatment is approximately 13 million, and that there are several million additional people who suffer from COPD or other pulmonary impairment conditions who have not been diagnosed. However, the size of the combined market for HFCWO is affected by the fact that there is often overlap among patient populations who suffer from pulmonary impairment.

Diseases and conditions that may benefit from HFCWO therapy include the following:


	•	genetic and neuro-muscular disorders such as cystic fibrosis, muscular dystrophy, lupus, and cerebral palsy;

	•	acquired diseases such as COPD, lung cancer, immuno-deficiency diseases and other diseases causing lung impairment; and

	•	accidents and other conditions causing impaired lung function such as paralysis, scoliosis, surgical recovery, and other conditions that restrict airway function, require ventilator assistance, or make the patient more vulnerable to lung infections such as pneumonia.

Reimbursement for HFCWO therapy and the SmartVest System varies among public and private insurance providers, and is often dependent on the reimbursement source. Most patients are able to obtain reimbursement from Medicare, Medicaid, private insurance or combinations of the foregoing. Please refer to the subheading in this Business section entitled “Third-Party Reimbursement.”

Cystic Fibrosis

Cystic fibrosis (“CF”) is a genetic defect that disrupts chloride (salt) transfer in and out of cells, causing the normal secretions from the exocrine glands to become very thick and sticky, eventually blocking ducts of the glands in the pancreas, lungs and liver. The thick mucus accumulates in the lung’s respiratory tracts, causing chronic infections, scarring, and decreased vital capacity. Normal coughing is often not sufficient to dislodge these secretions. Cystic fibrosis usually appears in early childhood. The median life expectancy for CF patients in the U.S. is approximately thirty-seven years, although some patients live into their fifties and beyond.

Approximately 25,000 people in the U.S. have cystic fibrosis, with an estimated 1,000 new cases diagnosed each year. We estimate that during our 2009 fiscal year, sales to CF patients comprised approximately 30% of our net revenue, although overlap in patient populations makes it difficult to attribute revenue to any particular condition with certainty.

The following information is a brief summary of the CF patient population in the U.S. The information is derived from the Cystic Fibrosis Foundation Patient Registry, found in its Annual Data Report:


	1985	1995	2008
Total CF Patients (receiving care at a CFF-accredited care center in the U.S.)	15,145	19,736	25,651
Total Newly Diagnosed Patients	802	822	1,006
Median Survival Age	25.6 years	29.6 years	37.4 years

All patients with cystic fibrosis require respiratory therapy as a daily part of their care regimen. The buildup of thick, sticky mucus in the lungs clogs airways and traps bacteria, providing an ideal environment for respiratory infections and chronic inflammation. This inflammation causes permanent scarring of the lung tissue, reducing the capacity of the lungs to absorb oxygen and, ultimately, sustain life. Respiratory therapy must be performed even when the patient is feeling well, in order to prevent infections and maintain vital capacity.

Traditionally, care providers perform Chest Physical Therapy (“CPT”) one to four times per day. CPT consists of a patient lying in one of twelve positions (most with the head pointed downward) while a caregiver “claps” or pounds on the chest and back over each lobe of the lung. To treat all areas of the lung in all twelve positions requires pounding for 30 to 45 minutes along with inhalation therapy. CPT clears the secretions by shaking loose airway secretions through chest percussions and draining the loosened secretions towards the mouth. Active coughing is required to ultimately remove the loosened secretions.

Although some older patients can learn to perform CPT on themselves, CPT usually requires the assistance of a caregiver, often a family member, a nurse or respiratory therapist. It is a physically exhausting process for both the patient and the caregiver. Patient and caregiver non-compliance with prescribed protocols is a well-recognized problem that diminishes the effectiveness of this method. CPT effectiveness is also highly technique sensitive and degrades as the giver becomes tired. The requirement that a second person be available to perform the therapy severely limits the independence of the CF patient.

Bronchiectasis

Bronchiectasis is a chronic lung condition characterized by abnormal widening of the bronchial tubes, or, as defined by Medicare, a productive cough that occurs more than twice per year or lasts longer than six months. In a patient with bronchiectasis, the bronchial tubes are damaged by the abnormal widening, which impairs their ability to clear mucus from the lungs and causes a chronic cough. Bronchiectasis may affect multiple areas of one or both lungs. The condition is often caused by inflammation and infection of the airways, for example due to bacterial lung infections (chronic bronchitis or pneumonia) or inhaling foreign objects. Cystic fibrosis causes about half of all

bronchiectasis in the U.S. The effects of bronchiectasis include excessive coughing, shortness of breath, fatigue, and recurring pneumonias. Depending on the severity of a patient’s condition, treatments range from bronchodilator medications (inhalers), antibiotics, daily CPT and drainage, or surgical removal of the affected lung tissue. We believe that our success in the CF market suggests that our SmartVest System can provide effective treatment to patients with bronchiectasis, as clearing the airways of secretions is central to the treatment of both conditions. We estimate that during our 2009 fiscal year, sales to bronchiectasis patients comprised approximately 43.5% of our net revenue, although overlap in patient populations makes it difficult to attribute revenue to any particular condition with certainty.

Chronic Obstructive Pulmonary Disease

Chronic obstructive pulmonary disease is a progressive disease that, over time, makes it more and more difficult for a patient to breathe. According to statistics published by the World Health Organization in November 2008, COPD is the fourth leading cause of death in the world, and some experts expect that it will be the largest cause of disability and death due to respiratory disease in the year 2020. It is also the only cause of death that is rising in the U.S. and in the world. The death rate from COPD is rising fastest among women. According to the U.S. Centers for Disease Control and Prevention, 10 million Americans already suffer from COPD and another 14 million have impaired lung function.

People with COPD may have chronic inflammation of the bronchial tubes, emphysema or, more likely, both. In emphysema, the walls between the air sacs in the lungs are damaged, causing them to lose their shape and become deflated. This damage can also destroy the walls of the air sacs, leading to fewer and larger air sacs instead of many tiny ones. In chronic obstructive bronchitis, the lining of the airways is constantly irritated and inflamed. This causes the lining to thicken. The patient’s immune system reacts by increasing secretions, making it difficult to breathe. Thus, patients with COPD slowly suffocate over a period of years. Using auxiliary muscles, people can inhale with considerable effort but are unable to exhale. Even a mild case of COPD can have an impact on the heart. Heart failure is also associated with severe COPD.

COPD has no cure, and traditional treatments are inconvenient for the patient and have limited effectiveness. These treatments consist of inhaled dilator and steroid medications, physical therapy exercises, major surgery, such as a lung transplant or lung volume reduction surgery, and oxygen therapy, either constantly through nasal prongs or for several hours per day through a mask. For some patients, the primary course of action is merely to manage the risks and complications that result from the disease, such as by obtaining pneumonia and influenza vaccines, since infections may suddenly increase the severity of COPD. We believe that the combination of excess secretions and the inability to forcibly exhale to clear the lungs make COPD patients ideal candidates for our airway clearance therapy.

Neuro-Muscular Diseases

Neuro-muscular diseases include muscular dystrophy, spinal muscular atrophy, and multiple sclerosis. Patients with neuro-muscular diseases have difficulty breathing, as well as difficulty clearing their lungs of accumulated mucus. The conditions often cause a patient’s diaphragm muscles to deteriorate and lead to poor spinal alignment, each of which impairs the patient’s ability to fully inhale. In addition, poor muscle coordination makes it difficult for the patient to forcefully exhale or cough. Due to this difficulty, patients with neuro-muscular diseases have an exceptionally high risk of developing serious secondary complications, such as pneumonia and respiratory failure. Secretion management is a critical aspect of the respiratory care of these patients. We believe that our SmartVest System aids in producing effective coughs, and thereby improves breathing and reduces the risk of infection.

New Markets

Acute Care

The acute care market includes ventilator-dependent patients and post-surgical patients at risk for pulmonary complications. Patients at risk include smokers, those with a history of lung disease, asthma, or chronic bronchitis, the overweight, the elderly, those immobilized by illness or injury, and those who have an adverse reaction to anesthesia. Specific problems may include pneumonia, infection, atelectasis (collapsed lung), and/or respiratory failure all of which increase mucus retention in the lungs.

We have worked with health care professionals to create products for acute care patients, including our Single Patient Use Vest, or SPUV, and our SmartVest Wrap. We market both of these products to health care providers, particularly those working in intensive care units. Hospitals issue the SPUV or SmartVest Wrap to one patient for the duration of his or her hospital stay. Both products facilitate continuity of care, because they introduce the patient to our product line and may encourage use of the home care SmartVest System, which can be provided to the chronic condition patient upon discharge. Both products provide full coverage pulsation. The SPUV is a full-sized vest that is often used for patients undergoing institutional treatment who are already accustomed to using a SmartVest System. The SmartVest Wrap, which we introduced in 2007, is lightweight, convenient and well-suited for patients recovering from surgery and short-term illnesses. We believe that the lightweight nature of the SmartVest Wrap makes it easy for the health care professional to operate. In addition, we believe that our ability to provide a relatively more comfortable therapy alternative to patients results in a higher level of patient cooperation and consistent use.

Other Indications

The benefits of airway clearance therapy using the SmartVest System are not disease-specific. They apply to a broad range of conditions characterized by lung congestion. One currently underserved group of patients are those with underlying medical conditions and circumstances, such as severe down syndrome, demobilizing injuries and severe muscular distrophy. Patients with severe underlying conditions often suffer from multiple physical problems and may be non-ambulatory. Their inability to move predisposes them to lung congestion, which often progresses to more serious medical conditions such as pneumonia. We believe these patients could improve their lung functionality and reduce their incidence of infection by using airway clearance therapy with the SmartVest System, and that the consistently higher oxygen levels that result from improvements to breathing could offer ancillary benefits for their conditions.

Marketing, Sales and Distribution

We believe we are poised for significant sales and earnings growth, which we intend to achieve through expanding and repositioning our domestic sales staff, focusing on continuing education opportunities and industry relationships, building distributor relationships in Europe and Asia, and maintaining leadership in product innovation. Each of these objectives is described in more detail above in the section entitled “Overview—Growth Strategy.”

Because sale of the SmartVest System is by physician’s prescription only, we focus our marketing efforts on physicians and health care professionals such as physician’s assistants, nurses, nurse practitioners, and respiratory therapists, as well as directly to their patients. In addition to increasing the visibility and acceptance of our products through participating in medical conferences and maintaining industry contacts, as explained in more detail above in the section entitled “Business Strengths—Industry Contacts,” we have a designated Marketing Department and place advertisements in leading medical magazines and journals in the U.S. and Europe. We also believe that the Internet has provided us with a marketing benefit in recent years, as several overseas distributors have contacted us after visiting our website.

In addition to distributors overseas, as explained in more detail below under the heading “International Marketing,” we have established our own sales force in the U.S., nearly all of whom are respiratory therapists. Each sales representative, or Clinical Area Manager (“CAM”), is responsible for introducing our products, principally the SmartVest System, to clinics and hospitals within a specific geographical area, and are also able to provide training and continued support to customers. We have also developed a network of over 300 respiratory therapists and health care professionals to assist with training patients across the U.S. on a non-exclusive independent contractor basis. We believe that the professional understanding of the Clinical Area Managers and trainers demonstrates our commitment to customer service and facilitates sales. We expect that with expanded funding, our current and future Clinical Area Managers can capture additional market share.

We have been marketing our SmartVest System and predecessor products to patients with cystic fibrosis for ten years. We have also been successful in securing reimbursement from major private insurance providers, HMOs, state Medicaid systems, and the federal Medicare system, which is an important consideration for patients considering an HFCWO course of therapy. We believe that our SmartVest System has created a solid foundation to support our entry into progressively larger markets for airway clearance therapy.

When evaluating market expansion for the SmartVest System, it is important to understand the needs of the patients requiring airway clearance therapy and, in some instances, their care providers. The essential requirements that make a patient a candidate for airway clearance therapy are compromised respiratory function with a need to:


	•	secure airway clearance therapy on a cost-effective long-term basis, confidently and with relative ease;

	•	maintain and/or improve pulmonary status;

	•	mobilize secretions several times per day; and

	•	carry out activities of daily living.

The SmartVest System provides a convenient means to mobilize secretions. In contrast, traditional manual Chest Physical Therapy (“CPT”) requires the presence and assistance of a second person, severely limiting independence. Attending college, working a job, traveling on business, and having a normal social life are all adversely impacted by the need for CPT. Although some older patients can learn to perform some elements of CPT on themselves, many adults do not, and must forego regular CPT in order to meet the requirements of school and employment with concomitant risk to their health.

The SmartVest System is designed to meet the individual patient’s needs by providing a therapy that is efficient, is easy to administer, and can be performed independently. Electromed’s established marketing and product support services provide education, training, and follow-up with the patient population to insure the product is integrated into their daily treatment regimen. We believe advantages of the SmartVest System to the independent patient include:


	•	usually can be reimbursed by private insurance, by federal or state government programs or combinations of the foregoing;

	•	consistent treatments at home;

	•	independence from a dedicated caregiver;

	•	portability;

	•	improved comfort during therapy; and

	•	improved self-image.

International Marketing

The international market for HFCWO therapy devices is emerging and we believe represents a major growth opportunity for us. In fiscal 2009, our international sales comprised approximately 7.1 % of net revenue.

Internationally, we have made sales in more than ten countries. We are actively identifying distributors and other sales opportunities. Our historical practice and continued intent includes developing long-term relationships with distributors who have knowledge and experience in serving respiratory physicians and patients in the host country. Units are sold at a consistent price with prepayment usually required. For all international sales, our Quality Assurance Department and Chief Financial Officer monitor pricing, payments and conforming regulatory practice. Our Chief Executive Officer and Marketing Director oversee the growth and performance of international sales.

We obtained ISO 9001 Certification in January 2005, which provides assurance to our international distributors and customers that our products conform with uniform standards for manufacturing quality and that our business meets certain professional standards. Securing certification from the International Organization for Standardization (“ISO”) provides assurance across national boundaries that the goods imparted are of a reliable and predictable quality, consistent with the representations of the manufacturer.

We have also obtained clearance to use the European Union CE Mark on our products. The CE Mark is required for medical device sales in countries within the European Economic Area, which includes the twenty-seven member countries of the European Union as well as Iceland, Liechtenstein, Norway, Switzerland, and Turkey, and other European countries that may adopt EU standards voluntarily. We also require all of our distributors to comply with their home country regulations. We originally obtained clearance to use the CE Mark in April 2005. Renewal is required every five years, and our notified body performs an annual audit to ensure that we are in compliance with all applicable regulations. We have maintained our CE Mark in good standing since originally receiving it and most recently renewed it in January 2010.

Competition

High Frequency Chest Wall Oscillation (“HFCWO”) was first developed for CF patients at the University of Minnesota. The purpose of HFCWO is to provide more effective mucus clearance in a form that could be performed independently of a caregiver. The original technology was licensed to American Biosystems, Inc. (now Advanced Respiratory, Inc. (“ARI”), part of Hill-Rom Holdings, Inc., a publicly traded company) which, until the introduction of our original MedPulse Respiratory Vest System® in 2000, was the only manufacturer of this technology. All of ARI’s products use a two-hose, closed-loop system, in contrast to the single-hose, flow-through system that we designed, which we believe provides greater ease of use and patient comfort. In 2005, Respiratory Technologies, Inc., a privately held company doing business as RespirTech, received FDA clearance to market their inCourage system (the “inCourage System”), which includes a HFWCO vest. Like our SmartVest System, ARI’s The Vest and RespirTech’s inCourage System are cleared for market by the FDA. We believe we compete effectively with our competitors on the basis of product features and customer service.


	Alternative products for administering pulmonary therapy include:

	•	Positive Expiratory Pressure (“PEP”) mask, which provides backpressure into the lungs on expiration to keep respiratory tracts open longer to drain;

	•	The Flutter ® (Scandipharm), a tube which vibrates on expiration;

	•	Acapella® Vibratory PEP Therapy System (Smiths Medical), a handheld device that combines PEP with oscillations;

	•	Intrapulmonary Percussive Ventilation Device, generally comprised of a ventilator that combines positive air pressure with nebulisation as appropriate; and

	•	Traditional Chest Physical Therapy (“CPT”), which is usually performed one to four times per day.

Physicians may prescribe a single product or treatment or a combination of products, depending on what they feel will best ensure patient compliance and well-being. We believe our primary competitive advantage over alternative treatments is patient comfort, ease of use, and the effectiveness of HFCWO treatment as compared to CPT and other alternative treatments. Because HFCWO is not “technique dependent,” as compared to most other pulmonary therapy products, therapy begins automatically once power is provided and remains consistent and controlled for the duration of the session. We strive to make the SmartVest System an increasingly attractive and comfortable form of HFCWO therapy. We believe that HFCWO therapy generally, and our SmartVest System in particular, produces less interference with daily activities, which increases the likelihood of regular use. We believe these advantages encourage physicians to prescribe and patients to request the SmartVest System for pulmonary therapy.

From a clinical performance perspective, all HFCWO products meet a common standard of “substantial evidence.” As a result, features and benefits such as number of hoses required to deliver the therapy (one hose versus two hoses), construction quality, appearance of the generator, reputation for patient services, and sales effectiveness of field personnel have become key variables. We believe that the product features of our SmartVest System enable us to compete effectively, particularly when health care professionals, patients, and caregivers are provided with demonstrations of product choices prior to committing to a specific product. We often provide demonstration units to encourage such comparisons. Unlike our competitors’ products, the SmartVest System has a single-hose, flow-through system design and an adjustable vest made from soft, breathable and washable fabric. We use Velcro in our patented vest to provide a tailored fit, as opposed to an inflatable fit model. In addition to product features, our focus on providing exemplary customer training and service, along with our commitment to engage and retain highly motivated employees and contractors, many of whom are medical professionals, provides a valuable competitive advantage.

Physicians who treat patients with respiratory difficulties are primarily concerned with maintaining the pulmonary capacity of their patients. Therefore, they will prescribe whatever product or combination of products they feel will best ensure patient compliance and well-being. The CF patient population is particularly unique in its knowledge of the disease, therapy options, and willingness to demand the best treatment possible. Patients may use some or all of these devices and techniques, depending upon their health status, severity of disease, compliance, or personal preference.

Manufacturing

Electromed staff is responsible for manufacturing each SmartVest System. While components are outsourced based upon detailed specifications, each SmartVest System is assembled, tested, and approved for final shipment at our manufacturing site in New Prague, Minnesota, under careful control consistent with FDA, Underwriters Laboratory (“UL”), and ISO standards. While all third-party vendors present some degree of risk of supply or impairment issues, many of our vendors are located within 100 miles of our headquarters, which enables us to closely monitor the supply chain. We maintain at least a two-month supply of all of our critical components.

Our headquarters in New Prague, Minnesota include a dedicated manufacturing and engineering facility of more than 10,000 square feet. Our site has been regularly audited by the FDA, in accordance with FDA practices, and we maintain our operations in a manner consistent with FDA requirements for a medical device manufacturer. Our manufacturing processes emphasize simplicity, cost-effectiveness, and a capacity to realize increases in production volume with escalation in demand. All employees are responsible for maintaining specific manufacturing and quality standards, which are monitored by our quality assurance manager under an extensive system designed to satisfy FDA and ISO standards.

A rigorous quality standard is applied to components received from vendors. Any adverse findings result in the quarantine of any out of specification components. Before a SmartVest System is shipped to a patient, rigorous testing is again applied to match the performance of the air pulse generator with the particular vest size stipulated for the patient.

Research and Development

We have demonstrated our commitment to product development by introducing several new products and product enhancements since we first entered the market in 2000. In addition to the 17 U.S. patents and 5 foreign patents that we currently hold, we have a number of pending patent applications domestically and internationally.

As of December 31, 2009, our research and development staff consisted of three full-time employee engineers. We also receive engineering support from several consultants, including Mr. Craig Hansen, pursuant to an agreement with Hansen Engine Corporation. See “Certain Relationships and Related Party Transactions.” Our team, the majority of whom have experience in respiratory therapy and medical device development, has a demonstrated record of developing new products which receive the appropriate product approvals and regulatory clearances, with our products having been approved or cleared in the U.S., Canada, and the member countries of the European Economic Area.

During the fiscal years ended June 30, 2009 and 2008, and the six months ended December 31, 2009, we incurred research and development expenses of $358,000, $271,000, and $251,000, respectively. As a result of our expected investments in enhancing the SmartVest System, we expect the amount we spend on research and development to increase in the future.

Intellectual Property

We currently hold 17 issued U.S. patents and 5 foreign patents covering the SmartVest System and its underlying technology. In addition, as of March 31, 2010, we had approximately 35 pending U.S. and foreign patent applications. The pending U.S. patent applications primarily relate to additional aspects of the underlying technology for the SmartVest System and the pending foreign patent applications correspond to our existing U.S. patents and pending U.S. patent applications. We believe it will take several years, or possibly longer, for pending patent applications to result in issued patents, if at all.

Our current patents and patent applications offer coverage in the field of air pressure pulse delivery to a human in support of airway clearance. The following table provides information about our issued U.S. patents:

U.S. Patent Number	Title	Issued
5,453,081	Pulsator	September 26, 1995
5,569,170	Pulsator	October 29,1996
6,254,556	Repetitive Pressure Pulse Jacket	July 3, 2001
D456,591	Human Body Pulsating Jacket	May 7, 2002
D461,897	Human Body Respiratory Vest	August 20, 2002
6,488,641	Body Pulsating Apparatus	December 3, 2002
D469,876	Human Respiratory Bladder	February 4, 2003
6,547,749	Body Pulsating Method and Apparatus	April 15, 2003
6,605,050	Body Pulsating Jacket	August 12, 2003
D478,989	Supine Respiratory Vest	August 26, 2003
6,676,614	Vest for Body Pulsating Method and Apparatus	January 13, 2004
D531,728	Combined Human Body Pulsator and Movable Pedestal	November 7, 2006
D547,718	Air Pulsating Generator	July 31, 2007
7,278,978	Respiratory Vest with Inflatable Bladder	October 9, 2007
7,374,550	Respiratory Vest for Repetitive Pressure Pulses	May 20, 2008
D585,991	Combined Air Pulsator and Movable Pedestal	February 3, 2009
7,537,575	Body Pulsating Method and Apparatus	May 26, 2009

We have also received the following U.S. trademark and service mark registrations: MEDPULSE, MEDPULSE RESPIRATORY VEST SYSTEM, SMARTVEST, SMARTVEST WRAP, SMARTWRAP, FACT, SOFT START, TRIMLINE, and CREATING SUPERIOR CARE THROUGH INNOVATION.

In addition to our patent and trademark protected intellectual property, we seek to protect proprietary information and know-how through confidentiality and non-competition provisions in the agreements with our executives and employees. We cannot provide assurance that these persons will abide by the terms of these agreements. In addition, despite measures taken to protect our intellectual property, unauthorized parties might copy aspects of our products or obtain and use information that we regard as proprietary.

We intend to continue expanding our intellectual property portfolio, and particularly our patent position, as our business grows. However, our patent applications may not result in issued patents, and we cannot assure you that any patents that have been issued or might be issued will be broad enough to prevent competitors from emulating our products, or that all of our patents will be upheld if asserted against third parties, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.

Our industry is characterized by the existence of a large number of patents and frequent litigation based on assertions of patent infringement. We were the defendant in a patent infringement action filed in U.S. District Court by Advanced Respiratory, Inc. of St. Paul, Minnesota, a subsidiary of Hill-Rom Holdings, Inc. Management and legal counsel took steps to provide an effective defense. On July 22, 2003, after a jury returned its verdict in our favor, the court dismissed the infringement action. On September 5, 2003, a Settlement Agreement was reached and approved by both parties. The terms of this agreement are confidential.

For a description of litigation relating to our intellectual property, please refer to the subheading in this Business section entitled “Legal Proceedings.”

Product Warranties

For SmartVest Systems initially purchased and currently located in the United States and Canada, we provide a lifetime warranty to the individual patient for whom the system is prescribed. The lifetime warranty covers the cost of a replacement system, parts and labor. For institutions and sales made outside of the United States and Canada, we provide a limited three-year warranty for replacement systems, and cost of parts and labor. Our warranties provide that if a newer model of our systems has been developed and sold between the time of purchase of the original system and the need for replacement, we may replace the system with a newer model at our discretion.

Third-Party Reimbursement

Much of our growth is dependent on continued acceptance of HFCWO technology by third-party payers. In the U.S., individuals who use the SmartVest System will generally rely on third-party payers, including private payers and governmental payers such as Medicare and Medicaid, to cover and reimburse all or part of the cost of using the SmartVest System. Reimbursement for HFCWO therapy and our SmartVest System varies among public and private insurance providers. Most patients are able to obtain reimbursement from Medicare, Medicaid, private insurance or combinations of the foregoing.

Recent government and private sector initiatives in the U.S. and foreign countries are aimed to limit the growth of health care costs, including price regulation, competitive pricing, coverage and payment policies, comparative effectiveness of therapies, technology assessments, and managed-care arrangements, and are causing the marketplace to put increased emphasis on the delivery of more cost-effective medical devices. Government programs, including Medicare and Medicaid, private health care insurance, and managed-care plans have attempted to control costs by limiting the amount of reimbursement they will pay for particular procedures or treatments, restricting coverage for certain products or services, and implementing other mechanisms designed to constrain utilization and contain costs, including, for example, gainsharing, where a hospital agrees with physicians to share any realized cost savings resulting from the physicians’ collective change in practice patterns such as standardization of devices where medically appropriate. This has created an increasing level of price sensitivity among customers. We believe HFCWO can reduce the risk of secondary complications and required hospitalizations from excess secretion, and is therefore a cost-effective alternative to traditional treatments. We believe that the cost-saving aspects of the SmartVest System will increase in importance as cost control measures become more prevalent in the health care industry.

We pursue product reimbursement and payment by seeking insurance authorization and processing claims on behalf of the patient. We have developed an effective system to secure the prescription and obtain reimbursement. First, a physician sends us a written prescription for a patient’s SmartVest System. In response, we provide a single-page data collection form to the prescribing physician. The information provided to us on this form enables our staff to confirm the validity of the prescription, contact the patient and/or the patient’s family to secure information necessary for reimbursement and confirm the likelihood of reimbursement, advise our Patient Services Department of the referral so that we can arrange for delivery of the SmartVest System, ensure proper sizing and contact a trainer in the area of the patient’s home to arrange a training time, and initiate an order copying the Administrative Department so that our Manufacturing/Shipping Department can arrange to ship the patient’s SmartVest System as promptly as possible. Once shipped, a notice is transmitted to our Reimbursement and Accounting Departments so that a claim can be prepared and tracked to payment.

Reimbursement for HFCWO therapy and our SmartVest System varies among public and private insurance providers, and is often dependent on the circumstances of the patient. Reimbursement under Medicare Part B is allowed pursuant to Local Coverage Determinations by all four regional carriers designated by the Department of Health and Human Services as Durable Medical Equipment Medicare Administrative Contractors (“DME MACs”). All four regional DME MACs have approved the SmartVest System for reimbursement. Consequently, reimbursement is available under Medicare in all U.S. states and territories for patients who have CF, certain neuro-muscular disorders, or bronchiectasis, which is usually defined as a productive cough that occurs more than twice per year or lasts longer than six months. Due to the broad definition of bronchiectasis, reimbursement is often available under Medicare for any condition that causes excess secretions and is not effectively treated by antibiotics.

Although the reimbursement process is subject to contingencies which may affect the status of the patient’s claim, the majority of patients are able to obtain monthly payments from Medicare, Medicaid, private insurance or combinations of the foregoing. Our payment terms allow patients to acquire the SmartVest System in accordance with reimbursement procedures typically used under Medicare. The amount we receive for any single unit is based on reimbursement schedules and may vary based on a number of factors, including Medicare and third-party reimbursement processes and policies.

Overseas sales to distributors are prepaid. Overseas sales were approximately 7.1 % of our net revenue in fiscal 2009, as explained in more detail below under the heading “International Marketing.”

A key element in our customer support strategy has been achieved by establishing an effective Reimbursement Department. The skill and knowledge gained and offered by our Reimbursement Department is an important factor in building our revenue and serving patients’ financial interests. Its function and attendant responsibilities involve:


	•	insurance pre-authorizations;

	•	claims processing; and

	•	payment.

We believe that subsequent generations of HFCWO products will also qualify for reimbursement under Medicare Plan B and most major health plans. However, some third-party payers must also approve coverage for new or innovative devices or therapies before they will reimburse health care providers who use the medical devices or therapies. Consequently, our sales will continue to depend in part on the availability of coverage and reimbursement from third-party payers, even though our devices may have been cleared for commercial distribution by the FDA.

The manner in which reimbursement is sought and obtained varies based upon the type of payer involved and the setting in which the procedure is furnished. The nature of any future legislation is uncertain, making it difficult for us to predict the impact of cost-containment trends on operating results.

Medicare and Medicaid

and can demonstrate that another less expensive physical or mechanical treatment did not adequately mobilize retained secretions. The amount of reimbursement a provider receives is based on the “allowable” values for HFCWO therapy. We believe the payment resulting from this process is generally sufficient, but there is a significant risk that new or modified products could have a lower reimbursement rate, or that the levels of reimbursement currently available for our existing products could decrease, which would hamper our ability to market and sell that product.

Commercial Insurers

Many private payers look to Medicare as a guideline in setting their coverage policies and payment amounts. They tend to seek guidance from a variety of sources, including recommendations issued by the U.S. Preventive Services Task Force (“USPTF”), which is an independent panel of experts assembled by the U.S. Department of Health and Human Services that develops recommendations for clinical preventive services. The current coverage policies of these private payers may differ from the Medicare program, and the payment rates they make may be higher, lower, or the same as the Medicare program. If the Centers for Medicare and Medicaid Service, the USPTF or other agencies make negative recommendations or decrease or limit reimbursement payments for physicians and individuals, this may affect coverage and reimbursement determinations by many private payers. Additionally, some private payers do not follow the Medicare guidelines, and those payers may reimburse only a portion of the costs associated with the use of our products, or not at all.

Governmental Regulation

We have received clearance from the U.S. Food and Drug Administration to market our products, including the SmartVest System, as a “powered percussor.” Since inception, management has retained the necessary clinical, medical and legal expertise to support required clearances and approvals to market our products. On April 7, 2004, our Model 2000ez SMARTVEST was cleared to market by the FDA pursuant to a 510(k) submission.

Our medical devices are subject to regulation by numerous government agencies, including the FDA and comparable foreign agencies. To varying degrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing, labeling, marketing, and distribution of our medical devices. A full-time quality assurance manager as well as a consulting regulatory and clinical expert provide detailed oversight of their respective areas of responsibility.

FDA Premarket Clearance and Approval Requirements

All of our current products have been cleared for sale in the U.S. by the FDA under the premarket notification (510(k) clearance process). However, unless an exemption applies, if we develop new medical devices or modifications to existing products that would affect the product’s safety or effectiveness, we must obtain FDA clearance before marketing the new or modified product in the U.S., either through the 510(k) clearance process or the more complex Premarket Approval Application (“PMA”) process.

The 510(k) clearance process would be available if we could demonstrate that our new medical device is substantially equivalent to a legally marketed medical device. In this process, we would be required to submit data that supports our equivalence claim. While human clinical data has not been routinely required for 510(k) products in the past, the FDA is increasingly requiring it for new technologies. If human clinical data is required, it must be gathered in compliance with FDA investigational device exemption regulations. We must receive an order from the FDA finding substantial equivalence to another legally marketed medical device before we can commercially distribute the new medical device. Modifications to cleared medical devices can be made without using the 510(k) process if the changes do not significantly affect safety or effectiveness. A very small number of our devices are exempt from pre-market review.

The second, more rigorous process, known as pre-market approval (PMA), would require us to independently demonstrate that the new medical device is safe and effective. We would do this by collecting data regarding design, materials, bench and animal testing, and human clinical data for the medical device. The FDA will authorize commercial release if it determines there is reasonable assurance that the medical device is safe and

effective. This determination is based on benefit outweighing risk for the population intended to be treated with the device. This process is much more detailed, time-consuming and expensive than the 510(k) clearance process.

510(k) Clearance Pathway

When a 510(k) clearance is required, we will be required to submit a 510(k) demonstrating that our proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of PMAs. In cases where no predicate is available, we can request a de novo classification of the product. If the FDA classifies the device as substantially equivalent to a predicate device, we will receive an order that allows us to market the device.

Any modification to a 510(k)-cleared device that would constitute a major change in its intended use, or any change that could significantly affect the safety or effectiveness of the device, requires a new 510(k) clearance and may even, in some circumstances, require a PMA, if the change raises complex or novel scientific issues or the product has a new intended use.

There is no guarantee that the FDA will grant 510(k) clearance to new or modified products that we develop in the future. Failure to obtain such clearances or approvals could adversely affect our ability to grow our business. Delays in receipt or failure to receive clearances or approvals, the loss of previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements could have a material adverse effect on our business.

Clinical Trials

We were able to obtain FDA clearance by demonstrating “substantial equivalence” to preexisting products, and therefore new clinical trials were not required to obtain FDA clearance for our current products. However, clinical trials are increasingly required for 510(k) clearance and therefore may be required to obtain FDA clearance for future products. If the device presents a “significant risk,” as defined by the FDA, to human health, the FDA requires the device sponsor to file an investigational device exemption (an “IDE”) application with the FDA and obtain IDE approval prior to commencing the human clinical trials. Such trials generally require an IDE application approved in advance by the FDA for a specified number of patients and study sites, unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements.

Clinical trials are subject to extensive monitoring, recordkeeping and reporting requirements. Clinical trials must be conducted under the oversight of an institutional review board (“IRB”) for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. To conduct a clinical trial, we also are required to obtain the patients’ informed consent in form and substance that complies with both FDA requirements and state and federal privacy and human subject protection regulations. If the clinical trial is not performed in accordance with the FDA’s IDE regulations, the FDA could seek an enforcement action against the sponsor and the investigators. In addition, the sponsor, the FDA or the IRB could suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance to market the product in the U.S. Similarly, in Europe the clinical study must be approved by a local ethics committee and in some cases, including studies with high-risk devices, by the ministry of health in the applicable country.

Pervasive and Continuing Regulation


	After a device is placed on the market, numerous regulatory requirements apply. These include:

	•	product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;

	•	Quality System Regulation (“QSR”), which is the medical device term for good manufacturing practices, requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;


	•	labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;

	•	clearance of product modifications that could significantly affect safety or efficacy or that would constitute a significant change in the safety or efficacy of our cleared devices;

	•	medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur;

	•	post-approval or post-clearance restrictions or conditions, including post-approval or post-clearance study commitments;

	•	post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device; and

	•	the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations.

Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, promotional activities for FDA-regulated products of other companies have been the subject of enforcement action brought under health care reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. In addition, we are required to meet regulatory requirements in countries outside the U.S., which can change rapidly with relatively short notice. If the FDA determines that our promotional materials or training constitutes promotion of an unapproved or uncleared use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged and adoption of the products would be impaired.

Furthermore, we could face product recalls, FDA enforcement actions, and user lawsuits if any of our products are found to pose a risk of injury or otherwise be defective. We believe that our products pose a low risk of injury because they are non-invasive, and we maintain an active training program that we expect would provide early identification of any product defects. Nevertheless, our products could be subject to voluntary recall if we or the FDA determine, for any reason, that our products pose a risk of injury or are otherwise defective. Moreover, the FDA can order a mandatory recall if there is a reasonable probability that our device would cause serious adverse health consequences or death.

The FDA has broad post-market and regulatory enforcement powers. Our facilities have been and will continue to be subject to unannounced inspections by the FDA to determine our level of compliance with the QSR and other regulations. Failure by us or by our suppliers to comply with applicable regulatory requirements can result in enforcement action by the FDA or other regulatory authorities, which may result in sanctions including, but not limited to:


	•	warning letters or untitled letters;

	•	fines and civil penalties;


	•	unanticipated expenditures to address or defend such actions;

	•	delays in clearing or approving, or refusal to clear or approve, our products;

	•	withdrawal or suspension of approval or clearance of our products or those of our third-party suppliers by the FDA or other regulatory bodies;

	•	product recall or seizure;

	•	orders for physician notification or device repair, replacement or refund;

	•	injunctions; and

	•	criminal prosecution.

Fraud and Abuse Laws

Federal health care laws apply when we or customers submit claims for items or services that are reimbursed under Medicare, Medicaid or other federally-funded health care programs. The principal federal laws include: the False Claims Act which prohibits the submission of false or otherwise improper claims for payment to a federally-funded health care program; the Anti-Kickback Statute which prohibits offers to pay or receive remuneration of any kind for the purpose of inducing or rewarding referrals of items or services reimbursable by a federal health care program; and health care fraud statutes that prohibit false statements and improper claims with any third-party payer. There are often similar state false claims, anti-kickback, and anti-self referral and insurance laws that apply to state-funded Medicaid and other health care programs and private third-party payers. In addition, the U.S. Foreign Corrupt Practices Act can be used to prosecute companies in the U.S. for arrangements with physicians, or other parties outside the U.S. if the physician or party is a government official of another country and the arrangement violates the law of that country.

The laws applicable to us are subject to change, and to evolving interpretations. If a governmental authority were to conclude that we are not in compliance with applicable laws and regulations, we and our officers and employees could be subject to severe criminal and civil penalties including substantial penalties, fines and damages, and exclusion from participation as a supplier of product to beneficiaries covered by Medicare or Medicaid.

The Federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal health care program such as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value, including for example gifts, improper discounts, the furnishing of free supplies, equipment or services, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal health care covered business, the statute has been violated. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal health care programs. In addition, some anti-kickback allegations have been claimed to violate the Federal False Claims Act, discussed in more detail below.

The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the health care industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congress authorized the Office of Inspector General of the U.S. Department of Health and Human Services, or OIG, to issue a series of regulations, known as “safe harbors.” These safe harbors, issued by the OIG beginning in July 1991, set forth provisions that, if all their applicable requirements are met, will assure health care providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG.

Many states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for health care items or services reimbursed by any source, not only the Medicare and Medicaid programs.

Government officials have focused their enforcement efforts on marketing of health care services and products, among other activities, and recently have brought cases against companies, and certain sales, marketing and executive personnel, for allegedly offering unlawful inducements to potential or existing customers in an attempt to procure their business.

Another development affecting the health care industry is the increased use of the Federal Civil False Claims Act and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “ qui tam ” provisions. The False Claims Act imposes liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal health care program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government and to share in any monetary recovery. In recent years, the number of suits brought against health care providers by private individuals has increased dramatically. In addition, various states have enacted false claim laws analogous to the Civil False Claims Act, although many of these state laws apply where a claim is submitted to any third-party payer and not merely a federal health care program.

When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of between $5,500 to $11,000 for each separate false claim. There are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federal government. The False Claims Act has been used to assert liability on the basis of inadequate care, kickbacks and other improper referrals, and improper use of Medicare numbers when detailing the provider of services, in addition to the more predictable allegations as to misrepresentations with respect to the services rendered. In addition, companies have been prosecuted under the False Claims Act in connection with alleged off-label promotion of products. Our future activities relating to the reporting of wholesale or estimated retail prices for our products, the reporting of discount and rebate information and other information affecting federal, state and third-party reimbursement of our products, and the sale and marketing of our products, may be subject to scrutiny under these laws. We are unable to predict whether we would be subject to actions under the False Claims Act or a similar state law, or the impact of such actions. However, the costs of defending such claims, as well as any sanctions imposed, could significantly affect our financial performance.

HIPAA and Other Fraud and Privacy Regulations

Among other things, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, created two new federal crimes: health care fraud and false statements relating to health care matters. The HIPAA health care fraud statute prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health care benefit program, including private payers. A violation of this statute is a felony and may result in fines, imprisonment and/or exclusion from government-sponsored programs. The HIPAA false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result in fines and/or imprisonment.

In addition to creating the two new federal health care crimes, regulations implementing HIPAA also establish uniform standards governing the conduct of certain electronic health care transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by health care providers, health plans and health care clearinghouses, which are referred to as “covered entities.” Three standards have been promulgated under HIPAA’s regulations: the Standards for Privacy of Individually Identifiable Health Information, which restrict the use and disclosure of certain individually identifiable health information, the Standards for Electronic Transactions, which establish standards for common health care transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures, and the Security Standards, which require covered entities to implement and maintain certain security measures to safeguard certain electronic health information. Because we provide our products directly to patients and bill third-party payers such as Medicare, Medicaid, and insurance companies, we are a “covered entity” and must comply with these standards. The government intended this legislation to reduce administrative expenses and burdens for the health care industry; however, our compliance with certain provisions of these standards entails significant costs for us. Although the HIPAA regulations allow disclosure to medical device companies for purposes of complying with FDA regulations, treatment, and payment, HIPAA may have a chilling effect on disclosure in some cases, limiting information that is available to us.

In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the more stringent state laws. If we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.

Environmental Laws

We are also subject to various environmental laws and regulations both within and outside the U.S. Like other medical device companies, our operations involve the use of substances regulated under environmental laws, primarily manufacturing and sterilization processes. To the best of our knowledge at this time, we do not expect that compliance with environmental protection laws will have a material impact on our consolidated results of operations, financial position, or cash flows.

Employees

As of December 31, 2009, we employed 62 total employees, 60 of which are full-time employees. Of our 62 employees, more than 30% are respiratory therapists, including all of the employees in our Patient Services Department and nearly all of our sales representatives. In addition, we retain as independent contractors several expert consultants, who assist with quality assurance, product development, marketing, and international opportunities. We also retain over 300 respiratory therapists and health care professionals on a non-exclusive independent contractor basis to provide training to our customers in the U.S. We believe this underscores our commitment to professional service and high quality.

We support an active on-campus program identified as the Forum On Airway Clearance Therapy (“FACT”). This educational experience includes training provided by employees of Electromed, Inc. This training is sanctioned by the American Association of Respiratory Care and provides continuing education unit (“CEU”) credits to medical professionals, such as respiratory therapists and nurses, when they participate fully and complete the course in good standing. We believe this underscores our commitment to professional service and high quality.

None of our employees is covered by a collective bargaining agreement. We believe our relations with our employees are good.

Properties

We own our principal headquarters and manufacturing facilities, consisting of approximately 48,000 total square feet, which are located on an approximately 2.3 acre parcel at 500 Sixth Avenue NW, New Prague, Minnesota 56071 and 502 Sixth Avenue NW, New Prague, Minnesota 56071. Management considers the current facilities to be satisfactory for our growth plans. In addition, we believe there is sufficient space within the lot for additions to the most recently constructed building.

Our site has been regularly audited by the FDA, in accordance with FDA practices, and we maintain our operations in a manner consistent with FDA requirements for a medical device manufacturer. Our manufacturing processes are maintained in such a way as to emphasize simplicity, cost-effectiveness, and a capacity to realize increases in production volume with escalation in demand.

Legal Proceedings

We have been a defendant in a patent infringement action filed in U.S. District Court by a competitor, Advanced Respiratory, Inc. of St. Paul, Minnesota (“ARI”). Management and legal counsel took steps to provide an effective defense. On July 22, 2003, after a jury returned its verdict in our favor, the court dismissed the infringement action. On September 5, 2003, a Settlement Agreement was reached and approved by both parties. The terms of this agreement are confidential.

Hill-Rom Services, Inc., ARI, Hill-Rom Company, Inc. and Hill-Rom Services Pte. Ltd. (collectively, “Hill-Rom”), subsidiaries of Hill-Rom Holdings, Inc., brought an action on August 21, 2009, against us in the Southern District of Indiana alleging that our use of the term “SmartVest” infringes on its alleged trademarks “The Vest” and “Vest.” We have answered the allegations and brought counter-claims against Hill-Rom alleging, among other things, defamation and libel.

ARI filed for registration of a stylized version of “Vest” and “The Vest” with the United States Patent and Trademark Office (the “PTO”) on November 9, 2001 and both stylized marks were registered on August 19, 2003, although ARI was required to disclaim ownership of the words “the” and “vest” apart from the stylized mark. We filed for trademark protection for the SmartVest mark with the PTO on April 5, 2004 and began using the SmartVest mark in June 2004. Our SmartVest mark was added to the Supplemental Register on August 22, 2005, and the PTO granted us registration for our SmartVest mark on November 15, 2005. Subsequently, ARI filed for registration of their alleged word mark “The Vest” on April 20, 2006, and the alleged word mark was registered by the PTO on February 13, 2007.

In addition to the foregoing, we may be party to legal actions, proceedings, or claims in the ordinary course of business. Corresponding costs are accrued when it is more likely than not that loss will be incurred and the amount can be precisely or reasonably estimated. We are not aware of any undisclosed actual or threatened litigation that would have a material adverse effect on our financial condition or results of operations.

M ANAGEMENT

Executive Officers and Directors

The following table set forth the names and positions of our directors and executive officers:


Name	Age	Years of Service with Electromed	Position

Robert D. Hansen	69	17	Co-Founder, Chairman and Chief Executive Officer

Terry M. Belford, CPA, CMA	59	6	Chief Financial Officer

Craig N. Hansen	61	17	Co-Founder, Director

Noel D. Collis, MD	58	11	Director

Thomas M. Hagedorn	66	13	Director

George H. Winn, DDS	73	5	Director

Each member of our Board of Directors was elected for a two-year term in September 2008 and will serve until the next regular meeting of shareholders of Electromed, and until a successor is elected and qualified, or until the earlier death, disqualification, or removal as provided by statute. The officers of Electromed hold office until the next election of officers or until their successors are elected or appointed and qualified, provided, however, that any officer may be removed with or without cause by the affirmative vote of a majority of the Board present at a meeting of the Board.

Robert D. Hansen—Chairman and CEO

Mr. Hansen co-founded Electromed in 1992 and is responsible for the strategic direction and development of the Company. Mr. Hansen is also a co-founder and is President and Chief Executive Officer of Hansen Engine Corporation, a research and development company that provides research and development services to Electromed. Mr. Hansen joined Hansen Engine Corporation in January 1983 and has over forty years of business leadership and investment industry experience. He was also the founder and CEO of LockerMate Corporation until January 1995. Mr. Hansen received a BA Degree from Dana College (1964), Masters of Arts Degree from the University of Cincinnati in U.S. History (1966), and a Masters of Divinity Degree (1976) from Luther Theological Seminary. He completed additional graduate studies in U.S. economic history and foreign policy at the University of Cincinnati. In 1996, Mr. Hansen was awarded a Mini-MBA in “Managing Growing Companies” from the University of St. Thomas. Among other attributes, skills, experiences and qualifications, our Board believes that Mr. Hansen’s history with Electromed and management and investment industry experience allow him to make a valuable contribution as a director. Mr. Hansen is the brother of Craig Hansen, one of our directors.

Terry M. Belford, CMA—Chief Financial Officer

Mr. Belford joined Electromed in January 2004 as its Chief Financial Officer. Before joining Electromed, Mr. Belford worked for ten years as an independent accountant and consultant, serving clients in the distributing, importing, and manufacturing industries. Prior to that he served for several years as a controller and chief financial officer for both established and start-up companies in the above mentioned industries. Mr. Belford earned a Bachelor of Science degree from the University of Missouri and also holds both CPA and CMA designations. He is a member of the American Institute of Certified Public Accountants, the Minnesota Society of Certified Public Accountants and the Institute of Certified Management Accountants.

Craig Hansen—Director

Mr. Hansen is the co-founder of Electromed and is the Vice President of Research and Development at Hansen Engine Corporation. Mr. Hansen has been with Hansen Engine Corporation since 1977. He is a graduate of Western Iowa Technical School. He has more than forty patents in several fields with numerous additional patents pending. The patents that Mr. Hansen has assigned to Electromed form the technical basis for the SmartVest System. Mr. Hansen is the brother of Robert Hansen, Electromed’s Chief Executive Officer. Among other attributes, skills, experiences and qualifications, our Board believes that Mr. Hansen’s history with Electromed and considerable experience with research and development in the medical device industry make him uniquely qualified to serve as a director.

Dr. Noel Collis—Director

Dr. Collis is currently a self-employed physician and has been since 1990. Dr. Collis is a graduate of the University of Minnesota School of Medicine and practices Internal Medicine in Little Falls, Minnesota. Dr. Collis has served on the faculty of the University of South Dakota School of Medicine. Among other attributes, skills, experiences and qualifications, our Board believes that, in addition to the industry relationships that Dr. Collis has developed, his experience in practicing and teaching medicine give him an understanding of the needs of physicians and patients, which makes him uniquely qualified to serve as a director.

Thomas Hagedorn—Director

Mr. Hagedorn is founder and owner of numerous companies where new technology is a principal factor. He also manages his own real estate and investment mortgage company in Northern Virginia, where he maintains his residence. Mr. Hagedorn is a former member of the Minnesota State Legislature and the U.S. Congress, representing southwest Minnesota. Among other attributes, skills, experiences and qualifications, our Board believes that Mr. Hagedorn’s extensive leadership and management experience, as well as his familiarity with legislative procedures, allow him to make valuable contributions as a director.

Dr. George Winn—Director

Dr. Winn has practiced dentistry with emphasis upon oral surgery and orthodontics in New Prague, MN for more than forty-three years. He is a graduate of the University of Minnesota School of Dentistry. Dr. Winn has served as an Adjunct Professor in the School of Dentistry where he has offered studies in medical ethics. Among other attributes, skills, experiences and qualifications, our Board believes that, in addition to the industry relationships that Dr. Winn has developed, his education and experience give him insight into the medical device industry, which makes him uniquely qualified to serve as a director.

Director Independence and Board Composition

We currently have five directors. Our Board of Directors has determined that three of our directors are independent directors, as defined under the applicable regulations of the SEC and the Nasdaq Capital Market, namely Mr. Thomas Hagedorn, Dr. Noel Collis, and Dr. George Winn.

In determining independence, our Board of Directors considered that Mr. Hagedorn is a director and owns approximately 11% of the outstanding equity of Hansen Engine Corporation, an entity which receives payment from Electromed in exchange for performing research and development services. In addition, our Board of Directors considered that Mr. Hagedorn’s son and Mr. Winn’s son are employees of Electromed and that Electromed purchased a building from Dr. Winn in December 2009 for $555,000. See “Certain Relationships and Related Party Transactions.”

Board Committees

We have appointed an Audit Committee, a Personnel and Compensation Committee and a Nominating and Corporate Governance Committee. The membership and responsibilities of each committee complies with the listing requirements of the Nasdaq Capital Market, except that Mr. Craig Hansen, who is not “independent” as defined

under Nasdaq Rule 5605, is a member of the Nominating and Corporate Governance Committee. In accordance with the listing requirements of the Nasdaq Capital Market, our director nominees will be selected by a majority of independent directors of the board in a vote in which only independent directors participate.

Director Compensation

The following table provides information regarding compensation paid to and earned by the non-employee directors during fiscal 2009:


Name	Fees Earned or Paid in Cash ⁽¹⁾ ($)	All Other Compensation ($)	Total ($)

Craig N. Hansen	$1,500	-	$1,500

Noel D. Collis, MD	$1,000	-	$1,000

Thomas M. Hagedorn	$2,000	-	$2,000

George H. Winn DDS	$2,000	-	$2,000


(1)	In fiscal 2009, each non-employee director was paid $500 for each Board meeting the director attended.

E XECUTIVE COMPENSATION

Executive Compensation Components for Fiscal 2009

We have two named executive officers, Robert D. Hansen, our Chief Executive Officer, and Terry M. Belford, our Chief Financial Officer. We provide a compensation package to our named executive officers that includes base salary and annual performance-based cash awards. Our named executive officers are also eligible to receive perquisites and to participate in benefit arrangements that are generally available to all salaried employees, such as group life insurance. Historically, we have also periodically awarded our named executive officers with long-term equity incentive grants in the form of warrants. However, we have made changes to our current executive compensation packages, as described below, and we have determined based on current circumstances to discontinue long-term equity incentive grants as a component of our overall executive compensation package.

Base Salary

In determining the appropriate base salaries for our named executive officers in fiscal 2009, our Personnel and Compensation Committee reviewed individual and our performance during the preceding fiscal year and considered compensation data for medical device manufacturing companies located in the Midwest. The Personnel and Compensation Committee also considered the Chief Executive Officer’s recommendations as to compensation for the Chief Financial Officer. The Personnel and Compensation Committee uses a subjective process to set base salaries and does not specifically weight any factors. Based upon the information reviewed by the Personnel and Compensation Committee, it makes a recommendation with respect to compensation for the Chief Executive Officer and Chief Financial Officer to the Board of Directors, and the Board of Directors sets the compensation for the Chief Executive Officer and Chief Financial Officer based on the information and recommendation provided by the Personnel and Compensation Committee.

Our Chief Executive Officer earned a base salary of $159,500 during each of our 2009 and 2008 fiscal years. Our Chief Financial Officer earned a base salary of $108,500 during each of our 2009 and 2008 fiscal years.

Incentive Compensation

In order to provide motivation to our named executive officers, we provide performance-based incentive compensation upon achievement of goals established by the Board of Directors on an annual basis. The incentive component of our executive compensation package is comprised of short-term cash incentive compensation and long-term equity compensation in the form of warrants that typically vest in 20% increments over a 5-year period.

Cash Incentive Compensation

For our 2008 fiscal year, our named executive officers were eligible to earn cash incentive compensation in incremental incentives of $5,000 for the Chief Financial Officer and $10,000 for the Chief Executive Officer for each increment of $1 million of revenue in excess of the revenue threshold. Our Chief Executive Officer earned cash incentive compensation of $62,500 for performance during the 2008 fiscal year, and our Chief Financial Officer earned cash incentive compensation of $46,875 for performance during the 2008 fiscal year. For our 2009 fiscal year and for the first six months of our 2010 fiscal year, our named executive officers were eligible to earn cash incentive compensation of $7,500 for the Chief Financial Officer and $10,000 for the Chief Executive Officer for achieving threshold performance goals, plus incremental incentives of $1,875 for the Chief Financial Officer and $2,500 for the Chief Executive Officer for each increment of $250,000 of revenue in excess of the revenue threshold. Our Chief Financial Officer earned cash incentive compensation of $67,500 for performance during the 2009 fiscal year and our Chief Executive Officer earned cash incentive compensation of $90,000 for performance during the 2009 fiscal year. Cash incentive awards earned by a named executive officer during a fiscal year are paid in bi-monthly installments for the first ten months of the following fiscal year.

Beginning January 1, 2010, the cash incentive compensation for Messrs. Hansen and Belford is set pursuant to the employment agreements entered into by Messrs. Hansen and Belford, which are both described below.

Pursuant to employment agreements executed by our named executive officers in January 2010, for the 2010 calendar year, our named executive officers are eligible to receive cash incentive awards upon achievement of sales targets established by the Board of Directors. Mr. Hansen is eligible to receive a cash incentive award equal to $2,500 for each increment of $250,000 of revenue in excess of the revenue threshold. Mr. Belford is eligible to receive a cash incentive award equal to $1,875 for each increment of $250,000 of revenue in excess of the revenue threshold.

The Board of Directors will set performance goals and related incentive payments for future calendar years on an annual basis.

Equity Incentive Compensation

For our 2009 fiscal year, our named executive officers were granted the following warrants:


	•	In November 2008, we issued warrants to purchase 35,000 shares of Electromed common stock to Terry M. Belford, our Chief Financial Officer. The warrants vest in annual 20% increments, have a ten-year term, and an exercise price of $3.50 per share.

	•	In November 2008, we issued warrants to purchase 35,000 shares of Electromed common stock to Robert D. Hansen, our Chief Executive Officer. The warrants vest in annual 20% increments, have a ten-year term, and an exercise price of $3.50 per share.

For our 2010 fiscal year, we have not issued any warrants to our named executive officers. Our current intention is to discontinue long-term equity incentive grants and provide future incentive compensation solely in the form of cash.

Perquisites and Other Benefits

We believe that providing perquisites to our named executive officers is beneficial because it improves our ability to retain qualified leaders and is consistent with the practice of similarly-sized companies in our industry. Our named executive officers are eligible to participate in our group health and life insurance plans and receive matching contributions to a 401(k) plan, which are benefits that are generally available to all of our salaried employees. The goal of these programs is to promote health and welfare benefits. In addition, we provide an automobile to our Chief Executive Officer and make monthly automobile lease payments on behalf of our Chief Financial Officer. The aggregate annual value of these perquisites was less than $10,000 for the last completed fiscal year. We also provide life insurance policies of at least $1,000,000 for the benefit of our Chief Executive Officer’s estate.

Employment Agreements for our Named Executive Officers

Prior to January 1, 2010, Robert D. Hansen, our Chief Executive Officer, was employed pursuant to an Executive Employment Agreement dated January 3, 2005 (the “2005 Employment Agreement”), which was subject to annual renewal by our Board of Directors. The 2005 Employment Agreement provided for an initial base salary of $89,500, cash incentive awards upon achievement of annual revenue and net income goals established by the Board of Directors, and equity incentive awards in the form of warrants upon achievement of annual revenue goals established by the Board of Directors. The 2005 Employment Agreement also provided that Electromed would pay the premiums on health and life insurance policies for Mr. Hansen for the term of the agreement, and would pay the premiums on life insurance policies for each of Mr. Hansen’s three adult children, in each case for the benefit of the recipient’s estate or another beneficiary chosen by the recipient.

Effective January 1, 2010, we entered into a new employment agreement with Mr. Hansen (the “2010 Employment Agreement”), which superseded the 2005 Employment Agreement. The 2010 Employment Agreement has an initial term of three years (the “Initial Term”), with automatic renewal for one-year periods (each a “Renewal Term,” together, the “Renewal Terms”) unless written notice of non-renewal is provided by us or Mr. Hansen at least 90 days prior to the anniversary date of agreement, and subject to earlier termination as described below. Mr. Hansen receives an initial base salary of $209,000 per calendar year pursuant to the 2010 Employment Agreement, subject to annual review and adjustment by our Board of Directors. Pursuant to the 2010 Employment Agreement, Mr. Hansen is also eligible to receive cash and equity incentive compensation, is entitled to the severance payments described below upon termination without cause or resignation upon a change of control of Electromed, and is entitled to maintain, at Electromed’s expense, life insurance policies of at least $1,000,000 for the benefit of his estate.

Effective January 1, 2010, we entered into an employment agreement with Terry M. Belford to serve as our Chief Financial Officer. Prior to January 1, 2010, the terms of Mr. Belford’s employment were set by our Board of Directors on an annual basis. Mr. Belford’s employment agreement has an initial term of three years (the “Initial Term”), with automatic renewal for one-year periods (each a “Renewal Term,” together, the “Renewal Terms”) unless written notice of non-renewal is provided by us or Mr. Belford at least 90 days prior to the anniversary date of agreement, and subject to earlier termination as described below. Mr. Belford receives an initial base salary of $146,000 per calendar year pursuant to his employment agreement, subject to annual review and adjustment by our Board of Directors. Mr. Belford is also eligible to receive cash and equity incentive compensation and is entitled to the severance payments described below upon termination without cause or resignation upon a change of control of Electromed.

The employment agreements with Messrs. Hansen and Belford are terminable by us at any time for any reason. If Messrs. Hansen or Belford are terminated by us without cause prior to the expiration of the Initial Term or any subsequent Renewal Term or if they resign without cause within six months of a change of control of the Company, Electromed would be required to pay severance pursuant to each employment agreement. With respect to a termination without cause, the amount of the severance payment would be equal to the base salary of the executive then in effect. With respect to a resignation upon a change in control, the amount of the severance payment would be equal to the sum of two times (2x) the annual base salary then in effect. In each instance, the executive would also be entitled to a pro rata portion of any earned but unpaid incentive compensation at the time of termination and would, in order to receive the severance and continued benefits, be required to sign a release of claims against us, return all property owned by Electromed and agree not to disparage us.

The employment agreements define “cause” as gross misconduct which damages Electromed; fraud, misappropriation, or embezzlement by the employee; conviction of a felony crime or a crime of moral turpitude; unethical conduct in the course of employment; or a material breach of the employment agreement. The employment agreements define “change of control” as: (i) a change in ownership, which is deemed to have occurred in the event one person, or more than one person acting as a group, acquires more than 50% of the total fair market value or total voting stock of Electromed; (ii) a change in effective control, which is deemed to have occurred when one person, or more than one person acting as a group, acquires ownership of stock of Electromed possessing 30% of more of the total voting power of the stock, or a majority of members of Electromed’s Board of Directors is replaced during any 12-month period; and/or (iii) a change in ownership of a substantial portion of the assets of Electromed, which is deemed to have occurred when one person, or more than one person acting as a group, acquires assets from Electromed that have a total gross fair market value equal to or greater then 40% of the total gross fair market value of all of the assets of Electromed before the acquisition.

Each of our executives has also entered into Non-Competition, Non-Solicitation, and Confidentiality Agreements (the “Confidentiality Agreements”). Pursuant to the Confidentiality Agreements, each of Messrs. Hansen and Belford agree to protect confidential information of Electromed and to return all confidential information and property of Electromed upon termination of employment for any reason, and that they will not compete with Electromed or solicit customers or business contacts of Electromed during the term of the agreement and for a period of 12 months after termination, for any reason. In addition, the executives agreed that they would inform any potential new employer of their obligations under the Confidentiality Agreement before accepting new employment.

Summary Compensation Table

The following table provides information regarding the compensation earned during fiscal 2009 and fiscal 2008 by our named executive officers:


Name and principal position	Year		Salary ($) ⁽¹⁾		Option awards ($)			Non-equity incentive plan compensation ($)		All other compensation ($)			Total ($)
Robert D. Hansen		2009		159,500		75,529	⁽²⁾		90,000		15,440	⁽³⁾⁽⁴⁾		340,469
Chief Executive
Officer
		2008		159,500		—			62,500		13,740	⁽⁴⁾ ⁽⁵⁾		235,740

Terry Belford		2009		108,500		75,529	⁽²⁾		67,500		6,594	⁽⁶⁾		258,123
Chief Financial
Officer
		2008		108,500		—			48,785		5,140	⁽⁷⁾		160,515


(1)	Amounts shown are not reduced to reflect the named executive officers’ elections, if any, to contribute portions of their salaries to 401(k) plans.

(2)	Represents the grant date fair value of warrants awarded during the fiscal year ended June 30, 2009, in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation — Stock Compensation, for outstanding performance-based option awards. The assumptions used to determine the valuation of the 2009 warrant awards are discussed in Note 7 to our consolidated financial statements.

(3)	Includes a company match of $8,880 to Mr. Hansen’s 401(k) plan.

(4)	Includes life insurance premiums paid on three separate life insurance policies for the benefit of Mr. Hansen’s estate, the premiums of which total $6,560 annually.

(5)	Includes a company match of $7,180 to Mr. Hansen’s 401(k) plan.

(6)	Includes a company match of $6,594 to Mr. Belford’s 401(k) plan.

(7)	Includes a company match of $5,140 to Mr. Belford’s 401(k) plan.

Outstanding Equity Awards at June 30, 2009

The following table sets forth certain information regarding equity awards granted to our named executive officers outstanding as of June 30, 2009:


	Option awards

Name	Number of securities underlying unexercised options (#) Exercisable ⁽¹⁾			Number of securities underlying unexercised options (#) Unexercisable ⁽¹⁾			Option exercise price ($)			Option expiration date
Robert D. Hansen		100,000			—			$	3.00		1/17/2011
		1,800	⁽²⁾		—			$	3.00		N/A
		—			35,000	⁽³⁾		$	3.50		11/24/2018
Terry Belford		12,000	⁽⁴⁾					$	2.00		N/A
		12,000						$	2.00		1/3/2011
		12,000			—			$	2.00		1/1/2012
		—			35,000	⁽³⁾		$	3.50		11/24/2018


(1)	The Exercisable and Unexercisable options are denominated as warrants to purchase common stock of the Company.

(2)	Exercised August 18, 2009 for a per share price of $2.50, pursuant to an arrangement which allowed all warrant holders who had been issued warrants in connection with certain convertible notes to exercise such warrants at the reduced price.

(3)	The option vests ratably on November 24 of each year from Fiscal Years 2010 – 2014, and expires on November 24, 2018.

(4)	Exercised November 17, 2009.

C ERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Described below are transactions and series of similar transactions that have occurred during this fiscal year, our last fiscal year, or the two fiscal years preceding our last fiscal year, to which we were or are a party in which:


	•	the amounts involved exceeded the lesser of $120,000 or one percent of the average of our total assets at year end for our last two completed fiscal years; and

	•	a director, executive officer, beneficial owner of more than 5% of any class of our voting securities or any member of their immediate family had or will have a direct or indirect material interest.

We obtain engineering services from Hansen Engine Corporation (d/b/a Hansen Engine Technologies, Inc.) (“Hansen Engine”) pursuant to a Letter Agreement dated February 16, 2010 (the “2010 Agreement”). Robert Hansen, our Chief Executive Officer, is the President, Chief Executive Officer and Chairman of the Board of Directors of Hansen Engine and owns approximately 11% of that entity’s outstanding common stock. In addition, Craig Hansen, a member of our Board of Directors and the brother of Robert Hansen, and Thomas Hagedorn, a member of our Board of Directors, are each a director of Hansen Engine and own approximately 12% and 11%, respectively, of that entity’s outstanding common stock. The 2010 Agreement provides that Hansen Engine will perform 80 hours per week of research and development work in exchange for a monthly fee of $25,000. The initial term of the 2010 Agreement expires in June 2010 but may be extended at the option of Electromed. During our 2009, 2008, and 2007 fiscal years, and for the six months ended December 31, 2009, expenses incurred to Hansen Engine approximately $115,000, $70,000, $59,000 and $114,000, respectively, pursuant to prior agreements for research and development.

From May 2006 through December 2009, we leased a 5,000 square-foot building from George Winn, a member of our Board of Directors. Our monthly lease payment for the building was approximately $7,000 until we bought the building for $555,000 on December 9, 2009. We also purchased an approximately 1.25 acre parcel of land adjacent to our original campus in March 2008, from Wil/Win Investments LLC, an entity in which Dr. Winn has a 50% equity interest, in exchange for shares of Electromed common stock valued at approximately $105,000.

In March 2008, we sold 87,000 shares of common stock to Dr. George H. Winn, a member of our Board of Directors, in a private placement for cash consideration of $304,500.

On March 2, 2010, we purchased from Robert D. Hansen, our Chief Executive Officer and a member of our Board of Directors, the non-controlling interest in Electromed Financial, LLC, a Minnesota limited liability company (“Electromed Financial”) that was our majority-owned subsidiary. The purchase price for Mr. Hansen’s interest in Electromed Financial was $125,000. Electromed Financial is now our wholly-owned subsidiary. Electromed Financial was formed on May 23, 2002 to assist in raising capital from outside investors.

P RINCIPAL SHAREHOLDERS AND MANAGEMENT SHAREHOLDINGS

The following table sets forth certain information with respect to the beneficial ownership of our outstanding common stock by (i) each of our named executive officers; (ii) each of our directors; and (iii) all of our executive officers and directors as a group. We are not aware of any beneficial owners of more than 5% of our common stock who are not executive officers or directors.

The percentage ownership information shown in the table is based upon 6,075,885 shares outstanding as of March 31, 2010, and, with respect to beneficial ownership after the offering, the issuance of shares in this offering. The percentage ownership information assumes no exercise of the underwriter’s over-allotment option.

Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Except as otherwise noted below, the address for each person or entity listed in the table is c/o Electromed, Inc., 500 Sixth Avenue NW, New Prague, Minnesota 56071.


			Percentage of the Class Beneficially Owned
Name	Number of Shares Beneficially Owned		Before this Offering		After this Offering

Robert D. Hansen ⁽¹⁾		602,455		9.74%

Terry M. Belford, CPA, CMA ⁽²⁾		45,000		*

Craig N. Hansen ⁽³⁾		551,000		9.07%

Noel D. Collis, MD		487,666		8.03%

Thomas M. Hagedorn		849,250		13.98%

George H. Winn, DDS		530,208		8.73%

Executive Officers and Directors as a Group (6 persons) ⁽⁴⁾		3,065,579		49.33%

* Indicates ownership of less than 1%.


(1)	Includes 107,000 shares which may be purchased upon exercise of warrants by Mr. Hansen that were exercisable as of March 31, 2010, or within 60 days of such date, 100,000 shares of Electromed common stock pledged pursuant to a lending arrangement, 65,000 shares of Electromed common stock pledged as collateral under a secured promissory note, and 20,000 shares subject to an exchange agreement, which would require Mr. Hansen to transfer such shares of common stock to a third party at the third party’s option.

(2)	Includes 31,000 shares which may be purchased upon exercise of warrants by Mr. Belford that were exercisable as of March 31, 2010, or within 60 days of such date.

(3)	Includes 20,000 shares subject to an exchange agreement, which would require Mr. Hansen to transfer such shares of common stock to a third party at the third party’s option.

(4)	Includes 138,000 shares which may be purchased upon exercise of warrants that were exercisable as of March 31, 2010, or within 60 days of such date.

D ESCRIPTION OF CAPITAL STOCK

As of March 31, 2010, there were 206 shareholders of record of our common stock. Our authorized capital stock consists of 10,000,000 shares of common stock. The common stock has no par value, except for the purpose of taxes or fees based on par value, in which case it is equal to $0.01 per share. Our Articles of Incorporation permit us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of common stock and to issue such stock without approval from our shareholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that may be issued in the future. In addition, we could issue preferred stock to prevent a change in control of our company, depriving common shareholders of an opportunity to sell their stock at a price in excess of the prevailing market price.

The following summarizes important provisions of our capital stock and describes all material provisions of our certificate of incorporation and bylaws. This summary is qualified by our certificate of incorporation and bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part, and by applicable provisions of law, including the Minnesota Business Corporation Act.

Common Stock

No outstanding share of common stock is entitled to preference over any other share, and each share is equal to any other share in all respects. Holders of the common stock are entitled to one vote for each share held of record at each meeting of shareholders. In any distribution of capital assets, such as liquidation, whether voluntary or involuntary, holders of the common stock are entitled to receive pro rata the assets remaining after creditors have been paid in full and after payment of the liquidation preference of all classes and series of preferred stock outstanding. Holders of shares of common stock have no preemptive rights.

Undesignated Shares

The Board of Directors may by resolution and without shareholder approval establish from the common shares different classes or series of shares (including classes or series of preferred stock), with such designations, voting power, preferences, rights qualifications, limitations, restrictions, dividends, time and prices of redemption, and conversion rights as the Board of Directors may establish. The issuance of such capital stock could adversely affect the rights and voting power of holders of common stock, entitle holders to greater liquidation preferences or Board representation than holders of our common stock or prevent or delay a change in control. No shares of preferred stock will be outstanding upon the closing of this offering.

Warrants


	As of March 31, 2010, the following warrants to purchase common stock are outstanding:

	•	34,000 shares at $2.00 per share, 22,000 of which expire in 2011 and 12,000 of which expire in 2012;

	•	207,767 shares at $3.00, 15,000 of which expire in 2010, 110,000 of which expire in 2011, 37,500 of which expire in 2012, and 45,267 of which expire in 2015;

	•	322,800 shares at $3.50, 5,000 of which expire in 2010, 10,000 of which expire in 2011, 20,000 of which expire in 2012, and 287,800 of which expire in 2018; and

	•	25,000 shares at $4.50 per share, 20,000 of which expire in 2013, 5,000 of which expire in 2014.

Registration Rights

As of March 31, 2010, there were no holders of common stock entitled to registration rights. Holders of warrants to purchase an aggregate of 481,800 shares of common stock are entitled to receive notice if our Board of Directors authorizes us to file a registration statement on Form S-1 under the Securities Act. Pursuant to the agreements governing these warrants, the holders may request that the shares underlying their warrants be included in our registration statement. Other than with respect to shares held by affiliates, registration of these shares would result in the shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration statement. However, the impact of any registration statement would be minimal, because such shares would also be freely tradable by non-affiliates under Rule 701 of the Securities Act beginning ninety days after effectiveness of this registration statement. We have the discretion to deny any and all requests for participatory registration.

Anti-Takeover Provisions

Several provisions of the Minnesota Business Corporation Act (“MBCA”) and our Articles of Incorporation and Bylaws may have anti-takeover effects. These provisions are intended to avoid costly takeover battles, lessen our vulnerability to a hostile change of control and enhance the ability of our Board of Directors to maximize shareholder value in connection with any unsolicited offer to acquire us. However, these anti-takeover provisions, which are summarized below, could also discourage, delay or prevent the merger or acquisition of our company by means of a tender offer, a proxy contest or otherwise, that a shareholder may consider in its best interest; and the removal of incumbent officers and directors.

Issuance of Preferred Stock

Under the terms of our Articles of Incorporation, all authorized and unissued shares of our capital stock are subject to redesignation by the Board of Directors. Our Board of Directors has the authority to establish the terms of authorized shares and issue such shares in one or more classes or series of preferred or other capital stock. Our Board of Directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our company or the removal of our management.

Prohibitions on Business Combinations

Minnesota law prohibits certain “business combinations” between a Minnesota corporation with at least 100 shareholders, or a publicly-held corporation that has at least 50 shareholders, and an “interested shareholder” for a four-year period following the share acquisition date by the interested shareholder, unless certain conditions are satisfied or an exemption is found. An “interested shareholder” is generally defined to include a person who beneficially owns at least 10% of the votes that all shareholders would be entitled to cast in an election of directors of the corporation. The MBCA also limits the ability of a shareholder who acquires beneficial ownership of more than certain thresholds of the percentage voting power of a Minnesota corporation, starting at 20%, from voting those shares in excess of the threshold unless such acquisition has been approved in advance by a majority of the voting power held by shareholders unaffiliated with such shareholder. Minnesota law provides that during any tender offer a publicly-held corporation may not enter into or amend an agreement, whether or not subject to contingencies, that increases the current or future compensation of any officer or director. In addition, under Minnesota law, a publicly-held corporation is prohibited from purchasing any voting shares owned for less than two years from a 5% shareholder for more than the market value of the shares unless the transaction has been approved by the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote or unless the corporation makes a comparable offer to all holders of shares of the class or series of stock held by the 5% shareholder and to all holders of any class or series into which such securities may be converted. We have not opted out of these provisions.

Election and Removal of Directors

Our Articles of Incorporation do not provide for cumulative voting in the election of directors. The MBCA also provides that directors elected by our shareholders may be removed only upon the affirmative vote of the holders of at least a majority of the outstanding shares of our common stock entitled to vote for such directors. These provisions may discourage, delay or prevent the removal of incumbent officers and directors.

Restriction on Control Share Acquisitions

The MBCA contains a control share acquisition statute that requires disinterested shareholder approval for certain transactions. The control share acquisition statute applies only if: the person acquiring the shares is an “acquiring person” which is a person (whether an individual or an entity) who acquires, owns or votes the “issuing public corporation’s” stock; the acquisition constitutes a “control share acquisition” which occurs when the “acquiring person’s” ownership exceeds certain designated percentages; and the shares acquired are shares of any “issuing public corporation” which is a corporation organized under the laws of the state of Minnesota which has at least 100 shareholders of record, or public reporting corporation which has at least 50 shareholders of record.

The Minnesota control share acquisition statute applies unless the “issuing public corporation” opts out of the statute in its articles of incorporation or bylaws which are approved by its shareholders. We have not opted out of such provisions. Under Minnesota law, a “control share acquisition” does not include, among other things, the following: an acquisition under Minnesota Statutes relating to mergers, statutory share exchanges and sales of substantially all assets if the issuing public corporation is a party to the transaction; an acquisition from the issuing public corporation; and an acquisition pursuant to a cash offer for all of the issuing corporation’s voting stock which has been approved by a majority vote of the members of a committee comprised of all of the disinterested members of the Board of Directors which was formed prior to the commencement or public announcement of the intent to commence, of the tender offer and pursuant to which the acquiring persons will become the owner of over 50% of the voting stock of the “issuing public corporation” outstanding at the time of the transaction.

Nasdaq Capital Market Listing

We intend to apply for listing of our common stock on the Nasdaq Capital Market under the symbol ELMD.

Registrar and Transfer Agent

The transfer agent and registrar for our common stock is Wells Fargo Shareowner Services.

S HARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there was no public market for our common stock. We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock. Sales of substantial amounts of our common stock in the public market could adversely affect the market prices of our common stock and could impair our future ability to raise capital through the sale of our equity securities.

Upon completion of this offering, based on our outstanding shares as of March 31, 2010, and assuming no exercise of outstanding warrants, we will have outstanding an aggregate of shares of our common stock ( shares if the underwriter’s over-allotment option is exercised in full). Of these shares, all of the shares sold in this offering (plus any shares sold as a result of the underwriter’s exercise of the over-allotment option) will be freely tradable without restriction or further registration under the Securities Act, unless those shares are purchased by our affiliates as that term is defined in Rule 144 under the Securities Act.

The remaining 6,075,885 shares of common stock to be outstanding after this offering will be “restricted securities” under Rule 144. All of these restricted securities will be subject to transfer restrictions following the date of this prospectus pursuant to the lock-up agreements described below. Upon expiration of the transfer restriction period set forth in the lock-up agreements, we expect that all of the shares will be eligible for resale under Rule 144, with the shares held by affiliates being subject to volume limitations. Restricted securities may be sold in the public market only if they have been registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act.

Lock-up Agreements

All of our officers, directors, and holders of shares of our common stock have entered into lock-up agreements pursuant to which they have agreed, subject to limited exceptions, not to offer, sell, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or securities convertible into or exchangeable or exercisable for shares of common stock. The lock-up agreements executed by our officers, directors, and holders of 5% or more of our outstanding common stock prior to this offering restrict the foregoing transactions by such persons for a period of twelve months from the date of this prospectus. Lock-up agreements executed by holders of shares of our common stock restrict such transactions for a period of six months from the date of this prospectus. In each case, exceptions to the lock-up period are subject to the prior written consent of Feltl and Company, Inc. After the lock-up period expires, the shares may be sold, subject to applicable securities laws. See “Underwriting – Lock-Up and Related Agreements.”

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person may sell shares of our common stock that are deemed restricted securities under Rule 144 if the person has beneficially owned the shares for at least six months and the number of shares sold by that person within any three-month period does not exceed the greater of:


	•	1% of the number of shares of our common stock then outstanding, which will equal approximately shares immediately after this offering; or

	•	the average weekly trading volume of our common stock on the Nasdaq Capital Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale.

In addition to the above requirements, sales under Rule 144 are also subject to the availability of current public information about us and, for persons who are or have been affiliates during the three months preceding the sale, manner of sale provisions and notice requirements.

A person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than an “affiliate,” is entitled to sell those shares without complying with the manner of sale, current public information, volume limitation or notice provisions of Rule 144.

Rule 701

Rule 701 generally allows a shareholder who purchased shares of our common stock pursuant to a written compensatory plan or written agreement relating to compensation and who is not deemed to have been an affiliate of our company to sell these shares in reliance upon Rule 144, without being required to comply with the public information or holding period provisions of Rule 144. Rule 701 also permits our affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required to wait 90 days after the date of this prospectus before selling shares pursuant to Rule 701. We are unable to estimate the number of shares that will be sold under Rules 144 or 701 because that number will depend on the market price for the common stock, the personal circumstances of the sellers and other factors.

Warrants

As of March 31, 2010, warrants to purchase a total of 589,567 shares of our common stock were outstanding. These warrants have a weighted average exercise price of $3.28 and expire between May 1, 2010 and November 25, 2018.

Registration Rights

As of March 31, 2010, no holders of our common stock were entitled to obligate us to register those shares for sale in the public market. Holders of warrants to purchase an aggregate of 481,800 shares of common stock are entitled to receive notice if our Board of Directors authorizes us to file a registration statement on Form S-1 under the Securities Act and may request that the shares underlying their warrants be included in our registration statement; however, we have the discretion to deny any and all requests for participatory registration. See “Description of Capital Stock – Registration Rights.”

UNDERWRITING

Under the terms and subject to the conditions in an Underwriting Agreement dated , 2010, we have agreed to sell to Feltl and Company, Inc., as underwriter, shares of our common stock.

Under the terms and subject to the conditions of such Underwriting Agreement, the underwriter has agreed to purchase such shares at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this prospectus. The Underwriting Agreement provides that the underwriter’s obligation to purchase such shares is subject to approval of legal matters by counsel and to the satisfaction of other conditions. The underwriter is obligated to purchase all of the shares (other than those covered by the over-allotment option described below) if it purchases any shares.

Commissions, Discounts and Expenses

The underwriter proposes to offer the shares to the public at the public offering price set forth on the cover page of this prospectus. The underwriter may offer the shares to securities dealers at the price to the public less a concession of not in excess of $ per share. After the shares are released for sale to the public, the underwriter may vary the offering price and other selling terms from time to time.

The following table shows the per share and total underwriting discounts and commissions that we are to pay to the underwriter in connection with this offering. These amounts are shown assuming no exercise and full exercise of the underwriter’s over-allotment option to purchase additional shares.

We estimate that the total expenses of the offering will be approximately $ , excluding underwriting discounts, commissions, and a nonaccountable expense allowance of $ . The nonaccountable expense allowance will be increased to $ if the underwriter exercises the over-allotment option in full. The non-accountable expense allowance represents an amount based upon a percentage of the gross offering proceeds that is payable to the underwriter in respect of expenses that need not be itemized.

Warrant

As additional underwriting compensation, we have agreed to issue to the underwriter a warrant (the “Underwriter’s Warrant”) to purchase up to a total of shares of our common stock. The Underwriter’s Warrant is not exercisable during the first year after the date of the final prospectus related to this offering and thereafter is exercisable at a price per share equal to % of the offering price set forth on the cover of this prospectus for a period of years. The Underwriter’s Warrant contains customary anti-dilution provisions and certain demand and participatory registration rights. The Underwriter’s Warrant also includes a “cashless” exercise provision entitling the underwriter to surrender a portion of the underlying common stock that has a value equal to the aggregate exercise price, in lieu of paying cash upon exercise. The Underwriter’s Warrant may not be sold, transferred, assigned or hypothecated for a period of one year from the date of the final prospectus related to this offering, except to officers or partners of the underwriter and members of the selling group and/or their officers or partners.

Over-Allotment Option

We have granted to the underwriter an option, exercisable not later than 45 days after the date of the final prospectus related to this offering, to purchase up to an aggregate of additional shares at the public offering price set forth on the cover page of this prospectus less the underwriting discounts and commissions. The underwriter may exercise this option only to cover over-allotments, if any, made in connection with the sale of shares offered hereby.

Lock-Up and Related Agreements

Except as noted below, our directors, executive officers and certain shareholders have agreed with the underwriter that for the duration of a defined lock-up period, they will not offer, sell, assign, transfer, pledge, contract or sell or otherwise dispose of or hedge any of our shares of common stock. The lock-up period is defined as twelve months following the date of the final prospectus related to this offering for directors, executive officers, and shareholders who beneficially own 5% or more of our outstanding common stock prior to this offering, and six months following the date of the final prospectus related to this offering for all other shareholders who held shares of our common stock prior to this offering. We have entered into a similar agreement with the underwriter that we will not issue additional shares of common stock (with the exception of shares pursuant to the over-allotment option) before the end of the twelve-month period following the date of the final prospectus related to this offering, other than with respect to our issuing shares pursuant to employee benefit plans, qualified option plans or other employee compensation plans already in existence, or pursuant to currently outstanding warrants or other rights to acquire shares of our common stock. The underwriter may, in its sole discretion, at any time without prior notice, release all or any portion of the shares from the restrictions in such agreements. In determining whether to release shares from the restrictions, the underwriter may consider, among other factors, the financial circumstances applicable to a director’s, executive officer’s or shareholder’s request to release shares and the number of shares that such director, executive officer or shareholder requests to be released. There are no agreements between the underwriter and us or any of our directors, executive officers or the shareholders subject to these agreements releasing us or them from such agreements before the expiration of the applicable lock-up period.

Indemnification Provisions

We have agreed to indemnify the underwriter against certain liabilities, including civil liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the Underwriting Agreement, or to contribute to payments that the underwriter may be required to make in respect of any such liabilities.

Offering Price Determination

Prior to the offering, there was no established trading market for our common stock. The initial public offering price for the shares of common stock offered by this prospectus will be arbitrarily determined by negotiations between us and the underwriter and may bear no relationship to our earnings, book value, net worth or other financial criteria of value and may not be indicative of the market price for our common stock after this offering. Among the factors to be considered in determining the public offering price will be our future prospects and those of our industry in general and certain financial and operating information of companies similar to ours. After completion of this offering, the market price of the common stock will be subject to change as a result of market conditions and other factors. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors.

Stabilization; Short Positions and Penalty Bids

In connection with this offering, the underwriter may purchase and sell shares of common stock in the open market. These transactions may include short sales, purchases to cover positions created by short sales, stabilizing transactions and passive market making in accordance with Regulation M under the Exchange Act. Short sales by the underwriter involve the sale by the underwriter of a greater number of shares than it is required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriter’s option to purchase additional shares from us in the offering pursuant to its over-allotment option. The underwriter may close out any covered short position by either exercising its option to purchase additional shares through the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which it may purchase additional shares through the over-allotment option. “Naked” short sales are any short sales of shares in excess of the shares the underwriter may purchase pursuant to the over-allotment option. The underwriter must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who

purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriter in the open market prior to the completion of the offering. In passive market making, the underwriter may, subject to certain limitations, make bids for or purchases of the shares o common stock until the time, if any, at which a stabilizing bid is made.

Stabilizing transactions to cover short sale positions may cause the price of the shares of common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be commenced and discontinued at any time.

Listing of Common Stock

We intend to apply to list our common stock for quotation on the Nasdaq Capital Market under the symbol “ELMD.”

Discretionary Accounts

The underwriter has advised us that it does not intend to confirm sales of the shares to discretionary accounts.

LEGAL MATTERS

The validity of the shares of common stock offered hereby and certain other legal matters will be passed upon for us by Fredrikson & Byron, P.A. The underwriter has been represented in connection with this offering by Faegre & Benson LLP.

EXPERTS

The financial statements of Electromed, Inc. included in this prospectus for each of the two fiscal years ended June 30, 2009 and 2008 have been so included in reliance on the report of McGladrey & Pullen, LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus does not contain all of the information included in the registration statement, portions of which are omitted as permitted by the rules and regulations of the SEC. For further information pertaining to us and the common stock to be sold in this offering, you should refer to the registration statement and its exhibits. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document filed as an exhibit to the registration statement or such other document, each such statement being qualified in all respects by such reference. On the closing of this offering, we will be subject to the informational requirements of the Securities Exchange Act and will be required to file annual, quarterly and current reports, proxy statements and other information with the SEC. We anticipate making these documents publicly available, free of charge, on our website as soon as reasonably practicable after filing such documents with the SEC.

You can read the registration statement and our future filings with the SEC over the Internet at the SEC’s website at www.sec.gov. You may request copies of the filing, at no cost, by telephone at (952) 758-9299 or by mail at Electromed, Inc., 500 Sixth Avenue NW, New Prague, Minnesota 56071. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

INDEX TO FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm		F-2

Financial Statements

Consolidated balance sheets as of June 30, 2009 and 2008 and December 31, 2009 (unaudited)		F-3

Consolidated statements of operations for the fiscal years ended June 30, 2009 and 2008 and the six months ended December 31, 2009 and 2008 (unaudited)		F-4

Consolidated statements of stockholders’ equity for the fiscal years ended June 30, 2009 and 2008 and the six months ended December 31, 2009 (unaudited)		F-5

Consolidated statements of cash flows for the fiscal years ended June 30, 2009 and 2008 and the six months ended December 31, 2009 and 2008 (unaudited)		F-6

Notes to consolidated financial statements		F-8

F-1

(FRONT COVER)

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Electromed, Inc.

We have audited the accompanying consolidated balance sheets of Electromed, Inc. and Subsidiary as of June 30, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Electromed, Inc. and subsidiary as of June 30, 2009 and 2008, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, on July 1, 2009, the Company changed its method of accounting for noncontrolling interest in its subsidiary.

/s/ McGladrey & Pullen, LLP

Minneapolis, Minnesota
April 30, 2010

F-2

Electromed, Inc.

Consolidated Balance Sheets
June 30, 2009 and 2008 and December 31, 2009 (Unaudited)


	June 30						December 31,
	2009			2008			2009
							(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	361,916		$	1,441,625		$	350,242
Accounts receivable (net of allowances for doubtful accounts of $45,000, $35,000 and $45,000, respectively)		6,348,146			3,929,481			6,709,177
Inventories		1,178,689			849,508			1,307,480
Prepaid expenses and other current assets		167,272			165,710			270,915
Deferred income taxes		357,000			159,000			387,000
Total current assets		8,413,023			6,545,324			9,024,814

Property and equipment, net		2,731,269			2,275,650			2,595,958
Finite-life intangible assets, net		228,783			183,658			680,277
Deferred income taxes		-			360,000			-
Other assets		88,023			30,965			129,110
Total assets	$	11,461,098		$	9,395,597		$	12,430,159

Liabilities and Stockholders’ Equity

Current Liabilities
Revolving line of credit	$	-		$	-		$	1,268,128
Current maturities of long-term debt		392,251			370,984			384,074
Accounts payable		426,320			339,278			591,838
Accrued compensation		541,125			244,404			576,394
Commissions payable		71,002			1,193,866			34,816
Other accrued liabilities		333,131			478,639			469,348
Income tax payable		334,031			-			160,904
Total current liabilities		2,097,860			2,627,171			3,485,502

Long-term debt, less current maturities		3,167,496			2,727,407			2,227,307
Deferred income taxes		137,000			-			112,000
Total liabilities		5,402,356			5,354,578			5,824,809

Commitments and Contingencies

Stockholders’ Equity
Electromed, Inc. stockholders’ equity:
Common stock, $0.01 par value; authorized: 10,000,000 shares; issued and outstanding: 6,040,152, 5,873,911 and 6,075,885 shares, respectively		60,402			58,739			60,759
Additional paid-in capital		6,201,706			5,540,992			6,375,107
Retained earnings (deficit)		(118,465	)		(1,451,371	)		252,564
Common stock subscriptions receivable for shares outstanding of 53,500, 47,333 and 48,500, respectively		(91,500	)		(111,999	)		(84,000	)
Total Electromed, Inc. stockholders’ equity		6,052,143			4,036,361			6,604,430

Noncontrolling interest		6,599			4,658			920
Total stockholders’ equity		6,058,742			4,041,019			6,605,350
Total liabilities and stockholders’ equity	$	11,461,098		$	9,395,597		$	12,430,159

See Notes to Consolidated Financial Statements.

F-3

Electromed, Inc.

C onsolidated Statements of Operations

Years Ended June 30, 2009 and 2008 and

Six Months Ended December 31, 2009 and 2008 (Unaudited)


	Years Ended June 30						Six Months Ended December 31
	2009			2008			2009			2008
							(Unaudited)
Net revenues	$	12,998,627		$	8,752,129		$	6,451,113		$	6,119,481
Cost of revenues		3,340,041			2,147,045			1,660,739			1,443,463
Gross profit		9,658,586			6,605,084			4,790,374			4,676,018

Operating expenses
Selling, general and administrative		6,845,106			5,999,620			3,773,727			3,295,668
Research and development		357,871			271,241			251,042			189,864
Total operating expenses		7,202,977			6,270,861			4,024,769			3,485,532

Operating income		2,455,609			334,223			765,605			1,190,486

Interest expense, net of interest income of $8,746, $24,816, $4,217 and $4,635, respectively		270,446			476,874			121,837			129,290
Net income (loss) before income taxes		2,185,163			(142,651	)		643,768			1,061,196

Income tax (expense) benefit		(830,000	)		427,000			(260,000	)		(400,000	)
Net income		1,355,163			284,349			383,768			661,196

Less: Net income attributable to noncontrolling interest		(22,257	)		(16,497	)		(12,739	)		(9,739	)
Net income attributable to Electromed, Inc.	$	1,332,906		$	267,852		$	371,029		$	651,457

Earnings per share attributable to Electromed, Inc. common shareholders:
Basic	$	0.22		$	0.05		$	0.06		$	0.11
Diluted		0.22			0.04			0.06			0.11

Weighted-average Electromed, Inc. common shares Outstanding:
Basic		5,980,383			5,430,486			6,059,158			5,937,474
Diluted		6,013,458			6,447,538			6,100,334			5,944,632

See Notes to Consolidated Financial Statements.

F-4

Electromed, Inc.

C onsolidated Statements of Stockholders’ Equity

Years Ended June 30, 2008 and 2009 and

Six Months Ended December 31, 2009 (Unaudited)


	Electromed, Inc.
	Common Stock					Additional Paid-in Capital			Retained Earnings (Deficit)			Common Stock Subscriptions Receivable			Noncontrolling Interest			Total Stockholders’ Equity
	Shares		Amount			Additional Paid-in Capital			Retained Earnings (Deficit)			Common Stock Subscriptions Receivable			Noncontrolling Interest			Total Stockholders’ Equity

Balance at June 30, 2007	5,186,453		$	51,865		$	3,408,602		$	(1,719,223	)	$	-		$	4,861		$	1,746,105

Net income	-			-			-			267,852			-			16,497			284,349

Issuance of common stock upon conversion of notes payable	388,341			3,883			1,161,117			-			-			-			1,165,000

Sale of common stock	117,715			1,177			410,824			-			-			-			412,001

Issuance of common stock for acquisition of land	35,000			350			104,650			-			-			-			105,000

Issuance of common stock for warrants exercised with subscription notes	47,333			473			111,526			-			(111,999	)		-			-

Issuance of common stock upon exercise of warrants	99,069			991			276,413			-			-			-			277,404

Distributions paid to holders of noncontrolling interest	-			-			-			-			-			(16,700	)		(16,700	)

Share-based compensation expense	-			-			67,860			-			-			-			67,860

Balance at June 30, 2008	5,873,911			58,739			5,540,992			(1,451,371	)		(111,999	)		4,658			4,041,019

Net income	-			-			-			1,332,906			-			22,257			1,355,163

Sale of common stock	58,572			586			214,414			-			-			-			215,000

Issuance of common stock for exercise of warrants	49,669			497			148,507			-			-			-			149,004

Issuance of common stock for warrants exercised with subscription notes	31,000			310			46,190			-			(46,500	)		-			-

Issuance of common stock for acquisition of property and payment of services	30,000			300			104,700			-			-			-			105,000

Proceeds on subscription notes receivable	-			-			-			-			66,999			-			66,999

Repurchase of common stock	(3,000	)		(30	)		(6,330	)		-			-			-			(6,360	)

Distributions paid to holders of noncontrolling interest	-			-			-			-			-			(20,316	)		(20,316	)

Share-based compensation expense	-			-			153,233			-			-			-			153,233

Balance at June 30, 2009	6,040,152			60,402			6,201,706			(118,465	)		(91,500	)		6,599			6,058,742

Activity (Unaudited):

Net income	-			-			-			371,029			-			12,739			383,768

Issuance of common stock upon exercise of warrants	30,733			307			73,025			-			-			-			73,332

Issuance of common stock for payment of services	5,000			50			22,450			-			-			-			22,500

Proceeds from subscription notes receivable	-			-			-			-			7,500			-			7,500

Distributions paid to holders of noncontrolling interest	-			-			-			-			-			(18,418	)		(18,418	)

Share-based compensation expense	-			-			77,926			-			-			-			77,926

Balance at December 31, 2009 (unaudited)	6,075,885		$	60,759		$	6,375,107		$	252,564		$	(84,000	)	$	920		$	6,605,350

See Notes to Consolidated Financial Statements.

F-5

Electromed, Inc.

C onsolidated Statements of Cash Flows

Years Ended June 30, 2009 and 2008 and

Six Months Ended December 31, 2009 and 2008 (Unaudited)


	Years Ended June 30						Six Months Ended December 31
	2009			2008			2009			2008
							(Unaudited)
Cash Flows From Operating Activities
Net income	$	1,355,163		$	284,349		$	383,768		$	661,196
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		302,162			253,746			150,361			147,693
Amortization of finite-life intangible assets		16,783			14,649			17,673			7,922
Amortization of debt issuance costs		9,638			176,423			25,703			4,725
Share-based compensation expense		153,233			67,860			77,926			76,261
Deferred income taxes		299,000			(459,000	)		(55,000	)		149,000
Noncash interest expense from warrants issued with convertible debt		-			49,393			-			-
Loss on disposal of property and equipment		56,301			28,020			3,728			32,398
Issuance of common stock for payment of services		35,000			-			22,500			35,000
Changes in operating assets and liabilities:
Accounts receivable		(2,418,665	)		(629,650	)		(361,031	)		(1,400,814	)
Inventories		(329,181	)		(259,361	)		(128,791	)		41,164
Prepaid expenses and other assets		(66,562	)		(95,932	)		(123,643	)		(76,543	)
Accounts payable and accrued liabilities		(570,578	)		812,661			65,125			(784,204	)
Net cash provided by (used in) operating activities		(1,157,706	)		243,158			78,319			(1,106,202	)

Cash Flows From Investing Activities
Expenditures for property and equipment		(648,716	)		(565,890	)		(45,386	)		(473,589	)
Payments of deferred financing fees		(1,696	)		(33,773	)		(46,791	)		-
Expenditures for finite-life intangible assets		(61,908	)		(45,968	)		(406,600	)		(16,225	)
Net cash used in investing activities		(712,320	)		(645,631	)		(498,777	)		(489,814	)

Cash Flows From Financing Activities
Net borrowings on revolving line of credit		-			-			1,268,128			-
Principal payments on long-term debt including capital lease obligations		(641,409	)		(2,004,835	)		(3,441,758	)		(451,860	)
Proceeds from long-term debt		1,027,399			2,209,508			2,520,000			900,702
Noncontrolling interest distributions paid		(20,316	)		(16,700	)		(18,418	)		-
Proceeds from sales of common stock		364,004			689,405			73,332			239,004
Proceeds on subscription notes receivable		66,999			-			7,500			51,999
Repurchase of common stock		(6,360	)		-			-			(6,360	)
Net cash provided by financing activities		790,317			877,378			408,784			733,485

Net increase (decrease) in cash and cash equivalents		(1,079,709	)		474,905			(11,674	)		(862,531	)

Cash and Cash Equivalents
Beginning of period		1,441,625			966,720			361,916			1,441,625
End of period	$	361,916		$	1,441,625		$	350,242		$	579,094

(Continued)

See Notes to Consolidated Financial Statements.

F-6

Electromed, Inc.

Consolidated Statements of Cash Flows (Continued)
Years Ended June 30, 2009 and 2008 and
Six Months Ended December 31, 2009 and 2008 (Unaudited)


	Years Ended June 30				Six Months Ended December 31
	2009		2008		2009		2008
					(Unaudited)
Supplemental Disclosures of Cash Flow Information
Cash paid for interest	$	266,265	$	275,566	$	91,809	$	134,545
Cash paid for income taxes		192,703		32,056		498,342		-

Supplemental Disclosures of Noncash Investing and Financing Activities
Common stock issued for acquisition of property and equipment	$	70,000	$	105,000	$	-	$	70,000
Reduction in basis of acquired building formerly under capital lease		-		-		93,172		-
Common stock issued for subscription notes		46,500		111,999		-		46,500
Expenditures for finite-life intangible assets included in accounts payable		-		-		62,556		-
Expenditures for property and equipment included in accounts payable		20,000		273,853		-		41,568
Common stock issued in payment of convertible notes		-		1,165,000		-		-
Property and equipment financed through capital leases		75,366		21,547		66,564		48,253

See Notes to Consolidated Financial Statements.

F-7

Electromed, Inc.
N otes to Consolidated Financial Statements
(Information with respect to the six-month periods ended December 31, 2009 and 2008, and as of December 31, 2009, is unaudited)


Note 1.	Nature of Business and Summary of Significant Accounting Policies

Nature of business: Electromed, Inc. (the Company) develops, manufactures and markets innovative airway clearance products which apply High Frequency Chest Wall Oscillation (HFCWO) therapy in pulmonary care for patients of all ages. The Company markets its products in the United States to the home health care and institutional markets for use by patients in personal residences, hospitals and clinics. The Company also sells internationally directly and through distributors. The Company had international sales of approximately $919,000, $727,000, $275,000 and $250,000 for the years ended June 30, 2009 and 2008, and for the six months ended December 31, 2009 and 2008, respectively. Since its inception, the Company has operated in a single industry segment: developing, manufacturing and marketing medical equipment. As a result, the information disclosed herein materially represents all of the financial information related to the Company’s operating segment.

Principles of consolidation: The accompanying consolidated financial statements include the accounts of Electromed, Inc. and its 95 percent–owned subsidiary, Electromed Financial, LLC. Income related to the noncontrolling interest in the subsidiary is reflected as noncontrolling interest on the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company acquired the remaining 5 percent of Electromed Financial, LLC on March 2, 2010. Electromed Financial, LLC was established by the Company to assist in raising capital from outside investors.

Unaudited interim financial information: The interim financial information of the Company for the six months ended December 31, 2009 and 2008, and as of December 31, 2009, is unaudited. The unaudited interim financial information has been prepared on the same basis as the annual consolidated financial statements and in the opinion of management reflects all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results of operations and cash flows of the Company for the six months ended December 31, 2009 and 2008, and the financial position of the Company as of December 31, 2009.

A summary of the Company’s significant accounting policies follows:

Use of estimates: Management uses estimates and assumptions in preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. The Company believes the critical accounting policies that require the most significant assumptions and judgments in the preparation of its consolidated financial statements include: revenue recognition and the estimation of contractual allowances, allowance for doubtful accounts, inventory obsolescence, valuation allowance for deferred income tax assets and warranty liability.

Revenue recognition: The Company recognizes revenue when persuasive evidence of a sales arrangement exists, delivery of goods occurs through the transfer of title and risks and rewards of ownership, the selling price is fixed or determinable, and collectability is reasonably assured. Revenues are primarily recognized upon shipment.

Direct patient sales are recorded at amounts estimated to be received under reimbursement arrangements with third-party payers, including private insurers, prepaid health plans, Medicare and Medicaid. Estimates are required to record revenues and accounts receivable at their net realizable values. The complexity of third-party billing arrangements, the uncertainty of approval and the ultimate reimbursement amounts from third-party payers may result in adjustments to amounts originally billed. Such adjustments generally occur at the point of cash application, claim denial or account review. The Company records an estimate of such potential future adjustments, including potential sales returns, as a reduction of net revenues in the same period revenue is recognized. Management has estimated this sales discount based on historical collection and sales allowance experience with direct patient sales. Management periodically reviews and makes changes to their estimation process by considering any changes in recent collection or sales allowance experience. Other than the installment sales as discussed below, the Company receives payment of the vast majority of accounts receivables within one year. However, in some instances, payment for direct patient sales can be delayed or interrupted resulting in a small portion of collections occurring later than one year.

F-8

Electromed, Inc.
Notes to Consolidated Financial Statements – (continued)
(Information with respect to the six-month periods ended December 31, 2009 and 2008, and as of December 31, 2009, is unaudited)


Note 1.	Nature of Business and Summary of Significant Accounting Policies (continued)

A summary of sales made under the installment method are as follows:


	Years Ended June 30				Six Months Ended December 31
	2009		2008		2009		2008
					(Unaudited)
Revenue recognized under installment sales	$	229,000	$	119,000	$	314,000	$	145,000
Amortized cost of revenues recognized		31,000		27,000		49,000		35,000

Unrecognized installment method sales were as follows:


	June 30				December 31, 2009
	2009		2008		December 31, 2009
					(Unaudited)
Estimated unrecognized sales, net of discounts	$	716,000	$	271,000	$	800,000
Unamortized cost of revenues included in prepaids and other current assets		94,000		46,000		122,000

Shipping and handling expense: Shipping and handling charges billed to customers are included as a reduction to cost of revenues. Shipping and handling charges incurred by the Company are included in selling, general and administrative expenses and were $174,000, $112,000, $93,000 and $79,000 for the years ended June 30, 2009 and 2008, and for the six months ended December 31, 2009 and 2008, respectively.

Cash and cash equivalents: Cash and cash equivalents include highly liquid investments with original maturities of three months or less at the date of acquisition. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in these accounts.

Accounts receivable: Accounts receivable are carried at amounts estimated to be received under reimbursement arrangements with third-party payers. Accounts receivable are also net of an allowance for doubtful accounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history. Receivable are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. The allowance for doubtful accounts was approximately $45,000, $35,000 and $45,000 as of June 30, 2009 and 2008, and December 31, 2009.

Inventories: Inventories, consisting of material, labor and manufacturing overhead are stated at the lower of cost (first-in, first-out method) or market. Work in process and finished goods are carried at standard cost, which includes materials, labor and allocated overhead. The reserve for obsolescence is determined by analyzing the inventory on hand and comparing it to expected production requirements.

Property and equipment: Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements and assets acquired under capital leases are depreciated over the shorter of their estimated useful lives or the remaining lease term. The Company retains ownership of demonstration equipment in the possession of both inside and outside sales representatives, who use the equipment in the sales process.

F-9


Note 1.	Nature of Business and Summary of Significant Accounting Policies (continued)

Finite-life intangible assets: Finite-life intangible assets include patents and trademarks. These intangible assets are being amortized on a straight-line basis over their estimated useful lives, as described in Note 4.

Long-lived assets: Long-lived assets, such as property and equipment and finite-life intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. In evaluating recoverability, the following factors, among others, are considered: a significant change in the circumstances used to determine the amortization period, an adverse change in legal factors or in the business climate, a transition to a new product or service strategy, a significant change in customer base, and a realization of failed marketing efforts. The recoverability of an asset is measured by a comparison of the unamortized balance of the asset to future undiscounted cash flows.

If the Company believes the unamortized balance is unrecoverable, it would recognize an impairment charge necessary to reduce the unamortized balance to the estimated fair value of the asset. The amount of such impairment would be charged to operations in the current period. The Company has not identified any indicators of impairment associated with its long-lived assets.

Warranty liability: The Company offers a limited warranty on its products. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time the product is sold. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amounts as necessary. The warranty liability is included in other accrued liabilities on the consolidated balance sheet.

Changes in the Company’s warranty liability were approximately as follows:


							Six Months Ended December 31, 2009

	Years Ended June 30
	2009			2008
							(Unaudited)
Beginning warranty reserve	$	195,000		$	183,000		$	292,000
Warranty expense		162,000			34,000			37,000
Warranty provision		(65,000	)		(22,000	)		(40,000	)
Ending warranty reserve	$	292,000		$	195,000		$	289,000

Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company recognizes tax liabilities when the Company believes that certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. The current portion of tax liabilities is included in other liabilities. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense.

F-10


Note 1.	Nature of Business and Summary of Significant Accounting Policies (continued)

Research and development: Research and development costs include costs of research activities as well as engineering and technical efforts required to develop new products or make improvement to existing products. Research and development costs are expensed as incurred.

Advertising costs: Advertising costs are charged to expense when incurred. Advertising, marketing and trade show costs for the years ended June 30, 2009 and 2008, and for the six months ended December 31, 2009 and 2008, were approximately $642,000, $454,000, $231,000 and $323,000, respectively.

Share-based payments: Share-based payment awards consist of warrants issued to employees for services, and to nonemployees in lieu of payment for products or services. Expense is estimated using the Black-Scholes pricing model at the date of grant and is recognized on a straight-line basis over the requisite service or vesting period of the award.

Fair value of financial instruments: The carrying values of cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short-term nature of these instruments. The carrying value of long-term debt is the remaining amount due to debtors under borrowing arrangements. To estimate the fair value of debt, the Company estimates the interest rate necessary to secure financing to replace its debt. At December 31, 2009, the fair value of long-term debt was not significantly different than its carrying value.

Basic and diluted earnings per share: Basic per share amounts are computed by dividing net income attributable to Electromed, Inc. by the weighted-average number of common shares outstanding. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless their effect is anti-dilutive, thereby reducing the loss per share or increasing the income per share (see Notes 5 and 7 for information on convertible debt and stock warrants, respectively).

Noncontrolling interest accounting change: In December 2007, the FASB issued accounting guidance which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Certain provisions of this guidance indicate that noncontrolling interest, in most cases, be treated as a separate component of equity, not as a liability, and that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions. The new requirements became effective for the Company beginning on July 1, 2009 and resulted in a change in presentation since the noncontrolling interest is now shown as a component of equity rather than as a liability. This change in presentation has been retrospectively applied to all periods presented within the consolidated financial statements.

Recently adopted accounting pronouncements: A summary of new accounting pronouncements that affect the Company is as follows:

In April 2009, the FASB issued accounting guidance regarding interim disclosures about the fair value of financial instruments, including the methods and significant assumptions used to estimate fair value. This guidance increases the frequency of certain fair value disclosures from annual to quarterly. This guidance was effective for interim periods ending after June 15, 2009. The Company has adopted this guidance with no impact on its consolidated financial statements.

In May 2009, the FASB updated its accounting guidance regarding subsequent events, establishing principles and requirements for disclosures concerning subsequent events. In particular, it sets forth the period after the balance sheet date during which management is required to evaluate events or transactions that have occurred or may occur for potential recognition or disclosure in the financial statements; the circumstances under which the Company must recognize events or transactions occurring after the balance sheet date in its consolidated financial statements, and the disclosures that the Company must make about events or transactions that occurred after the consolidated balance sheet date. This updated guidance was effective for annual and interim periods ending after June 15, 2009. Accordingly, the Company has applied the provisions of this guidance in the current reporting period. See Note 11 for information relating to subsequent events.

F-11


Note 2.	Inventories

The components of inventory at June 30, 2009 and 2008, and December 31, 2009, are approximately as follows:


	June 30						December 31, 2009
	2009			2008			December 31, 2009
							(Unaudited)
Parts inventory	$	759,000		$	483,000		$	659,000
Finished goods		450,000			397,000			678,000
Less: Reserve for obsolescence		(30,000	)		(30,000	)		(30,000	)
Total	$	1,179,000		$	850,000		$	1,307,000


Note 3.	Property and Equipment

Property and equipment, including assets under capital leases, consisted of approximately the following:


	Estimated Useful Lives (Years)
		June 30						December 31, 2009
			2009			2008		December 31, 2009
								(Unaudited)
Building and building improvements	15-39	$	1,920,000		$	1,008,000		$	1,832,000
Land	N/A		200,000			200,000			200,000
Land improvements	15		162,000			—			162,000
Equipment	3-7		755,000			554,000			830,000
Demonstration equipment	3		396,000			616,000			418,000
Vehicles	5		35,000			35,000			35,000
Construction in progress	N/A		—			620,000			—
			3,468,000			3,033,000			3,477,000
Less: Accumulated depreciation			(737,000	)		(757,000	)		(881,000	)
Total property and equipment		$	2,731,000		$	2,276,000		$	2,596,000


Note 4.	Finite-Life Intangible Assets

The carrying value of patents and trademarks includes the original cost of obtaining the patents, periodic renewal fees, and other costs associated with maintaining and defending patent and trademark rights. Patents and trademarks are amortized over their estimated useful lives, generally 15 and 12 years, respectively. Accumulated amortization was $61,000, $44,000 and $79,000 at June 30, 2009 and 2008, and at December 31, 2009, respectively.

The activity and balances of finite-life intangible assets were approximately as follows:


							Six Months Ended December 31, 2009

	Years Ended June 30
	2009			2008
							(Unaudited)
Balance, beginning	$	184,000		$	153,000		$	229,000
Additions		62,000			46,000			469,000
Amortization expense		(17,000	)		(15,000	)		(18,000	)
Balance, ending	$	229,000		$	184,000		$	680,000

Based on the carrying value at December 31, 2009, amortization expense is expected to be approximately $29,000 for the remainder of fiscal 2010 and $58,000 annually thereafter.

F-12


Note 4.	Finite-Life Intangible Assets (continued)

Additions during the six-month period ended December 31, 2009 were all legal defense costs associated with a trademark infringement lawsuit filed against the Company (see Note 9). Such defense costs are being capitalized by the Company and amortized over the remaining useful life of the trademark. The future amortization amount is expected to change as the Company incurs additional costs associated with its patents and trademarks, including the trademark defense costs.


Note 5.	Financing Arrangements

The Company entered into a $3,500,000 revolving line of credit on December 9, 2009, which expires on November 30, 2010, if not renewed. Advances are due at the expiration date and are secured by substantially all Company assets. The amount eligible for borrowing is limited to 60 percent of eligible accounts receivable less the outstanding balance on the Company’s term note. Interest on advances accrues at LIBOR plus 2.75 percent and is payable monthly. As of December 31, 2009, there was approximately $1,268,000 outstanding on the line of credit and $1,259,000 available for future borrowing. ^(a)

Long-term debt consists of approximately the following as of June 30, 2009 and 2008, and December 31, 2009:


	June 30
	2009		2008		December 31, 2009
					(Unaudited)
Mortgage note payable with bank, due in monthly installments of $10,706, including interest at 5.79%, remaining due December 2014, secured by land and building ^(a)	$	-	$	-	$	1,514,000
Term note payable with bank, due in monthly installments of $29,649, including interest at 4.28%, due in December 2012, secured by substantially all assets ^(a)		-		-		973,000
Capital lease obligations, due in varying monthly installments, including interest ranging from 8.99% to 12.07%, to March 2013, secured by equipment		78,000		21,000		124,000
Capital lease obligation for building, implied interest of 11.92%, terminated with the purchase of the building subsequent to June 30, 2009		654,000		657,000		-
Notes payable with bank, interest ranging from 6.75% to 9.0%, paid in full prior to December 31, 2009		1,629,000		1,940,000		-
Construction and mortgage notes payable with bank, interest at 6.0%, paid in full prior to December 31, 2009		1,198,000		480,000		-
Total		3,559,000		3,098,000		2,611,000

Less: Current portion		392,000		371,000		384,000
Long-term debt	$	3,167,000	$	2,727,000	$	2,227,000


(a)	These instruments have certain financial and nonfinancial covenants which, among others, require the Company to maintain a minimum fixed charge coverage ratio and a maximum cash flow leverage ratio, and restrict the payment of dividends.

F-13


Note 5.	Financing Arrangements (continued)

Approximate future maturities of long-term debt as of December 31, 2009 are as follows:


Year ending June 30:

2010 (remainder of year)	$	175,000
2011		420,000
2012		420,000
2013		230,000
2014		50,000
Thereafter		1,316,000
Total	$	2,611,000

Conversion of debt to equity: At June 30, 2007, the Company had convertible notes outstanding of $3,025,000. These notes were paid in full during the year ended June 30, 2008, through a combination of $1,860,000 cash and the issuance of 388,341 shares of common stock valued at $1,165,000, or approximately $3.00 per share. The remaining unamortized fair value of warrants issued in conjunction with these convertible notes was fully amortized upon conversion, resulting in a $49,000 noncash charge to interest expense for the year ended June 30, 2008. The convertibility feature of the previously outstanding notes resulted in additional common equivalent shares outstanding for purposes of diluted earnings per share for the period ended June 30, 2008.

Capital leases: The Company has financed certain office equipment through capital leases. The Company also had a building capital lease with a director of the Company through December 2009, at which time the Company purchased the building for approximately $555,000 using the proceeds from a new mortgage note with a bank. The net carrying value of the capital lease obligation exceeded the purchase price by approximately $93,000 which was recognized as a reduction in the net book value of the acquired building, which had been capitalized at the inception of the lease.

At June 30, 2009 and 2008, and December 31, 2009, carrying value of assets under these capital leases are approximately as follows:


	June 30						December 31, 2009
	2009			2008			December 31, 2009
								(Unaudited)
Building	$	675,000		$	675,000		$	-
Fixtures and office equipment		96,000			22,000			163,000
Less: Accumulated depreciation		(67,000	)		(38,000	)		(24,000	)
Total	$	704,000		$	659,000		$	139,000

Depreciation expense for these assets was $29,000, $20,000, $12,000 and $13,000 for the years ended June 30, 2009 and 2008, and the six months ended December 31, 2009 and 2008, respectively.

Approximate future minimum payments under capital leases as of December 31, 2009 are as follows:


Year ending June 30:

2010 (remainder of year)	$	32,000
2011		60,000
2012		38,000
2013		9,000
Total		139,000

Less: Amount representing interest		(15,000	)
Present value of future minimum lease payments (included in long term debt above)	$	124,000

F-14


Note 6.	Common Stock

Common stock issued for property and services: In fiscal 2009, the Company issued 20,000 and 10,000 shares for land improvements and services with estimated fair values of $70,000 and $35,000, respectively. In fiscal 2008, the Company issued 35,000 shares of common stock to a related party as consideration for land purchased with a fair value of $105,000. During the six months ended December 31, 2009, the Company issued 5,000 shares for services valued at $22,500.

Common stock subscription receivables: During fiscal 2009, the Company issued 31,000 shares of common stock to an employee upon the exercise of outstanding warrants. The Company agreed to accept a subscription note receivable from this employee for approximately $47,000. The note receivable matures in December 2011. The Company revalued the warrants upon issuance of these subscription notes and recognized additional share-based expense of approximately $67,000 for the year ended June 30, 2009.

During fiscal 2008, the Company issued 47,333 shares of common stock to unrelated third parties upon the exercise of outstanding warrants. The Company agreed to accept subscription notes receivable from these individuals for a total of approximately $112,000. For the year ended June 30, 2009, and for the six months ended December 30, 2009, cash collected on these notes was approximately $67,000 and $8,000, respectively. The Company revalued the warrants upon issuance of these subscription notes and recognized additional share-based expense of approximately $50,000 for the year ended June 30, 2008.

Sales of common stock: The Company from time to time has sold common stock to investors for cash. During the year ended June 30, 2009, the Company sold 48,572 shares at $3.50 per share and 10,000 shares at $4.50 per share, for total cash proceeds of approximately $215,000. All shares were sold to unrelated third-party investors.

During the year ended June 30, 2008, the Company sold 117,715 shares of common stock for cash proceeds of approximately $412,000, or $3.50 per share. Of this amount, 87,000 shares were sold to a Company director, and the remaining 30,715 shares were sold to unrelated third-party investors.


Note 7.	Share-Based Payments

Employee warrants: The Company grants stock warrants to employees as long-term incentive compensation. All warrants are granted at exercise prices equal to or greater than the estimated fair market value of the Company’s common stock. Warrants generally expire three to ten years from the grant date and vest over a period of up to five years. Warrants have not been granted under a formal plan; however, the number of warrants eligible for issuance is limited to the number of authorized shares of the Company’s common stock.

The Company recognizes compensation expense related to share-based payment transactions in the consolidated financial statements based on the estimated fair value of the award issued. The fair value of each warrant is estimated using the Black-Scholes pricing model at the time of award grant. The Company estimates the expected life of warrants based on the expected holding period by the warrant holder. The risk-free interest rate is based upon observed U.S. Treasury interest rates for the expected term of the warrants. The Company makes assumptions with respect to expected stock price volatility based upon the volatility of similar companies. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from initial estimates. Forfeitures are estimated based on the percentage of awards expected to vest, taking into consideration the seniority level of the award recipient.

Share-based compensation expense for the years ended June 30, 2009 and 2008, and the six months ended December 31, 2009, was approximately $86,000, $18,000 and $78,000, respectively.

F-15


Note 7.	Share-Based Payments (continued)

The following weighted-average assumptions were used to estimate the fair value of warrants granted:


	Years Ended June 30
	2009	2008
Risk-free interest rate	1.2% - 3.4%	2.2% - 4.8%
Expected life (years)	4 - 10	3
Expected volatility	46.9%	21.6%
Expected dividends	0%	0%

The following table presents employee warrant activity for the year ended June 30, 2009, and the six months ended December 31, 2009:


	Number of Shares		Weighted- Average Grant Date Fair Value			Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Life (in Years)
Warrants outstanding at June 30, 2008	272,000			$	1.32		$	2.64		1.14
Granted	307,800				2.13			3.55		-
Exercised	(31,000	)			0.61			1.50		-
Canceled or forfeited	(40,000	)			1.06			2.56		-
Warrants outstanding at June 30, 2009	508,800				1.87			3.27		6.03
Activity (unaudited):
Granted	5,000				1.69			4.50		-
Exercised	(17,000	)			0.86			2.29		-
Canceled or forfeited	(5,000	)			1.92			3.00		-
Warrants outstanding at December 31, 2009	491,800				1.90			3.31		6.17

Warrants exercisable at December 31, 2009	241,560				1.67			3.04		3.79

For the years ended June 30, 2009 and 2008, and for the six months ended December 31, 2009, net cash proceeds from the exercise of employee warrants was approximately $47,000, $12,000 and $39,000, respectively.

At December 31, 2009, the Company had approximately $507,000 of unrecognized stock-based compensation, which is expected to be recognized over a weighted-average period of 2.3 years. The aggregate intrinsic value of warrants outstanding was approximately $583,000, and the intrinsic value of warrants exercisable was approximately $352,000 at December 31, 2009.

Warrants issued for services: In years prior to fiscal 2008, the Company issued warrants for services in lieu of cash payments. At June 30, 2009, the Company had warrants outstanding and exercisable to purchase 25,000 shares of common stock at a weighted-average exercise price of $3.10 per share. These warrants expire at various dates through January 3, 2011.

All outstanding warrants issued for services were granted prior to the 2008 fiscal year. During the years ended June 30, 2009 and 2008, there were 400,000 and 6,000 warrants forfeited, respectively. The warrants canceled during the year ended June 30, 2009 were forfeited as a result of a termination agreement with an independent sales representative (see Note 9). Warrants for 40,000 shares were exercised during the year ended June 30, 2008, for $2.00 per share.

Warrants issued with convertible debt: In years prior to fiscal 2008, the Company issued convertible notes payable to certain individuals. In conjunction with the issuance of these convertible notes, creditors also received warrants to purchase common stock for an exercise price of $3.00 per share. At June 30, 2009, the Company had 96,500 warrants outstanding and exercisable at a weighted-average exercise price of $3.00 per share. These warrants expire in September 2012. During the years ended June 30, 2009 and 2008, warrant holders exercised 49,669 and

F-16


Note 7.	Share-Based Payments (continued)

99,002 warrants at a weighted-average exercise price of $3.00. Also during the years ended June 30, 2009 and 2008, warrants forfeited and canceled were 62,338 and 72,002, respectively.

During the six months ended December 31, 2009, warrant holders exercised 13,733 warrants at an exercise price of $2.50 per share.

F-17


Note 8.	Income Taxes

Components of the provision (benefit) for income taxes for the years ended June 30, 2009 and 2008, are as follows:


	Years Ended June 30
	2009		2008
Current	$	531,000	$	32,000
Deferred		299,000		67,000
Subtotal		830,000		99,000

Change in valuation allowance		-		(526,000	)
Total	$	830,000	$	(427,000	)

The total income tax expense (benefit) differs from the expected tax expense (benefit), computed by applying the federal statutory rate to the Company’s income (loss) before income taxes, as follows:


	Years Ended June 30
	2009		2008
Tax expense (benefit) at statutory federal rate	$	743,000	$	(49,000	)
State income tax benefit, net of federal tax		75,000		31,000
Change in valuation allowance – deferred income tax		-		(526,000	)
Other permanent items		12,000		117,000
Income tax expense (benefit)	$	830,000	$	(427,000	)

The significant components of deferred income taxes are as follows:


	June 30
	2009			2008
Deferred tax assets (liabilities):
Revenue recognition and accounts receivable	$	221,000		$	83,000
Accrued liabilities		200,000			71,000
Net operating loss carryforwards		31,000			415,000
Property and equipment		(118,000	)		1,000
Finite-life intangible assets		(52,000	)		(33,000	)
Investment in subsidiary		(80,000	)		(54,000	)
Warrants		82,000			31,000
Other		(64,000	)		5,000
Net deferred tax assets	$	220,000		$	519,000

The components giving rise to the net deferred income tax assets described above have been included in the accompanying consolidated balance sheets as follows:


	June 30
	2009			2008
Current assets	$	357,000		$	159,000
Long-term assets		-			360,000
Long-term liabilities		(137,000	)		-
Net deferred tax assets	$	220,000		$	519,000

The Company has state net operating loss carryforwards at June 30, 2009, of approximately $321,000 to reduce future income tax liabilities, which will begin to expire in 2024.

The gross deferred tax assets as of June 30, 2007, were reduced by a valuation allowance of $526,000, relating primarily to operating loss carryforwards and other tax attributes, as it was determined that more likely than not some portion or all of these tax attributes would not be realized. The valuation allowance was fully reversed during the year ended June 30, 2008, due to expected utilization of the deferred tax assets.

F-18


Note 8.	Income Taxes (continued)

The Company has evaluated its exposure to unrecognized tax benefits as of June 30, 2009 and 2008, and has estimated that there are no unrecognized benefits which would be material to the consolidated financial statements. The Company’s policy would be to recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. With limited exceptions, tax years prior to fiscal 2007 are no longer open to federal, state and local examination by taxing authorities.


Note 9.	Commitments and Contingencies

Settlement of sales representation agreement: In July 2008, the Company settled a lawsuit with an independent sales representative organization. The terms of the settlement required the Company pay all commissions upon cash collection for sales through July 31, 2008, in accordance with the original agreement. Approximately $71,000 and $1,194,000 of commissions related to this independent sales representative organization were accrued in the accompanying consolidated financial statements as of June 30, 2009 and 2008, respectively. The period for which commissions would otherwise be payable to the independent sales representative organization was reduced by three months from October 31, 2008, to July 31, 2008. As a condition of the settlement, the independent sales representative organization did not exercise and forfeited their warrants for 400,000 shares of Company common stock, which had been previously expensed. Additional conditions of the settlement included the cancellation of a $1,000,000 contingent payment clause upon a change in control of the Company and a requirement by the Company to repurchase 3,000 shares of its common stock held by the independent sales representative organization for $2.12 per share.

Litigation: Subsidiaries of Hill-Rom Holdings, Inc., (collectively, “Hill-Rom”) brought an action on August 21, 2009, against the Company alleging that the Company’s use of the term “SmartVest” infringes on its alleged trademark “The Vest.” The Company has answered the allegations and brought counter-claims against Hill-Rom alleging, among other things, defamation and libel. Although the Company’s management believes that Hill-Rom’s action is without merit, an adverse outcome of this matter could have a material adverse effect on the operating results and financial position of the Company. The Company is currently and expects to continue incurring costs associated with defending this trademark. For the six-month period ended December 31, 2009, the company incurred and capitalized costs of $469,000 in defending this trademark.

In the addition to the trademark matter discussed above, the Company is occasionally involved in claims and disputes arising in the ordinary course of business. The Company insures its business risks where possible to mitigate the financial impact of individual claims, and establishes reserves for an estimate of any probable cost of settlement or other disposition. In the opinion of management, the ultimate disposition or resolution of these matters, if any, will not have a material adverse effect on the Company’s financial position or results of operations.

401k profit sharing plan: Effective January 1, 2007, the Company adopted an employee benefit plan under Section 401(k) of the Internal Revenue Code covering all employees who are 21 years of age or older and have 1,000 hours of service with the Company. The Company matches each employee’s salary reduction contribution, not to exceed 4 percent of annual compensation. Total employer contributions to this plan for the years ended June 30, 2009 and 2008, and for the six months ended December 31, 2009 and 2008, were approximately $108,000, $81,000, $59,000 and $48,000, respectively.

Employment Agreements: Effective January 1, 2010, the Company entered into new employment agreements with its chief executive officer and chief financial officer. These agreements provide the officers, with among other things, one year’s salary upon a separation of service without cause for termination. Also, in the event the employee resigns within six months of a change in control, the chief executive officer and chief financial officer are entitled to receive a severance equal to two year’s base salary.

F-19


Note 10.	Related Parties

The Company uses a related-party service provider, a director and minority shareholder of which was the original inventor of the Company’s product, to perform certain outsourced research and development functions. The Company’s chief executive officer is also the president, chief executive officer and chairman of the board of directors of the service provider and owns approximately 11% of that entity’s outstanding common stock. In addition, two members of the Company’s board of directors are directors and minority shareholders of the service provider. The Company has an agreement with the service provider which provides that the service provider will perform 80 hours per week of research and development work in exchange for a monthly fee of $25,000. The initial term of the agreement expires in June 2010 but may be extended at the option of the Company. For the years ended June 30, 2009 and 2008, and for the six months ended December 31, 2009 and 2008, research and development expenses for these services totaled approximately $115,000, $70,000, $114,000 and $30,000, respectively.


Note 11.	Subsequent Events

In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date of the public accounting firm’s report, which is the date these consolidated financial statements were issued. The following events occurred subsequent to December 31, 2009:

On March 2, 2010, the Company acquired the remaining 5 percent noncontrolling interest in Electromed Financial, LLC for $125,000. The noncontrolling interest holder was an officer and director of the Company.

F-20

Shares

(ELECTROMED INC LOGO)

Common Stock

PROSPECTUS

Until , 2010 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotment or subscriptions.

(FELT AND COMAPANY LOGO)

, 2010

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by us in connection with the sale of common stock being registered. All amounts shown are estimates, except the SEC registration fee, the National Association of Securities Dealers, Inc. filing fee and the Nasdaq Capital Market listing fee.


		Amount

SEC registration fee
FINRA fee
Nasdaq Capital Market listing fee
Blue sky fees and expenses
Legal fees and expenses
Accounting fees and expenses
Printing expenses
Transfer agent and registrar fees and expenses
Miscellaneous

Total		$ *

* To be filed by amendment

Item 14. Indemnification of Officers and Directors

Section 302A.521 of the Minnesota Business Corporation Act provides that, unless prohibited or limited by a corporation’s articles of incorporation or bylaws, the corporation must indemnify its current and former officers, directors, employees and agents against expenses (including attorneys’ fees), judgments, penalties, fines and amounts paid in settlement and which were incurred in connection with actions, suits, or proceedings in which such persons are parties by reason of the fact that they are or were an officer, director, employee or agent of the corporation, if they: (i) have not been indemnified by another organization; (ii) acted in good faith; (iii) received no improper personal benefit; (iv) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and (v) reasonably believed that the conduct was in the best interests of the corporation. Section 302A.521 also permits a corporation to purchase and maintain insurance on behalf of its officers, directors, employees and agents against any liability which may be asserted against, or incurred by, such persons in their capacities as officers, directors, employees and agents of the corporation, whether or not the corporation would have been required to indemnify the person against the liability under the provisions of such section.

Article 6 of our Articles of Incorporation limits our directors’ personal liability for claims of breach of fiduciary duty to the full extent permitted by the Minnesota Business Corporation Act, and Article 5 of the Bylaws of the Company provides that we will indemnify and advance expenses to officers, directors and employees to the full extent permitted by the Minnesota Business Corporation Act.

Item 15. Recent Sales of Unregistered Securities

In the three years preceding the date of this registration statement, we issued the securities described below that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). None of the transactions involved any underwriters, underwriting discounts, or commissions or any public offering, and we believe each transaction, if deemed to be a sale of a security, was exempt from the registration requirements of the Securities Act by virtue of Section 4(2), and Regulation D promulgated thereunder, or Section 3(a)(9) thereof, or Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts related to compensation.

II-1

From March 2008 through November 2009, we issued an aggregate of 54,800 shares of common stock to six employees pursuant to warrant exercises, for aggregate cash consideration of $97,300.

From June 2007 through September 2008, we issued an aggregate of 161,858 shares of common stock to 10 accredited investors for aggregate cash consideration of approximately $553,000.

In February 2009, we issued 10,000 shares of common stock to one accredited investor for aggregate cash consideration of $45,000.

In November 2008, we issued warrants to purchase 600 shares of common stock to a family member of an affiliate. The warrants vest in annual 20% increments, have a ten-year term, and an exercise price of $3.50 per share.

In November 2007, we issued 600 shares of common stock to a family member of an affiliate pursuant to a warrant exercise, for aggregate cash consideration of $600.

From February through September 2008, we issued an aggregate of 153,003 shares of common stock to 24 accredited investors pursuant to warrant exercises, for aggregate cash consideration of approximately $438,000.

In March 2009 and August 2009, we issued an aggregate of 40,401 shares of common stock to 24 accredited investors pursuant to warrant exercises, for aggregate cash consideration of approximately $114,000.

From November 2007 through June 2008, we issued an aggregate of 388,341 shares of common stock to 24 accredited investors in exchange for the cancellation of convertible promissory notes in the aggregate principal amount of approximately $1,165,000, which bore interest at a rate of 7.0%.

In March 2008, we issued 35,000 shares of common stock to an accredited investor in exchange for an approximately 1.25 acre parcel of land in New Prague, Minnesota.

In September and December 2008, we issued an aggregate of 30,000 shares of common stock to two accredited investors in exchange for consulting and construction services.

Item 16. Exhibits and Financial Statement Schedules


(a)	Exhibits

The attached Exhibit Index is incorporated herein by reference.

(b)	Financial Statement Schedules.

No financial statement schedules are required because the registrant is a smaller reporting company.

Item 17. Undertakings

The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or

II-2

controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered, and the offering of these securities at that time shall be deemed to be the initial bona fide offering.

II-3

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New Prague, State of Minnesota on this 3rd day of May, 2010.


	ELECTROMED, INC.

	By:	/s/ Robert D. Hansen

	Robert D. Hansen
	Co-Founder, Chairman and Chief Executive Officer

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement been signed by the following persons in the capacities and on the dates indicated. Each person whose signature to this Registration Statement appears below hereby constitutes and appoints Robert D. Hansen, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf individually and in the capacity stated below and to perform any acts necessary to be done in order to file all amendments and post-effective amendments to this Registration Statement, any registration statement filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and any and all instruments or documents filed as part of or in connection with any of such amendments or registration statements, and each of the undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his substitutes, shall do or cause to be done by virtue hereof.


Signature	Title	Date


/s/ Robert D. Hansen	Co-Founder, Chairman and Chief Executive Officer	May 3, 2010

Robert D. Hansen

/s/ Terry M. Belford	Chief Financial Officer	May 3, 2010

Terry M. Belford, CPA, CMA

/s/ Craig N. Hansen	Co-Founder and Director	May 3, 2010

Craig N. Hansen

/s/ Dr. Noel D. Collis	Director	May 3, 2010

Dr. Noel D. Collis, MD

/s/ Thomas M. Hagedorn	Director	May 3, 2010

Thomas M. Hagedorn

/s/ Dr. George H. Winn	Director	May 3, 2010

Dr. George H. Winn, DDS

II-4

ELECTROMED, INC.

REGISTRATION STATEMENT ON FORM S-1

EXHIBIT INDEX


Exhibit Number		Description
1.1		Form of Underwriting Agreement between Feltl and Company, Inc. and Electromed, Inc.*

3.1		Articles of Incorporation of Electromed, Inc., as amended.

3.2		Bylaws of Electromed, Inc.

4.1		Specimen certificate representing shares of common stock of Electromed, Inc.*

4.2		Form of warrant issued to investors.

4.3		Form of warrant issued to employees and service providers.

4.4		Form of warrant issued in connection with 7% Senior Secured Convertible Notes.

4.5		Form of Underwriter’s Warrant.*

5.1		Opinion of Fredrikson & Byron, P.A. regarding the legality of the shares.*

10.1		Credit Agreement, dated December 9, 2009, between Electromed, Inc. and U.S. Bank, N.A.

10.2		$3,500,000 Revolving Note, dated December 9, 2009, payable to U.S. Bank, N.A.

10.3		$1,520,000 Term Loan A, dated December 9, 2009, payable to U.S. Bank N.A.

10.4		$1,000,000 Term Loan B, dated December 9, 2009, payable to U.S. Bank N.A.

10.5		Security Agreement, dated December 9, 2009, between Electromed, Inc. and U.S. Bank N.A.

10.6		Security Agreement, dated December 9, 2009, between Electromed Financial, LLC and U.S. Bank N.A.

10.7		Pledge Agreement, dated December 9, 2009, between Electromed, Inc. and U.S. Bank N.A.

10.8		Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement, dated December 9, 2009, between Electromed, Inc. and U.S. Bank N.A.

10.9		Guaranty, dated December 9, 2009, between Electromed Financial, LLC and U.S. Bank, N.A.

10.10		Environmental and ADA Indemnification Agreement dated December 9, 2009, between Electromed, Inc. and U.S. Bank N.A.

10.11		Form of Assignment of Patent Application.

10.12		Employment Agreement, dated January 1, 2010, between Electromed, Inc. and Robert D. Hansen.

10.13		Employment Agreement, dated January 1, 2010, between Electromed, Inc. and Terry Belford.

10.14		Non-Competition, Non-Solicitation, and Confidentiality Agreement dated January 1, 2010 between Electromed, Inc. and Robert D. Hansen.

II-5



10.15		Non-Competition, Non-Solicitation, and Confidentiality Agreement dated January 1, 2010, between Electromed, Inc. and Terry Belford.

10.16		Purchase Agreement, dated March 2, 2010, between Electromed, Inc. and Robert D. Hansen.

10.17		Letter Agreement dated February 16, 2010, between Electromed, Inc. and Hansen Engine Technologies, Inc.*

21.1		Subsidiaries of Electromed, Inc.

23.1		Consent of McGladrey & Pullen, LLP.

23.2		Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1).*

24.1		Power of Attorney (included on signature page).



*	To be provided by amendment.

II-6

Exhibit 3.1

ARTICLES OF INCORPORATION

ELECTROMED, INC.

The undersigned, being a natural person of full age, for the purpose of forming a corporation under and pursuant to Chapter 302A of Minnesota Statutes, as amended, hereby adopts the following Articles of Incorporation:

ARTICLE 1 - NAME

1.1 The name of the corporation shall be Electromed, Inc.

ARTICLE 2 - REGISTERED OFFICE

2.1 The location and office address of the registered office of the corporation in this state shall be 14920 Minnetonka Industrial Road, Minnetonka, Minnesota 55345.

ARTICLE 3 - CAPITAL STOCK

3.1 Authorized Shares. The aggregate number of shares that the corporation has authority to issue shall be One Million (1,000,000) shares of common stock. Such shares shall not have any par value, except that they shall have a par value of one cent ($.01) per share solely for the purpose of a statute or regulation imposing a tax or fee based upon the capitalization of a corporation, and except that they shall have such par value as may be fixed by the corporation’s Board of Directors for the purpose of a statute or regulation requiring the shares of the corporation to have a par value.

3.2 Issuance of Shares. The Board of Directors of the corporation is authorized from time to time to accept subscriptions for, issue, sell and deliver shares of stock of any class or series of the corporation, and rights to purchase securities of the corporation, to such persons, at such time, for such consideration, and upon such terms and conditions as the Board shall determine.

ARTICLE 4 - RIGHTS OF SHAREHOLDERS

4.1 No Preemptive Rights. No shareholder of the corporation shall have any preemptive right to subscribe for, purchase or acquire any shares of stock of any class or series of the corporation now or hereafter authorized or issued by the corporation.

4.2 No Cumulative Voting Rights. No shareholder shall have the right to cumulate votes for the election of directors or for any other purpose.

ARTICLE 5 - WRITTEN ACTION BY DIRECTORS

5.1 Any action required or permitted to be taken at a Board meeting may be taken by written action signed by all of the directors or, in cases where the action need not be approved by the shareholders, by written action signed by the number of directors that would be required to take the same action at a meeting of the Board at which all directors were present.

ARTICLE 6 - LIMITATION OF DIRECTOR LIABILITY

6.1 A director shall not be personally liable to the corporation or to its stockholders for monetary damages for any breach of fiduciary duty as a director, except to the extent that elimination or limitation of liability is not permitted under Section 302A.251, the Minnesota Business Corporation Act, as the same exists or may hereafter be amended. Any repeal or modification of the provisions of this Article shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.

ARTICLE 7 - MERGER, EXCHANGE, SALE OF ASSETS AND DISSOLUTION

7.1 Where approval of shareholders is required by law, the affirmative vote of the holders of at least a majority of the voting power of all shares entitled to vote shall be required to authorize the corporation (i) to merge into or with one or more other corporations, (ii) to exchange its shares for shares of one or more other corporations, (iii) to sell, lease, transfer or otherwise dispose of all or substantially all of its property and assets, including its good will, or (iv) to commence voluntary dissolution.

ARTICLE 8 - AMENDMENT OF ARTICLES OF INCORPORATION

8.1 Any provision contained in these Articles of Incorporation may be amended, altered, changed or repealed by the affirmative vote of the holders of at least a majority of the

voting power of the shares present and entitled to vote at a duly held meeting or such greater percentage as may be otherwise prescribed by the laws of the State of Minnesota.

ARTICLE 9 - INCORPORATOR


	9.1 The name and post office address of the incorporator are as follows:

	Robert D. Hansen	14920 Minnetonka Industrial Road
		Minnetonka, Minnesota 55345

	IN WITNESS WHEREOF, the undersigned incorporator has hereunto set his hand this 12th day of October, 1992.


Subscribed and sworn to before me
this 12th day of October, 1992.


Notary Public

AMENDMENT NO. 1

TO THE

ARTICLES OF INCORPORATION

ELECTROMED, INC.

“ ARTICLE 3 - CAPITAL STOCK

3.1 Authorized Shares. The aggregate number of shares that the corporation has authority to issue shall be Five Million (5,000,000) shares of common stock. Such shares shall not have any par value, except that they shall have a par value of one cent ($.01) per share solely for the purpose of a statute or regulation imposing a tax or fee based upon the capitalization of a corporation, and except that they shall have such par value as may be fixed by the corporation’s Board of Directors for the purpose of a statute or regulation requiring the shares of the corporation to have a par value.

3.3 Classes and Series of Shares. The Board of Directors of the corporation is further authorized to establish from among the authorized shares, by resolutions adopted and filed in the manner provided by law, one or more classes and/or series of shares, to designate each such class and/or series, and to fix the relative rights, preferences, and limitations of any such classes and/or series.”


	STATE OF MINNESOTA
	DEPARTMENT OF STATE
	FILED
	JUN 25 1996



	Secretary of State

6051510002

ARTICLES OF AMENDMENT
OF
ELECTROMED, INC.

I, the undersigned, of full age, for the purpose of amending the Articles of Incorporation for a corporation under and pursuant to the provisions of Chapter 302A of the Minnesota Statutes and laws amendatory thereof and supplementary thereto, do hereby amend a body corporate and adopt the following Article of Amendment.

The following amendment of articles regulating the above corporation was adopted:

ARTICLE III-CAPITAL STOCK

3.1 Authorized Shares. The aggregate number of shares that the corporation has authority to issue shall be Ten Million (10,000,000) shares of common stock. Such shares shall not have any par value, except that they shall have a par value of one cent ($.01) per share solely for the purpose of a statute or regulation imposing a tax or fee based upon the capitalization of a corporation, and except that they shall have such par value as may be fixed by the corporation’s Board of Directors for the purpose of a statute or regulation requiring the shares of the corporation to have a par value.

On behalf of the above-named corporation, I have hereunto executed these Articles of Amendment this 19th day of August, 2003. I certify that I am authorized to execute this amendment and I further certify that I understand that by signing this amendment, I am subject to the penalties of perjury as set forth in Section 609.48 as if I had signed this amendment under oath.



	Scott A. Becker, Authorized Person



	STATE OF MINNESOTA
	DEPARTMENT OF STATE
	FILED
	AUG 27 2003

	Secretary of State

Exhibit 3.2

BYLAWS
OF
ELECTROMED, INC.

ARTICLE ONE
OFFICES

1.1 Offices . The principal executive office of the corporation shall be 14920 Minnetonka Industrial Road, Minnetonka, Minnesota 55345, and the corporation may have offices at such other places within or without the State of Minnesota as the Board of Directors shall from time to time determine or the business of the corporation requires.

ARTICLE TWO
MEETINGS OF SHAREHOLDERS

2.1 Regular Meetings . Regular meetings of the shareholders of the corporation entitled to vote shall be held on an annual or other less frequent basis as shall be determined by the Board of Directors or by the chief executive officer; provided, that if a regular meeting has not been held during the immediately preceding 15 months, a shareholder or shareholders holding 3% or more of the voting power of all shares entitled to vote may demand a regular meeting of shareholders by written notice of demand given to an officer of the corporation. At each regular meeting, the shareholders, voting as provided in the Articles of Incorporation and these Bylaws, shall elect qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six months after the date of the meeting, and shall transact such other business as shall come before the meeting. No meeting shall be considered a regular meeting unless specifically designated as such in the notice of meeting or unless all shareholders entitled to vote are present in person or by proxy and none of them objects to such designation.

2.2 Special Meetings . Special meetings of the shareholders entitled to vote may be called at any time by the Chairman of the Board, the chief executive officer, the chief financial officer, two or more directors, or a shareholder or shareholders holding ten percent (10%) or more of the voting power of all shares entitled to vote.

2.3 Place of Meetings . Meetings of the shareholders shall be held at the principal executive office of the corporation

or at such other place, within or without the State of Minnesota, as is designated by the Board of Directors, except that a regular meeting called by or at the demand of a shareholder shall be held in the county where the principal executive office of the corporation is located.

2.4 Notice of Meetings . There shall be mailed to each holder of shares entitled to vote, at his address as shown by the books of the corporation, a notice setting out the place, date and hour of any regular or special meeting, which notice shall be mailed not less than ten (10) days nor more than sixty (60) days prior to the date of the meeting; provided, that notice of a meeting at which there is to be considered a proposal (i) to dispose of all, or substantially all, of the property and assets of the corporation or (ii) to dissolve the corporation shall be mailed to all shareholders of record, whether or not entitled to vote; and provided further, that notice of a meeting at which there is to be considered a proposal to adopt a plan of merger or exchange shall be mailed to all shareholders of record, whether or not entitled to vote, at least fourteen (14) days prior thereto. Notice of any special meeting shall state the purpose or purposes of the proposed meeting, and the business transacted at all special meetings shall be confined to the purposes stated in the notice, unless all of the shareholders are present in person or by proxy and none of them objects to consideration of a particular item of business. Attendance at a meeting by any shareholder, without objection by him, shall constitute his waiver of notice of the meeting.

2.5 Quorum and Adjourned Meeting . The holders of a majority of the voting power of the shares entitled to vote at a meeting, represented either in person or by proxy, shall constitute a quorum for the transaction of business at any regular or special meeting of shareholders. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though the withdrawal of a number of shareholders originally present leaves less than the proportion or number otherwise required for a quorum. In case a quorum is not present at any meeting, those present shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite number of shares entitled to vote shall be represented. At such adjourned meeting at which the required amount of shares entitled to vote shall be represented, any business may be transacted which might

have been transacted at the original meeting.

2.6 Voting . At each meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person or by proxy duly appointed by an instrument in writing subscribed by such shareholder. Each shareholder shall have one (1) vote for each share having voting power standing in his name on the books of the corporation except as may be otherwise required to provide for cumulative voting (if not denied by the Articles). Upon the demand of any shareholder, the vote for directors or the vote upon any question before the meeting shall be by ballot. All elections shall be determined and all questions decided by a majority vote of the number of shares entitled to vote and represented at any meeting at which there is a quorum except in such cases as shall otherwise be required by statute, the Articles of Incorporation or these Bylaws. Except as may otherwise be required to conform to cumulative voting procedures, directors shall be elected by a plurality of the votes cast by holders of shares entitled to vote thereon.

2.7 Record Date . The Board of Directors may fix a time, not exceeding sixty (60) days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of and entitled to vote at such meeting, notwithstanding any transfer of any shares on the books of the corporation after any record date so fixed. In the absence of action by the Board, only shareholders of record twenty (20) days prior to a meeting may vote at such meeting.

2.8 Order of Business . The suggested order of business at any regular meeting, and, to the extent appropriate, at all other meetings of the shareholders shall, unless modified by the presiding chairman, be:

	(a)	Call of roll
	(b)	Proof of due notice of meeting or waiver of notice
	(c)	Determination of existence of quorum
	(d)	Reading and disposal of any unapproved minutes
	(e)	Reports of officers and committees
	(f)	Election of directors
	(g)	Unfinished business
	(h)	New business
	(i)	Adjournment.

ARTICLE THREE
DIRECTORS

3.1 General Powers . Except as authorized by the shareholders pursuant to a shareholder control agreement or unanimous affirmative vote, the business and affairs of the corporation shall be managed by or under the direction of a Board of Directors.

3.2 Number, Term and Qualifications . The Board of Directors shall consist of one or more members. The number of members of the first Board (if not named in the Articles of Incorporation) shall be determined by the incorporators or shareholders. Thereafter, at each regular meeting of shareholders, the shareholders shall determine the number of directors; provided, that between regular meetings of shareholders the authorized number of directors may be increased or decreased by the shareholders or increased by the Board of Directors. Each director shall serve for an indefinite term that expires at the next regular meeting of shareholders, and until his successor is elected and qualified, or until his earlier death, resignation, disqualification, or removal as provided by statute.

3.3 Vacancies . Vacancies on the Board of Directors may be filled by the affirmative vote of a majority of the remaining members of the Board, though less than a quorum; provided, that newly created directorships resulting from an increase in the authorized number of directors shall be filled by the affirmative vote of a majority of the directors serving at the time of such increase. Persons so elected shall be directors until their successors are elected by the shareholders, who may make such election at the next regular or special meeting of the shareholders.

3.4 Quorum and Voting . A majority of the directors currently holding office shall constitute a quorum for the transaction of business. Except as otherwise provided in the Articles of Incorporation or these Bylaws, the acts of a majority of the directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors.

3.5 Board Meeting; Place and Notice . Meetings of the Board of Directors may be held from time to time at any place

within or without the State of Minnesota that the Board of Directors may designate. In the absence of designation by the Board of Directors, Board meetings shall be held at the principal executive office of the corporation. Any director may call a Board meeting by giving forty-eight (48) hours notice to all directors of the date and time of the meeting. The notice need not state the purpose of the meeting, and may be given by mail, telephone, telegram, or in person. If a meeting schedule is adopted by the Board, or if the date and time of a Board meeting has been announced at a previous meeting, no notice is required.

3.6 Absent Directors . A director may give advance written consent or opposition to a proposal to be acted on at a Board meeting. If the director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes of the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected.

3.7 Compensation . Directors who are not salaried officers of the corporation shall receive such fixed sum per meeting attended or such fixed annual sum or both as shall be determined from time to time by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor.

3.8 Committees . The Board of Directors may, by resolution approved by the affirmative vote of a majority of the Board, establish committees having the authority of the Board in the management of the business of the corporation only to the extent provided in the resolution. Each such committee shall consist of one or more natural persons (who need not be directors) appointed by affirmative vote of a majority of the directors present, and shall be subject at all times to the direction and control of the Board. A majority of the members of a committee present at a meeting shall constitute a quorum for the transaction of business.

3.9 Committee of Disinterested Persons . The Board may establish a committee composed of two or more disinterested directors or other disinterested persons to determine whether it is in the best interests of the corporation to pursue a particular legal right or remedy of the corporation and whether to cause the dismissal or discontinuance of a particular proceeding that seeks to assert a right or remedy on behalf of the corporation. For purposes of this section, a director or other person is “disinterested” if the director or other person is not the owner of more than one percent of the outstanding shares of, or a present or former officer, employee, or agent of, the corporation or of a related corporation and has not been made or threatened to be made a party to the proceeding in question. The committee, once established, is not subject to the direction or control of, or termination by, the Board. A vacancy on the committee may be filled by a majority vote of the remaining members. The good faith determinations of the committee are binding upon the corporation and its directors, officers and shareholders. The committee terminates when it issues a written report of its determinations to the Board.

3.10 Order of Business . The suggested order of business at any meeting of the Board of Directors shall, to the extent appropriate and unless modified by the presiding chairman, be:

	(a)	Roll call
	(b)	Proof of due notice of meeting or waiver of notice, or unanimous presence and declaration by presiding chairman
	(c)	Determination of existence of quorum
	(d)	Reading and disposal of any unapproved minutes
	(e)	Reports of officers and committees
	(f)	Election of officers
	(g)	Unfinished business
	(h)	New business
	(i)	Adjournment

ARTICLE FOUR
OFFICERS

4.1 Number and Designation . The corporation shall have one or more natural persons exercising the functions of the offices of chief executive officer and chief financial officer. The Board of Directors may elect or appoint such other officers or agents as it deems necessary for the operation and management of the corporation including, but not limited to, a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Treasurer, each of whom shall have the powers, rights, duties and responsibilities set forth in these Bylaws unless otherwise determined by the Board. Any of the offices or functions of those offices may be held by the same person.

4.2 Election, Term of Office and Qualification . At the first meeting of the Board following each election of directors, the Board shall elect officers, who shall hold office until the next election of officers or until their successors are elected or appointed and qualify; provided, however, that any officer may be removed with or without cause by the affirmative vote of a majority of the Board of Directors present (without prejudice, however, to any contract rights of such officer).

4.3 Resignation . Any officer may resign at any time by giving written notice to the corporation. The resignation is effective when notice is given to the corporation, unless a later date is specified in the notice, and acceptance of the resignation shall not be necessary to make it effective.

4.4 Vacancies in Office . If there be a vacancy in any office of the corporation, by reason of death, resignation, removal or otherwise, such vacancy shall be filled for the unexpired term by the Board of Directors.

4.5 Chief Executive Officer . Unless provided otherwise by a resolution adopted by the Board of Directors, the chief executive officer (a) shall have general active management of the business of the corporation; (b) shall, when present and in the absence of the Chairman of the Board, preside at all meetings of the shareholders and Board of Directors; (c) shall see that all orders and resolutions of the Board are carried into effect; (d) shall sign and deliver in the name of the corporation any deeds, mortgages, bonds, contracts or other instruments pertaining to the

business of the corporation, except in cases in which the authority to sign and deliver is required by law to be exercised by another person or is expressly delegated by the Articles, these Bylaws or the Board to some other officer or agent of the corporation; (e) may maintain records of and certify proceedings of the Board and shareholders; and (f) shall perform such other duties as may from time to time be assigned to him by the Board.

4.6 Chief Financial Officer . Unless provided otherwise by a resolution adopted by the Board of Directors, the chief financial officer (a) shall keep accurate financial records for the corporation; (b) shall deposit all monies, drafts and checks in the name of and to the credit of the corporation in such banks and depositories as the Board of Directors shall designate from time to time; (c) shall endorse for deposit all notes, checks and drafts received by the corporation as ordered by the Board, making proper vouchers therefor; (d) shall disburse corporate funds and issue checks and drafts in the name of the corporation, as ordered by the Board; (e) shall render to the chief executive officer and the Board of Directors, whenever requested, an account of all of his transactions as chief financial officer and of the financial condition of the corporation; and (f) shall perform such other duties as may be prescribed by the Board of Directors or the chief executive officer from time to time.

4.7 Chairman of the Board . The Chairman of the Board shall preside at all meetings of the shareholders and of the Board and shall exercise general supervision and direction over the more significant matters of policy affecting the affairs of the corporation, including particularly its financial and fiscal affairs.

4.8 President . Unless otherwise determined by the Board, the President shall be the chief executive officer. If an officer other than the President is designated chief executive officer, the President shall perform such duties as may from time to time be assigned to him by the Board.

4.9 Vice president . Each Vice President shall have such powers and shall perform such duties as may be specified in these Bylaws or prescribed by the Board of Directors. In the event of absence or disability of the President, the Board of Directors may

designate a Vice President or Vice Presidents to succeed to the power and duties of the President.

4.10 Secretary . The Secretary shall, unless otherwise determined by the Board, be secretary of and attend all meetings of the shareholders and Board of Directors, and may record the proceedings of such meetings in the minute book of the corporation and, whenever necessary, certify such proceedings. The Secretary shall give proper notice of meetings of shareholders and shall perform such other duties as may be prescribed by the Board of Directors or the chief executive officer from time to time.

4.11 Treasurer . Unless otherwise determined by the Board, the Treasurer shall be the chief financial officer of the corporation. If an officer other than the Treasurer is designated chief financial officer, the Treasurer shall perform such duties as may be prescribed by the Board of Directors or the chief executive officer from time to time.

4.12 Delegation . Unless prohibited by a resolution approved by the affirmative vote of a majority of the directors present, an officer elected or appointed by the Board may delegate in writing some or all of the duties and powers of his office to other persons.

ARTICLE FIVE
INDEMNIFICATION

5.1 The corporation shall indemnify such persons, for such expenses and liabilities, in such manner, under such circumstances, and to such extent, as permitted by Minnesota Statutes, Section 302A.521, as now enacted or hereafter amended.

ARTICLE SIX
SHARES AND THEIR TRANSFER

6.1 Certificate of Stock . Every owner of stock of the corporation shall be entitled to a certificate, in such form as the Board of Directors may prescribe, certifying the number of shares of stock of the corporation owned by him. The certificates for such stock shall be numbered (separately for each class) in the

order in which they are issued and shall, unless otherwise determined by the Board, be signed by the chief executive officer, the chief financial officer, or any other officer of the corporation. A signature upon a certificate may be a facsimile. Certificates on which a facsimile signature of a former officer, transfer agent or registrar appears may be issued with the same effect as if such person were such officer, transfer agent or registrar on the date of issue.

6.2 Stock Record . As used in these Bylaws, the term “shareholder” shall mean the person, firm or corporation in whose name outstanding shares of capital stock of the corporation are currently registered on the stock record books of the corporation. The corporation shall keep, at its principal executive office or at another place or places within the United States determined by the Board, a share register not more than one year old containing the names and addresses of the shareholders and the number and classes of shares held by each shareholder. The corporation shall also keep at its principal executive office or at another place or places within the United States determined by the Board, a record of the dates on which certificates representing shares were issued. Every certificate surrendered to the corporation for exchange or transfer shall be cancelled and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled (except as provided for in Section 6.4 of this Article Six).

6.3 Transfer of Shares . Transfer of shares on the books of the corporation may be authorized only by the shareholder named in the certificate (or his legal representative or duly authorized attorney-in-fact) and upon surrender for cancellation of the certificate or certificates for such shares. The shareholder in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation; provided, that when any transfer of shares shall be made as collateral security and not absolutely, such fact, if known to the corporation or to the transfer agent, shall be so expressed in the entry of transfer; and provided, further, that the Board of Directors may establish a procedure whereby a shareholder may certify that all or a portion of the shares registered in the name of the shareholder are held for the account of one or more beneficial owners.

6.4 Lost Certificate . Any shareholder claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact in such form as the Board of Directors may require, and shall, if the directors so require, give the corporation a bond of indemnity in form and with one or more sureties satisfactory to the Board of at least double the value, as determined by the Board, of the stock represented by such certificate in order to indemnify the corporation against any claim that may be made against it on account of the alleged loss or destruction of such certificate, whereupon a new certificate may be issued in the same tenor and for the same number of shares as the one alleged to have been destroyed or lost.

ARTICLE SEVEN
GENERAL PROVISIONS

7.1 Distributions; Acquisitions of Shares . Subject to the provisions of law, the Board of Directors may authorize the acquisition of the corporation’s shares and may authorize distributions whenever and in such amounts as, in its opinion, the condition and the affairs of the corporation shall render it advisable.

7.2 Fiscal Year . The fiscal year of the corporation shall be established by the Board of Directors.

7.3 Seal . The corporation shall have such corporate seal or no corporate seal as the Board of Directors shall from time to time determine.

7.4 Securities of Other Corporations .

(a) Voting Securities Held by the Corporation . Unless otherwise ordered by the Board of Directors, the chief executive officer shall have full power and authority on behalf of the corporation (i) to attend and to vote at any meeting of security holders of other companies in which the corporation may hold securities; (ii) to execute any proxy for such meeting on behalf of the corporation; and (iii) to execute a written action in lieu of a meeting of such other company on behalf of this corporation; provided, however, that any vote cast shall be in direct proportion to the way in which each director of the corporation would have

voted on the matter in question, if given the opportunity so to vote. At such meeting, by such proxy or by such writing in lieu of meeting, the chief executive officer shall, subject to the provisions of this section, possess and may exercise any and all rights and powers incident to the ownership of such securities that the corporation might have possessed and exercised if it had been present. The Board of Directors may from time to time confer like powers upon any other person or persons.

(b) Purchase and Sale of Securities . Upon unanimous approval of the Board of Directors, the chief executive officer shall have full power and authority on behalf of the corporation to purchase, sell, transfer or encumber securities of any other company owned by the corporation which represent not more than 10% of the outstanding securities of such issuer, and may execute and deliver such documents as may be necessary to effectuate such purchase, sale, transfer or encumbrance. The Board of Directors may from time to time confer like powers upon any other person or persons.

ARTICLE EIGHT
MEETINGS

8.1 Waiver of Notice . Whenever any notice whatsoever is required to be given by these Bylaws, the Articles of Incorporation or any of the laws of the State of Minnesota, a waiver thereof given by the person or persons entitled to such notice, whether before, at or after the time stated therein and either in writing, orally or by attendance, shall be deemed equivalent to the actual required notice.

8.2 Conference Meetings and Participation . A conference among directors by any means of communication through which the directors may simultaneously hear each other during the conference constitutes a Board meeting, if the same notice is given of the conference as would be required for a meeting, and if the number of directors participating in the conference would be sufficient to constitute a quorum at a meeting. Participation in a meeting by that means constitutes presence in person at the meeting. A director may participate in a Board meeting not heretofore described in this paragraph, by any means of communication through which the director, other directors so participating, and all directors physically present at the meeting may simultaneously hear

each other during the meeting. Participation in a meeting by that means constitutes presence in person at the meeting. The provisions of this section shall apply to committees and members of committees to the same extent as they apply to the Board and directors.

8.3 Authorization Without Meeting . Any action of the shareholders, the Board of Directors, or any committee of the corporation which may be taken at a meeting thereof, may be taken without a meeting if authorized by a writing signed by all of the holders of shares who would be entitled to vote on such action, by all of the directors (unless less than unanimous action is permitted by the Articles of Incorporation) , or by all of the members of such committee, as the case may be.

ARTICLE NINE
AMENDMENTS OF BYLAWS

9.1 Amendments . Unless the Articles of Incorporation provide otherwise, these Bylaws may be altered, amended, added to or repealed by the majority vote of the members of the Board of Directors. Such authority in the Board of Directors is subject to the power of the shareholders to change or repeal such Bylaws, and the Board of Directors shall not make or alter any Bylaws fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies on the Board, or fixing the number of directors or their classifications, qualifications or terms of office, but the Board may adopt or amend a Bylaw to increase the number of directors.

The undersigned, Secretary of Electromed, Inc. hereby certifies that the foregoing Bylaws were duly adopted as the initial Bylaws of the corporation by its Board of Directors as of February 1, 1993.



	Secretary

Exhibit 4.2

STOCK PURCHASE WARRANT

To Purchase Common Stock of

ELECTROMED, INC.

DATE OF GRANT:		2003 “Date”
DATE OF ISSUE: ,		2003 “Issue Date”
NAME OF HOLDER:		“Holder”
NUMBER OF SHARES PURCHASABLE:		“Shares
TERM:	Thirty-Six (36) months (from date of grant)	“Term”
EXERCISE PRICE:	$_____ Per Share (as of Issue Date)	“Exercise Date”

THIS CERTIFIES THAT, for value received, the Holder, named above, or registered assigns, is entitled to purchase from ELECTROMED, [ (herein called the “Company”), a Minnesota corporation for the Term, stated above, beginning on the Date, stated above, that number of Shares, stated above, of the Company’s Common Stock, as adjusted as provided in Section 5 below, at the Exercise Price, stated above. This Stock Purchase Warrant is subject to the following provisions, terms and conditions:

1. Exercise of Warrant . The rights represented by this Warrant may be exercised by the Holder, in whole or in part (but not as fractional shares of Common Stock), by the surrender of this Warrant (properly endorsed if required) and the attached form of exercise at the Company’s registered office, and upon payment to the Company by certified or bank check of the Exercise Price for the Shares. The Shares are deemed to be issued to the Holder as the record owner as of the close of business on the date on which this Warrant shall have been surrendered and payment made for the Shares. Certificates for the Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding fifteen (15) days, after the rights represented by this Warrant shall have been so exercised. Unless this Warrant has expired, a new Warrant representing the number of Shares, if any, with respect to which this Warrant shall not then have been exercised, shall be delivered to the Holder at the same time.

2. Transfer of Warrants . During the Term of this Warrant, this Warrant may, subject to any applicable securities laws restrictions, be transferred or exchanged with respect to all Warrants, or any number of Warrants, less than all, represented by this Warrant Certificate. If this Warrant is transferred or exchanged in part, the Company shall, upon surrender for transfer, or exchange of this Warrant Certificate, properly endorse, and, at the Company’s expense, issue and deliver to the purchaser of said Warrant, a Certificate representing the number of Warrants transferred or exchanged, and a Certificate to the Holder, representing the number of Warrants retained.

3. Certain Covenants of the Company . The Company covenants and agrees as follows:

a.	All shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and issued, fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof.
b.	During the Term of this Warrant, the Company will at all times have authorized, and reserved free of preemptive or other rights for the exclusive purpose of issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant.

4. Participatory Registration Rights .

The Company agrees that, if at any time prior to the last day of the Term of this Warrant, the Board of Directors of the Company shall authorize under the Securities Act of 1933 (the “Securities Act”) or Minnesota Securities Act (the “Minnesota Act”) the filing of (i) a Securities Act Registration Statement; or (ii) a Notification on Form 1-A under the Securities Act; (collectively called “registration forms”, herein) in connection with the proposed offer of any of its Common Stock by it or any of its shareholders, the Company shall promptly notify the Holder or assigns that a registration form will be filed and that the Shares will, to the extent provided herein, be included in such registration form upon the Holder’s written request and will cause such registration form to include all shares which it has been so requested to include.

b.	Shares outstanding at the time that the foregoing notice is given may only be included in a registration form, to the extent that the Company does not wish itself to take full advantage of the maximum dollar amount available under such form.
c.	The Company agrees that it will also, upon request by any of the Holders, use its best efforts to include the Shares in any registration or similar proceeding undertaken by the Company to qualify its securities for sale in various states selected by the Company.
d.	The Company agrees that the expenses incurred in preparing and filing such registration forms (including all amendments thereto) and in complying with the securities acts of such states shall be paid by the Company. However, each Holder shall be responsible for paying the fees and expenses of any attorney retained by Holder, and for paying sales commission or underwriting discounts related to the sale of the Shares.
e.	The Company shall indemnify the Holders substantially to the same extent as the Company shall indemnify the underwriter of its own shares, and the Holders shall indemnify the Company with respect to written information furnished by them to the Company for inclusion in any such registration statement.

5. Adjustment of Exercise Price and Number of Shares . The above provisions are, however, subject to the following:

The Exercise Price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the Exercise Price, the Holder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustments by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.

In case at any time the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased.

c.	In case at any time:
	(1)	the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; or
	(2)	the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or any rights; or
	(3)	there shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantial all of its assets to, another corporation; or
	(4)	there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;
	Then, in any one or more of said cases, the Company shall give written notice, by first class mail, postage prepaid, addressed to the Holder at the address of the Holder as shown on the books of the Company, of the date on which (a) the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (b) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sales, dissolution, liquidation, or winding up, as the case may be. Such written notice shall be given at least 20 days prior to the action in question and not less that 20 days prior to the record date on which the Company’s transfer books are closed in respect thereto.

6. Term and Assignment .

a.	This Warrant shall be valid and exercisable by the Holder during its Term.
b.	During the Term of the Warrant, the holder may assign the rights represented by this Warrant, to the extent not previously exercised, subject to any applicable securities laws restrictions.

7. No Rights as Stockholder . This Warrant shall not entitle the Holder as such to any voting rights or other rights as a stockholder of the Company.

IN WITNESS WHEREOF, ELECTROMED, INC. has caused this Warrant to be signed by a duly authorized officer as of the Date of Grant stated above.

	ELECTROMED, INC.


	BY:
		Robert D. Hansen, Chairman/CEO

Exhibit 4.3

STOCK PURCHASE WARRANT

To Purchase Common Stock of

ELECTROMED, INC.

DATE OF GRANT:		“Date”
DATE OF ISSUE: ,		“Issue Date”
NAME OF HOLDER:		“Holder”
NUMBER OF SHARES PURCHASABLE:		“Shares
TERM:	One-Hundred Twenty (120) months (from date of grant)	“Term”
EXERCISE PRICE:	$3.50 Per Share (as of Issue Date)	“Exercise Date”
VESTED:	20% of Warrants vest each anniversary after issue date; 100% Vested 5 years following issue date	“Vested”

THIS CERTIFIES THAT, for value received, the Holder, named above, or registered assigns, is entitled to purchase from ELECTROMED, (herein called the “Company”), a Minnesota corporation for the Term, stated above, beginning one year following the Date, stated above, that number of Shares vested, stated above, of the Company’s Common Stock, as adjusted as provided in Section 5 below, at the Exercise Price, stated above. This Stock Purchase Warrant is subject to the following provisions, terms and conditions:

3. Certain Covenants of the Company . The Company covenants and agrees as follows:

a. All shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and issued, fully paid and non-assessable and free from all taxes. liens and charges with respect to the issue thereof.

b. During the Term of this Warrant, the Company will at all times have authorized, and reserved free of preemptive or other rights for the exclusive purpose of issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant.

4. Participatory Registration Rights .

a. The Company agrees that, if at any time prior to the last day of the Term of this Warrant, the Board of Directors of the Company shall authorize under the Securities Act of 1933 (the “Securities Act”) or Minnesota Securities Act (the “Minnesota Act”) the filing of (i) a Securities Act Registration Statement; or (ii) a Notification on Form 1-A under the Securities Act; (collectively called “registration forms”, herein) in connection with, the proposed offer of any of its Common Stock by it or any of its shareholders, the Company shall promptly notify the Holder or assigns that a registration form will be filed and that the Shares will to flip to the extent provided herein, be included in such registration form upon the Holder’s written request and will cause such registration form to include all shares which it has been so requested to include.

b. Shares outstanding at the time that the foregoing notice is given may only be included in a registration form, to the extent that the Company does not wish itself to take full advantage of the maximum dollar amount available under such form.

c. The Company agrees that it will also, upon request by any of the Holders, use its best efforts to include the Shares in any registration or similar proceeding undertaken by the Company to qualify its securities for sale in various states selected by the Company.

d. The Company agrees that the expenses incurred in preparing and filing such registration forms (including all amendments thereto) and in complying with the securities acts of such states shall be paid by the Company. However, each Holder shall be responsible for paying the fees and expenses of any attorney retained by Holder, and for paying sales commission or underwriting discounts related to the sale of the Shares.

e. The Company shall indemnify the Holders substantially to the same extent as the Company shall indemnify the underwriter of its own shares, and the Holders shall indemnify the Company with respect to written information furnished by them to the Company for inclusion in any such registration statement.

5. Adjustment of Exercise Price and Number of Shares . The above provisions are, however, subject to the following:

a. The Exercise Price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the Exercise Price, the Holder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares obtained by multiplying the Exercise Price ‘in effect immediately prior to such adjustments by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment.

b. In case at any time the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased.

c. In case at any time:

(1) the Company shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; or

(2) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or any rights; or

(3) there shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantial all of its assets to, another corporation; or

(4) there shall be a change of control of 50% or more of the shares outstanding to a third party that is not already a shareholder of the company; or

(5) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;

Then, in any one or more of said cases, the Company shall give written notice, by first class mail, postage prepaid, addressed to tile, Holder at the address of the Holder as shown on the books of the Company, of the date on which (a) the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (b) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sales, dissolution, liquidation, or winding up, as the case may be. Such written notice shall be given at least 20 days prior to the action in question and not less that 20 days prior to the record date on which the Company’s transfer books are closed in respect thereto.

6. Term and Assignment .

a. This Warrant shall be valid and exercisable by the Holder during its Term.

b. During the Term of the Warrant, the holder may assign the rights represented by this Warrant, to the extent not previously exercised, subject to any applicable securities laws restrictions.

7. No Rights as Stockholder . This Warrant shall not entitle the Holder as such to any voting rights or other rights as a stockholder of the Company.

IN WITNESS WHEREOF, ELECTROMED, INC. has caused this Warrant to be signed by a duly authorized officer as of the Date of Grant stated above.

	ELECTROMED, INC.


	BY:
		Robert D. Hansen, Chairman/CEO

Exhibit 4.4

WARRANT #W- ___ TO PURCHASE COMMON STOCK

___ Shares of Common Stock of Electromed, Inc.

[Date]

THIS CERTIFIES THAT, Minnesota ______________ (the “Holder”), is entitled to subscribe for and purchase from Electromed, Inc., a Minnesota corporation (the “Company”) from the date hereof through ______________ up to ______________ (____) fully paid and non-assessable shares (the “Shares”) of the Company’s Common Stock, no par value (the “Common Stock”) at a price of $ ____ per share.

In addition to the aforedescribed conditions of exercise, this Warrant is subject to the following provisions, terms and conditions:

1. Exercise of Warrant . The purchase rights under this Warrant must be exercised, in whole or in part, by the Holder surrendering this Warrant with the form of subscription attached hereto duly executed by such Holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, of the purchase price payable in respect of the Common Stock being purchased. If less than all of the Common Stock is purchased, the Company will, upon such exercise, execute and deliver to the Holder hereof a new Warrant (dated the date hereof) evidencing the number of shares of Common Stock not so purchased. As soon as practicable after the exercise of this Warrant and payment of the purchase price, the Company will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder may direct, a certificate or certificates representing the Shares purchased upon such exercise.

The Company may require that such certificate or certificates contain on the face thereof a legend substantially as follows:

“The securities represented by the within certificate have not been registered under the Securities Act of 1933, as amended, or under the applicable provisions of any State Blue Sky laws, and may not be sold, transferred or otherwise disposed of unless (1) the Company consents in writing to such transfer, or (2) at the time of the proposed transfer, the securities are eligible for public resale under Rule 144 of the General Rules and Regulations of the Securities and Exchange Commission under the Securities Act (or successor rule if Rule 144 is no longer then in effect) and such transfer is made pursuant to Rule 144.”

2. Negotiability and Transfer . This Warrant may not be sold, pledged, gifted or otherwise transferred by Holder without the express written consent of the Company except upon transfer of the Company’s 7% Senior Secured Convertible Notes due ______________ with respect to the purchase of which this Warrant was issued.

3. Antidilution Adjustments . In case the Company shall at any time hereafter subdivide (i.e., stock split) or combine (i.e., reverse stock split) its outstanding shares of Common Stock, or declare a dividend payable in Common Stock, the exercise price in effect immediately prior to the subdivision, combination or record date for such dividend payable in Common Stock shall forthwith be proportionately increased, in the case of combination, or proportionately decreased, in the case of subdivision or declaration of a dividend payable in Common Stock, and each share of Common Stock purchasable upon exercise of the Warrant shall be changed to the number determined by dividing the then current exercise price by the exercise price as adjusted after such subdivision, combination or dividend payable in Common Stock.

No fractional shares of Common Stock are to be issued upon the exercise of the Warrant, but the Company shall pay a cash adjustment in respect of any fraction of a share which would otherwise be issuable in an amount equal to the same fraction of the per share value of Common Stock on the day of exercise as determined in good faith by the Company.

In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or in the case of any consolidation with or merger of the Company into or with another corporation, or the sale of all or substantially all of its assets to another corporation effected in such manner that the holders of common shares shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a part of such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Holder of the Warrant shall have the right thereafter to receive, upon the exercise hereof, the kind and amount of shares of stock or other securities or property which the holder would have been entitled to receive if, immediately prior to such reorganization, reclassification, consolidation or merger, the Holder had held the number of shares of Common Stock which were then purchasable upon the exercise of the Warrant. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Holder of the Warrant, to the end that the provisions set forth herein (including provisions with respect to adjustments of the exercise price) shall thereafter be applicable, as nearly as reasonably maybe, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant.

When any adjustment is required to be made in the exercise price, initial or adjusted, the Company shall forthwith determine the new exercise price; and

(a) Prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new exercise price; and

(b) Cause a copy of such statement to be mailed to the Holder of the Warrant as of a date within then (10) days after the date when the circumstances giving rise to the adjustment occurred.

4. No Registration Rights . No Holder of the Warrant shall have any registration rights under the terms of the Warrant with respect to either the Warrant or the securities issuable upon exercise of the Warrant.

5. Limitation of Rights; Notices . The Holder of the Warrant shall have no voting rights or dividend rights with respect to the Shares before exercise and payment therefor. The Company shall mail a notice to the registered Holder of the Warrant, at the Holder’s last known post office address appearing on the books of the Company, not less than fifteen (15) days prior to the date on which (a) a record will be taken for the purpose of determining the holders of Common Stock entitled to dividends, or (b) a record will be taken (of in lieu thereof, the transfer books will be closed) for the purpose of determining the holders of Common Stock entitled to notice of and to vote at a meeting of stockholders at which any capital reorganization, reclassification of shares of Common Stock, consolidation, merger, dissolution, liquidation, winding up or sale of substantially all of the Company’s assets shall be considered and acted upon.

6. Reservation of Common Stock . A number of shares of Common Stock sufficient to provide for the exercise of the Warrant upon the basis herein set forth shall at all times be reserved for the exercise thereof.

7. Miscellaneous . The representatives, warranties and agreements herein contained shall survive the exercise of the Warrant. References to the “holder of” include the immediate holders of shares purchased on the exercise of the Warrant, and the words “holder” shall include the plural thereof.

All shares of Common Stock or other securities issued upon the exercise of the Warrant shall be validly issued, fully paid and nonassessable, and the Company will pay all taxes in respect of the issuer thereof.

8. Acknowledgement of the Warrant Holder . The Holder hereby represents and warrants as follows:

(a) to the extent requested, the Holder has provided the Company with complete and accurate information concerning its knowledge, experience and financial condition;

(b) as a sophisticated investor, the Holder has such knowledge and experience in financial business matters that it believes it is capable of evaluating the merits and risks of the prospective investment in the Warrant;

(c) the Holder recognizes that investment in the Warrant may involve a high degree of risk and immediate substantial dilution, that the purchase of the Warrant maybe a long-term investment, that transferability and resale is restricted and that, in the event of disposition of the underlying capital stock, the undersigned could sustain a loss;

(d) in connection with the purchase of the Warrant, the Holder represents and warrants that the Holder intends to acquire the Warrant for the Holder’s own account for investment purposes and not with a view to or for resale in connection with any distribution thereof, and agrees that the Holder will not sell or assign the Warrant without registration under all applicable securities law or appropriate exemption therefrom. The undersigned understands and acknowledges that the Warrant has not been registered under the Securities Act of 1933 nor under applicable Blue Sky laws, pursuant to exemption therefrom, which depend upon its investment intention. The undersigned also understands and acknowledges that the underlying capital stock has not been nor will be registered under applicable securities laws and therefore will not be freely transferable and that the shares of capital stock will be marked with an appropriate legend reciting the resale restrictions.

IN WITNESS WHEREOF, this Warrant has been duly executed this ___ day of ______________, 20__

	ELECTROMED, INC.


	By
		Robert D. Hansen Its Chief Executive Officer

The Holder hereby acknowledges the terms and conditions of the transfer restrictions herein contained and only executes this Warrant for that purpose.

Exhibit 10.1

CREDIT AGREEMENT

THIS CREDIT AGREEMENT, dated as of December 9, 2009, is by and between ELECTROMED, INC., a corporation organized under the laws of the State of Minnesota (the “Borrower”), and U.S. BANK NATIONAL ASSOCIATION, a national banking association (the “Bank”).

ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS

Section 1.1 Defined Terms . As used in this Agreement the following terms shall have the following respective meanings (and such meanings shall be equally applicable to both the singular and plural form of the terms defined, as the context may require):


	“ Affiliate ”: When used with reference to any Person, (a) each Person that, directly or indirectly, controls, is controlled by or is under common control with, the Person referred to, (b) each Person which beneficially owns or holds, directly or indirectly, five percent or more of any class of voting Equity Interests of the Person referred to, (c) each Person, five percent or more of the voting Equity Interests (or if such Person is not a corporation, five percent or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by the Person referred to, and (d) each of such Person’s officers, directors, joint venturers and partners. The term control (including the terms “controlled by” and “under common control with”) means the possession, directly, of the power to direct or cause the direction of the management and policies of the Person in question.

	“ Applicable Margin ”: 2.75%.

	“ Bank ”: As defined in the opening paragraph hereof.

	“ Banking Day ”: Any day (other than a Saturday, Sunday or legal holiday in the State of Minnesota) on which banks are permitted to be open in Minneapolis, Minnesota.

	“ Board ”: The Board of Governors of the Federal Reserve System or any successor thereto.

	“ Borrower ”: As defined in the opening paragraph hereof.

	“ Borrower Loan Documents ”: This Agreement, the Notes and any of the Security Documents to be executed by the Borrower.

	“ Borrowing Base ”: As determined in accordance with the formula set forth in Exhibit E hereto.

	“ Borrowing Base Certificate ”: A certificate in the form of Exhibit F hereto.


	“ Borrowing Base Deficiency ”: At the time of any determination, the amount, if any, by which the unpaid principal balance of the Revolving Note exceeds the Borrowing Base.

	“ Capital Expenditures ”: For any period, the sum of all amounts that would, in accordance with GAAP, be included as additions to property, plant and equipment on a statement of cash flows for the Borrower during such period, in respect of (a) the acquisition, construction, improvement, replacement or betterment of land, buildings, machinery, equipment or of any other fixed assets or leaseholds, (b) to the extent related to and not included in (a) above, materials, contract labor (excluding expenditures properly chargeable to repairs or maintenance in accordance with GAAP), and (c) other capital expenditures and other uses recorded as capital expenditures or similar terms having substantially the same effect.

	“ Capitalized Lease ”: A lease of (or other agreement conveying the right to use) real or personal property with respect to which at least a portion of the rent or other amounts thereon constitute Capitalized Lease Obligations.

	“ Capitalized Lease Obligations ”: As to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board), and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including such Statement No. 13).

	“ Change of Control ”: The occurrence, after the Closing Date, of any of the following circumstances: (a) any Person or two or more Persons acting in concert acquiring beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Equity Interests of the Borrower representing 50% or more of the combined voting power of all Equity Interests of the Borrower entitled to vote in the election of directors; or (b) during any period of up to twelve consecutive months, whether commencing before or after the Closing Date, individuals who at the beginning of such twelve-month period were directors of the Borrower ceasing for any reason to constitute a majority of the Board of Directors of the Borrower (other than by reason of death, disability or scheduled retirement).

	“ Charges ”: As defined in Section 8.20.

	“ Closing Date ”: Any Banking Day between the date of this Agreement and December 31, 2009 selected by the Borrower for the making of the Term Loan or the first Revolving Loan hereunder; provided, that all the conditions precedent to the obligation of the Bank to make such Loan, as set forth in Article III, have been, or, on such Closing Date, will be, satisfied.


	“ Code ”: The Internal Revenue Code of 1986, as amended.

	“ Commitments ”: The Revolving Commitment and the Term Loan Commitments.

	“ Contingent Obligation ”: With respect to any Person at the time of any determination, without duplication, any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the “primary obligor”) in any manner, whether directly or otherwise: (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any direct or indirect security therefor, (b) to purchase property, securities, Equity Interests or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness, (c) to maintain working capital, equity capital or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such Indebtedness or otherwise to protect the owner thereof against loss in respect thereof, or (d) entered into for the purpose of assuring in any manner the owner of such Indebtedness of the payment of such Indebtedness or to protect the owner against loss in respect thereof; provided, that the term “Contingent Obligation” shall not include endorsements for collection or deposit, in each case in the ordinary course of business.

	“ Current Liabilities ”: As of any date, the current liabilities of the Borrower, determined in accordance with GAAP.

	“ Default ”: Any event which, with the giving of notice (whether such notice is required under Section 7.1, or under some other provision of this Agreement, or otherwise) or lapse of time, or both, would constitute an Event of Default.

	“ EBITDA ”: For any period of determination, the net income of the Borrower before deductions for income taxes, Interest Expense, depreciation and amortization, all as determined in accordance with GAAP.

	“ EBITDAR : For any period of determination, the net income of the Borrower before deductions for income taxes, Interest Expense, depreciation, amortization and operating lease expense, all as determined in accordance with GAAP.

	“ Environmental & ADA Indemnity Agreement ”: The Environmental & ADA Indemnity Agreement by the Borrower in favor of the Bank dated as of the date hereof, as the same may be amended, restated or otherwise modified from time to time.

	‘‘ Equity Interests ”: All shares, interests, participation or other equivalents, however designated, of or in a corporation or limited liability company, whether or not voting, including but not limited to common stock, member interests, warrants, preferred stock, convertible debentures, and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing.

	“ ERISA ”: The Employee Retirement Income Security Act of 1974, as amended.


	“ ERISA Affiliate ”: Any trade or business (whether or not incorporated) that is a member of a group of which the Borrower is a member and which is treated as a single employer under Section 414 of the Code.

	“ Event of Default ”: Any event described in Section 7.1.

	“ Fixed Charge Coverage Ratio ”: For the four consecutive fiscal quarters ending on the date of determination, the ratio of

		(a) EBITDA, plus operating lease expense, minus the sum of (i) any Restricted Payments, (ii) 50% of depreciation and (iii) tax expenses of the Borrower paid in cash,

		to

		(b) the sum of Interest Expense and all required principal payments with respect to Total Liabilities (including but not limited to all payments with respect to Capitalized Lease Obligations of the Borrower), plus operating lease expense,

	in each case determined for said period in accordance with GAAP.

	“ GAAP ”: Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of any date of determination.

	“ Government Receivable ” means any account receivable with respect to which the obligor is a Governmental Entity.

	“ Governmental Entity ” means the United States of America, any state, any political subdivision of a state and any agency or instrumentality of the United States of America or any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. Payments from Governmental Entities shall be deemed to include payments governed under the Social Security Act (42 U.S.C. § 1395, et seq.), including payments under Medicare, Medicaid and CHAMPUS, and payments administered or regulated by CMS.

	“ Governmental Entity Receivables Account ” means account no. 1-047-9049-1310 or any successor thereto at the Bank.

	“ Governmental Entity Receivables Account Notice ” means a notice pursuant to which the Borrower gives revocable standing instructions to the Bank to sweep funds on a daily basis from the Governmental Entity Receivables Account to a deposit account


	satisfactory to the Bank in its sole discretion which account is subject to the Bank’s “control,” as defined in Section 9-104 of the Uniform Commercial Code.

	“ Immediately Available Funds ”: Funds with good value on the day and in the city in which payment is received.

	“ Indebtedness ”: With respect to any Person at the time of any determination, without duplication, all obligations, contingent or otherwise, of such Person which in accordance with GAAP should be classified upon the balance sheet of such Person as liabilities, but in any event including: (a) all obligations of such Person for borrowed money (including non-recourse obligations), (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid or accrued, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services, (f) all obligations of others secured by any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Capitalized Lease Obligations of such Person, (h) all obligations of such Person in respect of interest rate swap agreements, cap or collar agreements, interest rate futures or option contracts, currency swap agreements, currency futures or option agreements and other similar contracts (i) all obligations of such Person, actual or contingent, as an account party in respect of letters of credit or bankers’ acceptances, (j) all obligations of any partnership or joint venture as to which such Person is or may become personally liable, (k) all obligations of such Person under any Equity Interests issued by such Person, and (1) all Contingent Obligations of such Person.

	“ Indemnitee ”: As defined in Section 8.13.

	“ Interest Expense ”: For any period of determination, the aggregate amount, without duplication, of interest paid, accrued or scheduled to be paid in respect of any Indebtedness of the Borrower, including (a) all but the principal component of payments in respect of conditional sale contracts, Capitalized Leases and other title retention agreements, (b) commissions, discounts and other fees and charges with respect to letters of credit and bankers’ acceptance financings and (c) net costs under interest rate protection agreements, in each case determined in accordance with GAAP.

	“ Interest Differential ”: As defined in Section 2.4.

	“ Investment ”: The acquisition, purchase, making or holding of any Equity Interests or other security, any loan, advance, contribution to capital, extension of credit (except for trade and customer accounts receivable for inventory sold or services rendered in the ordinary course of business and payable in accordance with customary trade terms), any acquisitions of real or personal property (other than real and personal property acquired in the ordinary course of business) and any purchase or commitment or option to purchase Equity Interests, securities or other debt of or any interest in another Person or any integral part of any business or the assets comprising such business or part thereof and the formation of, or entry into, any partnership as a limited or general partner


	or the entry into any joint venture. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment.

	“ Lien ”: With respect to any Person, any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of each lessor under any Capitalized Lease), in, of or on any assets or properties of such Person, now owned or hereafter acquired, whether arising by agreement or operation of law.

	“ Loan ”: A Revolving Loan or a Term Loan.

	“ Loan Documents ”: This Agreement, the Notes, and the Security Documents.

	“ Material Adverse Occurrence ”: Any occurrence of whatsoever nature (including, without limitation, any adverse determination in any litigation, arbitration, or governmental investigation or proceeding) which could reasonably be expected to materially and adversely affect (a) the financial condition or operations of the Borrower, (b) impair the ability of the Borrower to perform its obligations under any Loan Document, or any writing executed pursuant thereto, (c) the validity or enforceability of the material obligations of the Borrower under any Loan Document, (d) the rights and remedies of the Bank against any the Borrower, (e) the timely payment of the principal of and interest on the Loans or other amounts payable by the Borrower hereunder, or (f) the validity of the joint and several nature of the obligations of the Borrower with respect to all of the Obligations.

	“ Maximum Rate ”: As defined in Section 8.20.

	“ Mortgage ”: The Mortgage by the Borrower in favor of the Bank dated as of the date hereof, as the same may be amended, restated or otherwise modified from time to time.

	“ Multiemployer Plan ”: A multiemployer plan, as such term is defined in Section 4001(a)(3) of ERISA, which is maintained (on the Closing Date, within the five years preceding the Closing Date, or at any time after the Closing Date) for employees of the Borrower or any ERISA Affiliate.

	“ Note ”: A Term Note or the Revolving Note.

	“ Obligations ”: The Borrower’s obligations in respect of the due and punctual payment of principal and interest on the Notes when and as due, whether by acceleration or otherwise and all fees, expenses, indemnities, reimbursements and other obligations of the Borrower under this Agreement or any other Borrower Loan Document, and the Rate Protection Obligations, in all cases whether now existing or hereafter arising or incurred.

	“ Other Taxes ”: As defined in Section 2.25(b).


	“ Participants ”: As defined in Section 8.7(b).

	“ PBGC ”: The Pension Benefit Guaranty Corporation, established pursuant to Subtitle A of Title IV of ERISA, and any successor thereto or to the functions thereof.

	“ Person ”: Any natural person, corporation, partnership, limited partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity.

	“ Plan ”: Each employee benefit plan (whether in existence on the Closing Date or thereafter instituted), as such term is defined in Section 3 of ERISA, maintained for the benefit of employees, officers or directors of the Borrower or of any ERISA Affiliate.

	“ Pledge Agreement ”: The Pledge Agreement by the Borrower in favor of the Bank dated as of the date hereof, as the same may be amended, restated or otherwise modified from time to time.

	“ Prepayment Event ”: Means:

		(a) any sale, transfer or other disposition (including pursuant to a sale and leaseback transaction) of any property or asset of the Borrower, other than dispositions described in clauses (a), (b) and (c) of Section 6.2;

		(b) any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of the Borrower, but only to the extent that the net proceeds therefrom have not been applied, or committed pursuant to an agreement (including any purchase orders) to be applied, to repair, restore or replace such property or asset within 180 days after such event;

		(c) the issuance by the Borrower of any Equity Interests, or receipt by the Borrower of any capital contribution, other than (i) stock options, warrants or other rights to acquire stock awarded to employees, consultants, agents, officers and directors pursuant to incentive compensation plans or agreements; provided that all such options, warrants and rights do not exceed, in the aggregate, $100,000; or

		(d) the incurrence by the Borrower of any Indebtedness, other than Indebtedness permitted by Section 6.12.

	“ Prohibited Transaction ”: The respective meanings assigned to such term in Section 4975 of the Code and Section 406 of ERISA.

	“ Rate Protection Agreement ”: Any interest rate swap, cap or option agreement, or any other agreement pursuant to which the Borrower hedges interest rate risk with respect to a portion of the Obligations, entered into by the Borrower with a Rate Protection Provider.


	“ Rate Protection Obligations ”: The liabilities, indebtedness and obligations of the Borrower, if any, to any Rate Protection Provider under a Rate Protection Agreement.

	“ Rate Protection Provider ”: The Bank, or any Affiliate of the Bank, that is the counterparty of the Borrower under any Rate Protection Agreement.

	“ Regulatory Change ”: Any change after the Closing Date in federal, state or foreign laws or regulations or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks including the Bank under any federal, state or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof.

	“ Reportable Event ”: A reportable event as defined in Section 4043 of ERISA and the regulations issued under such Section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any waiver in accordance with Section 412(d) of the Code.

	“ Restricted Payments ”: With respect to the Borrower, collectively, all dividends or other distributions of any nature (cash, Equity Interests other than common stock of the Borrower, assets or otherwise), and all payments on any class of Equity Interests (including warrants, options or rights therefor) issued by the Borrower, whether such Equity Interests are authorized or outstanding on the Closing Date or at any time thereafter and any redemption or purchase of, or distribution in respect of, any of the foregoing, whether directly or indirectly.

	“ Revolving Commitment ”: The obligation of the Bank to make Revolving Loans to the Borrower.

	“ Revolving Commitment Amount ”: $3,500,000.

	“ Revolving Loan ”: As defined in Section 2.1.

	“ Revolving Loan Date ”: The date of the making of any Revolving Loan hereunder.

	“ Revolving Note ”: A promissory note of the Borrower in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Revolving Loan.

	“ Security Agreement ”: The Security Agreement by the Borrower in favor of the Bank dated as of the date hereof, as the same may be amended, restated or otherwise modified from time to time.

	“ Security Documents ”: The Security Agreement, the Pledge Agreement, the Mortgage and the Environmental & ADA Indemnity Agreement.


	“ Subordinated Debt ”: Any Indebtedness of the Borrower, now existing or hereafter created, incurred or arising, which is subordinated in right of payment to the payment of the Obligations in a manner and to an extent (a) that the Bank has approved in writing prior to the creation of such Indebtedness, or (b) as to any Indebtedness of the Borrower existing on the date of this Agreement, that the Bank has approved as Subordinated Debt in a writing delivered by the Bank to the Borrower on or prior to the Closing Date.

	“ Subsidiary ”: Any corporation or other entity of which Equity Interests having ordinary voting power for the election of a majority of the board of directors or other Persons performing similar functions are owned by the Borrower either directly or through one or more Subsidiaries.

	“ Termination Date ”: The earliest of (a) November 30, 2010, or (b) the date on which the Revolving Commitment is terminated pursuant to Section 7.2 hereof.

	“ Term Loan A ”: As defined in Section 2.1. “ Term Loan B ”: As defined in Section 2.1. “ Term Loan A Maturity Date ”: December 9, 2014. “ Term Loan B Maturity Date ”: December 9, 2012.

	“ Term Loan Commitment ”: The agreement of the Bank to make a Term Loan to the Borrower in the amount specified in Section 2.1 upon the terms and subject to the conditions of this Agreement.

	“ Term Note A ”: A promissory note of the Borrower in the form of Exhibit B hereto, evidencing the obligation of the Borrower to repay the Term Loan A.

	“ Term Note B ”: A promissory note of the Borrower in the form of Exhibit C hereto, evidencing the obligation of the Borrower to repay the Term Loan B.

	“ Total Cash Flow Leverage Ratio ”: For any period of determination, the ratio of

		(a) the sum (without duplication) of the aggregate principal amount of all outstanding Capitalized Lease Obligations of the Borrower and that portion of Total Liabilities bearing interest determined as of the last day of that period, plus six times operating lease expense for such period,

		to

		(b) EBITDAR determined for said period in accordance with GAAP.

	“ Total Liabilities ”: At the time of any determination, the amount of all items of Indebtedness of the Borrower that would constitute “liabilities” for balance sheet purposes in accordance with GAAP.


	“ U.S. Taxes ”: As defined in Section 2.25(e).

Section 1.2 Accounting Terms and Calculations . Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. To the extent any change in GAAP affects any computation or determination required to be made pursuant to this Agreement, such computation or determination shall be made as if such change in GAAP had not occurred unless the Borrower and the Bank agree in writing on an adjustment to such computation or determination to account for such change in GAAP.

Section 1.3 Computation of Time Periods . In this Agreement, in the computation of a period of time from a specified date to a later specified date, unless otherwise stated the word “from” means “from and including” and the word “to” or “until” each means “to but excluding”.

Section 1.4 Other Definitional Terms . The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections, Exhibits, schedules and like references are to this Agreement unless otherwise expressly provided. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” Unless the context in which used herein otherwise clearly requires, “or” has the inclusive meaning represented by the phrase “and/or.” All incorporation by reference of covenants, terms, definitions or other provisions from other agreements are incorporated into this Agreement as if such provisions were fully set forth herein, and such incorporation shall include all necessary definitions and related provisions from such other agreements but including only amendments thereto agreed to by the Bank, and shall survive any termination of such other agreements until the obligations of the Borrower under this Agreement and the Notes are irrevocably paid in full, and the commitments of the Bank to advance funds to the Borrower are terminated.

ARTICLE II
TERMS OF THE CREDIT FACILITIES

Section 2.1 Lending Commitments . On the terms and subject to the conditions hereof, the Bank agrees to make the following lending facilities available to the Borrower:


	(a) Revolving Credit . A revolving credit facility available as loans (each, a “Revolving Loan” and, collectively, the “Revolving Loans”) to the Borrower on a revolving basis at any time and from time to time from the Closing Date to the Termination Date, during which period the Borrower may borrow, repay and reborrow in accordance with the provisions hereof, provided , the unpaid principal amount of outstanding Revolving Loans shall not at any time exceed the Revolving Commitment Amount; and provided , further , that no Revolving Loan will be made if, after giving effect thereto, the unpaid principal balance of all Revolving Loans would exceed the Borrowing Base.

	(b) Term Loan A . A term loan (the “Term Loan A”) from the Bank to the Borrower on the Closing Date in the amount of $1,520,000.


	(c) Term Loan B . A term loan (the “Term Loan B”) from the Bank to the Borrower on the Closing Date in the amount of $1,000,000.

Notwithstanding any provision hereof, this Agreement and the Revolving Commitment shall terminate and the Bank shall have no obligation hereunder if the Term Loans hereunder have not been made by December 31, 2009, provided, however, that the obligations of the Borrower under Section 8.3 shall survive any such termination.


Section 2.2 Procedure for Loans . This is the procedure for obtaining Loans:

	(a) Procedure for Revolving Loans . Any request by the Borrower for a Revolving Loan hereunder shall be in writing or by telephone and must be given so as to be received by the Bank not later than 2:00 pm (Minneapolis time) on the requested Revolving Loan Date. Each request for a Revolving Loan hereunder shall be irrevocable and shall be deemed a representation by the Borrower that on the requested Revolving Loan Date and after giving effect to the requested Revolving Loan the applicable conditions specified in Article III have been and will be satisfied. Each request for a Revolving Loan hereunder shall specify (i) the requested Revolving Loan Date, and (ii) the amount of the Revolving Loan to be made on such date. The Bank may rely on any telephone request by the Borrower for a Revolving Loan hereunder which it believes in good faith to be genuine; and the Borrower hereby waives the right to dispute the Bank’s record of the terms of such telephone request. Unless the Bank determines that any applicable condition specified in Article III has not been satisfied, the Bank will make available to the Borrower at the Bank’s principal office in Minneapolis, Minnesota in Immediately Available Funds not later than 4:00 pm (Minneapolis time) on the requested Revolving Loan Date the amount of the requested Revolving Loan.

	(b) Procedure for Term Loans . The Borrower shall deliver to the Bank a written notice of borrowing. The request for the Term Loans shall be deemed a representation by the Borrower that on the Closing Date and after giving effect to the Term Loans the applicable conditions specified in Article III have been and will be satisfied. Unless the Bank determines that any applicable condition specified in Article III has not been satisfied, the Bank will make the proceeds of the Term Loans available to the Borrower at the Bank’s main office on the requested date.

Section 2.3 Notes . The Revolving Loans shall be evidenced by a single Revolving Note payable to the order of the Bank in a principal amount equal to the Revolving Commitment Amount originally in effect. The Term Loan A shall be evidenced by a Term Note A payable to the order of the Bank in the principal amount of the Term Loan A. The Term Loan B shall be evidenced by a Term Note B payable to the order of the Bank in the principal amount of the Term Loan B. The Bank shall enter in its ledgers and records the amount of the Term Loans and each Revolving Loan, converted or continued and the payments made thereon, and the Bank is authorized by the Borrower to enter on a schedule attached to a Term Note or Revolving Note, as appropriate, a record of such Term Loan, Revolving Loans, and payments; provided, however that the failure by the Bank to make any such entry or any error in making such entry shall not limit or otherwise affect the obligation of the Borrower hereunder and on the Notes, and, in all events, the principal amounts owing by the Borrower in respect of the Revolving Note shall be

the aggregate amount of all Revolving Loans made by the Bank less all payments of principal thereof made by the Borrower and the principal amount owing by the Borrower in respect of the Term Note shall be the aggregate amount of such Term Loan less all payments of principal thereof made by the Borrower.


Section 2.4 Interest Rates; Conversions and Continuations; Etc .

	(a) Interest on Revolving Loans . Interest on each advance hereunder shall accrue at an annual rate equal to the Applicable Margin plus the one-month LIBOR rate quoted by Bank from Reuters Screen LIBOR01 Page or any successor thereto, which shall be that one-month LIBOR rate in effect two New York Banking Days prior to the Reprice Date, adjusted for any reserve requirement and any subsequent costs arising from a change in government regulation, such rate rounded up to the nearest one-sixteenth percent and such rate to be reset monthly on each Reprice Date. The term “New York Banking Day” means any date (other than a Saturday or Sunday) on which commercial banks are open for business in New York, New York. The term “Reprice Date” means the first day of each month. If the initial advance under this Note occurs other than on the Reprice Date, the initial one-month LIBOR rate shall be that one-month LIBOR rate in effect two New York Banking Days prior to the date of the initial advance, which rate plus the percentage described above shall be in effect until the next Reprice Date. Bank’s internal records of applicable interest rates shall be determinative in the absence of manifest error.

	(b) The Term Loan A . The Term Loan A shall bear interest on the unpaid principal amount thereof at a per annum rate of 5.79%.

	(c) The Term Loan B . The Term Loan B shall bear interest on the unpaid principal amount thereof at a per annum rate of 4.28%.

	(d) Interest Upon Event of Default . Upon the occurrence of any Event of Default, each Loan shall, at the option of the Bank (or, in the case of an Event of Default under Section 7.1(f), (g) or (h), automatically upon the occurrence of such Event of Default), bear interest until paid in full at the rate otherwise applicable thereto plus 5%.

Section 2.5 Repayment .

	(a) Revolving Loans . Interest and principal upon the Revolving Loans shall be paid as follow:

		(i) Interest shall be payable (A) on the last day of each month; (B) with respect to all Revolving Loans, upon any permitted prepayment (on the amount prepaid); and (C) with respect to all Revolving Loans, on the Termination Date; provided that interest under Section 2.4(d) shall be payable on demand.

		(ii) Principal on the Revolving Loans is payable on the Termination Date.


	(b) Term Loan . Interest and principal upon the Term Loans shall be paid as follows:

		(i) Principal and interest on the Term Loan A are payable in installments of $10,706.41 each, beginning December 31, 2009, and on the same date of each consecutive month thereafter (except that if a given month does not have such a date, the last day of such month), plus a final payment equal to all unpaid principal and accrued interest on the Term Loan A Maturity Date.

		(ii) Principal and interest on the Term Loan B are payable in installments of $29,648.71 each, beginning December 31, 2009, and on the same date of each consecutive month thereafter (except that if a given month does not have such a date, the last day of such month), plus a final payment equal to all unpaid principal and accrued interest on the Term Loan B Maturity Date.

Section 2.6 Prepayments .

	(a) Mandatory Prepayments for Borrowing Base Deficiency . If at any time a Borrowing Base Deficiency exists, the Borrower shall immediately pay on the principal of the Advances an amount equal to such Borrowing Base Deficiency.

	(b) Mandatory Prepayments for a Prepayment Event . If at any time a Prepayment Event occurs, the Borrower shall immediately pay to the Bank the net proceeds realized by such Prepayment Event. Any such prepayments shall be applied first , to the Term Loan B, second , to the Term Loan A, and third , to any outstanding Revolving Loan. All prepayments applied to a Term Loan shall be applied to the scheduled principal payments on such Term Loan in the inverse order of their maturities.

	(c) Other Mandatory Prepayments . If at any time the aggregate unpaid principal balance of the Revolving Note exceeds the Revolving Commitment Amount, the Borrower shall immediately repay to the Bank the amount of such excess.

Section 2.7 Computation . Interest on the Loans shall be computed on the basis of actual days elapsed and a year of 360 days.

Section 2.8 Payments . Payments and prepayments of principal of, and interest on, the Notes and all fees, expenses and other obligations under this Agreement payable to the Bank shall be made without setoff or counterclaim in Immediately Available Funds not later than 3:00 pm (Minneapolis time) on the dates called for under this Agreement and the Notes to the Bank at its main office in Minneapolis, Minnesota. Funds received after such time shall be deemed to have been received on the next Banking Day. Whenever any payment to be made hereunder or on the Notes shall be stated to be due on a day which is not a Banking Day, such payment shall be made on the next succeeding Banking Day and such extension of time, in the case of a payment of principal, shall be included in the computation of any interest on such principal payment.

Section 2.9 Use of Loan Proceeds . The proceeds of the Loans shall be used for refinancing existing indebtedness and general business purposes in a manner not in conflict with any of the Borrower’s covenants in this Agreement.

Section 2.10 Prepayment of Term Note . There shall be no prepayments of a Term Note, provided that the Bank may consider requests for its consent with respect to prepayment of a Term Note, without incurring an obligation to do so, and the Borrower acknowledges that in the event that such consent is granted, the Borrower shall be required to pay the Bank, upon prepayment of all or part of the principal amount before final maturity, a prepayment indemnity (“Prepayment Fee”) equal to the greater of zero, or that amount, calculated on any date of prepayment (“Prepayment Date”), which is derived by subtracting: (a) the principal amount of such Term Note or portion of such Term Note to be prepaid from (b) the Net Present Value of such Term Note or portion of such Term Note to be prepaid on such Prepayment Date; provided, however, that the Prepayment Fee shall not in any event exceed the maximum prepayment fee permitted by applicable law. For purposes of this Section:


	“ Net Present Value ” shall mean the amount which is derived by summing the present values of each prospective payment of principal and interest which, without such full or partial prepayment, could otherwise have been received by the Bank over the shorter of the remaining contractual life of such Term Note or next repricing date if the Bank had instead initially invested such Term Note proceeds at the Initial Money Market Rate. The individual discount rate used to present value each prospective payment of interest and/or principal shall be the Money Market Rate at Prepayment for the maturity matching that of each specific payment of principal and/or interest.

	“ Initial Money Market Rate ” shall mean the rate per annum, determined solely by the Bank, on the first day of the term of such Term Note or the most recent repricing date or as mutually agreed upon by the Borrower and the Bank, as the rate at which the Bank would be able to borrow funds in Money Markets for the amount of such Term Note and with an interest payment frequency and principal repayment schedule equal to such Term Note and for a term as may be arranged and agreed upon by the Borrower and the Bank, adjusted for any reserve requirement and any subsequent costs arising from a change in government regulation. The Borrower acknowledges that the Bank is under no obligation to actually purchase and/or match funds for the Initial Money Market Rate of such Term Note.

	“ Money Market Rate At Prepayment ” shall mean that zero-coupon rate, calculated on the Prepayment Date, and determined solely by the Bank, as the rate at which the Bank would be able to borrow funds in Money Markets for the prepayment amount matching the maturity of a specific prospective Term Note payment or repricing date, adjusted for any reserve requirement and any subsequent costs arising from a change in government regulation. A separate Money Market Rate at Prepayment will be calculated for each prospective interest and/or principal payment date.

	“ Money Markets ” shall mean one or more wholesale funding markets available to and selected by the Bank, including negotiable certificates of deposit, commercial paper, eurodollar deposits, bank notes, federal funds, interest rate swaps or others.

In calculating the amount of such Prepayment Fee, the Bank is hereby authorized by the Borrower to make such assumptions regarding the source of funding, redeployment of funds and other related matters, as the Bank may deem appropriate. If the Borrower fails to pay any Prepayment Fee when due, the amount of such Prepayment Fee shall thereafter bear interest until paid at the default rate specified in this Agreement (computed on the basis of a 360-day year, actual days elapsed). Any prepayment of principal shall be accompanied by a payment of interest accrued to date thereon; and said prepayment shall be applied to the principal installments in the inverse order of their maturities. All prepayments shall be in an amount of at least $100,000 or, if less, the remaining entire principal balance of such Term Note.


Section 2.11 Taxes .

	(a) Any and all payments by the Borrower hereunder or under the Notes shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges of withholdings, and all liabilities with respect thereto, excluding , in the case of the Bank, taxes imposed on its overall net income and franchise taxes imposed on it in lieu of net income taxes (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the Notes being hereinafter referred to as “Taxes” ).

	(b) The Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under the Notes or from the execution, delivery or registration of, performing under, or otherwise with respect to, this Agreement or the Notes (hereinafter referred to as “Other Taxes” ).

	(c) The Borrower shall indemnify the for the full amount of Taxes or Other Taxes imposed on or paid by the and any penalties, interest and expenses with respect thereto. Payments on this indemnification shall be made within 30 days from the date the makes written demand therefor.

	(d) In the case of any payment hereunder or under the Notes by or on behalf of the Borrower through an account or branch outside the United States or by or on behalf of the Borrower by a pay or that is not a United States person, if the Borrower determine that no Taxes are payable in respect thereof, the Borrower shall furnish or shall cause such payor to furnish, to the Bank, at such address, an opinion of counsel acceptable to the Bank stating that such payment is exempt from Taxes. For purposes of this subsection (d), the terms “ United States ” and “ United States person ” shall have the meanings specified in Section 7701 of the Internal Revenue Code.

	(e) If the Borrower shall be required by law or regulation to make any deduction, withholding or backup withholding of any taxes, levies, imposts, duties, fees, liabilities or similar charges of the United States of America, any possession or territory of the United States of America (including the Commonwealth of Puerto Rico) or any area subject to the jurisdiction of the United States of America (“ U.S. Taxes ”) from any payments to the Bank pursuant to any Loan Document in respect of the Obligations payable to the then or thereafter outstanding, the Borrower shall make such withholdings


	or deductions and pay the full amount withheld or deducted to the relevant taxation authority or other authority in accordance with applicable law.

ARTICLE III
CONDITIONS PRECEDENT


Section 3.1 Conditions of Initial Transaction . The making of the Term Loan and the initial Revolving Loan shall be subject to the prior or simultaneous fulfillment of the following conditions:

	(a)	Documents . The Bank shall have received the following:

	(i) The Revolving Note and the Term Notes executed by a duly authorized officer (or officers) of the Borrower and dated the Closing Date.

	(ii) The Security Documents, each duly executed by a duly authorized officer (or officers) of the Borrower.

	(iii) A copy of the corporate resolution of the Borrower authorizing the execution, delivery and performance of the Borrower Loan Documents, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower.

	(iv) An incumbency certificate showing the names and titles and bearing the signatures of the officers of the Borrower authorized to execute the Borrower Loan Documents and to request Loans and conversions and continuations of Advances hereunder, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower.

	(v) A copy of the Articles of Incorporation of the Borrower with all amendments thereto, certified by the appropriate governmental official of the jurisdiction of its incorporation as of a date not more than 30 days prior to the Closing Date.

	(vi) A certificate of good standing for the Borrower in the jurisdiction of its incorporation or organization certified by the appropriate governmental officials as of a date not more than 30 days prior to the Closing Date.

	(vii) A copy of the bylaws of the Borrower, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower.

	(viii) A certificate dated the Closing Date of the chief executive officer or chief financial officer of the Borrower certifying as to the matters set forth in Sections 3.2(a) and (b) below.

	(ix) A Governmental Entity Receivables Account Notice, duly executed by the Borrower.

	(x) The initial Borrowing Base Certificate required under Section 5.1.


		(xi) ACORD 27 certificates of insurance with respect to each of the businesses and real properties of the Borrower in such amounts and with such carriers as shall be reasonably acceptable to the Bank.

		(xii) A Guaranty and Security Agreement, each duly executed by a duly authorized officer (or officers) of Electromed Financial, LLC.

	(b) Opinion . The Borrower shall have requested Kelly, Hannaford & Battles, P.A., its counsel, to prepare a written opinion, addressed to the Bank and dated the Closing Date, covering the matters set forth in Exhibit D hereto, and such opinion shall have been delivered to the Bank.

	(c) Compliance . The Borrower shall have performed and complied with all agreements, terms and conditions contained in this Agreement required to be performed or complied with by the Borrower prior to or simultaneously with the Closing Date.

	(d) Security Documents . All Security Documents (or financing statements with respect thereto) shall have been appropriately filed or recorded to the satisfaction of the Bank; any pledged collateral shall have been duly delivered to the Bank; any title insurance required by the Bank (with endorsements required by the Bank) shall have been obtained and be satisfactory to the Bank; and the priority and perfection of the Liens created by the Security Documents shall have been established to the satisfaction of the Bank and its counsel.

	(e) Other Matters . All corporate and legal proceedings relating to the Borrower and all instruments and agreements in connection with the transactions contemplated by this Agreement shall be satisfactory in scope, form and substance to the Bank and its counsel, and the Bank shall have received all information and copies of all documents, including records of corporate proceedings, as the Bank or its counsel may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities.

	(f) Fees and Expenses . The Bank shall have received all fees and other amounts due and payable by the Borrower on or prior to the Closing Date, including (i) an origination fee in the amount of $30,100;and (ii) the reasonable fees and expenses of counsel to the Bank payable pursuant to Section 8.3.

Any one or more of the conditions set forth above which have not been satisfied by the Borrower on or prior to the date of disbursement of the initial Loan under this Agreement shall not be deemed permanently waived by the Bank unless the Bank shall waive the same in a writing which expressly states that the waiver is permanent, and in all cases in which the waiver is not stated to be permanent the Bank may at any time subsequent thereto insist upon compliance and satisfaction of any such condition as a condition to any subsequent Loan hereunder and failure by the Borrower to comply with any such condition within five (5) Business Day’s written notice from the Bank to the Borrower shall constitute an Event of Default under this Agreement.


Section 3.2 Conditions Precedent to all Loans . The obligation of the Bank to make any Loans hereunder (including the Term Loan and the initial Revolving Loan) shall be subject to fulfillment of the following conditions:

	(a) Representations and Warranties . The representations and warranties contained in Article IV shall be true and correct on and as of the Closing Date and on the date of each Revolving Loan with the same force and effect as if made on such date.

	(b) No Default . No Default or Event of Default shall have occurred and be continuing on the Closing Date and on the date of each Revolving Loan or will exist after giving effect to the Loans made on such date.

	(c) Notices and Requests . The Bank shall have received the Borrower”s request for such Loan as required under Section 2.2.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES

To induce the Bank to enter into this Agreement and to make Loans hereunder, the Borrower represents and warrants to the Bank:

Section 4.1 Organization, Standing, Etc . The Borrower is a corporation duly incorporated and validly existing and in good standing under the laws of the jurisdiction named in the opening paragraph hereof and has all requisite power and authority to carry on its business as now conducted, to enter into this Agreement and to issue the Notes and to perform its obligations under the Borrower Loan Documents. The Borrower (a) holds all certificates of authority, licenses and permits necessary to carry on its business as presently conducted in each jurisdiction in which it is carrying on such business, except where the failure to hold such certificates, licenses or permits would not constitute a Material Adverse Occurrence and (b) is duly qualified and in good standing as a foreign corporation (or other organization) in each jurisdiction in which the character of the properties owned, leased or operated by it or the business conducted by it makes such qualification necessary and the failure so to qualify would permanently preclude the Borrower from enforcing its rights with respect to any assets or expose the Borrower to any Material Adverse Occurrence.

Section 4.2 Authorization and Validity . The execution, delivery and performance by the Borrower of the Borrower Loan Documents have been duly authorized by all necessary corporate action by the Borrower. This Agreement constitutes, and the Notes and other Borrower Loan Documents when executed will constitute, the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, moratorium and other similar laws affecting creditors’ rights generally and subject to limitations on the availability of equitable remedies.

Section 4.3 No Conflict; No Default . The execution, delivery and performance by the Borrower of the Borrower Loan Documents will not (a) violate any provision of any law, statute, rule or regulation or any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to the Borrower,

(b) violate or contravene any provision of the Articles of Incorporation, bylaws or partnership agreement of the Borrower, or (c) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or any of its properties may be bound or result in the creation of any Lien thereunder. The Borrower is not in default under or in violation of any such law, statute, rule or regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, loan or credit agreement or other agreement, lease or instrument in any case in which the consequences of such default or violation could constitute a Material Adverse Occurrence.

Section 4.4 Government Consent . No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on the part of the Borrower to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, the Borrower Loan Documents, except for any necessary filing or recordation of or with respect to any of the Security Documents.

Section 4.5 Financial Statements and Condition . The Borrower’s audited financial statements as at June 30, 2009, as heretofore furnished to the Bank, have been prepared in accordance with GAAP on a consistent basis (except for the absence of footnotes and subject to year-end audit adjustments as to the interim statements) and fairly present the financial condition of the Borrower as at such dates and the results of its operations and changes in financial position for the respective periods then ended. As of the dates of such financial statements, the Borrower had no material obligation, contingent liability, liability for taxes or long-term lease obligation which is not reflected in such financial statements or in the notes thereto. Since June 30, 2009, there has been no Material Adverse Occurrence.

Section 4.6 Litigation . There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which, if determined adversely to the Borrower, would constitute a Material Adverse Occurrence, and there are no unsatisfied judgments against the Borrower, the satisfaction or payment of which would constitute a Material Adverse Occurrence.

Section 4.7 Environmental, Health and Safety Laws . There does not exist any violation by the Borrower of any applicable federal, state or local law, rule or regulation or order of any government, governmental department, board, agency or other instrumentality relating to environmental, pollution, health or safety matters which has, will or threatens to impose a material liability on the Borrower or which has required or would require a material expenditure by the Borrower to cure. The Borrower has not received any notice to the effect that any part of its operations or properties is not in material compliance with any such law, rule, regulation or order or notice that it or its property is the subject of any governmental investigation evaluating whether any remedial action is needed to respond to any release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to constitute a Material Adverse Occurrence. The Borrower does not have knowledge that it or its property will become subject to environmental laws or regulations during the term of

this Agreement, compliance with which could reasonably be expected to require Capital Expenditures which would constitute a Material Adverse Occurrence.

Section 4.8 ERISA . Each Plan is in substantial compliance with all applicable requirements of ERISA and the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and the Code setting forth those requirements. No Reportable Event has occurred and is continuing with respect to any Plan. All of the minimum funding standards applicable to such Plans have been satisfied and there exists no event or condition which would reasonably be expected to result in the institution of proceedings to terminate any Plan under Section 4042 of ERISA. With respect to each Plan subject to Title IV of ERISA, as of the most recent valuation date for such Plan, the present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Plan and previously furnished in writing to the Bank) of such Plan’s projected benefit obligations did not exceed the fair market value of such Plan’s assets.

Section 4.9 Federal Reserve Regulations . The Borrower is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (as defined in Regulation U of the Board). The value of all margin stock owned by the Borrower does not constitute more than 25% of the value of the assets of the Borrower.

Section 4.10 Title to Property; Leases; Liens; Subordination . The Borrower has (a) good and marketable title to its real properties and (b) good and sufficient title to, or valid, subsisting and enforceable leasehold interest in, its other material properties, including all real properties, other properties and assets, referred to as owned by the Borrower in the most recent financial statement referred to in Section 5.1 (other than property disposed of since the date of such financial statements in the ordinary course of business). None of such properties is subject to a Lien, except as allowed under Section 6.12. The Borrower has not subordinated any of its rights under any obligation owing to it to the rights of any other person.

Section 4.11 Taxes . The Borrower has filed all federal, state and local tax returns required to be filed and has paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property and all other taxes, fees and other charges imposed on it or any of its property by any governmental authority (other than taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower). No tax Liens have been filed and no material claims are being asserted with respect to any such taxes, fees or charges. The charges, accruals and reserves on the books of the Borrower in respect of taxes and other governmental charges are adequate and the Borrower knows of no proposed material tax assessment against it or any basis therefor.

Section 4.12 Trademarks, Patents . The Borrower possesses or has the right to use all of the patents, trademarks, trade names, service marks and copyrights, and applications therefor, and all technology, know-how, processes, methods and designs used in or necessary for the conduct of its business, without known conflict with the rights of others.

Section 4.13 Burdensome Restrictions . The Borrower is not a party to or otherwise bound by any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter, corporate or partnership restriction which would foreseeably constitute a Material Adverse Occurrence.

Section 4.14 Force Majeure . Since the date of the most recent financial statement referred to in Section 5.1, the business, properties and other assets of the Borrower have not been materially and adversely affected in any way as the result of any fire or other casualty, strike, lockout, or other labor trouble, embargo, sabotage, confiscation, condemnation, riot, civil disturbance, activity of armed forces or act of God.

Section 4.15 Investment Company Act . The Borrower is not an “investment company” or a company “controlled” by an investment company within the meaning of the Investment Company Act of 1940, as amended.

Section 4.16 Public Utility Holding Company Act . The Borrower is not a “holding company” or a “subsidiary company” of a holding company or an “affiliate” of a holding company or of a subsidiary company of a holding company within the meaning of the Public Utility Holding Company Act of 1935, as amended.

Section 4.17 Retirement Benefits . Except as required under Section 4980B of the Code, Section 601 of ERISA or applicable state law, neither the Borrower nor any Subsidiary is obligated to provide post-retirement medical or insurance benefits with respect to employees or former employees.

Section 4.18 Full Disclosure . Subject to the following sentence, neither the financial statements referred to in Section 5.1 nor any other certificate, written statement, exhibit or report furnished by or on behalf of the Borrower in connection with or pursuant to this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained therein not misleading. Certificates or statements furnished by or on behalf of the Borrower to the Bank consisting of projections or forecasts of future results or events have been prepared in good faith and based on good faith estimates and assumptions of the management of the Borrower, and the Borrower has no reason to believe that such projections or forecasts are not reasonable.

Section 4.19 Subsidiaries . The Borrower has one Subsidiary, Electromed Financial, LLC, a Minnesota limited liability company.

Section 4.20 Labor Matters . There are no pending or threatened strikes, lockouts or slowdowns against the Borrower. The Borrower has not been or is in violation in any material respect of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters. All payments due from the Borrower on account of wages and employee health and welfare insurance and other benefits (in each case, except for de minimus amounts), have been paid or accrued as a liability on the books of the Borrower. The consummation of the transactions contemplated under the Loan Documents will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which the Borrower is bound.

Section 4.21 Solvency . After the making of any Loan and after giving effect thereto, (a) the fair value of the assets of the Borrower, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of the Borrower will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) the Borrower will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) the Borrower will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is proposed to be conducted following the Closing Date.

ARTICLE V
AFFIRMATIVE COVENANTS

Until any obligation of the Bank hereunder to make the Term Loan and Revolving Loans shall have expired or been terminated and the Notes and all of the other Obligations have been paid in full, unless the Bank shall otherwise consent in writing:

Section 5.1 Financial Statements and Reports . The Borrower will furnish to the Bank:


	(a) As soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, the audited financial statements of the Borrower consisting of at least statements of income, cash flow and changes in stockholders’ equity, and a balance sheet as at the end of such year, setting forth in each case in comparative form corresponding figures from the previous annual audit, certified without qualification by Larson Allen LLC or other independent certified public accountants of recognized national standing selected by the Borrower and acceptable to the Bank, together with any management letters, management reports or other supplementary comments or reports to the Borrower or its board of directors furnished by such accountants.

	(b) As soon as available and in any event within 30 days after the end of each fiscal quarter, unaudited statements of income, cash flow and changes in stockholders’ equity for the Borrower for such quarter and for the period from the beginning of such fiscal year to the end of such quarter, and a balance sheet of the Borrower as at the end of such quarter, setting forth in comparative form figures for the corresponding period for the preceding fiscal year, accompanied by a certificate signed by the chief financial officer of the Borrower stating that such financial statements present fairly the financial condition of the Borrower and that the same have been prepared in accordance with GAAP (except for the absence of footnotes and subject to year-end audit adjustments as to the interim statements).

	(c) As soon as practicable and in any event within 30 days after the end of each fiscal quarter, a Compliance Certificate in the form attached hereto as Exhibit G signed by the chief financial officer of the Borrower demonstrating in reasonable detail compliance (or noncompliance, as the case may be) with Sections 6.14 and Section 6.15 as at the end of such quarter and stating that as at the end of such quarter there did not


	exist any Default or Event of Default or, if such Default or Event of Default existed, specifying the nature and period of existence thereof and what action the Borrower proposes to take with respect thereto.

	(d) As soon as practicable and in any event within 30 days after the end of each month, a Borrowing Base Certificate signed by the chief financial officer of the Borrower, reporting (i) the Borrowing Base as of the last day of the month just ended, (ii) gross monthly A/R billings; and (iii) levels of dilutive write-offs to receivables.

	(e) As soon as practicable and in any event within 30 days after the beginning of each fiscal year of the Borrower, statements of forecasted income for the Borrower for each fiscal month in such fiscal year and a forecasted balance sheet of the Borrower, together with supporting assumptions, as at the end of each fiscal month, all in reasonable detail and reasonably satisfactory in scope to the Bank.

	(f) Immediately upon any officer of the Borrower becoming aware of any Default or Event of Default, a notice describing the nature thereof and what action Borrower proposes to take with respect thereto.

	(g) Immediately upon any officer of the Borrower becoming aware of the occurrence, with respect to any Plan, of any Reportable Event or any Prohibited Transaction, a notice specifying the nature thereof and what action the Borrower proposes to take with respect thereto, and, when received, copies of any notice from PBGC of intention to terminate or have a trustee appointed for any Plan.

	(h) Immediately upon any officer of the Borrower becoming aware of any matter that has resulted or is reasonably likely to result in a Material Adverse Occurrence, a notice from the Borrower describing the nature thereof and what action Borrower proposes to take with respect thereto.

	(i) Immediately upon any officer of the Borrower becoming aware of (i) the commencement of any action, suit, investigation, proceeding or arbitration before any court or arbitrator or any governmental department, board, agency or other instrumentality affecting the Borrower or any property of such Person, or to which the Borrower is a party (other than litigation where the insurance insures against the damages claimed and the insurer has assumed defense of the litigation without reservation) and in which an adverse determination or result could constitute a Material Adverse Occurrence; or (ii) any adverse development which occurs in any litigation, arbitration or governmental investigation or proceeding previously disclosed by the Borrower which, if determined adversely to the Borrower would constitute a Material Adverse Occurrence, a notice from the Borrower describing the nature and status thereof and what action the Borrower proposes to take with respect thereto.

	(j) As required pursuant to Section 5.3, proof of insurance as requested by the Bank.

	(k) Promptly upon the mailing or filing thereof, copies of all financial statements, reports and proxy statements mailed to the Borrower’s shareholders, and


	copies of all registration statements, periodic reports and other documents filed with the Securities and Exchange Commission (or any successor thereto) or any national securities exchange.

	(1) From time to time, such other information regarding the business, operation and financial condition of the Borrower as the Bank may reasonably request.

Section 5.2 Existence . The Borrower will maintain its corporate existence in good standing under the laws of its jurisdiction of organization and its qualification to transact business in each jurisdiction where failure so to qualify would permanently preclude the Borrower from enforcing its rights with respect to any material asset or would expose the Borrower to any material liability.

Section 5.3 Insurance . The Borrower shall maintain with financially sound and reputable insurance companies such insurance as may be required by law and such other insurance in such amounts and against such hazards as is customary in the case of reputable firms engaged in the same or similar business and similarly situated. Without limiting the generality of the foregoing, with respect to the property covered by the Mortgage, the Borrower shall obtain, maintain and keep in full force and effect policies of insurance as described in, and meeting the requirements set forth in, Exhibit H attached hereto. Upon request of the Bank and in any event not later than one hundred twenty (120) days after the end of each calendar year, the Borrower shall furnish to the Bank copies of policies of insurance meeting the requirements set forth in this Section and shall furnish to the Bank proof of payment of all premiums for such insurance. At least ten (10) days prior to the termination of any such coverage, the Borrower shall provide the Bank with evidence satisfactory to the Bank that such coverage will be renewed or replaced upon termination with insurance that complies with the provisions of this Section. The Borrower, at its sole cost and expense, from time to time when the Bank shall so request, will provide the Bank with evidence, in a form acceptable to the Bank, of the full insurable replacement cost of the property covered by the Mortgage. All property (including boiler and machinery) and liability insurance policies maintained by the Borrower pursuant to this Section shall (i) include effective waivers by the insurer of all claims for insurance premiums against the Bank, and (ii) provide that any losses shall be payable notwithstanding (a) any act of negligence by the Borrower or the Bank, (b) any foreclosure or other proceedings or notice of foreclosure sale relating to the property covered by the Mortgage, or (c) any release from liability or waiver of subrogation rights granted by the insured. All insurance policies maintained by the Borrower pursuant to the foregoing provisions shall respond on a primary basis relative to any other insurance carried by the Bank in the event of loss. Insurance terms not otherwise defined herein shall be interpreted consistent with insurance industry usage.

Section 5.4 Payment of Taxes and Claims . The Borrower shall file all tax returns and reports which are required by law to be filed by it and will pay before they become delinquent all taxes, assessments and governmental charges and levies imposed upon it or its property and all claims or demands of any kind (including but not limited to those of suppliers, mechanics, carriers, warehouses, landlords and other like Persons) which, if unpaid, might result in the creation of a Lien upon its property; provided that the foregoing items need not be paid if they are being contested in good faith by appropriate proceedings, and as long as the Borrower’s title to its property is not materially adversely affected, its use of such property in the ordinary course

of its business is not materially interfered with and adequate reserves with respect thereto have been set aside on Borrower’s books in accordance with GAAP.

Section 5.5 Inspection . The Borrower shall permit any Person designated by the Bank to visit and inspect any of the properties, books and financial records of the Borrower, to examine and to make copies of the books of accounts and other financial records of the Borrower, and to discuss the affairs, finances and accounts of the Borrower with, and to be advised as to the same by, its officers at such reasonable times and intervals as the Bank may designate.

Section 5.6 Maintenance of Properties . The Borrower will maintain its properties used or useful in the conduct of its business in good condition, repair and working order, and supplied with all necessary equipment, and make all necessary repairs, renewals, replacements, betterments and improvements thereto, all as may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times.

Sections 5.7 Books and Records . The Borrower will keep adequate and proper records and books of account in which full and correct entries will be made of its dealings, business and affairs.

Section 5.8 Compliance . The Borrower will comply in all material respects with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject; provided, however, that failure so to comply shall not be a breach of this covenant if such failure does not constitute a Material Adverse Occurrence and the Borrower is acting in good faith and with reasonable dispatch to cure such noncompliance.

Section 5.9 ERISA . The Borrower will maintain each Plan in compliance with all material applicable requirements of ERISA and of the Code and with all applicable rulings and regulations issued under the provisions of ERISA and of the Code and will not, and will not permit any of the ERISA Affiliates to (a) engage in any transaction in connection with which the Borrower or any of the ERISA Affiliates would be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, in either case in an amount exceeding $50,000, (b) fail to make full payment when due of all amounts which, under the provisions of any Plan, the Borrower any ERISA Affiliate is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency (as such term is defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, with respect to any Plan in an aggregate amount exceeding $50,000 or (c) fail to make any payments in an aggregate amount exceeding $50,000 to any Multiemployer Plan that the Borrower or any of the ERISA Affiliates may be required to make under any agreement relating to such Multiemployer Plan or any law pertaining thereto.

Section 5.10 Environmental Matters; Reporting . The Borrower will observe and comply with all laws, rules, regulations and orders of any government or government agency relating to health, safety, pollution, hazardous materials or other environmental matters to the extent non-compliance could result in a material liability or otherwise constitute a Material Adverse Occurrence. The Borrower will give the Bank prompt written notice of any violation as to any environmental matter by the Borrower and of the commencement of any judicial or

administrative proceeding relating to health, safety or environmental matters (a) in which an adverse determination or result could result in the revocation of or have a material adverse effect on any operating permits, air emission permits, water discharge permits, hazardous waste permits or other permits held by the Borrower which are material to the operations of the Borrower, or (b) which will or threatens to impose a material liability on the Borrower to any Person or which will require a material expenditure by the Borrower to cure any alleged problem or violation.

Section 5.11 Further Assurances . The Borrower shall promptly correct any defect or error that may be discovered in any Loan Document or in the execution, acknowledgment or recordation thereof. Promptly upon request by the Bank, the Borrower also shall do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, any and all deeds, conveyances, mortgages, deeds of trust, trust deeds, assignments, estoppel certificates, financing statements and continuations thereof, notices of assignment, transfers, certificates, assurances and other instruments as the Bank may reasonable require from time to time in order: (a) to carry out more effectively the. purposes of the Loan Documents; (b) to perfect and maintain the validity, effectiveness and priority of any security interests intended to be created by the Loan Documents including, without limitation, the delivery of a landlord waiver from any landlord required by the Bank; and (c) to better assure, convey, grant, assign, transfer, preserve, protect and confirm unto the Bank the rights granted now or hereafter intended to be granted to the Bank under any Loan Document or under any other instrument executed in connection with any Loan Document or that the Borrower may be or become bound to convey, mortgage or assign to the Bank in order to carry out the intention or facilitate the performance of the provisions of any Loan Document. The Borrower shall furnish to the Bank evidence satisfactory to the Bank of every such recording, filing or registration.

Section 5.12 Compliance with Terms of Material Contracts . The Borrower shall make all payments and otherwise perform all material obligations in respect of all material contracts to which the Borrower is a party.

ARTICLE VI
NEGATIVE COVENANTS

Section 6.1 Merger . The Borrower will not merge or consolidate or enter into any analogous reorganization or transaction with any Person or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution).

Section 6.2 Disposition of Assets . The Borrower will not directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one transaction or a series of transactions) any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except:


	(a) dispositions of inventory, or used, worn-out or surplus equipment, all in the ordinary course of business; and


	(b) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are applied with reasonable promptness to the purchase price of such replacement equipment.

Section 6.3 Plans . The Borrower will not permit any event to occur or condition to exist which would permit any Plan to terminate under any circumstances which would cause the Lien provided for in Section 4068 of ERISA to attach to any assets of the Borrower; and the Borrower will not permit, as of the most recent valuation date for any Plan subject to Title IV of ERISA, the present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Plan and previously furnished in writing to the Bank) of such Plan’s projected benefit obligations to exceed the fair market value of such Plan’s assets.

Section 6.4 Change in Nature of Business . The Borrower will not make any material change in the nature of the business of the Borrower, as carried on at the date hereof.

Section 6.5 Subsidiaries . The Borrower will not form or acquire any corporation which would thereby become a Subsidiary.

Section 6.6 Negative Pledges . The Borrower will not enter into any agreement, bond, note or other instrument with or for the benefit of any Person other than the Bank which would (i) prohibit the Borrower from granting, or otherwise limit the ability of the Borrower to grant, to the Bank any Lien on any assets or properties of the Borrower, or (ii) require the Borrower to grant a Lien to any other Person if the Borrower grants any Lien to the Bank.

Section 6.7 Restricted Payments . The Borrower will not make any Restricted Payments.

Section 6.8 Transactions with Affiliates . The Borrower will not enter into any transaction with any Affiliate of the Borrower, except upon fair and reasonable terms no less favorable than the Borrower would obtain in a comparable arm’s-length transaction with a Person not an Affiliate.

Section 6.9 Accounting Changes . The Borrower will not make any significant change in accounting treatment or reporting practices, except as required by GAAP, or change its fiscal year.

Section 6.10 Subordinated Debt . The Borrower will not (a) make any payment of the principal of or interest on any Subordinated Debt which would be prohibited by the terms of any subordination agreement related to such Subordinated Debt; (b) amend or cancel the subordination provisions applicable to any Subordinated Debt; (c) take or omit to take any action if as a result of such action or omission the subordination of such Subordinated Debt, or any part thereof, to the Obligations might be terminated, impaired or adversely affected; or (d) omit to give the Bank prompt notice of any notice received from any holder of Subordinated Debt, or any trustee therefor, or of any default under any agreement or instrument relating to any Subordinated Debt by reason whereof such Subordinated Debt might become or be declared to be due or payable.

Section 6.11 Indebtedness . The Borrower will not incur, create, issue, assume or suffer to exist any Indebtedness, except:


	(a) The Obligations.

	(b) Current Liabilities, other than for borrowed money, incurred in the ordinary course of business.

	(c) Indebtedness existing on the date of this Agreement and previously disclosed to the Bank, but not including any extension or refinancing thereof.

	(d) Subordinated Debt in the form of debentures not to exceed $2,500,000 in the aggregate:


	(i)	which U.S. Bank was given a right of first refusal to provide on terms and conditions substantially similar to such Indebtedness as issued;

	(ii)	which after giving effect to such Subordinated Debt, would not cause the Fixed Charge Coverage Ratio, as of the date of issuance for the preceding four fiscal quarters, to be less than 1.20 to 1.0;

	(iii)	which after giving effect to such Subordinated Debt, would not cause, in the Bank’s reasonable judgment, a projected Default or an Event of Default under Sections 6.15 or 6.16 in any of the four fiscal quarters ending on or after the date of issuance;

	(iv)	which imposes covenants on the Borrower, financial or otherwise, which are no more restrictive than the covenants set forth in this Credit Agreement; and

	(v)	which was issued at a time when no Default or Event of Default has occurred and is continuing.


	(e) Indebtedness secured by Liens permitted under Section 6.12 hereof.

Section 6.12 Liens . The Borrower will not create, incur, assume or suffer to exist any Lien, or enter into, or make any commitment to enter into, any arrangement for the acquisition of any property through conditional sale, lease-purchase or other title retention agreements, with respect to any property now owned or hereafter acquired by the Borrower, except:


	(a) Liens granted to the Bank under the Security Documents to secure the Obligations.

	(b) Liens existing on the date of this Agreement and previously disclosed to the Bank.


	(c) Deposits or pledges to secure payment of workers’ compensation, unemployment insurance, old age pensions or other social security obligations, in the ordinary course of business of the Borrower.

	(d) Liens for taxes, fees, assessments and governmental charges not delinquent or to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of Section 5.4.

	(e) Liens of carriers, warehousemen, mechanics and materialmen, and other like Liens arising in the ordinary course of business, for sums not due or to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of Section 5.4.

	(f) Liens incurred or deposits or pledges made or given in connection with, or to secure payment of, indemnity, performance or other similar bonds.

	(g) Liens arising solely by virtue of any statutory or common law provision relating to banker’s liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restriction against access by the Borrower in excess of those set forth by regulations promulgated by the Board, and (ii) such deposit account is not intended by the Borrower to provide collateral to the depository institution.

	(h) Encumbrances in the nature of zoning restrictions, easements and rights or restrictions of record on the use of real property and landlord’s Liens under leases on the premises rented, which do not materially detract from the value of such property or impair the use thereof in the business of the Borrower.

	(i) The interest of any lessor under any Capitalized Lease entered into after the Closing Date or purchase money Liens on property acquired after the Closing Date; provided, that, (i) the Indebtedness secured thereby is otherwise permitted by this Agreement and (ii) such Liens are limited to the property acquired and do not secure Indebtedness other than the related Capitalized Lease Obligations or the purchase price of such property.

Section 6.13 Contingent Liabilities . The Borrower will not be or become liable on any Contingent Obligations.

Section 6.14 Fixed Charge Coverage Ratio . The Borrower will not permit the Fixed Charge Coverage Ratio, as of the last day of any fiscal quarter for the four consecutive fiscal quarters ending on that date to be less than 1.2 to 1.0.

Section 6.15 Total Cash Flow Leverage Ratio . The Borrower will not permit the Total Cash Flow Leverage Ratio, as of the last day of any fiscal quarter, to be more than 3.5 to 1.0.

Section 6.16 Loan Proceeds . The Borrower will not use any part of the proceeds of the Loans or Advances directly or indirectly, and whether immediately, incidentally or ultimately,

(a) to purchase or carry margin stock (as defined in Regulation U of the Board) or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund Indebtedness originally incurred for such purpose or (b) for any purpose which entails a violation of, or which is inconsistent with, the provisions of Regulations U or X of the Board.

Section 6.17 Key-Man Life Insurance . The Borrower shall have obtained a key-man life insurance policy on the life of Robert D. Hansen in the face amount of $3,000,000, which policy shall be in full force and effect as of the Closing Date. Within sixty days after the date hereof, such insurance policy shall name the Bank as the beneficiary and shall provide that such insurance policies may not be canceled unless the insurance carrier gives at least 30 days prior written notice of such cancellation to the beneficiary.

Section 6.18 Lockbox; Bank Accounts . As of the Closing Date, the Borrower shall direct each Account Debtor (as such term is defined in the Security Agreement) that is a Government Entity to remit payments with respect to Accounts (as such term is defined in the Security Agreement) to the Governmental Entity Receivables Account. At the Bank’s sole discretion and direction, the Borrower shall direct each Account Debtor that is not a Government Entity to remit payments with respect to Accounts to a lockbox and/or a lockbox account established with the Bank. The Borrower shall not make any change in its instructions to any Account Debtor regarding payments to be made to any such box or account.

(b) The Borrower, and all of the Borrower’s Subsidiaries, shall maintain the Borrower’s and such Subsidiaries’ primary depository and operating accounts and securities accounts with the Bank. The Borrower shall identify to the Bank, in writing, any deposit or securities account opened by the Borrower with any institution other than the Bank. In addition, for each such account that the Borrower at any time opens or maintains, the Borrower shall, at the Bank’s request and option, pursuant to an agreement in form and substance acceptable to the Bank, cause the depository bank or securities intermediary to agree that such account is the collateral of the Bank. The provisions of the previous sentence shall not apply to deposit accounts exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of the Borrower’s employees.

Section 6.19 Management . In no event shall Robert D. Hansen or Terry M. Belford cease to be chief executive officer or chief financial officer, respectively.

Section 6.20 Collateral Exam . The Borrower shall permit the Bank to make annual collateral examinations as provided in the Security Agreement.

Section 6.21 Revolving Commitment . The Borrower shall not permit the Revolving Commitment to expire or terminate.

Section 6.22 Medicaid/Medicare Certification . The Borrower shall remain at all times an enrolled participating provider or supplier in the Medicare program and any other federal or state health care programs in which the Borrower is enrolled as a participating provider or supplier as of the Closing Date, and none of the Borrower’s enrollments or participating provider or supplier agreements in such programs, nor its status as a participating provider or supplier in such programs may terminate, either voluntarily or involuntarily.

Section 6.23 Sale and Leaseback Transactions . The Borrower will not enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property, real or personal, and thereafter lease such property for the same or a substantially similar purpose or purposes as the property sold or transferred.

Section 6.24 Hedging Agreements . The Borrower will not enter into any hedging arrangements, other than any Rate Protection Agreements.

ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES

Section 7.1 Events of Default . The occurrence of any one or more of the following events shall constitute an Event of Default:


	(a) The Borrower shall fail to make when due, whether by acceleration or otherwise, any payment of principal of or interest on either Note or any other Obligation required to be made to the Bank pursuant to this Agreement.

	(b) Any representation or warranty made by or on behalf of the Borrower in this Agreement or any other Loan Document or by or on behalf of the Borrower in any certificate, statement, report or document herewith or hereafter furnished to the Bank pursuant to this Agreement or any other Loan Document shall prove to have been false or misleading in any material respect on the date as of which the facts set forth are stated or certified.

	(c) The Borrower shall fail to comply with Sections 5.2 or 5.3 hereof or any Section of Article VI hereof.

	(d) The Borrower shall fail to comply with any other agreement, covenant, condition, provision or term contained in this Agreement (other than those hereinabove set forth in this Section 7.1) and such failure to comply shall continue for 30 calendar days after whichever of the following dates is the earliest: (i) the date the Borrower gives notice of such failure to the Bank, (ii) the date the Borrower should have given notice of such failure to the Bank pursuant to Section 5.1, or (iii) the date the Bank gives notice of such failure to the Borrower.

	(e) Any default (however denominated or defined) shall occur under any Security Document.

	(f) The Borrower shall become insolvent or shall generally not pay its debts as they mature or shall apply for, shall consent to, or shall acquiesce in the appointment of a custodian, trustee or receiver of the Borrower or for a substantial part of the property thereof or, in the absence of such application, consent or acquiescence, a custodian, trustee or receiver shall be appointed for the Borrower or for a substantial part of the property thereof and shall not be discharged within 45 days, or the Borrower shall make an assignment for the benefit of creditors.


	(g) Any bankruptcy, reorganization, debt arrangement or other proceedings under any bankruptcy or insolvency law shall be instituted by or against the Borrower, and, if instituted against the Borrower, shall have been consented to or acquiesced in by the Borrower, or shall remain undismissed for 60 days, or an order for relief shall have been entered against the Borrower.

	(h) Any dissolution or liquidation proceeding shall be instituted by or against the Borrower, and, if instituted against the Borrower, shall be consented to or acquiesced in by the Borrower or shall remain for 45 days undismissed.

	(i) A judgment or judgments for the payment of money in excess of the sum of $25,000 in the aggregate shall be rendered against the Borrower and either (i) the judgment creditor executes on such judgment or (ii) such judgment remains unpaid or undischarged for more than 60 days from the date of entry thereof or such longer period during which execution of such judgment shall be stayed during an appeal from such judgment.

	(j) The maturity of any material Indebtedness of the Borrower (other than Indebtedness under this Agreement) shall be accelerated, or the Borrower shall fail to pay any such material Indebtedness when due (after the lapse of any applicable grace period) or, in the case of such Indebtedness payable on demand, when demanded (after the lapse of any applicable grace period), or any event shall occur or condition shall exist and shall continue for more than the period of grace, if any, applicable thereto and shall have the effect of causing, or permitting the holder of any such Indebtedness or any trustee or other Person acting on behalf of such holder to cause, such material Indebtedness to become due prior to its stated maturity or to realize upon any collateral given as security therefor. For purposes of this Section, Indebtedness of the Borrower shall be deemed “material” if it exceeds $25,000 as to any item of Indebtedness or in the aggregate for all items of Indebtedness with respect to which any of the events described in this Section 7.1(j) has occurred.

	(k) Any execution or attachment shall be issued whereby any substantial part of the property of the Borrower shall be taken or attempted to be taken and the same shall not have been vacated or stayed within 30 days after the issuance thereof.

	(l) Any Security Document shall, at any time, cease to be in full force and effect or shall be judicially declared null and void, or the validity or enforceability thereof shall be contested by the Borrower, or the Bank shall cease to have a valid and perfected security interest having the priority contemplated thereunder in all of the collateral described therein, other than by action or inaction of the Bank if (i) the aggregate value of the collateral affected by any of the foregoing exceeds $25,000 and (ii) any of the foregoing shall remain unremedied for ten days or more after receipt of notice thereof by the Borrower from the Bank.

	(m) Any Governmental Entity Receivables Account Notice shall be revoked or revised without the written consent of the Bank.


	(n) An easement or license agreement, in form and substance acceptable to the Bank, regarding the pipeline and detention pond encroachment on the Borrower’s land onto the adjoining Lot 1, Block 1, New Prague Business Park 1st Addition to the north, for which no easements currently appear of record, as shown on the survey prepared by Bohlen Surveying & Associates, LLC, dated October 23, 2009, designated as Job No. H60-05-07B, has not been executed and consented to by all appropriate parties and properly recorded in the appropriate county recording office no later than 180 days after the date hereof.

	(o) Any Change of Control shall occur.

Section 7.2 Remedies . If (a) any Event of Default described in Sections 7.1 (f), (g) or (h) shall occur, the Commitments shall automatically terminate and the Notes and all other Obligations shall automatically become immediately due and payable; or (b) any other Event of Default shall occur and be continuing, then, the Bank may (i) declare the Commitments terminated, whereupon the Commitments shall terminate and (ii) declare the outstanding unpaid principal balance of the Notes, the accrued and unpaid interest thereon and all other Obligations to be forthwith due and payable, whereupon the Notes, all accrued and unpaid interest thereon and all such Obligations shall immediately become due and payable, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything in this Agreement or in the Notes to the contrary notwithstanding. Upon the occurrence of any of the events described in clause (a) or (b) of the preceding sentence the Bank may exercise all rights and remedies under any of the Loan Documents, and enforce all rights and remedies under any applicable law.

Section 7.3 Deposit Accounts; Offset . The Borrower hereby grants the Bank a security interest in all deposits, credits and deposit accounts of the Borrower with the Bank (the “Deposits”). In addition to the remedies set forth in Section 7.2, upon the occurrence of any Event of Default and thereafter while the same be continuing, the Borrower hereby irrevocably authorizes the Bank to (a) set off any Obligations against all Deposits of the Borrower with, and any and all claims of the Borrower against, the Bank, and (b) to enforce the security interest granted pursuant to the first sentence hereof. Such right shall exist whether or not the Bank shall have made any demand hereunder or under any other Loan Document, whether or not the Obligations, or any part thereof, or Deposits is or are matured or unmatured, and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to the Bank. The Bank agrees that, as promptly as is reasonably possible after the exercise of any such setoff or enforcement right, it shall notify the Borrower of its exercise of such setoff or enforcement right; provided, however, that the failure of the Bank to provide such notice shall not affect the validity of the exercise of such setoff or enforcement rights. Nothing in this Agreement shall be deemed a waiver or prohibition of or restriction on the Bank to all rights of banker’s Lien, setoff and counterclaim available pursuant to law. Notwithstanding anything contained herein to the contrary, the Bank waives any security interest or right of setoff in the Governmental Entity Receivables Account.

ARTICLE VIII
MISCELLANEOUS

Section 8.1 Modifications . Notwithstanding any provisions to the contrary herein, any term of this Agreement may be amended with the written consent of the Borrower; provided that no amendment, modification or waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such amendment, modification, waiver or consent shall be effective only in the specific instance and for the purpose for which given.

Section 8.2 Expenses . Whether or not the transactions contemplated hereby are consummated, the Borrower agrees to pay or reimburse the Bank upon demand for all reasonable out-of-pocket expenses paid or incurred by the Bank, including filing and recording costs and fees, charges and disbursements of outside counsel to the Bank (determined on the basis of such counsel’s generally applicable rates, which may be higher than the rates such counsel charges the Bank in certain matters) and/or the allocated costs of in-house counsel incurred from time to time, in connection with the negotiation, preparation, approval, review, execution, delivery, administration, amendment, modification, interpretation, collection and enforcement of this Agreement and the other Loan Documents and any commitment letters relating thereto paid or incurred by the Bank in connection with the collection and enforcement of this Agreement and any other Loan Document. The obligations of the Borrower under this Section shall survive any termination of this Agreement.

Section 8.3 Waivers, etc . No failure on the part of the Bank or the holder of a Note to exercise and no delay in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The remedies herein and in the other Loan Documents provided are cumulative and not exclusive of any remedies provided by law.

Section 8.4 Notices . Except when telephonic notice is expressly authorized by this Agreement, any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by facsimile transmission, from the first Banking Day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed; provided, however, that any notice to the Bank under Article II hereof shall be deemed to have been given only when received by the Bank.

Section 8.5 Taxes . The Borrower agrees to pay, and save the Bank harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Agreement or the issuance of the Notes, which obligation of the Borrower shall survive the termination of this Agreement.

Section 8.6 Successors and Assigns; Participations; Purchasing Banks .


	(a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Bank, all future holders of the Notes, and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Bank.

	(b) The Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other financial institutions (“ Participants ”) participating interests in a minimum amount of $100,000 in any Revolving Loan or the Term Loan or other Obligation owing to the Bank, the Revolving Note or the Term Note, and the Revolving Commitment or the Term Loan Commitment, or any other interest of the Bank hereunder. In the event of any such sale by the Bank of participating interests to a Participant, (i) the Bank’s obligations under this Agreement to the other parties to this Agreement shall remain unchanged, (ii) the Bank shall remain solely responsible for the performance thereof, (iii) the Bank shall remain the holder of the Revolving Note or the Term Note for all purposes under this Agreement, (iv) the Borrower shall continue to deal solely and directly with the Bank in connection with the Bank’s rights and obligations under this Agreement and (v) the agreement pursuant to which such Participant acquires its participating interest herein shall provide that the Bank shall retain the sole right and responsibility to enforce the Obligations, including, without limitation the right to consent or agree to any amendment, modification, consent or waiver with respect to this Agreement or any other Loan Document, provided that such agreement may provide that the Bank will not consent or agree to any such amendment, modification, consent or waiver with respect to the matters set forth in Sections 8.2(a) through (e) without the prior consent of such Participant. The Borrower agrees that if amounts outstanding under this Agreement, the Revolving Note, the Term Note and the Loan Documents are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have, to the extent permitted by applicable law, the right of setoff in respect of its participating interest in amounts owing under this Agreement and the Revolving Note, the Term Note or other Loan Document to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement or any the Revolving Note, the Term Note or other Loan Document. The Borrower also agrees that each Participant shall be entitled to the benefits of this Credit Agreement with respect to its participation in the Revolving Commitment, Term Loan Commitment, Revolving Loan and Term Loan; provided , that no Participant shall be entitled to receive any greater amount pursuant to such subsections than the Bank would have been entitled to receive in respect of the amount of the participation transferred by the Bank to such Participant had no such transfer occurred.

	(c) The Borrower shall not be liable for any costs incurred by the Bank in effecting any participation under subparagraph (b) of this subsection.

	(d) The Bank may disclose to any Assignee or Participant and to any prospective Assignee or Participant any and all financial information in the Bank’s possession concerning the Borrower or any of their Subsidiaries (if any) which has been delivered to the Bank by or on behalf of the Borrower or any of its Subsidiaries pursuant to this Agreement or which has been delivered to the Bank by or on behalf of the


	Borrower or any of their Subsidiaries in connection with the Bank’s credit evaluation of the Borrower or any of its Subsidiaries prior to entering into this Agreement, provided that prior to disclosing such information, the Bank shall first obtain the agreement of such prospective Assignee or Participant to comply with the provisions of Section 8.7.

	(e) Notwithstanding any other provision in this Agreement, the Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any note held by it in favor of any federal reserve bank in accordance with Regulation A of the Board or U. S. Treasury Regulation 31 CFR § 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law.

	(f) In connection with this Agreement, the other Loan Documents and the transactions and any litigation relating thereto (including in connection with (i) the negotiation, preparation and execution of the Loan Documents, (ii) the perfection of any security interest, (iii) the completion of any filings or registrations, (iv) the obtaining of any consents and (v) any present or future legal representation relating to the administration, amendment, modification, waiver or enforcement of, or any restructuring or forbearance arrangement relating to, any Loan Document), Dorsey & Whitney LLP and any other counsel retained by the Bank in connection with any of such matters (collectively, the “Bank’s Counsel”) has only represented and shall only represent the Bank. Each Borrower and each assignee or participant of the Bank (by accepting an assignment or a participation under Section 8.6 hereof), agrees and acknowledges that the Bank’s Counsel does not represent it, and no attorney-client relationship exists between it and the Bank’s Counsel, in connection with any of the matters described in the preceding sentence.

Section 8.7 Confidentiality of Information . The Bank shall use reasonable efforts to assure that information about the Borrower and its operations, affairs and financial condition, not generally disclosed to the public or to trade and other creditors, which is furnished to the Bank pursuant to the provisions hereof is used only for the purposes of this Agreement and any other relationship between the Bank and the Borrower and shall not be divulged to any Person other than the Bank, its Affiliates and their respective officers, directors, employees and agents, except: (a) to their attorneys and accountants, (b) in connection with the enforcement of the rights of the Bank hereunder and under the Loan Documents or otherwise in connection with applicable litigation, (c) in connection with assignments and participations and the solicitation of prospective assignees and participants referred to in the immediately preceding Section, (d) if such information is generally available to the public other than as a result of disclosure by the Bank, (e) to any direct or indirect contractual counterparty in any hedging arrangement or such contractual counterparty’s professional advisor, (f) to any nationally recognized rating agency that requires information about the Bank’s investment portfolio in connection with ratings issued with respect to the Bank, and (g) as may otherwise be required or requested by any regulatory authority having jurisdiction over the Bank or by any applicable law, rule, regulation or judicial process, the opinion of the Bank’s counsel concerning the making of such disclosure to be binding on the parties hereto. The Bank shall not incur any liability to the Borrower by reason of any disclosure permitted by this Section.

Section 8.8 Governing Law and Construction . THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS. Whenever possible, each provision of this Agreement and the other Loan Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto.

Section 8.9 Consent to Jurisdiction . AT THE OPTION OF THE BANK, THIS AGREEMENT AND THE OTHER BORROWER LOAN DOCUMENTS MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY; AND THE BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE BANK AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.

Section 8.10 Waiver of Jury Trial . EACH OF THE BORROWER AND THE BANK IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

Section 8.11 Survival of Agreement . All representations, warranties, covenants and agreement made by the Borrower herein or in the other Borrower Loan Documents and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be deemed to have been relied upon by the Bank and shall survive the making of the Loan by the Bank and the execution and delivery to the Bank by the Borrower of the Note, regardless of any investigation made by or on behalf of the Bank, and shall continue in full force and effect as long as any Obligation is outstanding and unpaid and so long as the Commitment has not been terminated; provided, however, that the obligations of the under 8.3, 8.6 and 8.13 shall survive payment in full of the Obligations and the termination of the Commitment.

Section 8.12 Indemnification . The Borrower hereby agrees to defend, protect, indemnify and hold harmless the Bank and its Affiliates and the directors, officers, employees, attorneys and agents of the Bank and its Affiliates (each of the foregoing being an “Indemnitee” and all of the foregoing being collectively the “Indemnitees”) from and against any and all claims, actions, damages, liabilities, judgments, costs and expenses (including all reasonable fees and disbursements of counsel which may be incurred in the investigation or defense of any matter) imposed upon, incurred by or asserted against any Indemnitee, whether direct, indirect or consequential and whether based on any federal, state, local or foreign laws or regulations (including securities laws, environmental laws, commercial laws and regulations), under common law or on equitable cause, or on contract or otherwise:


	(a) by reason of, relating to or in connection with the execution, delivery, performance or enforcement of any Loan Document, any commitments relating thereto, or any transaction contemplated by any Loan Document; or

	(b) by reason of, relating to or in connection with any credit extended or used under the Loan Documents or any act done or omitted by any Person, or the exercise of any rights or remedies thereunder, including the acquisition of any collateral by the Bank by way of foreclosure of the Lien thereon, deed or bill of sale in lieu of such foreclosure or otherwise;

provided, however, that the Borrower shall not be liable to any Indemnitee for any portion of such claims, damages, liabilities and expenses resulting from such Indemnitee’s gross negligence or willful misconduct. In the event this indemnity is unenforceable as a matter of law as to a particular matter or consequence referred to herein, it shall be enforceable to the full extent permitted by law.

This indemnification applies, without limitation, to any act, omission, event or circumstance existing or occurring on or prior to the later of the Termination Date or the date of payment in full of the Obligations, including specifically Obligations arising under clause (b) of this Section. The indemnification provisions set forth above shall be in addition to any liability the Borrower may otherwise have. Without prejudice to the survival of any other obligation of the Borrower hereunder the indemnities and obligations of the Borrower contained in this Section shall survive the payment in full of the other Obligations.

Section 8.13 Captions . The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement.

Section 8.14 Entire Agreement . This Agreement and the other Borrower Loan Documents embody the entire agreement and understanding between the Borrower and the Bank with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. Nothing contained in this Agreement or in any other Loan Document, expressed or implied, is intended to confer upon any Persons other than the parties hereto any rights, remedies, obligations or liabilities hereunder or thereunder.

Section 8.15 Counterparts . This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart.

Section 8.16 Borrower Acknowledgements . The Borrower hereby acknowledges that (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents, (b) the Bank has no fiduciary relationship to the Borrower, the relationship being solely that of debtor and creditor, (c) no joint venture exists between the Borrower and the Bank, and (d) the Bank undertakes no responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the business or operations of the Borrower and the Borrower shall rely entirely upon its own judgment with respect to its business, and any review, inspection or supervision of, or information supplied to, the Borrower by the Bank is for the protection of the Bank and neither the Borrower nor any third party is entitled to rely thereon.

Section 8.17 Interest Rate Limitation . Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts that are treated as interest on such Loan under applicable law (collectively, the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) that may be contracted for, charged, taken, received or reserved by the Bank in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to the Bank in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by the Bank.

[The remainder of this page has been left blank intentionally.]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.


	ELECTROMED, INC.

	By:
	Name: Robert D. Hansen
	Title: Chief Executive Officer

Address:

500 Sixth Avenue NW New Prague, MN 56071 ATTN: Robert D. Hansen Fax Number: 952-758-1941

	U.S. BANK NATIONAL ASSOCIATION

	By:


	Name:	Gregory J. Guttormsson


	Title:	Vice President


Address for Bank:

U.S. Bank National Association BC-MN-H03W
800 Nicollet Mall
Minneapolis, MN 55402-4302 ATTN: Daniel J. Miller Fax Number: 612-303-2252

[Signature Page to Credit Agreement]

EXHIBIT A TO
CREDIT AGREEMENT

REVOLVING NOTE


$3,500,000	December [ ], 2009
	Minneapolis, Minnesota

FOR VALUE RECEIVED, ELECTROMED, INC., a corporation organized under the laws of the State of Minnesota hereby promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION (the “Bank”) at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in Immediately Available Funds (as such term and each other capitalized term used herein are defined in the Credit Agreement hereinafter referred to) on the Termination Date the principal amount of THREE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($3,500,000.00) or, if less, the aggregate unpaid principal amount of all Advances made by the Bank under the Credit Agreement, and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement.

This note is the Revolving Note referred to in the Credit Agreement dated as of December [ ], 2009 (as the same may hereafter be from time to time amended, restated or otherwise modified, the “Credit Agreement”) between the undersigned and the Bank. This note is secured, it is subject to certain mandatory prepayments and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement.

In the event of default hereunder, the undersigned agrees to pay all costs and expenses of collection, including reasonable attorneys’ fees. The undersigned waives demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor.

THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS.


	ELECTROMED, INC.

	By:
	Name: Robert D. Hansen
	Title: Chief Executive Officer

EXHIBIT B TO
CREDIT AGREEMENT

TERM NOTE A


$1,520,000	December [ ], 2009
	Minneapolis, Minnesota

FOR VALUE RECEIVED, ELECTROMED, INC., a corporation organized under the laws of the State of Minnesota hereby promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION (the “Bank”) at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in Immediately Available Funds (as such term and each other capitalized term used herein are defined in the Credit Agreement hereinafter referred to) the principal amount of ONE MILLION FIVE HUNDRED TWENTY THOUSAND AND NO/100 DOLLARS ($1,520,000.00) and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement.

The principal hereof is payable as provided in the Credit Agreement.

This note is the Term Note A referred to in the Credit Agreement dated as of December [ ], 2009 (as the same may hereafter be from time to time amended, restated or otherwise modified, the “Credit Agreement”) between the undersigned and the Bank. This note is secured and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement.

THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF,, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS.


	ELECTROMED, INC.

	By:
	Name: Robert D. Hansen
	Title: Chief Executive Officer

EXHIBIT C TO
CREDIT AGREEMENT

TERM NOTE B


$1,000,000	December [ ], 2009
	Minneapolis, Minnesota

FOR VALUE RECEIVED, ELECTROMED, INC., a corporation organized under the laws of the State of Minnesota hereby promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION (the “Bank”) at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in Immediately Available Funds (as such term and each other capitalized term used herein are defined in the Credit Agreement hereinafter referred to) the principal amount of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00) and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement.

The principal hereof is payable as provided in the Credit Agreement.

This note is the Term Note B referred to in the Credit Agreement dated as of December [ ], 2009 (as the same may hereafter be from time to time amended, restated or otherwise modified, the “Credit Agreement”) between the undersigned and the Bank. This note is secured and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement.

THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF,, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS.


	ELECTROMED, INC.

	By:
	Name: Robert D. Hansen
	Title: Chief Executive Officer

EXHIBIT D TO
CREDIT AGREEMENT

MATTERS TO BE COVERED BY
OPINION OF COUNSEL
TO THE BORROWER

The opinion of counsel to the Borrower which is called for by Article III of the Credit Agreement (the “Credit Agreement”) shall be addressed to the Bank and dated the Closing Date. It shall be satisfactory in form and substance to the Bank and shall cover the matters set forth below, subject to such assumptions, exceptions and qualifications as may be acceptable to the Bank and counsel to the Bank. Capitalized terms used herein have the respective meanings given such terms in the Credit Agreement.

1. The Borrower is a corporation duly incorporated and validly existing and in good standing under the laws of the State of Minnesota and has all requisite corporate power and authority to carry on its business as now conducted, to enter into the Borrower Loan Documents and to perform all of its obligations under each and all of the foregoing. The Borrower is duly qualified and in good standing as a foreign corporation in all of the jurisdictions in which the character of the properties owned or leased by it or the business conducted by it makes such qualification necessary and the failure to so qualify would permanently preclude the Borrower from enforcing its rights with respect to any material asset or expose the Borrower to any material liability.

2. The execution, delivery and performance by the Borrower of the Borrower Loan Documents have been duly authorized by all necessary corporate action by the Borrower.

3. The Borrower Loan Documents constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms.

4. The execution, delivery and performance by the Borrower of the Borrower Loan Documents will not (i) violate any provision of any law, statute, rule or regulation or, to the best knowledge of such counsel, any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to the Borrower, (ii) violate or contravene any provision of the Articles of Incorporation or bylaws of the Borrower of the Borrower, or (iii) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument known to such counsel to which the Borrower is a party or by which it or any of its properties may be bound or result in the creation of any Lien thereunder.

5. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on the part of the Borrower to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, the Borrower Loan Documents, except for any necessary filing or recordation of or with respect to any of the Security Documents.

6. To the best knowledge of such counsel, there are no actions, suits or proceedings pending or threatened against or affecting the Borrower or any of its properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which (i) challenge the legality, validity or enforceability of the Borrower Loan Documents, or (ii) if determined adversely to the Borrower, would constitute a Material Adverse Occurrence.

7. Each Security Document creates the Lien it purports to create upon the properties and interests specifically described therein. The descriptions of properties and interests in the Security Documents and any related financing statements are adequate for the purpose of such instruments and for perfection of the Liens of the Bank. As to any Security Documents which are Security Agreements, the filing of the Uniform Commercial Code financing statements delivered by the Borrower to the Bank in the filing offices listed thereon will perfect Liens created under such Security Agreements to the extent such Liens are capable of being perfected by filing financing statements under the Uniform Commercial Code.

8. The Mortgage is in proper form for recording in the State of Minnesota in order to create a lien upon the real property included within the Mortgaged Property (“Real Property”) and in order to assign the leases and rents evidenced thereby to the Bank as security for the Loan. Upon the proper recording of the Mortgage in the office(s) of the ___________________ [and of the ___________________ (if both Torrens and Abstract Property)] in and for ________________ County(ies), Minnesota, and payment of mortgage registry tax in the proper amount, the Mortgage will, subject to the assumptions and qualifications herein set forth, create a valid lien upon the Real Property and a valid assignment of the leases of and the rents from the Real Property, and will impart constructive notice to third parties of the existence of said lien and assignment as of the date and time of recording (“Recording Date”).

9. The Mortgage is effective as a grant by the Borrower to the Bank of a security interest in the fixtures which form a part of the Real Property (“Fixtures”) to secure the obligations secured by the Mortgage. [Upon proper recording of the Mortgage in the office(s) of the ________________ [ and of the _______________________________________ (if both Torrens and Abstract Property) ] in and for _____________ County(ies), Minnesota, the Mortgage will be effective as a fixture filing and a fixture financing statement, the security interest in the Fixtures granted by the Mortgage will be perfected, and no other filing, registration or recording in the State of Minnesota will be required to perfect such security interest in the Fixtures (if requested) ] . The Mortgage [Security Agreement] is effective as a grant by the Borrower to the Bank of a security interest in the portion of the Mortgaged Property in which a security interest may be granted pursuant to the UCC.

EXHIBIT E TO
CREDIT AGREEMENT

FORMULA FOR
BORROWING BASE


	1. Borrowing Base. The “Borrowing Base” as of any date of determination shall be 60% of the face amount of Eligible Accounts.

2. Definitions. Capitalized terms use herein which are defined in the Credit Agreement are used herein with the respective meanings attributed thereto in the Credit Agreement. In addition, for the purposes of this Exhibit and for determining the Borrowing Base, the following terms shall have the following respective meanings:

	“ Eligible Accounts ”: the right of the Borrower to receive payment for goods sold or services rendered, including any such right evidenced by instruments or chattel paper, provided such right to payment:

		(a) has arisen out of the sale of goods or the performance of services by the Borrower within the United States, or, if such goods are sold or services performed outside the United States, is backed by a letter of credit issued or confirmed by a bank chartered under the laws of the United States or of any State;

		(b) is the valid, binding and legally enforceable obligation of the obligor and such right to payment has not been subordinated by the Borrower to any other claim against the obligor and such obligor is not (i) the Borrower or an Affiliate of the Borrower (ii) a Person who is a shareholder, director, officer or employee of the Borrower, (iii) the United States or any department, agency or instrumentality thereof unless the Borrower shall have complied with Section 6.18(a) with respect to such account, (iv) a debtor under any proceeding under the Bankruptcy Code or comparable provision of state or foreign law or (v) an assignor for the benefit of creditors;

		(c) is assignable;

		(d) is subject to a perfected first security interest in favor of the Bank and is free and clear of any other Lien;

		(e) is not subject to any claimed offset, counterclaim or other defense with respect thereto;

		(f) is not unpaid more than 90 days from the due date of the relevant invoice;

		(g) is not conditioned upon the approval of the obligor obligated thereon or subject to any repurchase obligations on the part of the Borrower or any return privilege on the part of such obligor; and


	(h) is not, as reasonably determined by the Bank in its discretion, uncollectible, difficult to collect or otherwise disqualified;

provided , that the Bank shall, notwithstanding the foregoing, have the right, in the reasonable exercise of its discretion, to establish reserves against the aggregate amount of Eligible Accounts.


	EXHIBIT F TO
	CREDIT AGREEMENT

FORM OF BORROWING BASE CERTIFICATE

Date


TOTAL ACCOUNTS RECEIVABLE
1)	A/R balance as of date above			$4,000,000
2)	Minus Ineligibles (from Schedule A)			$0
3)	ELIGIBLE ACCOUNTS RECEIVABLE: (Line 1 minus Line 2 times advance rate):		60%	$2,400,000
			(Advance rate)

4)	MAXIMUM AVAILABLE: (lesser of line 3 or $3,500,000)		$3,500,000	$2,400,000
		(Maximum Line Amount)
LOAN DETAIL
5)	Line of Credit Outstanding:	$	0
6)	Term Loan Outstanding	$	0
7)	TOTAL LOANS OUTSTANDING: (Line 5 plus Line 6)			$0

8)	Amount to be (Repaid)/Available: (Line 4 minus Line 7)			$2,400,000

The undersigned represents and warrants that:
The foregoing information is true, complete and correct, and that the collateral, designated as eligible, hereby complies fully with the conditions, terms, warranties, representations and covenants set forth in the Loan Agreement (“Agreement”) between the undersigned and U.S. Bank National Association(“Lender”).


ELECTROMED, INC.
Borrower	Authorized signature	Date

SCHEDULE A
COMPUTATION OF INELIGIBLES


Date:


INELIGIBLE ACCOUNTS RECEIVABLE:

	a) Over 90 days past due date		$	—

	b) Aged Credits **		$	—

	c) Contra accounts		$	—

	d) Co-op Advertising Accrual		$	—

	e) Foreign accounts receivable		$	—

	f) Employee/intercompany accounts receivable		$	—

	g) Cash/COD accounts		$	—

	h) Finance/service charges		$	—

	i) Debit memos/charge-backs		$	—

	j) Other ineligible accounts receivable (describe)		$	—

	TOTAL INELIGIBLE ACCOUNTS RECEIVABLE	(Transfer to line 2, page 1)	$	0

	** Credit balances over 60 days past due need to be added to ineligibles

EXHIBIT G TO
CREDIT AGREEMENT

FORM OF COMPLIANCE CERTIFICATE

To: U.S. Bank National Association:

THE UNDERSIGNED HEREBY CERTIFIES THAT:

(1) I am the duly elected chief financial officer of Electromed, Inc. (the “Borrower”);

(2) I have reviewed the terms of the Credit Agreement dated as of December [ ], 2009 between the Borrower and U.S. Bank National Association (the “Credit Agreement”) and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower during the accounting period covered by the Attachment hereto;

(3) The examination described in paragraph (2) did not disclose, and I have no knowledge, whether arising out of such examinations or otherwise, of the existence of any condition or event which constitutes a Default or an Event of Default (as such terms are defined in the Credit Agreement) during or at the end of the accounting period covered by the Attachment hereto or as of the date of this Certificate, except as described below (or on a separate attachment to this Certificate). The exceptions listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking or proposes to take with respect to each such condition or event are as follows:

The foregoing certification, together with the computations in the Attachment hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this ___ day of _______________, _______ pursuant to Section 5.1(d) of the Credit Agreement.


	ELECTROMED, INC.

	By

	Title

ATTACHMENT TO COMPLIANCE CERTIFICATE

This Compliance Certificate is delivered under the Credit Agreement dated as of ________________, 2009, between Electromed and U.S. Bank National Association (the “Credit Agreement”).

All terms used in this Compliance Certificate shall have the meanings given them in the Credit Agreement.

The figures used in this Compliance Certificate were determined as of____________________.

I certify that the following amounts were correctly determined according to the Credit Agreement as of the date set forth above:

1. Total Cash Flow Leverage (Tested Quarterly) In Compliance Yes______ No______


Long Term Interest Bearing Debt
Plus Short Term Interest Bearing Debt
Plus Capital Leases
Plus 6 times Annual Rent Expense
Total (A)

EBITDAR for LTM (B)

Ratio of (A) to (B)

2. Fixed Charge Coverage Ratio (Tested Quarterly) In Compliance Yes______ No______


		For LTM
EBITDAR
Less:
Cash Taxes
Cash Dividends/Cash distributions
Maintenance CAPEX (50% of Depreciation Expense)
Total (A)

Required Principal Payments
Plus Interest Expense
Plus Rental or Lease Expense
Total (B)

Ratio of (A) to (B)

3. No Additional Interest Bearing Debt (except for S2.5MM debentures, if approved by US Bank) (Tested Quarterly)


In Compliance Yes ______ No______

I further certify that the Borrower is in compliance with all other terms and conditions of the Agreement and that no Event of Default or event that with notice or lapse of time would be an Event of Default has occurred since the last Compliance Certificate provided to the Bank.

Electromed, Inc.


By

Title

EXHIBIT H TO
CREDIT AGREEMENT

INSURANCE REQUIREMENTS


I.	PROPERTY INSURANCE


An ORIGINAL (or certified copy) All-Risk Hazard Insurance Policy or ORIGINAL Acord 27 Certificate of Insurance naming the borrowing entity as an insured, reflecting coverage of 100% of the replacement cost, and written by a carrier approved by the Bank with a current Best’s Insurance Guide Rating of at least A- IX (which is authorized to do business in the state in which the property is located) that affirmatively includes the following:

1.	Mortgagee Clause naming U.S. Bank National Association as Mortgagee with a 30-day notice to the Bank in the event of cancellation, non-renewal or material change.

2.	The Bank’s Loss Payable Endorsement with a Severability of Interest Clause with a 30-day notice to the Bank in the event of cancellation, non-renewal or material change.

3.	Replacement Cost Endorsement.

4.	No Exclusion for Acts of Terrorism.

5.	No Coinsurance Clause.

6.	Boiler and Machinery Coverage.

7.	Sprinkler Leakage Coverage.

8.	Vandalism and Malicious Mischief Coverage.

9.	If applicable, Loss of Rents Insurance in an amount of not less than 100% of one year’s Rental Value of the Project. “Rental Value” shall include:

	a)	The total projected gross rental income from tenant occupancy of the property,

	b)	The amount of all charges which are the legal obligation of tenants and which would otherwise be the obligation of the Borrower, and

	c)	The fair rental value of any portion of the property which is occupied by the Borrower.

10.	One year’s business interruption insurance in an amount acceptable to the Bank.

11.	Extra Expense Coverage.

12.	The Borrower’s coverage is primary and non-contributory with any insurance or self-insurance carried by U.S. Bank National Association.


		13. Waiver of Subrogation against any party whose interests are covered in the policy.


II.	LIABILITY INSURANCE

	An ORIGINAL Acord 25 Certificate of General Comprehensive Liability Insurance naming the borrowing entity as an insured, providing coverage on an “occurrence” rather than a “claims made” basis and written by a carrier approved by the Bank with a current A.M. Best’s Insurance Guide Rating of at least A- IX (which is authorized to do business in the state in which the property is located) that affirmatively includes the following:

	1.	Combined general liability policy limit of at least $5,000,000.00 each occurrence, applying liability for Bodily Injury, Personal Injury, Property Damage, Contractual, Products and Completed Operations which combined limit may be satisfied by the limit afforded under the Commercial General Liability Policy, or by such Policy in combination with the limits afforded by an Umbrella or Excess Liability Policy (or policies); provided the coverage afforded under any such Umbrella or Excess Liability Policy is at least as broad in all material respects as that afforded by the underlying Commercial General Liability Policy.

	2.	No Exclusion for Acts of Terrorism.

	3.	Aggregate limit to apply per location.

	4.	The Borrower’s coverage is primary and non-contributory with any insurance or self-insurance carried by U.S. Bank National Association.


	5.	Waiver of Subrogation against any party whose interests are covered in the policy.

	Additional Insured Endorsement naming U.S. Bank National Association as an additional insured with a 30-day notice to the Bank in the event of cancellation, non-renewal or material change. A Severability of Interests provision should be included.

III.	WORKER’S COMPENSATION

An ORIGINAL Certificate of Worker’s Compensation coverage in the statutory amount and Employer’s Liability Coverage with minimum limits of $500,000 / $500,000 / $500,000, naming the Borrower and written by a carrier approved by the Bank.

Exhibit 10.2

REVOLVING NOTE


$3,500,000	December 9, 2009 Minneapolis, Minnesota

This note is the Revolving Note referred to in the Credit Agreement dated as of December 9, 2009 (as the same may hereafter be from time to time amended, restated or otherwise modified, the “Credit Agreement”) between the undersigned and the Bank. This note is secured, it is subject to certain mandatory prepayments and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement.


	ELECTROMED, INC.

	By:
	Name: Robert D. Hansen
	Title: Chief Executive Officer

Exhibit 10.3

TERM NOTE A


$1,520,000	December 9, 2009 Minneapolis, Minnesota

FOR VALUE RECEIVED, ELECTROMED, INC., a corporation organized under the laws of the State of Minnesota hereby promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION (the “Bank”) at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in Immediately Available Funds (as such term and each other capitalized term used herein are defined in the Credit Agreement hereinafter referred to) the principal amount of ONE MILLION FIVE HUNDRED TWENTY THOUSAND AND NO/100 DOLLARS ($1,520,000.00) and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement.

The principal hereof is payable as provided in the Credit Agreement.

This note is the Term Note A referred to in the Credit Agreement dated as of December 9, 2009 (as the same may hereafter be from time to time amended, restated or otherwise modified, the “Credit Agreement”) between the undersigned and the Bank. This note is secured and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement.

In the event of default hereunder, the undersigned agrees to pay all costs and expenses of collection, including reasonable attorneys' fees. The undersigned waives demand, presentment, notice of nonpayment, protest, notice of protest and notice of dishonor.

THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF,, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS.


	ELECTROMED, INC.

	By:
	Name: Robert D. Hansen
	Title: Chief Executive Officer

Exhibit 10.4

TERM NOTE B


$1,000,000	December 9, 2009 Minneapolis, Minnesota

FOR VALUE RECEIVED, ELECTROMED, INC., a corporation organized under the laws of the State of Minnesota hereby promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION (the “Bank”) at its main office in Minneapolis, Minnesota, in lawful money of the United States of America in Immediately Available Funds (as such term and each other capitalized term used herein are defined in the Credit Agreement hereinafter referred to) the principal amount of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00) and to pay interest (computed on the basis of actual days elapsed and a year of 360 days) in like funds on the unpaid principal amount hereof from time to time outstanding at the rates and times set forth in the Credit Agreement.

The principal hereof is payable as provided in the Credit Agreement.

This note is the Term Note B referred to in the Credit Agreement dated as of December 9, 2009 (as the same may hereafter be from time to time amended, restated or otherwise modified, the “Credit Agreement”) between the undersigned and the Bank. This note is secured and its maturity is subject to acceleration, in each case upon the terms provided in said Credit Agreement.

THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF,, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS.


	ELECTROMED, INC.

	By:
	Name: Robert D. Hansen
	Title: Chief Executive Officer

Exhibit 10.5

SECURITY AGREEMENT

THIS SECURITY AGREEMENT, dated as of December 9, 2009, is made and given by ELECTROMED, INC., a corporation organized under the laws of the State of Minnesota (the “Grantor”), to U.S. BANK NATIONAL ASSOCIATION, a national banking association (the “Secured Party”).

RECITALS

A. The Grantor and the Secured Party have entered into a Credit Agreement dated as of December 9, 2009 (as the same may hereafter be amended, supplemented, extended, restated, or otherwise modified from time to time, the “Credit Agreement”) pursuant to which the Secured Party has agreed to extend to the Grantor certain credit accommodations consisting of a revolving credit facility and two term loan facilities.

B. It is a condition precedent to the obligation of the Secured Party to extend credit accommodations pursuant to the terms of the Credit Agreement that this Agreement be executed and delivered by the Grantor.

C. The Grantor finds it advantageous, desirable and in its best interests to comply with the requirement that it execute and deliver this Security Agreement to the Secured Party.

NOW, THEREFORE, in consideration of the premises and in order to induce the Secured Party to enter into the Credit Agreement and to extend credit accommodations to the Grantor thereunder, the Grantor hereby agrees with the Secured Party for the Secured Party’s benefit as follows:


	Section 1. Defined Terms .

	l (a) As used in this Agreement, the following terms shall have the meanings indicated:

		“ Account ” means a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii) for services rendered or to be rendered, (iii) for a policy of insurance issued or to be issued, (iv) for a secondary obligation incurred or to be incurred, (v) for energy provided or to be provided, (vi) for the use or hire of a vessel under a charter or other contract, (vii) arising out of the use of a credit or charge card or information contained on or for use with the card, or (viii) as winnings in a lottery or other game of chance operated, sponsored, licensed or authorized by a State or governmental unit of a State, or person licensed or authorized to operate the game by a State or governmental unit of a State. The term includes health-care insurance receivables.

		“ Account Debtor ” shall mean a Person who is obligated on or under any Account, Chattel Paper, Instrument or General Intangible.


		“ Chattel Paper ” shall mean a record or records that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, a lease of specific goods, or a lease of specific goods and license of software used in the goods.

		“ Collateral ” shall mean all property and rights in property now owned or hereafter at any time acquired by the Grantor in or upon which a Security Interest is granted to the Secured Party by the Grantor under this Agreement.

		“ Deposit Account ” shall mean any demand, time, savings, passbook or similar account maintained with a bank.

		“ Document ” shall mean a document of title or a warehouse receipt.

		“ Equipment ” shall mean all machinery, equipment, motor vehicles, furniture, furnishings and fixtures, including all accessions, accessories and attachments thereto, and any guaranties, warranties, indemnities and other agreements of manufacturers, vendors and others with respect to such Equipment.

		“ Event of Default ” shall have the meaning given to such term in Section 18 hereof.

		“ Financing Statement ” shall have the meaning given to such term in Section 4 hereof.

		“ Fixtures ” shall mean goods that have become so related to particular real property that an interest in them arises under real property law.

		“ General Intangibles ” shall mean any personal property (other than goods, Accounts, Chattel Paper, Deposit Accounts, Documents, Instruments, Investment Property, Letter of Credit Rights and money) including things in action, contract rights, payment intangibles, software, corporate and other business records, inventions, designs, patents, patent applications, service marks, trademarks, tradenames, trade secrets, internet domain names, engineering drawings, good will, registrations, copyrights, licenses, franchises, customer lists, tax refund claims, royalties, licensing and product rights, rights to the retrieval from third parties of electronically processed and recorded data and all rights to payment resulting from an order of any court.

		“ Instrument ” shall mean a negotiable instrument or any other writing which evidences a right to the payment of a monetary obligation and is not itself a security agreement or lease and is of a type which is transferred in the ordinary course of business by delivery with any necessary endorsement or assignment.

		“ Inventory ” shall mean goods, other than farm products, which are leased by a person as lessor, are held by a person for sale or lease or to be furnished under a contract of service, are furnished by a person under a contract of service,


		or consist of raw materials, work in process, or materials used or consumed in a business or incorporated or consumed in the production of any of the foregoing and supplies, in each case wherever the same shall be located, whether in transit, on consignment, in retail outlets, warehouses, terminals or otherwise, and all property the sale, lease or other disposition of which has given rise to an Account and which has been returned to the Grantor or repossessed by the Grantor or stopped in transit.

		“ Investment Property ” shall mean a security, whether certificated or uncertificated, a security entitlement, a securities account and all financial assets therein, a commodity contract or a commodity account.

		“ Letter of Credit Right ” shall mean a right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance.

		“ Lien ” shall mean any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of the lessors under capitalized leases), in, of or on any assets or properties of the Person referred to.

		“ Obligations ” shall mean (a) all indebtedness, liabilities and obligations of the Grantor to the Secured Party of every kind, nature or description under the Credit Agreement, including the Grantor’s obligation on any promissory note or notes under the Credit Agreement and any note or notes hereafter issued in substitution or replacement thereof, (b) all liabilities of the Grantor under this Agreement, and (c) any and all other liabilities and obligations of the Grantor to the Secured Party of every kind, nature and description, whether direct or indirect or hereafter acquired by the Secured Party from any Person, absolute or contingent, regardless of how such liabilities arise or by what agreement or instrument they may be evidenced, and in all of the foregoing cases whether due or to become due, and whether now existing or hereafter arising or incurred.

		“ Person ” shall mean any individual, corporation, partnership, limited partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity.

		“ Security Interest ” shall have the meaning given such term in Section 2 hereof.

	1 (b) All other terms used in this Agreement which are not specifically defined herein shall have the meaning assigned to such terms in Article 9 of the Uniform Commercial Code as in effect in the State of Minnesota

	1 (c) Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular, the plural and “or” has the


	inclusive meaning represented by the phrase “and/or.” The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” The words “hereof,” “herein,” “hereunder” and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections are references to Sections in this Security Agreement unless otherwise provided.

Section 2. Grant of Security Interest . As security for the payment and performance of all of the Obligations, the Grantor hereby grants to the Secured Party a security interest (the “Security Interest”) in all of the Grantor’s right, title, and interest in and to the following, whether now or hereafter owned, existing, arising or acquired and wherever located:

		2(a)	All Accounts.

		2(b)	All Chattel Paper.

		2(c)	All Deposit Accounts

		2(d)	All Documents.

		2(e)	All Equipment.

		2(f)	All Fixtures

		2(g)	All General Intangibles.

		2(h)	All Instruments.

		2(i)	All Inventory.

		2(j)	All Investment Property

		2(k)	All Letter of Credit Rights

		2(1) To the extent not otherwise included in the foregoing, all other rights to the payment of money, including rents and other sums payable to the Grantor under leases, rental agreements and other Chattel Paper; all books, correspondence, credit files, records, invoices, bills of lading, and other documents relating to any of the foregoing, including, without limitation, all tapes, cards, disks, computer software, computer runs, and other papers and documents in the possession or control of the Grantor or any computer bureau from time to time acting for the Grantor; all rights in, to and under all policies insuring the life of any officer, director, stockholder or employee of the Grantor, the proceeds of which are payable to the Grantor; all accessions and additions to, parts and appurtenances of, substitutions for and replacements of any of the foregoing; and all proceeds (including insurance proceeds) and products thereof.

	Section 3. Grantor Remains Liable . Anything herein to the contrary notwithstanding, (a) the Grantor shall remain liable under the Accounts, Chattel Paper, General Intangibles and

other items included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Secured Party of any of the rights hereunder shall not release the Grantor from any of its duties or obligations under the Accounts or any other items included in the Collateral, and (c) the Secured Party shall have no obligation or liability under Accounts, Chattel Paper, General Intangibles and other items included in the Collateral by reason of this Agreement, nor shall the Secured Party be obligated to perform any of the obligations or duties of the Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.

Section 4. Title to Collateral . The Grantor has (or will have at the time it acquires rights in Collateral hereafter acquired or arising) and will maintain so long as the Security Interest may remain outstanding, title to each item of Collateral (including the proceeds and products thereof), free and clear of all Liens except the Security Interest and except Liens permitted by the Credit Agreement. The Grantor will not license any Collateral. The Grantor will defend the Collateral against all claims or demands of all Persons (other than the Secured Party) claiming the Collateral or any interest therein. As of the date of execution of this Security Agreement, no effective financing statement or other similar document used to perfect and preserve a security interest under the laws of any jurisdiction (a “Financing Statement”) covering all or any part of the Collateral is on file in any recording office, except such as may have been filed (a) in favor of the Secured Party relating to this Agreement, or (b) to perfect Liens permitted by the Credit Agreement.

Section 5. Disposition of Collateral . The Grantor will not sell, lease or otherwise dispose of, or discount or factor with or without recourse, any Collateral, except for sales of items of Inventory in the ordinary course of business and dispositions of Equipment which are immediately replaced with comparable replacement equipment.

Section 6. Names, Offices, Locations, Jurisdiction of Organization . The Grantor’s legal name (as set forth in its constituent documents filed with the appropriate governmental official or agency) is as set forth in the opening paragraph hereof. The jurisdiction of organization of the Grantor is the state of Minnesota, and the organizational number of the Grantor is set forth on the signature page of this Agreement. The Grantor will from time to time at the request of the Secured Party provide the Secured Party with current good standing certificates and/or state-certified constituent documents from the appropriate governmental officials. The chief place of business and chief executive office of Grantor are located at its address set forth on the signature page hereof. The Grantor will not locate or relocate any item of Collateral into any jurisdiction in which an additional Financing Statement would be required to be filed to maintain the Secured Party’s perfected security interest in such Collateral. The Grantor will not change its name, the location of its chief place of business and chief executive office or its corporate structure (including without limitation, its jurisdiction of organization) unless the Secured Party has been given at least 30 days prior written notice thereof and the Grantor has executed and delivered to the Secured Party such Financing Statements and other instruments required or appropriate to continue the perfection of the Security Interest.

Section 7. Rights to Payment . Except as the Grantor may otherwise advise the Secured Party in writing, each Account, Chattel Paper, Document, General Intangible and Instrument constituting or evidencing Collateral is (or, in the case of all future Collateral, will be

when arising or issued) the valid, genuine and legally enforceable obligation of the Account Debtor or other obligor named therein or in the Grantor’s records pertaining thereto as being obligated to pay or perform such obligation. Without the Secured Party’s prior written consent, the Grantor will not agree to any modifications, amendments, subordinations, cancellations or terminations of the obligations of any such Account Debtors or other obligors except in the ordinary course of business and in amounts not exceeding $25,000 per Account Debtor or other obligor in any calendar year. The Grantor will perform and comply in all material respects with all its obligations under any items included in the Collateral and exercise promptly and diligently its rights thereunder.

Section 8. Further Assurances; Attorney-in-Fact .


	8(a) The Grantor agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or that the Secured Party may reasonably request, in order to perfect and protect the Security Interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral (but any failure to request or assure that the Grantor execute and deliver such instrument or documents or to take such action shall not affect or impair the validity, sufficiency or enforceability of this Agreement and the Security Interest, regardless of whether any such item was or was not executed and delivered or action taken in a similar context or on a prior occasion). Without limiting the generality of the foregoing, the Grantor will, promptly and from time to time at the request of the Secured Party: (i) execute and file such Financing Statements or continuation statements in respect thereof, or amendments thereto, and such other instruments or notices (including fixture filings with any necessary legal descriptions as to any goods included in the Collateral which the Secured Party determines might be deemed to be fixtures, and instruments and notices with respect to vehicle titles), as may be necessary or desirable, or as the Secured Party may request, in order to perfect, preserve, and enhance the Security Interest granted or purported to be granted hereby; (ii) obtain from any bailee holding any item of Collateral an acknowledgement, in form satisfactory to the Secured Party that such bailee holds such collateral for the benefit of the Secured Party; (iii) obtain from any securities intermediary, or other party holding any item of Collateral, control agreements in form satisfactory to the Secured Party (iv) and deliver and pledge to the Secured Party, all Instruments and Documents, duly indorsed or accompanied by duly executed instruments of transfer or assignment, with full recourse to the Grantor, all in form and substance satisfactory to the Secured Party; (v) obtain waivers, in form satisfactory to the Secured Party, of any claim to any Collateral from any landlords or mortgagees of any property where any Inventory or Equipment is located.

	8(b) The Grantor hereby authorizes the Secured Party to file one or more Financing Statements or continuation statements in respect thereof, and amendments thereto, relating to all or any part of the Collateral without the signature of the Grantor where permitted by law. The Grantor irrevocably waives any right to notice of any such filing. A photocopy or other reproduction of this Agreement or any Financing Statement covering the Collateral or any part thereof shall be sufficient as a Financing Statement where permitted by law.


	8(c) The Grantor will furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request, all in reasonable detail and in form and substance reasonably satisfactory to the Secured Party.

	8(d) In furtherance, and not in limitation, of the other rights, powers and remedies granted to the Secured Party in this Agreement, the Grantor hereby appoints the Secured Party the Grantor’s attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor or otherwise, from time to time in the Secured Party’s good faith discretion, to take any action (including the right to collect on any Collateral) and to execute any instrument that the Secured Party may reasonably believe is necessary or advisable to accomplish the purposes of this Agreement, in a manner consistent with the terms hereof.

Section 9. Taxes and Claims . The Grantor will promptly pay all taxes and other governmental charges levied or assessed upon or against any Collateral or upon or against the creation, perfection or continuance of the Security Interest, as well as all other claims of any kind (including claims for labor, material and supplies) against or with respect to the Collateral, except to the extent (a) such taxes, charges or claims are being contested in good faith by appropriate proceedings, (b) such proceedings do not involve any material danger of the sale, forfeiture or loss of any of the Collateral or any interest therein and (c) such taxes, charges or claims are adequately reserved against on the Grantor’s books in accordance with generally accepted accounting principles.

Section 10. Books and Records . The Grantor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including a record of all payments received and credits granted with respect to all Accounts, Chattel Paper and other items included in the Collateral.

Section 11. Inspection, Reports, Verifications . The Grantor will at all reasonable times permit the Secured Party or its representatives to examine or inspect any Collateral, any evidence of Collateral and the Grantor’s books and records concerning the Collateral, wherever located. The Borrower shall pay for (a) one collateral exam per calendar year and (b) any expenses incurred by the Bank pursuant to its rights of examination and inspection under the preceding sentence at the time an Event of Default has occurred and is continuing. The Grantor will from time to time when requested by the Secured Party furnish to the Secured Party a report on its Accounts, Chattel Paper, General Intangibles and Instruments, naming the Account Debtors or other obligors thereon, the amount due and the aging thereof. The Secured Party or its designee is authorized to contact Account Debtors and other Persons obligated on any such Collateral from time to time to verify the existence, amount and/or terms of such Collateral.

Section 12. Notice of Loss . The Grantor will promptly notify the Secured Party of any loss of or material damage to any material item of Collateral or of any substantial adverse change, known to Grantor, in any material item of Collateral or the prospect of payment or performance thereof.

Section 13. Insurance. The Grantor will keep the Collateral insured as required in the Credit Agreement.

Section 14. Lawful Use; Fair Labor Standards Act. The Grantor will use and keep the Collateral, and will require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. All Inventory of the Grantor as of the date of this Agreement that was produced by the Grantor or with respect to which the Grantor performed any manufacturing or assembly process was produced by the Grantor (or such manufacturing or assembly process was conducted) in compliance in all material respects with all requirements of the Fair Labor Standards Act, and all Inventory produced, manufactured or assembled by the Grantor after the date of this Agreement will be so produced, manufactured or assembled, as the case may be.

Section 15. Action by the Secured Party. If the Grantor at any time fails to perform or observe any of the foregoing agreements, the Secured Party shall have (and the Grantor hereby grants to the Secured Party) the right, power and authority (but not the duty) to perform or observe such agreement on behalf and in the name, place and stead of the Grantor (or, at the Secured Party’s option, in the Secured Party’s name) and to take any and all other actions which the Secured Party may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of Liens, the procurement and maintenance of insurance, the execution of assignments, security agreements and Financing Statements, and the indorsement of instruments); and the Grantor shall thereupon pay to the Secured Party on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys’ fees and legal expenses) incurred by the Secured Party in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Secured Party, together with interest thereon from the date expended or incurred at the highest lawful rate then applicable to any of the Obligations, and all such monies expended, costs and expenses and interest thereon shall be part of the Obligations secured by the Security Interest.

Section 16. Insurance Claims. As additional security for the payment and performance of the Obligations, the Grantor hereby assigns to the Secured Party any and all monies (including proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Grantor with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto. At any time, whether before or after the occurrence of any Event of Default, the Secured Party may (but need not), in the Secured Party’s name or in Grantor’s name, execute and deliver proofs of claim, receive all such monies, indorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. Notwithstanding any of the foregoing, so long as no Event of Default exists the Grantor shall be entitled to all insurance proceeds with respect to Equipment or Inventory provided that such proceeds are applied to the cost of replacement Equipment or Inventory.

care in the safekeeping of any Collateral in its possession if such Collateral is accorded treatment substantially equal to the safekeeping which the Secured Party accords its own property of like kind. Except for the safekeeping of any Collateral in its possession and the accounting for monies and for other properties actually received by it hereunder, the Secured Party shall have no duty, as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any Persons or any other rights pertaining to any Collateral. The Secured Party will take action in the nature of exchanges, conversions, redemptions, tenders and the like requested in writing by the Grantor with respect to the Collateral in the Secured Party’s possession if the Secured Party in its reasonable judgment determines that such action will not impair the Security Interest or the value of the Collateral, but a failure of the Secured Party to comply with any such request shall not of itself be deemed a failure to exercise reasonable care with respect to the taking of any necessary steps to preserve rights against any Persons or any other rights pertaining to any Collateral.

Section 18. Default. Each of the following occurrences shall constitute an “ Event of Default ” under this Agreement: (a) the Grantor shall fail to observe or perform any covenant or agreement applicable to the Grantor under this Agreement; or (b) any representation or warranty made by the Grantor in this Agreement or any schedule, exhibit, supplement or attachment hereto or in any financial statements, or reports or certificates heretofore or at any time hereafter submitted by or on behalf of the Grantor to the Secured Party shall prove to have been false or materially misleading when made; or (c) any Event of Default shall occur under the Credit Agreement.

Section 19. Remedies on Default. Upon the occurrence of an Event of Default and at any time thereafter:


	19(a) The Secured Party may exercise and enforce any and all rights and remedies available upon default to a secured party under Article 9 of the Uniform Commercial Code as in effect in the State of Minnesota

	19(b) The Secured Party shall have the right to enter upon and into and take possession of all or such part or parts of the properties of the Grantor, including lands, plants, buildings, Equipment, Inventory and other property as may be necessary or appropriate in the judgment of the Secured Party to permit or enable the Secured Party to manufacture, produce, process, store or sell or complete the manufacture, production, processing, storing or sale of all or any part of the Collateral, as the Secured Party may elect, and to use and operate said properties for said purposes and for such length of time as the Secured Party may deem necessary or appropriate for said purposes without the payment of any compensation to Grantor therefor. The Secured Party may require the Grantor to, and the Grantor hereby agrees that it will, at its expense and upon request of the Secured Party forthwith, assemble all or part of the Collateral as directed by the Secured Party and make it available to the Secured Party at a place or places to be designated by the Secured Party.


	19(c) Any disposition of Collateral may be in one or more parcels at public or private sale, at any of the Secured Party’s offices or elsewhere, for cash, on credit, or for future delivery, and upon such other terms as the Secured Party may reasonably believe are commercially reasonable. The Secured Party shall not be obligated to dispose of Collateral regardless of notice of sale having been given, and the Secured Party may adjourn any public or private sale from time to time by announcement made at the time and place fixed therefor, and such disposition may, without further notice, be made at the time and place to which it was so adjourned.

	19(d) The Secured Party is hereby granted a license or other right to use, without charge, all of the Grantor’s property, including, without limitation, all of the Grantor’s labels, trademarks, copyrights, patents and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any Collateral, and the Grantor’s rights under all licenses and all franchise agreements shall inure to the Secured Party’s benefit until the Obligations are paid in full.

	19(e) If notice to the Grantor of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given in the manner specified for the giving of notice in Section 24 hereof at least ten calendar days prior to the date of intended disposition or other action, and the Secured Party may exercise or enforce any and all other rights or remedies available by law or agreement against the Collateral, against the Grantor, or against any other Person or property. The Secured Party (i) may dispose of the Collateral in its then present condition or following such preparation and processing as the Secured Party deems commercially reasonable, (ii) shall have no duty to prepare or process the Collateral prior to sale, (iii) may disclaim warranties of title, possession, quiet enjoyment and the like, and (iv) may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and none of the foregoing actions shall be deemed to adversely affect the commercial reasonableness of the disposition of the Collateral.

Section 20. Remedies as to Certain Rights to Payment. Upon the occurrence of an Event of Default and at any time thereafter the Secured Party may notify any Account Debtor or other Person obligated on any Accounts or other Collateral that the same have been assigned or transferred to the Secured Party and that the same should be performed as requested by, or paid directly to, the Secured Party, as the case may be. The Grantor shall join in giving such notice, if the Secured Party so requests. The Secured Party may, in the Secured Party’s name or in the Grantor’s name, demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such Collateral or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligation of any such Account Debtor or other Person. If any payments on any such Collateral are received by the Grantor after an Event of Default has occurred, such payments shall be held in trust by the Grantor as the property of the Secured Party and shall not be commingled with any funds or property of the Grantor and shall be forthwith remitted to the Secured Party for application on the Obligations.

Section 21. Application of Proceeds. All cash proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as collateral for, or then or at any time thereafter be applied in whole or in part by the Secured Party against, all or any part of the Obligations (including, without limitation, any expenses of the Secured Party payable pursuant to Section 22 hereof).

Section 22. Costs and Expenses; Indemnity. The Grantor will pay or reimburse the Secured Party on demand for all reasonable out-of-pocket expenses paid or incurred by the Secured Party, including in each case all filing and recording costs and fees, taxes, charges and disbursements of outside counsel to the Secured Party (determined on the basis of such counsel’s generally applicable rates, which may be higher than the rates such counsel charges the Secured Party in certain matters) and/or the allocated costs of in-house counsel incurred from time to time, in connection with the creation, perfection, protection, satisfaction, foreclosure, collection or enforcement of the Security Interest and the preparation, administration, continuance, amendment or enforcement of this Agreement, and all such costs and expenses shall be part of the Obligations secured by the Security Interest. The Grantor shall indemnify and hold the Secured Party harmless from and against any and all claims, losses and liabilities (including reasonable attorneys’ fees) growing out of or resulting from this Agreement and the Security Interest hereby created (including enforcement of this Agreement) or the Secured Party’s actions pursuant hereto, except claims, losses or liabilities resulting from the Secured Party’s gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction. Any liability of the Grantor to indemnify and hold the Secured Party harmless pursuant to the preceding sentence shall be part of the Obligations secured by the Security Interest. The obligations of the Grantor under this Section shall survive any termination of this Agreement.

Section 23. Waivers; Remedies; Marshalling. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by the Secured Party. A waiver so signed shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any rights and remedies available to the Secured Party. All rights and remedies of the Secured Party shall be cumulative and may be exercised singly in any order or sequence, or concurrently, at the Secured Party’s option, and the exercise or enforcement of any such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. The Grantor hereby waives all requirements of law, if any, relating to the marshalling of assets which would be applicable in connection with the enforcement by the Secured Party of its remedies hereunder, absent this waiver.

Section 24. Notices. Any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by facsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed.

Section 25. Grantor Acknowledgments. The Grantor hereby acknowledges that (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement, (b) the Secured Party has no fiduciary relationship to the Grantor, the relationship being solely that of debtor and creditor, and (c) no joint venture exists between the Grantor and the Secured Party.

Section 26. Continuing Security Interest; Assignments under Credit Agreement. This Agreement shall (a) create a continuing security interest in the Collateral and shall remain in full force and effect until payment in full of the Obligations and the expiration of the obligations, if any, of the Secured Party to extend credit accommodations to the Grantor, (b) be binding upon the Grantor, its successors and assigns, and (c) inure to the benefit of, and be enforceable by, the Secured Party and its successors, transferees, and assigns. Without limiting the generality of the foregoing clause (c), the Secured Party may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement to any other Persons to the extent and in the manner provided in the Credit Agreement and may similarly transfer all or any portion of its rights under this Security Agreement to such Persons.

Section 27. Termination of Security Interest. Upon payment in full of the Obligations and the expiration of any obligation of the Secured Party to extend credit accommodations to the Grantor, the Security Interest granted hereby shall terminate. Upon any such termination, the Secured Party will return to the Grantor such of the Collateral then in the possession of the Secured Party as shall not have been sold or otherwise applied pursuant to the terms hereof and execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination. Any reversion or return of Collateral upon termination of this Agreement and any instruments of transfer or termination shall be at the expense of the Grantor and shall be without warranty by, or recourse on, the Secured Party. As used in this Section, “Grantor” includes any assigns of Grantor, any Person holding a subordinate security interest in any of the Collateral or whoever else may be lawfully entitled to any part of the Collateral.

Section 28. Governing Law and Construction. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE MANDATORILY GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF MINNESOTA. Whenever possible, each provision of this Agreement and any other statement, instrument or transaction contemplated hereby or relating hereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto.

Section 29. Consent to Jurisdiction. AT THE OPTION OF THE SECURED PARTY, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR

MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY; AND THE GRANTOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE GRANTOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE SECURED PARTY AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.

Section 30. Waiver of Notice and Hearing. THE GRANTOR HEREBY WAIVES ALL RIGHTS TO A JUDICIAL HEARING OF ANY KIND PRIOR TO THE EXERCISE BY THE SECURED PARTY OF ITS RIGHTS TO POSSESSION OF THE COLLATERAL WITHOUT JUDICIAL PROCESS OR OF ITS RIGHTS TO REPLEVY, ATTACH, OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR HEARING. THE GRANTOR ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL OF ITS CHOICE WITH RESPECT TO THIS PROVISION AND THIS AGREEMENT.

Section 31. Waiver of Jury Trial. EACH OF THE GRANTOR AND THE SECURED PARTY, BY ITS ACCEPTANCE OF THIS AGREEMENT, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

Section 32. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument.

Section 33. General. All representations and warranties contained in this Agreement or in any other agreement between the Grantor and the Secured Party shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. The Grantor waives notice of the acceptance of this Agreement by the Secured Party. Captions in this Agreement are for reference and convenience only and shall not affect the interpretation or meaning of any provision of this Agreement.

[The remainder of this page has been left blank intentionally.]

IN WITNESS WHEREOF, the Grantor has caused this Security Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written.


	ELECTROMED, INC.

	By:
	Name: Robert D. Hansen
	Title: Chief Executive Officer
Address:

500 Sixth Avenue NW New Prague, MN 56071 ATTN: Robert D. Hansen Fax Number: 952-758-1941

Address for the Lender:

U.S. Bank National Association BC-MN-H03W 800 Nicollet Mall Minneapolis, MN 55402-4302 ATTN: Daniel J. Miller Fax Number: 612-303-2252

[Signature Page to Security Agreement]

Exhibit 10.6

SECURITY AGREEMENT

THIS SECURITY AGREEMENT, dated as of December 9, 2009, is made and given by ELECTROMED FINANCIAL, LLC, a limited liability company organized under the laws of the State of Minnesota (the “Grantor”), to U.S. BANK NATIONAL ASSOCIATION, a national banking association (the “Secured Party”).

RECITALS

A. Electromed, Inc., a Minnesota corporation (the “Debtor”), and the Secured Party have entered into a Credit Agreement dated as of December 9, 2009 (as the same may hereafter be amended, restated, or otherwise modified from time to time, the “Credit Agreement”) pursuant to which the Secured Party has agreed to extend to the Debtor certain credit accommodations consisting of a revolving facility and two term loan facilities.

C. The Grantor is a majority-owned subsidiary of the Debtor.

D. The Grantor expects to derive benefits from the extension of credit accommodations to the Debtor by the Secured Party and finds it advantageous, desirable and in its best interests to execute and deliver this Security Agreement to the Secured Party.

NOW, THEREFORE, in consideration of the premises and in order to induce the Secured Party to extend or continue credit accommodations to the Debtor, the Grantor hereby agrees with the Secured Party for the Secured Party’s benefit as follows:

Section 1. Defined Terms .


	1(a) As used in this Agreement, the following terms shall have the meanings indicated:

		“ Account ” means a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii) for services rendered or to be rendered, (iii) for a policy of insurance issued or to be issued, (iv) for a secondary obligation incurred or to be incurred, (v) for energy provided or to be provided, (vi) for the use or hire of a vessel under a charter or other contract, (vii) arising out of the use of a credit or charge card or information contained on or for use with the card, or (viii) as winnings in a lottery or other game of chance operated, sponsored, licensed or authorized by a State or governmental unit of a State, or person licensed or authorized to operate the game by a State or governmental unit of a State. The term includes health-care insurance receivables.

		“ Account Debtor ” shall mean a Person who is obligated on or under any Account, Chattel Paper, Instrument or General Intangible.


		“ Chattel Paper ” shall mean a record or records that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, a lease of specific goods, or a lease of specific goods and license of software used in the goods.

		“ Collateral ” shall mean all property and rights in property now owned or hereafter at any time acquired by the Grantor in or upon which a Security Interest is granted to the Secured Party by the Grantor under this Agreement.

		“ Deposit Account ” shall mean any demand, time, savings, passbook or similar account maintained with a bank.

		“ Document ” shall mean a document of title or a warehouse receipt.

		“ Equipment ” shall mean all machinery, equipment, motor vehicles, furniture, furnishings and fixtures, including all accessions, accessories and attachments thereto, and any guaranties, warranties, indemnities and other agreements of manufacturers, vendors and others with respect to such Equipment.

		“ Event of Default ” shall have the meaning given to such term in Section 18 hereof.

		“ Financing Statement ” shall have the meaning given to such term in Section 4 hereof.

		“ Fixtures ” shall mean goods that have become so related to particular real property that an interest in them arises under real property law.

		“ General Intangibles ” shall mean any personal property (other than goods, Accounts, Chattel Paper, Deposit Accounts, Documents, Instruments, Investment Property, Letter of Credit Rights and money) including things in action, contract rights, payment intangibles, software, corporate and other business records, inventions, designs, patents, patent applications, service marks, trademarks, tradenames, trade secrets, internet domain names, engineering drawings, good will, registrations, copyrights, licenses, franchises, customer lists, tax refund claims, royalties, licensing and product rights, rights to the retrieval from third parties of electronically processed and recorded data and all rights to payment resulting from an order of any court.

		“ Instrument ” shall mean a negotiable instrument or any other writing which evidences a right to the payment of a monetary obligation and is not itself a security agreement or lease and is of a type which is transferred in the ordinary course of business by delivery with any necessary endorsement or assignment.

		“ Inventory ” shall mean goods, other than farm products, which are leased by a person as lessor, are held by a person for sale or lease or to be furnished under a contract of service, are furnished by a person under a contract of service,


		or consist of raw materials, work in process, or materials used or consumed in a business or incorporated or consumed in the production of any of the foregoing and supplies, in each case wherever the same shall be located, whether in transit, on consignment, in retail outlets, warehouses, terminals or otherwise, and all property the sale, lease or other disposition of which has given rise to an Account and which has been returned to the Grantor or repossessed by the Grantor or stopped in transit.

		“ Investment Property ” shall mean a security, whether certificated or uncertificated, a security entitlement, a securities account and all financial assets therein, a commodity contract or a commodity account.

		“ Letter of Credit Right ” shall mean a right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance.

		“ Lien ” shall mean any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of the lessors under capitalized leases), in, of or on any assets or properties of the Person referred to.

		“ Obligations ” shall mean (a) all indebtedness, liabilities and obligations of the Debtor to the Secured Party of every kind, nature or description under the Credit Agreement, including the Debtor’s obligation on any promissory note or notes under the Credit Agreement and any note or notes hereafter issued in substitution or replacement thereof, (b) any and all other liabilities and obligations of the Debtor to the Secured Party of every kind, nature and description, whether direct or indirect or hereafter acquired by the Secured Party from any Person, absolute or contingent, regardless of how such liabilities arise or by what agreement or instrument they may be evidenced, and (c) all liabilities of the Grantor under this Agreement, and in all of the foregoing cases whether due or to become due, and whether now existing or hereafter arising or incurred.

		“ Person ” shall mean any individual, corporation, partnership, limited partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity.

		“ Security Interest ” shall have the meaning given such term in Section 2 hereof.

	l(b) All other terms used in this Agreement which are not specifically defined herein shall have the meaning assigned to such terms in Article 9 of the Uniform Commercial Code as in effect in the State of Minnesota

	1(c) Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular, the plural and “or” has the


	inclusive meaning represented by the phrase “and/or.” The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” The words “hereof,” “herein,” “hereunder” and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections are references to Sections in this Security Agreement unless otherwise provided.

Section 2. Grant of Security Interest . As security for the payment and performance of all of the Obligations, the Grantor hereby grants to the Secured Party a security interest (the “Security Interest”) in all of the Grantor’s right, title, and interest in and to the following, whether now or hereafter owned, existing, arising or acquired and wherever located:


		2(a)	All Accounts.

		2(b)	All Chattel Paper.

		2(c)	All Deposit Accounts

		2(d)	All Documents.

		2(e)	All Equipment.

		2(f)	All Fixtures

		2(g)	All General Intangibles.

		2(h)	All Instruments.

		2(i)	All Inventory.

		2(j)	All Investment Property

		2(k)	All Letter of Credit Rights

		2(l) To the extent not otherwise included in the foregoing, all other rights to the payment of money, including rents and other sums payable to the Grantor under leases, rental agreements and other Chattel Paper; all books, correspondence, credit files, records, invoices, bills of lading, and other documents relating to any of the foregoing, including, without limitation, all tapes, cards, disks, computer software, computer runs, and other papers and documents in the possession or control of the Grantor or any computer bureau from time to time acting for the Grantor; all rights in, to and under all policies insuring the life of any manager, governor, member or employee of the Grantor, the proceeds of which are payable to the Grantor; all accessions and additions to, parts and appurtenances of, substitutions for and replacements of any of the foregoing; and all proceeds (including insurance proceeds) and products thereof.

Sections. Grantor Remains Liable . Anything herein to the contrary notwithstanding, (a) the Grantor shall remain liable under the Accounts, Chattel Paper, General Intangibles and

Section 6. Names, Offices, Locations, Jurisdiction of Organization . The Grantor’s legal name (as set forth in its constituent documents filed with the appropriate governmental official or agency) is as set forth in the opening paragraph hereof. The jurisdiction of organization of the Grantor is the state of Minnesota, and the organizational number of the Grantor is set forth on the signature page of this Agreement. The Grantor will from time to time at the request of the Secured Party provide the Secured Party with current good standing certificates and/or state-certified constituent documents from the appropriate governmental officials. The chief place of business and chief executive office of Grantor are located at his address set forth on the signature page hereof. The Grantor will not locate or relocate any item of Collateral into any jurisdiction in which an additional Financing Statement would be required to be filed to maintain the Secured Party’s perfected security interest in such Collateral. The Grantor will not change his name, the location of his chief place of business and chief executive office or its corporate structure (including without limitation, its jurisdiction of organization) unless the Secured Party has been given at least 30 days prior written notice thereof and the Grantor has executed and delivered to the Secured Party such Financing Statements and other instruments required or appropriate to continue the perfection of the Security Interest.

when arising or issued) the valid, genuine and legally enforceable obligation of the Account Debtor or other obligor named therein or in the Grantor’s records pertaining thereto as being obligated to pay or perform such obligation. Without the Secured Party’s prior written consent, the Grantor will not agree to any modifications, amendments, subordinations, cancellations or terminations of the obligations of any such Account Debtors or other obligors except in the ordinary course of business and in amounts not exceeding $25,000 per Account debtor or other obligor in any calendar year. The Grantor will perform and comply in all material respects with all its obligations under any items included in the Collateral and exercise promptly and diligently its rights thereunder.


	Section 8. Further Assurances; Attorney-in-Fact .

	8(a) The Grantor agrees that from time to time, at his expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or that the Secured Party may reasonably request, in order to perfect and protect the Security Interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral (but any failure to request or assure that the Grantor execute and deliver such instrument or documents or to take such action shall not affect or impair the validity, sufficiency or enforceability of this Agreement and the Security Interest, regardless of whether any such item was or was not executed and delivered or action taken in a similar context or on a prior occasion). Without limiting the generality of the foregoing, the Grantor will, promptly and from time to time at the request of the Secured Party: (i) execute and file such Financing Statements or continuation statements in respect thereof, or amendments thereto, and such other instruments or notices (including fixture filings with any necessary legal descriptions as to any goods included in the Collateral which the Secured Party determines might be deemed to be fixtures, and instruments and notices with respect to vehicle titles), as may be necessary or desirable, or as the Secured Party may request, in order to perfect, preserve, and enhance the Security Interest granted or purported to be granted hereby; (ii) obtain from any bailee holding any item of Collateral an acknowledgement, in form satisfactory to the Secured Party that such bailee holds such collateral for the benefit of the Secured Party; (iii) obtain from any securities intermediary, or other party holding any item of Collateral, control agreements in form satisfactory to the Secured Party (iv) and deliver and pledge to the Secured Party, all Instruments and Documents, duly indorsed or accompanied by duly executed instruments of transfer or assignment, with full recourse to the Grantor, all in form and substance satisfactory to the Secured Party; (v) obtain waivers, in form satisfactory to the Secured Party, of any claim to any Collateral from any landlords or mortgagees of any property where any Inventory or Equipment is located.

	8(b) The Grantor hereby authorizes the Secured Party to file one or more Financing Statements or continuation statements in respect thereof, and amendments thereto, relating to all or any part of the Collateral without the signature of the Grantor where permitted by law. The Grantor irrevocably waives any right to notice of any such filing. A photocopy or other reproduction of this Agreement or any Financing Statement covering the Collateral or any part thereof shall be sufficient as a Financing Statement where permitted by law.


	8(c) The Grantor will furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request, all in reasonable detail and in form and substance reasonably satisfactory to the Secured Party.

	8(d) In furtherance, and not in limitation, of the other rights, powers and remedies granted to the Secured Party in this Agreement, the Grantor hereby appoints the Secured Party the Grantor’s attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor or otherwise, from time to time in the Secured Party’s good faith discretion, to take any action (including the right to collect on any Collateral) and to execute any instrument that the Secured Party may reasonably believe is necessary or advisable to accomplish the purposes of this Agreement, in a manner consistent with the terms hereof.

Section 11. Inspection, Reports, Verifications . The Grantor will at all reasonable times permit the Secured Party or its representatives to examine or inspect any Collateral, any evidence of Collateral and the Grantor’s books and records concerning the Collateral, wherever located. The Grantor will from time to time when requested by the Secured Party furnish to the Secured Party a report on his Accounts, Chattel Paper, General Intangibles and Instruments, naming the Account Debtors or other obligors thereon, the amount due and the aging thereof. The Secured Party or its designee is authorized to contact Account Debtors and other Persons obligated on any such Collateral from time to time to verify the existence, amount and/or terms of such Collateral.

Section 13. Insurance . The Grantor will keep the Inventory and Equipment insured against “all risks” for the full replacement cost thereof subject to a deductible not exceeding $100,000 and with an insurance company or companies satisfactory to the Secured Party, the

policies to protect the Secured Party as its interests may appear, with such policies or certificates with respect thereto to be delivered to the Secured Party at its request. Each such policy or the certificate with respect thereto shall provide that such policy shall not be canceled or allowed to lapse unless at least 30 days prior written notice is given to the Secured Party.

Section 14. Lawful Use; Fair Labor Standards Act . The Grantor will use and keep the Collateral, and will require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. All Inventory of the Grantor as of the date of this Agreement that was produced by the Grantor or with respect to which the Grantor performed any manufacturing or assembly process was produced by the Grantor (or such manufacturing or assembly process was conducted) in compliance in all material respects with all requirements of the Fair Labor Standards Act, and all Inventory produced, manufactured or assembled by the Grantor after the date of this Agreement will be so produced, manufactured or assembled, as the case may be.

Section 15. Action by the Secured Party . If the Grantor at any time fails to perform or observe any of the foregoing agreements, the Secured Party shall have (and the Grantor hereby grants to the Secured Party) the right, power and authority (but not the duty) to perform or observe such agreement on behalf and in the name, place and stead of the Grantor (or, at the Secured Party’s option, in the Secured Party’s name) and to take any and all other actions which the Secured Party may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of Liens, the procurement and maintenance of insurance, the execution of assignments, security agreements and Financing Statements, and the indorsement of instruments); and the Grantor shall thereupon pay to the Secured Party on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys’ fees and legal expenses) incurred by the Secured Party in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Secured Party, together with interest thereon from the date expended or incurred at the highest lawful rate then applicable to any of the Obligations, and all such monies expended, costs and expenses and interest thereon shall be part of the Obligations secured by the Security Interest.

Section 16. Insurance Claims . As additional security for the payment and performance of the Obligations, the Grantor hereby assigns to the Secured Party any and all monies (including proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Grantor with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto. At any time, whether before or after the occurrence of any Event of Default, the Secured Party may (but need not), in the Secured Party’s name or in Grantor’s name, execute and deliver proofs of claim, receive all such monies, indorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. Notwithstanding any of the foregoing, so long as no Event of Default exists the Grantor shall be entitled to all insurance proceeds with respect to Equipment or Inventory provided that such proceeds are applied to the cost of replacement Equipment or Inventory.

Section 17. The Secured Party’s Duties . The powers conferred on the Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. The Secured Party shall be deemed to have exercised reasonable care in the safekeeping of any Collateral in its possession if such Collateral is accorded treatment substantially equal to the safekeeping which the Secured Party accords its own property of like kind. Except for the safekeeping of any Collateral in its possession and the accounting for monies and for other properties actually received by it hereunder, the Secured Party shall have no duty, as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any Persons or any other rights pertaining to any Collateral. The Secured Party will take action in the nature of exchanges, conversions, redemptions, tenders and the like requested in writing by the Grantor with respect to the Collateral in the Secured Party’s possession if the Secured Party in its reasonable judgment determines that such action will not impair the Security Interest or the value of the Collateral, but a failure of the Secured Party to comply with any such request shall not of itself be deemed a failure to exercise reasonable care with respect to the taking of any necessary steps to preserve rights against any Persons or any other rights pertaining to any Collateral.

Section 18. Default . Each of the following occurrences shall constitute an “ Event of Default ” under this Agreement: (a) the Grantor shall fail to observe or perform any covenant or agreement applicable to the Grantor under this Agreement; or (b) any representation or warranty made by the Grantor in this Agreement or any schedule, exhibit, supplement or attachment hereto or in any financial statements, or reports or certificates heretofore or at any time hereafter submitted by or on behalf of the Grantor to the Secured Party shall prove to have been false or materially misleading when made; or (c) any Event of Default shall occur under the Credit Agreement.

Section 19. Remedies on Default . Upon the occurrence of an Event of Default and at any time thereafter:


	19(a) The Secured Party may exercise and enforce any and all rights and remedies available upon default to a secured party under Article 9 of the Uniform Commercial Code as in effect in the State of Minnesota

	19(b) The Secured Party shall have the right to enter upon and into and take possession of all or such part or parts of the properties of the Grantor, including lands, plants, buildings, Equipment, Inventory and other property as may be necessary or appropriate in the judgment of the Secured Party to permit or enable the Secured Party to manufacture, produce, process, store or sell or complete the manufacture, production, processing, storing or sale of all or any part of the Collateral, as the Secured Party may elect, and to use and operate said properties for said purposes and for such length of time as the Secured Party may deem necessary or appropriate for said purposes without the payment of any compensation to Grantor therefor. The Secured Party may require the Grantor to, and the Grantor hereby agrees that it will, at his expense and upon request of the Secured Party forthwith, assemble all or part of the Collateral as directed by the


	Secured Party and make it available to the Secured Party at a place or places to be designated by the Secured Party.

	19(c) Any disposition of Collateral may be in one or more parcels at public or private sale, at any of the Secured Party’s offices or elsewhere, for cash, on credit, or for future delivery, and upon such other terms as the Secured Party may reasonably believe are commercially reasonable. The Secured Party shall not be obligated to dispose of Collateral regardless of notice of sale having been given, and the Secured Party may adjourn any public or private sale from time to time by announcement made at the time and place fixed therefor, and such disposition may, without further notice, be made at the time and place to which it was so adjourned.

	19(d) The Secured Party is hereby granted a license or other right to use, without charge, all of the Grantor’s property, including, without limitation, all of the Grantor’s labels, trademarks, copyrights, patents and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any Collateral, and the Grantor’s rights under all licenses and all franchise agreements shall inure to the Secured Party’s benefit until the Obligations are paid in full.

	19(e) If notice to the Grantor of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given in the manner specified for the giving of notice in Section 19 hereof at least ten calendar days prior to the date of intended disposition or other action, and the Secured Party may exercise or enforce any and all other rights or remedies available by law or agreement against the Collateral, against the Grantor, or against any other Person or property. The Secured Party (i) may dispose of the Collateral in its then present condition or following such preparation and processing as the Secured Party deems commercially reasonable, (ii) shall have no duty to prepare or process the Collateral prior to sale, (iii) may disclaim warranties of title, possession, quiet enjoyment and the like, and (iv) may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and none of the foregoing actions shall be deemed to adversely affect the commercial reasonableness of the disposition of the Collateral.

Section 20. Remedies as to Certain Rights to Payment . Upon the occurrence of an Event of Default and at any time thereafter the Secured Party may notify any Account Debtor or other Person obligated on any Accounts or other Collateral that the same have been assigned or transferred to the Secured Party and that the same should be performed as requested by, or paid directly to, the Secured Party, as the case may be. The Grantor shall join in giving such notice, if the Secured Party so requests. The Secured Party may, in the Secured Party’s name or in the Grantor’s name, demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such Collateral or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligation of any such Account Debtor or other Person. If any payments on any such Collateral are received by the Grantor after an Event of Default has occurred, such payments shall be held in trust by the Grantor as the property of the Secured Party and shall not be commingled with any

funds or property of the Grantor and shall be forthwith remitted to the Secured Party for application on the Obligations.

Section 21. Application of Proceeds . All cash proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as collateral for, or then or at any time thereafter be applied in whole or in part by the Secured Party against, all or any part of the Obligations (including, without limitation, any expenses of the Secured Party payable pursuant to Section 22 hereof).

Section 22. Costs and Expenses; Indemnity . The Grantor will pay or reimburse the Secured Party on demand for all reasonable out-of-pocket expenses paid or incurred by the Secured Party, including in each case all filing and recording costs and fees, taxes, charges and disbursements of outside counsel to the Secured Party (determined on the basis of such counsel’s generally applicable rates, which may be higher than the rates such counsel charges the Secured Party in certain matters) and/or the allocated costs of in-house counsel incurred from time to time, in connection with the creation, perfection, protection, satisfaction, foreclosure, collection or enforcement of the Security Interest and the preparation, administration, continuance, amendment or enforcement of this Agreement, and all such costs and expenses shall be part of the Obligations secured by the Security Interest. The Grantor shall indemnify and hold the Secured Party harmless from and against any and all claims, losses and liabilities (including reasonable attorneys’ fees) growing out of or resulting from this Agreement and the Security Interest hereby created (including enforcement of this Agreement) or the Secured Party’s actions pursuant hereto, except claims, losses or liabilities resulting from the Secured Party’s gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction. Any liability of the Grantor to indemnify and hold the Secured Party harmless pursuant to the preceding sentence shall be part of the Obligations secured by the Security Interest. The obligations of the Grantor under this Section shall survive any termination of this Agreement.

Section 23. Waivers; Remedies; Marshalling . This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by the Secured Party. A waiver so signed shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any rights and remedies available to the Secured Party. All rights and remedies of the Secured Party shall be cumulative and may be exercised singly in any order or sequence, or concurrently, at the Secured Party’s option, and the exercise or enforcement of any such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. The Grantor hereby waives all requirements of law, if any, relating to the marshalling of assets which would be applicable in connection with the enforcement by the Secured Party of its remedies hereunder, absent this waiver.

Section 24. Waiver of Defenses . The Grantor waives the benefit of any and all defenses and discharges available to a guarantor, surety, indorser or accommodation party, dependent on its character as such. Without limiting the generality of the foregoing, the Grantor (in such capacity) waives presentment, demand for payment, and notice of nonpayment or protest of any note or any other instrument evidencing any of the Obligations; and the Grantor

agrees that his liability hereunder and the Security Interest hereby created shall not be affected or impaired in any way by any of the following acts and things (which the Secured Party may do from time to time without notice to the Grantor): (a) by any sale, pledge, surrender, compromise, settlement, release, renewal, extension, indulgence, alteration, substitution, exchange, change in, modification, or other disposition of any of the Obligations or any evidence thereof or any collateral therefor, (b) by any acceptance or release of collateral for or guarantors of any of the Obligations, (c) by any failure, neglect or omission to realize upon or protect any of the Obligations, or to obtain, perfect, enforce or realize upon any collateral therefor, or to exercise any Lien upon or right of appropriation of any moneys, credits or property toward the liquidation of any of the Obligations, or (d) by any application of payments or credits upon any of the Obligations. The Secured Party shall not be required, before exercising its rights under this Agreement, to first resort for payment of any of the Obligations to the Debtor or any other Persons, its or their properties or estates, or any collateral, property, Liens or other rights or remedies whatsoever. The Grantor agrees not to exercise any right of contribution, recourse, subrogation or reimbursement available to the Grantor against the Debtor or any other Person or property, unless and until all Obligations and all other debts, liabilities and obligations owed by the Debtor and the Grantor to the Secured Party have been paid and discharged. The Grantor expects to derive benefits from the transactions resulting in the creation of the Obligations. The Secured Party may rely conclusively on the continuing warranty, hereby made, that the Grantor continues to be benefited by the Secured Party’s extension of credit accommodations to the Debtor and the Secured Party shall have no duty to inquire into or confirm the receipt of any such benefits, and this Agreement shall be effective and enforceable by the Secured Party without regard to the receipt, nature or value of any such benefits.

Section 25. Notices . Any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by facsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed.

Section 26. Grantor Acknowledgments . The Grantor hereby acknowledges that (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement, (b) the Secured Party has no fiduciary relationship to the Grantor, the relationship being solely that of debtor and creditor, and (c) no joint venture exists between the Grantor and the Secured Party.

Section 27. Representations and Warranties . The Grantor hereby represents and warrants to the Secured Party that:


	27(a) The Grantor is a limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the corporate power and authority and the legal right to own and operate its properties and to conduct the business in which it is currently engaged.


	27(b) The Grantor has the power and authority and the legal right to execute and deliver, and to perform its obligations under, this Agreement and has taken all necessary action to authorize such execution, delivery and performance.

	27(c) This Agreement constitutes a legal, valid and binding obligation of the Grantor enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

	27(d) The execution, delivery and performance of this Agreement will not (i) violate any provision of any law, statute, rale or regulation or any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to the Grantor, (ii) violate or contravene any provision of the articles of organization of the Grantor, or (iii) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument to which the Grantor is a party or by which it or any of its properties may be bound or result in the creation of any Lien thereunder. The Grantor is not in default under or in violation of any such law, statute, rule or regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, loan or credit agreement or other agreement, lease or instrument in any case in which the consequences of such default or violation could have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of the Grantor.

	27(e) Except for filings, recordings and registrations to perfect the Security Interest, no order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on the part of the Grantor to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, this Agreement.

	27(f) There are no actions, suits or proceedings pending or, to the knowledge of the Grantor, threatened against or affecting the Grantor or any of its properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which, if determined adversely to the Grantor, would have a material adverse effect on the business, operations, property or condition (financial or otherwise) of the Grantor or on the ability of the Grantor to perform its obligations hereunder.

Section 28. Continuing Security Interest; Assignments under Credit Agreement . This Agreement shall (a) create a continuing security interest in the Collateral and shall remain in full force and effect until payment in full of the Obligations and the expiration of the obligations, if any, of the Secured Party to extend credit accommodations to the Debtor, (b) be binding upon the Grantor, its successors and assigns, and (c) inure to the benefit of, and be enforceable by, the Secured Party and its successors, transferees, and assigns. Without limiting the generality of the foregoing clause (c), the Secured Party may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement to any other Persons to the extent and in the

manner provided in the Credit Agreement and may similarly transfer all or any portion of its rights under this Security Agreement to such Persons.

Section 29. Termination of Security Interest . Upon payment in full of the Obligations and the expiration of any obligation of the Secured Party to extend credit accommodations to the Debtor, the Security Interest granted hereby shall terminate. Upon any such termination, the Secured Party will return to the Grantor such of the Collateral then in the possession of the Secured Party as shall not have been sold or otherwise applied pursuant to the terms hereof and execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination. Any reversion or return of Collateral upon termination of this Agreement and any instruments of transfer or termination shall be at the expense of the Grantor and shall be without warranty by, or recourse on, the Secured Party. As used in this Section, “Grantor” includes any assigns of Grantor, any Person holding a subordinate security interest in any of the Collateral or whoever else may be lawfully entitled to any part of the Collateral.

Section 30. Governing Law and Construction . THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE MANDATORILY GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF MINNESOTA. Whenever possible, each provision of this Agreement and any other statement, instrument or transaction contemplated hereby or relating hereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto.

Section 31. Consent to Jurisdiction . AT THE OPTION OF THE SECURED PARTY, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY; AND THE GRANTOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE GRANTOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE SECURED PARTY AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.

Section 32. Waiver of Notice and Hearing . THE GRANTOR HEREBY WAIVES ALL RIGHTS TO A JUDICIAL HEARING OF ANY KIND PRIOR TO THE EXERCISE BY THE SECURED PARTY OF ITS RIGHTS TO POSSESSION OF THE COLLATERAL WITHOUT JUDICIAL PROCESS OR OF ITS RIGHTS TO REPLEVY, ATTACH, OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR HEARING. THE GRANTOR ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL OF ITS CHOICE WITH RESPECT TO THIS PROVISION AND THIS AGREEMENT.

Section 33 . Waiver of Jury Trial . EACH OF THE GRANTOR AND THE SECURED PARTY, BY ITS ACCEPTANCE OF THIS AGREEMENT, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

Section 34. Counterparts . This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument.

Section 35. General . All representations and warranties contained in this Agreement or in any other agreement between the Grantor and the Secured Party shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. The Grantor waives notice of the acceptance of this Agreement by the Secured Party. Captions in this Agreement are for reference and convenience only and shall not affect the interpretation or meaning of any provision of this Agreement.

[The remainder of this page has been left blank intentionally.]

IN WITNESS WHEREOF, the Grantor has caused this Security Agreement to be duly executed and delivered by its manager thereunto duly authorized as of the date first above written.


	ELECTROMED FINANCIAL, LLC


	By
	Name: Robert D. Hansen
	Title: Chief Manager and Chief Executive Officer

Address:

500 Sixth Avenue NW

New Prague, MN 56071

ATTN: Robert D. Hansen

Fax Number: 952-758-1941

Address for the Lender:

U.S. Bank National Association

BC-MN-H03W

800 Nicollet Mall

Minneapolis, MN 55402-4302

ATTN: Daniel J. Miller

Fax Number: 612-303-2252

[Signature Page to Security Agreement (Guarantor)]

Exhibit 10.7

PLEDGE AGREEMENT

THIS PLEDGE AGREEMENT, dated as of December 9, 2009, is made and given by ELECTROMED, INC., a corporation organized under the laws of the State of Minnesota (the “Pledgor”) to U.S. BANK NATIONAL ASSOCIATION (the “Secured Party”).

RECITALS

A. The Pledgor and the Secured Party have entered into a Credit Agreement dated as of December 9, 2009 (as the same may hereafter be amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) pursuant to which the Secured Party has agreed to extend to the Pledgor certain credit accommodations consisting of a revolving facility and two term loan facilities.

B. The Pledgor is the owner of the member interests (the “Pledged Member Interests”) described in Schedule I hereto issued by the limited liability company named therein.

C. It is a condition precedent to the obligation of the Secured Party to extend credit accommodations pursuant to the terms of the Credit Agreement that this Agreement be executed and delivered by the Pledgor.

D. The Pledgor finds it advantageous, desirable and in the best interests of the Pledgor to comply with the requirement that this Agreement be executed and delivered to the Secured Party.

NOW, THEREFORE, in consideration of the premises and in order to induce the Secured Party to enter into the Credit Agreement and to extend credit accommodations to the Pledgor thereunder, the Pledgor hereby agrees with the Secured Party for the Secured Party’s benefit as follows:

Section 1. Defined Terms .


	1(a) As used in this Agreement, the following terms shall have the meanings indicated:

		“ Collateral ” shall have the meaning given to such term in Section 2.

		“ Event of Default ” shall have the meaning given to such term in Section 11.

		“ Lien ” shall mean any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of the lessors under capitalized leases), in, of or on any assets or properties of the Person referred to.

		“ Obligations ” shall mean (a) all indebtedness, liabilities and obligations of the Pledgor to the Secured Party of every kind, nature or description under the Credit Agreement, including the Pledgor’s obligation on any promissory note or


		notes under the Credit Agreement and any note or notes hereafter issued in substitution or replacement thereof, (b) all liabilities of the Pledgor under this Agreement, (c) any and all other liabilities and obligations of the Pledgor to the Secured Party of every kind, nature and description, whether direct or indirect or hereafter acquired by the Secured Party from any Person, absolute or contingent, regardless of how such liabilities arise or by what agreement or instrument they may be evidenced, and in all of the foregoing cases whether due or to become due, and whether now existing or hereafter arising or incurred.

		“ Person ” shall mean any individual, corporation, partnership, limited partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity.

		“ Pledged Member Interests ” shall have the meaning given to such term in Recital B above.

		“ Security Interest ” shall have the meaning given to such term in Section 2.


	1(b) Terms Defined in Uniform Commercial Code . All other terms used in this Agreement that are not specifically defined herein or the definitions of which are not incorporated herein by reference shall have the meaning assigned to such terms in Revised Article 9 of the Uniform Commercial Code as adopted in the State of Minnesota.

	1(c) Singular/Plural, Etc . Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular, the plural and “or” has the inclusive meaning represented by the phrase “and/or.” The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” The words “hereof,” “herein,” “hereunder,” and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections are references to Sections in this Pledge Agreement unless otherwise provided.

Section 2. Pledge . As security for the payment and performance of all of the Obligations, the Pledgor hereby pledges to the Secured Party and grants to the Secured Party a security interest (the “Security Interest”) in the following, including any securities account containing a securities entitlement with respect to the following (the “Collateral”):

	2(a) The Pledged Member Interests and the certificates representing the Pledged Member Interests, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Member Interests.

	2(b) All additional member interests of any issuer of the Pledged Member Interests from time to time acquired by the Pledgor in any manner, and the certificates representing such additional member interests, and all dividends, cash, instruments and


	other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such member interests.

	2(c) All proceeds of any and all of the foregoing (including proceeds that constitute property of types described above).

Section 3. Delivery of Collateral . All certificates and instruments representing or evidencing the Pledged Member Interests shall be delivered to the Secured Party contemporaneously with the execution of this Agreement. All certificates and instruments representing or evidencing Collateral received by the Pledgor after the execution of this Agreement shall be delivered to the Secured Party promptly upon the Pledgor’s receipt thereof. All such certificates and instruments shall be held by or on behalf of the Secured Party pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Secured Party. With respect to all Pledged Member Interests consisting of uncertificated securities, book-entry securities or securities entitlements, the Pledgor shall either (a) execute and deliver, and cause any necessary issuers or securities intermediaries to execute and deliver, control agreements in form and substance satisfactory to the Secured Party covering such Pledged Member Interests, or (b) cause such Pledged Member Interests to be transferred into the name of the Secured Party. The Secured Party shall have the right at any time, whether before or after an Event of Default, to cause any or all of the Collateral to be transferred of record into the name of the Secured Party or its nominee (but subject to the rights of the Pledgor under Section 6) and to exchange certificates representing or evidencing Collateral for certificates of smaller or larger denominations. If the Collateral is in the possession of a bailee, the Pledgor will join with the Secured Party in notifying the bailee of the interest of the Secured Party and in obtaining from the bailee an acknowledgment that it hold the Collateral for the benefit of the Secured Party.

Section 4. Certain Warranties and Covenants . The Pledgor makes the following warranties and covenants:


	4(a) The Pledgor has title to the Pledged Member Interests and will have title to each other item of Collateral hereafter acquired, free of all Liens except the Security Interest.

	4(b) The Pledgor has full power and authority to execute this Pledge Agreement, to perform the Pledgor’s obligations hereunder and to subject the Collateral to the Security Interest created hereby.

	4(c) No financing statement covering all or any part of the Collateral is on file in any public office (except for any financing statements filed by the Secured Party).

	4(d) The Pledged Member Interests have been duly authorized and validly issued by the issuer thereof and are fully paid and non-assessable. The certificates representing the Pledged Member Interests The Pledged Member Interests are not subject to any offset or similar right or claim of the issuers thereof.


	4(e) The Pledged Member Interests constitute the percentage of the issued and outstanding member interests of the respective issuers thereof indicated on Schedule I (if any such percentage is so indicated).

Section 5. Further Assurances . The Pledgor agrees that at any time and from time to time, at the expense of the Pledgor, the Pledgor will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or that the Secured Party may reasonably request, in order to perfect and protect the Security Interest or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral (but any failure to request or assure that the Pledgor execute and deliver such instruments or documents or to take such action shall not affect or impair the validity, sufficiency or enforceability of this Agreement and the Security Interest, regardless of whether any such item was or was not executed and delivered or action taken in a similar context or on a prior occasion).

Section 6. Voting Rights; Dividends; Etc .


	6(a) Subject to paragraph (d) of this Section 6, the Pledgor shall be entitled to exercise or refrain from exercising any and all voting and other consensual rights pertaining to the Pledged Member Interests or any other stock that becomes part of the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement; provided, however, that the Pledgor shall not exercise or refrain from exercising any such right if such action could reasonably be expected to have a material adverse effect on the value of the Collateral or any material part thereof.

	6(b) Subject to paragraph (e) of this Section 6, the Pledgor shall be entitled to receive, retain, and use in any manner not prohibited by the Credit Agreement any and all dividends paid in respect of the Collateral; provided , however , that any and all

		(i) dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Collateral,

		(ii) dividends and other distributions paid or payable in cash in respect of any Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and

		(iii) cash paid, payable or otherwise distributed in redemption of, or in exchange for, any Collateral,

	shall be, and shall be forthwith delivered to the Secured Party to hold as, Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Secured Party, be segregated from the other property or funds of the Pledgor, and be forthwith delivered to the Secured Party as Collateral in the same form as so received (with any necessary indorsement or assignment). The Pledgor shall, upon request by the Secured Party, promptly execute all such documents and do all such acts as may be necessary or desirable to give effect to the provisions of this Section 6.


	6(c) The Secured Party shall execute and deliver (or cause to be executed and delivered) to the Pledgor all such proxies and other instruments as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the voting and other rights that it is entitled to exercise pursuant to Section 6 hereof and to receive the dividends that it is authorized to receive and retain pursuant to Section 6 hereof.

	6(d) Upon the occurrence and during the continuance of any Event of Default, the Secured Party shall have the right in its sole discretion, and the Pledgor shall execute and deliver all such proxies and other instruments as may be necessary or appropriate to give effect to such right, to terminate all rights of the Pledgor to exercise or refrain from exercising the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 6 hereof, and all such rights shall thereupon become vested in the Secured Party who shall thereupon have the sole right to exercise or refrain from exercising such voting and other consensual rights; provided, however, that the Secured Party shall not be deemed to possess or have control over any voting rights with respect to any Collateral unless and until the Secured Party has given written notice to the Pledgor that any further exercise of such voting rights by the Pledgor is prohibited and that the Secured Party and/or its assigns will henceforth exercise such voting rights; and provided, further, that neither the registration of any item of Collateral in the Secured Party’s name nor the exercise of any voting rights with respect thereto shall be deemed to constitute a retention by the Secured Party of any such Collateral in satisfaction of the Obligations or any part thereof.

	6(e) Upon the occurrence and during the continuance of any Event of Default:

		(i) all rights of the Pledgor to receive the dividends that it would otherwise be authorized to receive and retain pursuant to Section 6 hereof shall cease, and all such rights shall thereupon become vested in the Secured Party who shall thereupon have the sole right to receive and hold such dividends as Collateral, and

		(ii) all payments of dividends that are received by the Pledgor contrary to the provisions of paragraph (i) of this Section 6 shall be received in trust for the benefit of the Secured Party, shall be segregated from other funds of the Pledgor and shall be forthwith paid over to the Secured Party as Collateral in the same form as so received (with any necessary indorsement).

	Section 7. Transfers and Other Liens; Additional Member Interests .

	7(a) Except as may be permitted by the Credit Agreement, the Pledgor agrees that it will not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, or (ii) create or permit to exist any Lien, upon or with respect to any of the Collateral.

	7(b) The Pledgor agrees that it will (i) cause each issuer of the Pledged Member Interests that it controls not to issue any stock or other securities in addition to or in substitution for the Pledged Member Interests issued by such issuer, except to the


	Pledgor, and (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional member interests or other securities of each issuer of the Pledged Member Interests.

Section 8. Secured Party Appointed Attorney-in-Fact . As additional security for the Obligations, the Pledgor hereby irrevocably appoints the Secured Party the Pledgor’s attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor or otherwise, from time to time in the Secured Party’s good-faith discretion, to take any action and to execute any instrument that the Secured Party may reasonably believe necessary or advisable to accomplish the purposes of this Agreement (subject to the rights of the Pledgor under Section 6 hereof), in a manner consistent with the terms hereof, including, without limitation, to receive, indorse and collect all instruments made payable to the Pledgor representing any dividend or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same.

Section 9. Secured Party May Perform . The Pledgor hereby authorizes the Secured Party to file financing statements with respect to the Collateral (including financing statements containing a broader description of the Collateral than the description set forth herein. The Pledgor irrevocable waives any right to notice of any such filing. If the Pledgor fails to perform any agreement contained herein, the Secured Party may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Secured Party incurred in connection therewith shall be payable by the Pledgor under Section 14 hereof.

Section 10. The Secured Party’s Duties . The powers conferred on the Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. The Secured Party shall be deemed to have exercised reasonable care in the safekeeping of any Collateral in its possession if such Collateral is accorded treatment substantially equal to the safekeeping which the Secured Party accords its own property of like kind. Except for the safekeeping of any Collateral in its possession and the accounting for monies and for other properties actually received by it hereunder, the Secured Party shall have no duty, as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any Persons or any other rights pertaining to any Collateral. The Secured Party will take action in the nature of exchanges, conversions, redemption, tenders and the like requested in writing by the Pledgor with respect to any of the Collateral in the Secured Party’s possession if the Secured Party in its reasonable judgment determines that such action will not impair the Security Interest or the value of the Collateral, but a failure of the Secured Party to comply with any such request shall not of itself be deemed a failure to exercise reasonable care.

Section 11. Default Each of the following occurrences shall constitute an Event of Default under this Agreement: (a) the Pledgor shall fail to observe or perform any covenant or agreement applicable to the Pledgor under this Agreement; (b) any representation or warranty made by the Pledgor in this Agreement or in any financial statements, reports or certificates heretofore or at any time hereafter submitted by or on behalf of the Pledgor to the Secured Party shall prove to have been false or materially misleading when made; (c) any Event of Default


shall occur under the Credit Agreement; (d) the Secured Party receives at any time any information indicating that the Secured Party’s Security Interest is not enforceable, is not perfected or in not prior to all other security interests or other interests in the Collateral, except as otherwise agreed by the Secured Party.

Section 12. Remedies upon Default . If any Event of Default shall have occurred and be continuing:

	12(a) The Secured Party may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under Revised Article 9 of the Uniform Commercial Code as adopted in the State of Minnesota (the “Code”) in effect at that time, and may, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker’s board or at any of the Secured Party’s offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Secured Party may reasonably believe are commercially reasonable. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days’ prior notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Pledgor hereby waives all requirements of law, if any, relating to the marshalling of assets which would be applicable in connection with the enforcement by the Secured Party of its remedies hereunder, absent this waiver. The Secured Party may disclaim warranties of title and possession and the like.

	12(b) The Secured Party may notify any Person obligated on any of the Collateral that the same has been assigned or transferred to the Secured Party and that the same should be performed as requested by, or paid directly to, the Secured Party, as the case may be. The Pledgor shall join in giving such notice, if the Secured Party so requests. The Secured Party may, in the Secured Party’s name or in the Pledgor’s name, demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such Collateral or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligation of any such Person.

	12(c) Any cash held by the Secured Party as Collateral and all cash proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Secured Party, be held by the Secured Party as collateral for, or then or at any time thereafter be applied in whole or in part by the Secured Party against, all or any part of the Obligations (including any expenses of the Secured Party payable pursuant to Section 14 hereof).

Section 13. Waiver of Certain Claims . The Pledgor acknowledges that because of present or future circumstances, a question may arise under the Securities Act of 1933, as from


time to time amended (the “Securities Act”), with respect to any disposition of the Collateral permitted hereunder. The Pledgor understands that compliance with the Securities Act may very strictly limit the course of conduct of the Secured Party if the Secured Party were to attempt to dispose of all or any portion of the Collateral and may also limit the extent to which or the manner in which any subsequent transferee of the Collateral or any portion thereof may dispose of the same. There may be other legal restrictions or limitations affecting the Secured Party in any attempt to dispose of all or any portion of the Collateral under the applicable Blue Sky or other securities laws or similar laws analogous in purpose or effect. The Secured Party may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such Collateral for their own account for investment only and not to engage in a distribution or resale thereof. The Pledgor agrees that the Secured Party shall not incur any liability, and any liability of the Pledgor for any deficiency shall not be impaired, as a result of the sale of the Collateral or any portion thereof at any such private sale in a manner that the Secured Party reasonably believes is commercially reasonable (within the meaning of Section 9-627 of the Uniform Commercial Code). The Pledgor hereby waives any claims against the Secured Party arising by reason of the fact that the price at which the Collateral may have been sold at such sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if the Secured Party shall accept the first offer received and does not offer any portion of the Collateral to more than one possible purchaser. The Pledgor further agrees that the Secured Party has no obligation to delay sale of any Collateral for the period of time necessary to permit the issuer of such Collateral to qualify or register such Collateral for public sale under the Securities Act, applicable Blue Sky laws and other applicable state and federal securities laws, even if said issuer would agree to do so. Without limiting the generality of the foregoing, the provisions of this Section would apply if, for example, the Secured Party were to place all or any portion of the Collateral for private placement by an investment banking firm, or if such investment banking firm purchased all or any portion of the Collateral for its own account, or if the Secured Party placed all or any portion of the Collateral privately with a purchaser or purchasers.

Section 14. Costs and Expenses; Indemnity . The Pledgor will pay or reimburse the Secured Party on demand for all reasonable out-of-pocket expenses paid or incurred by the Secured Party, including in each case all filing and recording costs and fees, charges, taxes and disbursements of outside counsel to the Secured Party (determined on the basis of such counsel’s generally applicable rates, which may be higher than the rates such counsel charges the Secured Party in certain matters) and/or the allocated costs of in-house counsel incurred from time to time, in connection with the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest and the preparation, administration, continuance, amendment, collection and enforcement of this Agreement, and all such costs and expenses shall be part of the Obligations secured by the Security Interest. The Pledgor shall indemnify and hold the Secured Party harmless from and against any and all claims, losses and liabilities (including reasonable attorneys’ fees) growing out of or resulting from this Agreement (including enforcement of this Agreement) or the Secured Party’s actions pursuant hereto, except claims, losses or liabilities resulting from the Secured Party’s gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction. Any liability of the Pledgor to indemnify and hold Secured Party harmless pursuant to the preceding sentence shall be part of the Obligations secured by the Security Interest. The obligations of the Pledgor under this Section shall survive any termination of this Agreement.


Section 15. Waivers and Amendments; Remedies . This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by the Secured Party. A waiver so signed shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any rights and remedies available to the Secured Party. All rights and remedies of the Secured Party shall be cumulative and may be exercised singly in any order or sequence, or concurrently, at the Secured Party’s option, and the exercise or enforcement of any such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other.

Section 16. Notices . Any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex or facsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed.

Section 17. Pledgor Acknowledgments . The Pledgor hereby acknowledges that (a) the Pledgor has been advised by counsel in the negotiation, execution and delivery of this Agreement, (b) the Secured Party has no fiduciary relationship to the Pledgor, the relationship being solely that of debtor and creditor, and (c) no joint venture exists between the Pledgor and the Secured Party.

Section 18. Continuing Security Interest; Assignments under Credit Agreement . This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Obligations and the expiration of the obligation, if any, of the Secured Party to extend credit accommodations to the Pledgor, (b) be binding upon the Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of the Secured Party hereunder, to the benefit of, and be enforceable by, the Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), the Secured Party may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement to any other Person to the extent and in the manner provided in the Credit Agreement, and may similarly transfer all or any portion of its rights under this Pledge Agreement to such Persons.

Section 19. Termination of Security Interest . Upon payment in full of the Obligations and the expiration of any obligation of the Secured Party to extend credit accommodations to the Pledgor, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Pledgor. Upon any such termination, the Secured Party will return to the Pledgor such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof and execute and deliver to the Pledgor such documents as the Pledgor shall reasonably request to evidence such termination. Any reversion or return of the Collateral upon termination of this Agreement and any instruments of transfer or termination shall be at the expense of the Pledgor and shall be without warranty by, or recourse on, the Secured Party. As used in this Section, “Pledgor” includes any assigns of Pledgor, any Person holding a subordinate security


interest in any part of the Collateral or whoever else may be lawfully entitled to any part of the Collateral.

Section 20. Governing Law and Construction . THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA; PROVIDED, HOWEVER, THAT NO EFFECT SHALL BE GIVEN TO CONFLICT OF LAWS PRINCIPLES OF THE STATE OF MINNESOTA, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE MANDATORILY GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF MINNESOTA. Whenever possible, each provision of this Agreement and any other statement, instrument or transaction contemplated hereby or relating hereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto.

Section 21. Consent to Jurisdiction . AT THE OPTION OF THE SECURED PARTY, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY; AND THE PLEDGOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE PLEDGOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE SECURED PARTY AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.

Section 22. Waiver of Jury Trial . EACH OF THE PLEDGOR AND THE SECURED PARTY, BY ITS ACCEPTANCE OF THIS AGREEMENT, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

Section 23. Counterparts . This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument.

Section 24. General . All representations and warranties contained in this Agreement or in any other agreement between the Pledgor and the Secured Party shall survive the execution,

delivery and performance of this Agreement and the creation and payment of the Obligations. The Pledgor waives notice of the acceptance of this Agreement by the Secured Party. Captions in this Agreement are for reference and convenience only and shall not affect the interpretation or meaning of any provision of this Agreement.

[The remainder of this page has been left blank intentionally.]

IN WITNESS WHEREOF, the Pledgor has caused this Pledge Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written.


	PLEDGOR:

	ELECTROMED, INC.

	By:
	Name: Robert D. Hansen
	Title: Chief Executive Officer

Address:

500 Sixth Avenue NW
New Prague, MN 56071
ATTN: Robert D. Hansen
Fax Number: 952-758-1941

Address for the Lender:

U.S. Bank National Association
BC-MN-H03W
800 Nicollet Mall
Minneapolis, MN 55402-4302
ATTN: Daniel J. Miller
Fax Number: 612-303-2252

[Signature Page to Pledge Agreement]

SCHEDULE I

PLEDGED STOCK


Stock Issuer:	Electromed Financial, LLC

Percentage Ownership:	95%

Exhibit 10.8

THIS INSTRUMENT WAS PREPARED BY,
AND WHEN RECORDED SHOULD BE
RETURNED TO:
Dorsey & Whitney LLP (CHMH)
Suite 1500
50 South Sixth Street
Minneapolis, Minnesota 55402-1498

MORTGAGE, SECURITY AGREEMENT,
ASSIGNMENT OF LEASES AND RENTS
AND FIXTURE FINANCING STATEMENT

NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, ENFORCEMENT OF THIS MORTGAGE IS LIMITED TO A DEBT AMOUNT OF $1,520,000 UNDER CHAPTER 287 OF MINNESOTA STATUTES.

This MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS AND FIXTURE FINANCING STATEMENT (this “Mortgage,” which term shall include any amendment, modification, supplement, extension, renewal, replacement, or restatement hereof) is made as of December 9, 2009, by Electromed, Inc., a Minnesota corporation (“Mortgagor”), having its principal offices at 500 6th Avenue NW, New Prague, Minnesota 56071, in favor of U.S. Bank National Association, a national banking association (“Lender”), having its principal offices at Minneapolis, Minnesota.

RECITALS

A. Lender has made loans, or agreed to make loans, to Mortgagor in the aggregate maximum principal amount of Six Million Twenty Thousand and No/100 Dollars ($6,020,000.00) and made and other credit extensions to Mortgagor (collectively, the “Loan”), to be repaid with interest thereon, pursuant to that certain Credit Agreement of even date herewith (the “Credit Agreement,” which term shall include any amendment, modification, supplement, extension, renewal, replacement, or restatement thereof), and certain notes described therein (collectively, the “Notes,” which term shall include any amendment, modification, supplement, extension, renewal, replacement, or restatement thereof). The Notes, the Credit Agreement and any other Loan Document (as defined in the Credit Agreement) are each dated the same date as this Mortgage, are hereby incorporated by reference, and, together with this Mortgage, as any of the same may be amended, modified, supplemented, extended, renewed, replaced or restated, are

sometimes collectively referred to as the “Loan Documents.” Capitalized terms used in this Mortgage have the meanings set forth herein; capitalized terms used in this Mortgage but not defined herein have the meanings assigned to such terms in the Credit Agreement.

B. This Mortgage secures the following (collectively, as used herein, the “Obligations”): (i) the Obligations, as defined in the Credit Agreement, which include, without limitation, the principal amount of $6,020,000.00 or so much thereof as may be advanced by Lender pursuant to the Notes or the Credit Agreement; plus interest on the amount advanced and unrepaid, at the interest rate or rates provided in the Notes or the Credit Agreement; and (ii) all other amounts payable by Mortgagor and all other agreements of Mortgagor under this Mortgage and the other the Loan Documents as the same now exist or may hereafter be amended.

C. The Obligations shall mature on or before December 9, 2014 (the “Maturity Date”).

D. Notwithstanding any provision herein to the contrary, the maximum principal indebtedness secured hereby is $1,520,000.00 plus amounts which may be advanced by Lender in protection of the Mortgaged Property or this Mortgage. This Mortgage secures only a portion of the Obligations owing or which may become owing by Mortgagor to Lender. In the event that the amount secured by this Mortgage is less than the Obligations, then all amounts paid upon the Obligations shall be first applied to the Obligations not secured hereby, and the amount secured hereby shall be reduced only by the last and final sums that Mortgagor repays with respect to the Obligations after the amount of the Obligations is reduced to an amount equal to or less than the amount secured hereby, and shall not be reduced by any intervening repayments of the Obligations unless arising from the Mortgaged Property, it being the parties’ intent that the portion of the Obligations last remaining unpaid shall be secured hereby. So long as the balance of the Obligations exceeds the amount secured hereby, any payments of the Obligations shall not be deemed to be applied against, or to reduce, the portion of the Obligations secured by this Mortgage unless owing from the Mortgaged Property. Such payments shall instead be deemed to reduce only such portions of the Obligations as are secured by other non-real estate collateral or by real estate collateral located outside the State of Minnesota or as are unsecured.

NOW, THEREFORE, Mortgagor, in consideration of Lender making the Loan, and to secure the Loan and payment and performance of the Obligations, hereby grants, bargains, sells, conveys and mortgages to Lender, its successors and assigns, forever, with power of sale, and grants to Lender, its successors and assigns, a security interest in, the following, all of which is called the “Mortgaged Property”:

A. LAND AND IMPROVEMENTS

The land described in Exhibit A attached hereto and all mineral rights, hereditaments, easements and appurtenances thereto (collectively the “Land”), and all improvements and structures thereon (the “Improvements”); and

B. FIXTURES AND PERSONAL PROPERTY

All fixtures (the “Fixtures”), and all machinery, equipment and personal property (collectively the “Personal Property”) now or hereafter located on, in or under the Land and the Improvements, or usable in connection with the Land or the Improvements, and which are owned by Mortgagor or in which Mortgagor has an interest, including any construction and building materials stored on and to be included in the Improvements, plus any repairs, replacements and betterments to any of the foregoing and the proceeds and products thereof; and

C. LEASES AND RENTS

All rights of Mortgagor with respect to tenants or occupants now or hereafter occupying any part of the Land or the Improvements, if any, including all leases and licenses and rights in connection therewith, whether oral or written (collectively the “Leases”), and all rents, income, both from services and occupation, royalties, revenues and payments, including prepayments and security deposits (collectively the “Rents”), which are now or hereafter due or to be paid in connection with the Land, the Improvements, the Fixtures or the Personal Property; and

D. GENERAL INTANGIBLES

All general intangibles of Mortgagor which relate to any of the Land, the Improvements, the Fixtures, the Personal Property, the Leases or the Rents, including proceeds of insurance and condemnation or conveyance of the Land and the Improvements, accounts, trade names, contract rights, accounts receivable and bank accounts; and

E. AFTER ACQUIRED PROPERTY AND PROCEEDS

All after acquired property similar to the property herein described and conveyed which may be subsequently acquired by Mortgagor and used in connection with the Land, the Improvements, the Fixtures, the Personal Property and other property; and all cash and non-cash proceeds and products of all of the foregoing property.

TO HAVE AND TO HOLD the same, and all estate therein, together with all the rights, privileges and appurtenances thereunto belonging, to the use and benefit of Lender, its successors and assigns, forever.

PROVIDED NEVERTHELESS, should Mortgagor pay and perform all the Obligations, then these presents will be of no further force and effect, and this Mortgage shall be satisfied by Lender, at the expense of Mortgagor.

This Mortgage constitutes an assignment of rents and profits within the meaning of Minnesota Statutes, Sections 559.17 and 576.01, and is intended to comply fully with the provisions thereof, and to afford Lender, to the fullest extent allowed by law, the rights and remedies of a mortgage lender or secured lender pursuant thereto.

This Mortgage also constitutes a security agreement within the meaning of the Uniform Commercial Code as in effect in the State of Minnesota (the “UCC”), with respect to all property described herein as to which a security interest may be granted and/or perfected pursuant to the

UCC, and is intended to afford Lender, to the fullest extent allowed by law, the rights and remedies of a secured party under the UCC.

MORTGAGOR FURTHER agrees as follows:

ARTICLE I
AGREEMENTS

Section 1.1 Performance of Obligations; Incorporation by Reference. Mortgagor shall pay and perform the Obligations owing by it or him. Time is of the essence hereof. All of the covenants, obligations, agreements, warranties and representations of Mortgagor contained in the Credit Agreement and the other Loan Documents and all of the terms and provisions thereof, are hereby incorporated herein and made a part hereof by reference as if fully set forth herein.

Section 1.2 Further Assurances. If Lender requests, Mortgagor shall sign and deliver and cause to be recorded as Lender shall direct any further mortgages, instruments of further assurance, certificates and other documents as Lender reasonably may consider necessary or desirable in order to perfect, continue and preserve the Obligations and Lender’s rights, title, estate, liens and interests under the Loan Documents. Further, the Mortgagor shall pay all reasonable out-of-pocket expenses incurred by the Lender, including title insurance costs and the reasonable fees, charges and disbursements of outside counsel for the Lender (determined on the basis of such counsel’s generally applicable rates, which may be higher than the rates such counsel charges the Lender in certain matters) and/or the allocated costs of in-house counsel incurred from time to time, in connection with the preparation, execution, recording, filing and refiling of any such documents.

Section 1.3 Sale, Transfer, Encumbrance. An immediate default and Event of Default shall occur hereunder if Mortgagor sells, conveys, transfers or otherwise disposes of, or encumbers, any part of its interest in the Mortgaged Property, whether voluntarily, involuntarily or by operation of law, without the prior written consent of Lender, and Lender shall have the option to declare the Obligations immediately due and payable without notice. Included within the foregoing actions requiring prior written consent of Lender are: (a) sale by deed or contract for deed; (b) mortgaging or granting a lien on the Mortgaged Property; and (c) a Change of Control Occurs. Mortgagor shall give notice of any proposed action to Lender at least thirty (30) days prior to taking such action. Mortgagor shall pay all costs and expenses incurred by Lender in evaluating any such action. Lender may condition such consent upon modification of the Loan Documents or payment of fees. No such action shall relieve Mortgagor from liability for the Obligations. The consent by Lender to any action shall not constitute a waiver of the necessity of such consent to any subsequent action.

Section 1.4 Insurance. Mortgagor shall obtain, maintain and keep in full force and effect (and upon request of Lender shall furnish to Lender copies of) policies of insurance as described in, and meeting the requirements set forth in the Credit Agreement.

Section 1.5 Taxes, Liens and Claims, Utilities. Mortgagor, at least five (5) days before any penalty attaches thereto, shall pay and discharge, or cause to be paid and discharged, all taxes, assessments and governmental charges and levies (collectively “Impositions”) imposed

upon or against the Mortgaged Property or the Rents, or upon or against the Obligations, or upon or against the interest of Lender in the Mortgaged Property or the Obligations, except Impositions measured by the income of Lender. Mortgagor shall provide evidence of such payment at Lender’s request. Mortgagor shall keep the Mortgaged Property free and clear of all liens, encumbrances, easements, covenants, conditions, restrictions and reservations (collectively “Liens”) except those listed on Exhibit A attached hereto (the “Permitted Encumbrances”). Mortgagor shall pay or cause to be paid when due all charges or fees for utilities and services supplied to the Mortgaged Property. Notwithstanding anything to the contrary contained in this Section, Mortgagor shall not be required to pay or discharge any Imposition or Lien so long as Mortgagor shall in good faith, and after giving notice to Lender, contest the same by appropriate legal proceedings. If Mortgagor contests any Imposition or Lien against the Mortgaged Property, Mortgagor shall provide such security to Lender as Lender shall reasonably require against loss or impairment of Mortgagor’s ownership of or Lender’s lien on the Mortgaged Property and shall in any event pay such Imposition or Lien before loss or impairment occurs.

Section 1.6 Escrow Payments. If requested by Lender, Mortgagor shall deposit with Lender monthly on the same date as payments are due under the Notes and the Credit Agreement the amount reasonably estimated by Lender to be necessary to enable Lender to pay, at least five (5) days before they become due, all Impositions against the Mortgaged Property and the premiums upon all insurance required hereby to be maintained with respect to the Mortgaged Property. All funds so deposited shall secure the Obligations. Such deposits shall be held by Lender, or its nominee, in a non-interest bearing account and may be commingled with other funds. Such deposits shall be used to pay such Impositions and insurance premiums when due. Any excess sums so deposited shall be retained by Lender and shall be applied to pay said items in the future, unless the Obligations have been paid and performed in full, in which case all excess sums so paid shall be refunded to Mortgagor. Upon the occurrence of an Event of Default, Lender may apply any funds in said account against the Obligations in such order as Lender may determine.

Section 1.7 Maintenance and Repair; Compliance with Laws. Mortgagor shall cause the Mortgaged Property to be operated, maintained and repaired in safe and good repair, working order and condition, reasonable wear and tear excepted; shall not commit or permit waste thereof; except as provided in any Loan Document, shall not remove, demolish or substantially alter the design or structural character of any Improvements without the prior written consent of Lender; shall complete or cause to be completed forthwith any Improvements which are now or may hereafter be under construction upon the Land; shall comply or cause compliance with all laws, statutes, ordinances and codes, and governmental rules, regulations and requirements, applicable to the Mortgaged Property or the manner of using or operating the same, and with any covenants, conditions, restrictions and reservations affecting the title to the Mortgaged Property, and with the terms of all insurance policies relating to the Mortgaged Property; and shall obtain and maintain in full force and effect all consents, permits and licenses necessary for the use and operation of the Mortgaged Property.

Section 1.8 Leases.

(a) Mortgagor shall not enter into or amend any Lease without Lender’s prior written consent, and shall furnish to Lender, upon execution, a complete and fully executed copy of each

Lease. Mortgagor shall provide Lender with a copy of each proposed Lease requiring the consent of Lender and with any information requested by Lender regarding the proposed Tenant thereunder. Lender may declare each Lease to be prior or subordinate to this Mortgage, at Lender’s option.

(b) Mortgagor shall, at its cost and expense, perform each obligation to be performed by it under each Lease; not borrow against, pledge or further assign any rents or other payments due thereunder; not permit the prepayment of any rents or other payments due for more than thirty (30) days in advance; and not permit any Tenant to assign its Lease or sublet the premises covered by its Lease.

(c) If any Tenant shall default under its Lease, Mortgagor shall, in the ordinary course of business, exercise sound business judgment with respect to such default, but Mortgagor may not discount, compromise, forgive or waive claims or discharge the Tenant from its obligations under the Lease or terminate or accept a surrender of the Lease without Lender’s written consent.

(d) If Mortgagor fails to perform any obligations of Mortgagor under any Lease or if Lender becomes aware of or is notified by any Tenant of a failure on the part of Mortgagor to so perform, Lender may, but shall not be obligated to, without waiving or releasing Mortgagor from any obligation in this Mortgage or any of the other Loan Documents, remedy such failure, and Mortgagor agrees to repay upon demand all sums incurred by Lender in remedying any such failure, together with interest thereon from the date incurred at the default rate specified in the Credit Agreement.

(e) For purposes of this Mortgage, the following terms shall have the following meanings:


	(i)	“Lease”: Any lease or other document or agreement, written or oral, permitting any Person to use or occupy any part of the Mortgaged Property.

	(ii)	“Person”: Any natural person, corporation, partnership, limited partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity.

	(iii)	“Tenant”: Any person or party using or occupying any part of the Mortgaged Property pursuant to a Lease.

Section 1.9 Indemnity. Mortgagor shall indemnify Lender and its directors, officers, agents and employees (collectively the “Indemnified Parties”) against, and hold the Indemnified Parties harmless from, all losses, damages, suits, claims, judgments, penalties, fines, liabilities, costs and expenses by reason of, or on account of, or in connection with the construction, reconstruction or alteration of the Mortgaged Property, or any accident, injury, death or damage to any person or property occurring in, on or about the Mortgaged Property or any street, drive, sidewalk, curb or passageway adjacent thereto. The indemnity contained in this Section shall include costs of defense of any such claim asserted against an Indemnified Party, including attorneys’ fees. The indemnity contained in this Section shall survive payment and performance

of the Obligations and satisfaction and release of this Mortgage and any foreclosure thereof or acquisition of title by deed in lieu of foreclosure.

Section 1.10 Appraisals. Lender shall have the right from time to time, but not more often than once during any twelve (12)-month period, to obtain an appraisal of the Mortgaged Property in form and substance satisfactory to Lender and prepared by an independent MAI appraiser selected by Lender. Mortgagor shall reimburse Lender for the cost incurred for any such appraisal within ten (10) days following demand therefor by Lender.

ARTICLE II
REPRESENTATIONS AND WARRANTIES

Mortgagor makes the following representations and warranties:

Section 2.1 Ownership, Liens, Compliance with Laws. Mortgagor owns the Mortgaged Property in fee, free from all Liens, except the Permitted Encumbrances. All applicable zoning, environmental, land use, subdivision, building, fire, safety and health laws, statutes, ordinances, codes, rules, regulations and requirements affecting the Mortgaged Property permit the current use and occupancy thereof, and Mortgagor has obtained all consents, permits and licenses required for such use. Mortgagor has examined and is familiar with all applicable covenants, conditions, restrictions and reservations, and with all applicable laws, statutes, ordinances, codes and governmental rules, regulations and requirements affecting the Mortgaged Property, and the Mortgaged Property complies with all of the foregoing.

Section 2.2 Use. The Mortgaged Property is not homestead property nor is it agricultural property or in agricultural use.

Section 2.3 Utilities; Services. The Mortgaged Property is serviced by all necessary public utilities, and all such utilities are operational and have sufficient capacity. There is no contract or agreement providing for services to or maintenance of the Mortgaged Property which cannot be canceled upon 30 days’ or less notice.

ARTICLE III
CASUALTY; CONDEMNATION

Section 3.1 Casualty, Repair, Proof of Loss. If any portion of the Mortgaged Property shall be damaged or destroyed by any cause (a “Casualty”), Mortgagor shall:

(a) give immediate notice to the Lender; and

(b) promptly commence and diligently pursue to completion (in accordance with plans and specifications approved by Lender) the restoration, repair and rebuilding of the Mortgaged Property as nearly as possible to its value, condition and character immediately prior to the Casualty; and

(c) if the Casualty is covered by insurance, immediately make proof of loss and collect all insurance proceeds, all such proceeds to be payable to Lender or as Lender shall direct. If an Event of Default shall be in existence, or if Mortgagor shall fail to provide notice to

Lender of filing proof of loss, or if Mortgagor shall not be diligently proceeding, in Lender’s reasonable opinion, to collect such insurance proceeds, then Lender may, but is not obligated to, make proof of loss, and is authorized, but is not obligated, to settle any claim with respect thereto, and to collect the proceeds thereof. Mortgagor shall not accept any settlement of an insurance claim, the result of which shall be a payment which is $10,000 or more less than the full amount of the claim, without the prior written consent of Lender.

Section 3.2 Use of Insurance Proceeds. Lender shall make the net insurance proceeds received by it (after reimbursement of Lender’s out-of pocket costs of collecting and disbursing the same) available to Mortgagor to pay the cost of restoration, repair and rebuilding of the Mortgaged Property, subject to the following conditions:

(a) There shall be no Event of Default in existence at the time of any disbursement of the insurance proceeds.

(b) Lender shall have determined, in its reasonable discretion, that the cost of restoration, repair and rebuilding is and will be equal to or less than the amount of insurance proceeds and other funds deposited by Mortgagor with Lender.

(c) Lender shall have determined, in its reasonable discretion, that the restoration, repair and rebuilding can be completed in accordance with plans and specifications approved by Lender (such approval not to be unreasonably withheld), in accordance with codes and ordinances, and in accordance with the terms, and within the time requirements in order to prevent termination, of any Lease, and in any event not less than six (6) months prior to the Maturity Date.

(d) All funds shall be disbursed, at Lender’s option, in accordance with Lender’s customary disbursement procedures for construction loans.

(e) The Casualty shall have occurred more than twelve (12) months prior to the Maturity Date.

(f) No Tenant shall have the right to terminate its Lease or their Leases as a result of the Casualty.

If any of these conditions shall not be satisfied, then Lender shall have the right to use the insurance proceeds to prepay the Loan in accordance with the Credit Agreement. If any insurance proceeds shall remain after completion of the restoration, repair and rebuilding of the Mortgaged Property, they shall be disbursed to Mortgagor, or at the Lender’s discretion, used to prepay the Loan in accordance with the Credit Agreement.

Section 3.3 Condemnation. If any portion of the Mortgaged Property shall be taken, condemned or acquired pursuant to exercise of the power of eminent domain or threat thereof (a “Condemnation”), Mortgagor shall:

(a) give immediate notice thereof to Lender, and send a copy of each document received by Mortgagor in connection with the Condemnation to Lender promptly after receipt; and

(b) diligently pursue any negotiation and prosecute any proceeding in connection with the Condemnation at Mortgagor’s expense. If an Event of Default shall be in existence, or if Mortgagor, in Lender’s reasonable opinion, shall not be diligently negotiating or prosecuting the claim, Lender is authorized, but not required, to negotiate and prosecute the claim and appear at any hearing for itself and on behalf of Mortgagor and to compromise or settle all compensation for the Condemnation. Lender shall not be liable to Mortgagor for any failure by Lender to collect or to exercise diligence in collecting any such compensation. Mortgagor shall not compromise or settle any claim resulting from the Condemnation if such settlement shall result in payment of $10,000 or more less than Lender’s reasonable estimate of the damages therefrom. All awards shall be paid to Lender.

Section 3.4 Use of Condemnation Proceeds. Lender shall make the net proceeds of any Condemnation received by it (after reimbursement of Lender’s out-of-pocket costs of collecting and disbursing the same) available to Mortgagor for restoration, repair and rebuilding of the Mortgaged Property, subject to the following conditions:

(a) There shall be no Event of Default in existence at the time of any disbursement of the condemnation proceeds.

(b) Lender shall have determined, in its reasonable discretion, that the cost of restoration, repair and rebuilding is and will be equal to or less than the amount of condemnation proceeds and other funds deposited by Mortgagor with Lender.

(d) All funds shall be disbursed, at Lender’s option, in accordance with Lender’s customary disbursement procedures for construction loans.

(e) The Condemnation shall have occurred more than twelve (12) months prior to the Maturity Date.

(f) No Tenant shall have the right to terminate its Lease or their Leases as a result of the Condemnation.

If any of these conditions shall not be satisfied, then Lender shall have the right to use the condemnation proceeds to prepay the Loan in accordance with the Credit Agreement. If any condemnation proceeds shall remain after completion of the restoration, repair and rebuilding of the Mortgaged Property, they shall be disbursed to Mortgagor, or at Lender’s discretion, used to prepay the Loan in accordance with the Credit Agreement.

ARTICLE IV
DEFAULTS AND REMEDIES

Section 4.1 Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default hereunder:

(a) An Event of Default, as defined in the Credit Agreement; or

(b) Mortgagor fails to comply with any agreement, covenant, condition, provision or term contained in this Mortgage.

Section 4.2 (b) Remedies. Upon the occurrence of certain Event of Default, as described more fully in the Credit Agreement, all of the Obligations shall be accelerated and become immediately due and payable without notice or declaration to Mortgagor. Upon the occurrence of one or more other Events of Default, as described more fully in the Credit Agreement, all of the Obligations, at the option of Lender, shall be accelerated and become immediately due and payable upon notice to Mortgagor. In either event, the Obligations shall be due and payable without presentment, demand or further notice of any kind. Lender shall have the right to proceed to protect and enforce its rights by one or more of the following remedies:

(a) LENDER SHALL HAVE THE RIGHT TO BRING SUIT either for damages, for specific performance of any agreement contained in any Loan Document, for the foreclosure of this Mortgage, or for the enforcement of any other appropriate legal or equitable remedy.

(b) LENDER SHALL HAVE THE RIGHT TO SELL THE MORTGAGED PROPERTY AT PUBLIC AUCTION AND CONVEY THE SAME TO THE PURCHASER IN FEE SIMPLE, as provided by law, Mortgagor to remain liable for any deficiency. Said sale may be as one tract or otherwise, at the sole option of Lender. In the event of any sale of the Mortgaged Property pursuant to any judgment or decree of any court or at public auction or otherwise in connection with the enforcement of any of the terms of this Mortgage, Lender, its successors or assigns, may become the purchaser, and for the purpose of making settlement for or payment of the purchase price, shall be entitled to deliver over and use the Credit Agreement or Notes and any claims for interest accrued and unpaid thereon, together with all other sums, with interest, advanced or secured hereby and unpaid hereunder, in order that there may be credited as paid on the purchase price the total amount of the Obligations then due, including principal and interest on the Loan and all other sums, with interest, advanced or secured hereby and unpaid hereunder or under any of the other Loan Documents.

(c) LENDER SHALL HAVE THE RIGHT TO OBTAIN THE APPOINTMENT OF A RECEIVER at any time after the occurrence of an Event of Default. Lender may apply for the appointment of a receiver to the district court for the county where the Mortgaged Property or any part thereof is located, by an action separate from any foreclosure of this Mortgage pursuant to Minnesota Statutes Chapter 580 or pursuant to Minnesota Statutes Chapter 581, or as a part of the foreclosure action under said Chapter 581 (it being agreed that the existence of a foreclosure pursuant to said Chapter 580 or a foreclosure action pursuant to said Chapter 581 is not a prerequisite to any action for a receiver hereunder). Lender shall be entitled to the appointment of a receiver without regard to waste, adequacy of the security or solvency of Mortgagor. The

receiver, who shall be an experienced property manager, shall collect (until the Obligations are fully paid and satisfied and, in the case of a foreclosure sale, during the entire redemption period) the Rents, and shall manage the Mortgaged Property, execute Leases within or beyond the period of the receivership if approved by the court and apply all rents, profits and other income collected by him in the following order:


	(i)	to the payment of all reasonable fees of the receiver, if any, approved by the court;

	(ii)	to the repayment of tenant security deposits, with interest thereon, as required by Minnesota Statutes, Section 504B.178;

	(iii)	to the payment when due of delinquent or current real estate taxes or special assessments with respect to the Mortgaged Property, or the periodic escrow for the payment of the same;

	(iv)	to the payment when due of premiums for insurance of the type required by this Mortgage, or the periodic escrow for the payment of the same;

	(v)	to the payment for the keeping of the covenants required of a lessor or licensor pursuant to Minnesota Statutes, Section 504B.161, subdivision 1;

	(vi)	to the payment of all expenses for normal maintenance of the Mortgaged Property; and

	(vii)	the balance to Lender (a) if received prior to the commencement of a foreclosure, to be applied to the Obligations, in such order as Lender may elect and (b) if received after the commencement of a foreclosure, to be applied to the amount required to be paid to effect a reinstatement prior to foreclosure sale, or, after a foreclosure sale to any deficiency and thereafter to the amount required to be paid to effect a redemption, all pursuant to Minnesota Statutes, Sections 580.30, 580.23 and 581.10, with any excess to be paid to Mortgagor. Provided, that if this Mortgage is not reinstated nor the Mortgaged Property redeemed as provided by said Sections 580.30, 580.23 or 581.10, the entire amount paid to Lender pursuant hereto shall be the property of Lender together with all or any part of the Mortgaged Property acquired through foreclosure.

Lender shall have the right, at any time and without limitation, as provided in Minnesota Statutes, Section 582.03, to advance money to the receiver to pay any part or all of the items which the receiver should otherwise pay if cash were available from the Mortgaged Property and sums so advanced, with interest at the default rate specified in the Credit Agreement, shall be secured hereby, or if advanced during the period of redemption shall be part of the sum required to be paid to redeem from the sale.

(d) LENDER SHALL HAVE THE RIGHT TO COLLECT THE RENTS from the Mortgaged Property and apply the same in the manner hereinbefore provided with respect to a receiver. For that purpose, Lender may enter and take possession of the Mortgaged Property and manage and operate the same and take any action which, in Lender’s judgment, is necessary or

proper to collect the Rents and to conserve the value of the Mortgaged Property. Lender may also take possession of, and for these purposes use, any and all of the Personal Property. The expense (including any receiver’s fees, attorneys’ fees, costs and agent’s compensation) incurred pursuant to the powers herein contained shall be secured by this Mortgage. Lender shall not be liable to account to Mortgagor for any action taken pursuant hereto other than to account for any Rents actually received by Lender. Enforcement hereof shall not cause Lender to be deemed a mortgagee in possession unless Lender elects in writing to be a mortgagee in possession.

(e) LENDER SHALL HAVE THE RIGHT TO ENTER AND TAKE POSSESSION of the Mortgaged Property and manage and operate the same in conformity with all applicable laws and take any action which, in Lender’s judgment, is necessary or proper to conserve the value of the Mortgaged Property.

(f) LENDER SHALL HAVE ALL OF THE RIGHTS AND REMEDIES PROVIDED IN THE UNIFORM COMMERCIAL CODE including the right to proceed under the Uniform Commercial Code provisions governing default as to any Personal Property separately from the real estate included within the Mortgaged Property, or to proceed as to all of the Mortgaged Property in accordance with its rights and remedies in respect of said real estate. If Lender should elect to proceed separately as to such Personal Property, Mortgagor agrees to make such Personal Property available to Lender at a place or places acceptable to Lender, and if any notification of intended disposition of any of such Personal Property is required by law, such notification shall be deemed reasonably and properly given if given at least ten (10) days before such disposition in the manner hereinafter provided.

(g) LENDER SHALL HAVE THE RIGHT TO FILE PROOF OF CLAIM and other documents as may be necessary or advisable in order to have its claims allowed in any receivership, insolvency, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceedings affecting Mortgagor, its creditors or its property, for the entire amount due and payable by Mortgagor in respect of the Obligations at the date of the institution of such proceedings, and for any additional amounts which may become due and payable by Mortgagor after such date.

Each remedy herein specifically given shall be in addition to every other right now or hereafter given or existing at law or in equity, and each and every right may be exercised from time to time and as often and in such order as may be deemed expedient by Lender and the exercise or the beginning of the exercise of one right shall not be deemed a waiver of the right to exercise at the same time or thereafter any other right. Lender shall have all rights and remedies available under the law in effect now and/or at the time such rights and remedies are sought to be enforced, whether or not they are available under the law in effect on the date hereof.

Section 4.3 Expenses of Exercising Rights Powers and Remedies. The reasonable expenses (including any receiver’s fees, attorneys’ fees, appraisers’ fees, environmental engineers’ and/or consultants’ fees, costs incurred for documentary and expert evidence, stenographers’ charges, publication costs, costs (which may be estimated as to items to be expended after entry of the decree of foreclosure) of procuring all abstracts of title, continuations of abstracts of title, title searches and examinations, title insurance policies and commitments and extensions therefor, UCC and chattel lien searches, and similar data and assurances with

respect to title as Lender may deem reasonably necessary either to prosecute any foreclosure action or to evidence to bidders at any sale which may be had pursuant to any foreclosure decree the true condition of the title to or the value of the Mortgaged Property, and agent’s compensation) incurred by Lender after the occurrence of any Event of Default and/or in pursuing the rights, powers and remedies contained in this Mortgage shall be immediately due and payable by Mortgagor, with interest thereon from the date incurred at the default rate specified in the Credit Agreement, and shall be added to the indebtedness secured by this Mortgage.

Section 4.4 Restoration of Position. In case Lender shall have proceeded to enforce any right under this Mortgage by foreclosure, sale, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then, and in every such case, Mortgagor and Lender shall be restored to their former positions and rights hereunder with respect to the Mortgaged Property subject to the lien hereof.

Section 4.5 Marshalling. Mortgagor, for itself and on behalf of all Persons which may claim under Mortgagor, hereby waives all requirements of law relating to the marshalling of assets, if any, which would be applicable in connection with the enforcement by Lender of its remedies for an Event of Default hereunder, absent this waiver. Lender shall not be required to sell or realize upon any portion of the Mortgaged Property before selling or realizing upon any other portion thereof.

Section 4.6 Waivers. No waiver of any provision hereof shall be implied from the conduct of the parties. Any such waiver must be in writing and must be signed by the party against which such waiver is sought to be enforced. The waiver or release of any breach of the provisions set forth herein to be kept and performed shall not be a waiver or release of any preceding or subsequent breach of the same or any other provision. No receipt of partial payment after acceleration of any of the Obligations shall waive the acceleration. No payment by Mortgagor or receipt by Lender of a lesser amount than the full amount secured hereby shall be deemed to be other than on account of the sums due and payable hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Lender may accept any check or payment without prejudice to Lender’s right to recover the balance of such sums or to pursue any other remedy provided in this Mortgage. The consent by Lender to any matter or event requiring such consent shall not constitute a waiver of the necessity for such consent to any subsequent matter or event.

Section 4.7 Lender’s Right to Cure Defaults. If Mortgagor shall fail to comply with any of the terms of the Loan Documents with respect to the procuring of insurance, the payment of taxes, assessments and other charges, the keeping of the Mortgaged Property in repair, or any other term contained herein or in any of the other Loan Documents, Lender may make advances to perform the same without releasing Mortgagor from any of the Obligations. Mortgagor agrees to repay upon demand all sums so advanced and all sums expended by Lender in connection with such performance, including without limitation attorneys’ fees, with interest at the default rate specified in the Credit Agreement from the dates such advances are made, and all sums so advanced and/or expenses incurred, with interest, shall be secured hereby, but no such advance and/or incurring of expense by Lender, shall be deemed to relieve Mortgagor from any default

hereunder or under any of the other Loan Documents, or to release Mortgagor from any of the Obligations.

Section 4.8 Suits and Proceedings. Lender shall have the power and authority, upon prior notice to Mortgagor, to institute and maintain any suits and proceedings as Lender may deem advisable to (i) prevent any impairment of the Mortgaged Property by any act which may be unlawful or by any violation of this Mortgage, (ii) preserve or protect its interest in the Mortgaged Property, or (iii) restrain the enforcement of or compliance with any legislation or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid, if, in the sole opinion of Lender, the enforcement of or compliance with such enactment, rule or order might impair the security hereunder or be prejudicial to Lender’s interest.

ARTICLE V
MISCELLANEOUS

Section 5.1 Binding Effect; Survival; Number; Gender. This Mortgage shall be binding on and inure to the benefit of the parties hereto, and their respective heirs, legal representatives, successors and assigns. All agreements, representations and warranties contained herein or otherwise heretofore made by Mortgagor to Lender shall survive the execution, delivery and foreclosure hereof. The singular of all terms used herein shall include the plural, the plural shall include the singular, and the use of any gender herein shall include all other genders, where the context so requires or permits.

Section 5.2 Severability. The unenforceability or invalidity of any provision of this Mortgage as to any person or circumstance shall not render that provision unenforceable or invalid as to any other person or circumstance.

Section 5.3 Notices. Except when telephonic notice is expressly authorized by this Mortgage, any notice or other communication to any party in connection with this Mortgage shall be in writing and shall be sent by manual delivery, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified below, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by facsimile transmission, from the first Banking Day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed. Notices shall be given to or made upon the respective parties hereto at their respective addresses set forth below:


	If to Mortgagor:	Electromed, Inc.
		500 6th Avenue NW
		New Prague, MN 56071
		Attn: Robert D. Hansen
		Telecopy No. 952-758-1941


	If to Lender:	U.S. Bank National Association
		800 Second Avenue South
		Minneapolis, MN 55402
		BC-MN-H03W
		Attention: Daniel Miller
		Telecopy No. 612-303-2252

Either party may change its address for notices by a notice given not less than five (5) Banking days prior to the effective date of the change.

Section 5.4 Governing Law and Construction. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS MORTGAGE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS. Whenever possible, each provision of this Mortgage and the other Loan Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Mortgage, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Mortgage, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto.

Section 5.5 Consent to Jurisdiction. AT THE OPTION OF LENDER, THIS MORTGAGE MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY; AND MORTGAGOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT MORTGAGOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS MORTGAGE, LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.

Section 5.6 Waiver of Jury Trial. EACH OF MORTGAGOR AND LENDER IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS MORTGAGE OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

Section 5.7 Effect. This Mortgage is in addition and not in substitution for any other guarantees, covenants, obligations or other rights now or hereafter held by Lender from any other person or entity in connection with the Obligations.

Section 5.8 Assignability. Lender shall have the right to assign this Mortgage, in whole or in part, or sell participation interests herein, to any person obtaining an interest in the Obligations.

Section 5.9 Headings. Headings of the Sections of this Mortgage are inserted for convenience only and shall not be deemed to constitute a part hereof.

Section 5.10 Fixture Filing. This instrument shall be deemed to be a Fixture Filing within the meaning of the Minnesota Uniform Commercial Code, and for such purpose, the following information is given:


a.	Name and address of Debtor:	Electromed, Inc. 500 6th Avenue NW New Prague, MN 56071 Attention: Robert D. Hansen

b.	Type of Organization:	Mortgagor is a corporation.

c.	Jurisdiction of Organization:	Mortgagor is organized under the laws of Minnesota.

d.	Organizational ID No.:	Mortgagor’s organizational ID is 7O-794.

e.	Name and Address of Secured Party:	U.S. Bank National Association 800 Second Avenue South Minneapolis, MN 55402

f.	Description of the types (or items) of property covered by this Financing Statement:	See Pages 2 and 3 hereof.

g	Legal Description of Land to which the collateral is attached or upon which is or will be fixtures:	See Exhibit A hereto.

Some of the above-described collateral is or is to become fixtures upon the above-described real estate, which Mortgagor owns in fee, and this Financing Statement is to be filed in the public real estate records. The above-stated address of Secured Party is the address from which information concerning the security interest may be obtained.

Section 5.11 Revolving Credit . The maximum principal indebtedness secured by this Mortgage is $1,520,000 (“Maximum Principal Amount”), a portion of which, for the purposes of Minnesota Statutes § 287.05, subd. 3, and Section 507.324, is and shall be a revolving line of credit under which advances, payments and readvances may be made from time to time, in accordance with the Loan Documents (subject always to the provisions of the Credit Agreement). The maximum amount of said line of credit that may be secured by this Mortgage at any one time is the Maximum Principal Amount. Mortgagor hereby agrees that, if the outstanding, unpaid balance of the revolving line of credit under the Loan Documents is ever reduced to zero, or if at any time no property is subject to the lien and/or security interest of this Mortgage, novation shall not be deemed to have occurred, and the lien and security interest hereof shall be deemed to remain in full force and effect to secure any future advances made under said revolving line of credit and against any property thereafter added to the Mortgaged Property by amendment hereof.

Section 5.12 MRT . Mortgagor agrees to pay upon demand, or upon demand to promptly reimburse Mortgagee for the payment of, the amount of the mortgage registry tax payable with respect to and upon the recording of this Mortgage, and of any amendment or modification hereof in accordance with Minnesota Statutes, Chapter 287.

[The remainder of this page has been left blank intentionally.]

IN WITNESS WHEREOF, Mortgagor has executed this Mortgage as of the date first written above.


		ELECTROMED, INC.

		By:
		Name:	Robert D. Hansen
		Title:	Chief Executive Officer

STATE OF MINNESOTA	)
	) ss.
COUNTY OF HENNEPIN	)

The foregoing instrument was acknowledged before me December 9, 2009, by Robert D. Hansen, the Chief Executive Officer of Electromed, Inc., a Minnesota corporation, on behalf of the corporation.



	Notary Public

[Signature Page to Mortgage, Security Agreement, Assignment of Leases and Rents
and Fixture Financing Statement]

EXHIBIT A

Legal Description

Lot 1, Block 1, New Prague Business Park 9 ^th Addition, Scott County, Minnesota.

Together with the benefit of the easement for utility purposes dated April 30, 2008, filed May 5, 2008, as Document No. A799662.

Together with the benefit of the easement for ingress and egress dated August 29, 2008, filed November 3, 2009 as Document No. A839579.

Exhibit 10.9

GUARANTY

THIS GUARANTY, dated as of December 9, 2009, is made and given by ELECTROMED FINANCIAL, LLC, a limited liability company organized under the laws of the State of Minnesota (the “Guarantor”), in favor of U.S. BANK NATIONAL ASSOCIATION, a national banking association (the “Lender”).

RECITALS

A. Electromed, Inc., a Minnesota corporation (the “Borrower”), and the Lender have entered into a Credit Agreement dated as of December 9, 2009 (as the same may hereafter be amended, restated, or otherwise modified from time to time, the “Credit Agreement”) pursuant to which the Lender has agreed to extend to the Borrower certain credit accommodations consisting of a revolving facility and two term loan facilities.

B. It is a condition precedent to the obligation of the Lender to extend credit accommodations pursuant to the terms of the Credit Agreement that this Guaranty be executed and delivered by the Guarantor.

C. The Guarantor is the majority-owned subsidiary of the Borrower.

D. The Guarantor expects to derive benefits from the extension of credit accommodations to the Borrower by the Lender and find Guarantor it advantageous, desirable and in its their best interests to execute and deliver this Guaranty to the Lender.

NOW, THEREFORE, In consideration of the credit accommodations to be extended to the Borrower and for other good and valuable consideration, the Guarantor hereby covenants and agrees with the Lender as follows:

Section 1. Defined Terms . As used in this Guaranty, the following terms shall have the meaning indicated:


	“ Borrower ” shall have the meaning indicated in Recital A.

	“ Credit Agreement ” shall have the meaning indicated in Recital A.

	“ Guarantor ” shall have the meaning indicated in the opening paragraph hereof.

	“ Lender ” shall have the meaning indicated in the opening paragraph hereof.

	“ Obligations ” shall mean (a) all indebtedness, liabilities and obligations of the Borrower to the Lender of every kind, nature or description under the Credit Agreement, including the Borrower’s obligation on any promissory note or notes under the Credit Agreement and any note or notes hereafter issued in substitution or replacement thereof, (b) any and all liabilities and obligations of the Borrower to the Lender of every kind, nature and description, whether direct or indirect or hereafter acquired by the Lender from any Person, absolute or contingent, regardless of how such liabilities arise or by what agreement or instrument they may be evidenced, and (c) in all of the foregoing


	cases whether due or to become due, and whether now existing or hereafter arising or incurred.

	“ Person ” shall mean any individual, corporation, partnership, limited partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity.

Section 2. The Guaranty . Subject always to the following Section, the Guarantor hereby absolutely and unconditionally guarantees to the Lender the payment when due (whether at a stated maturity or earlier by reason of acceleration or otherwise) and performance of the Obligations.

Section 3. Limitation; Insolvency Laws . As used in this Section: (a) the term “Applicable Insolvency Laws” means the laws of the United States of America or of any State, province, nation or other governmental unit relating to bankruptcy, reorganization, arrangement, adjustment of debts, relief of debtors, dissolution, insolvency, fraudulent transfers or conveyances or other similar laws (including, without limitation, 11 U. S. C. §547, §548, §550 and other “avoidance” provisions of Title 11 of the United Stated Code) as applicable in any proceeding in which the validity and/or enforceability of this Guaranty or any Specified Lien is in issue; and (b) “Specified Lien” means any security interest, mortgage, lien or encumbrance securing this Guaranty, in whole or in part. Notwithstanding any other provision of this Guaranty, if, in any proceeding, a court of competent jurisdiction determines that this Guaranty or any Specified Lien would, but for the operation of this Section, be subject to avoidance and/or recovery or be unenforceable by reason of Applicable Insolvency Laws, this Guaranty and each such Specified Lien shall be valid and enforceable only to the maximum extent that would not cause this Guaranty or such Specified Lien to be subject to avoidance, recovery or unenforceability. To the extent that any payment to, or realization by, the Lender on the guaranteed Obligations exceeds the limitations of this Section and is otherwise subject to avoidance and recovery in any such proceeding, the amount subject to avoidance shall in all events be limited to the amount by which such actual payment or realization exceeds such limitation, and this Guaranty as limited shall in all events remain in full force and effect and be fully enforceable against the Guarantor This Section is intended solely to reserve the rights of the Lender hereunder against the Guarantor in such proceeding to the maximum extent permitted by Applicable Insolvency Laws and neither the Guarantor the Borrower, any other guarantor of the Obligations nor any Person shall have any right, claim or defense under this Section that would not otherwise be available under Applicable Insolvency Laws in such proceeding.

Section 4. Continuing Guaranty . This Guaranty is an absolute, unconditional and continuing guaranty of payment and performance of the Obligations, and the obligations of the Guarantor. hereunder shall not be released, in whole or in part, by any action or thing which might, but for this provision of this Guaranty, be deemed a legal or equitable discharge of a surety or guarantor, other than irrevocable payment and performance in full of the Obligations. No notice of the Obligations to which this Guaranty may apply, or of any renewal or extension thereof need be given to the Guarantor and none of the foregoing acts shall release the Guarantor from liability hereunder. The Guarantor hereby expressly waives (a) demand of payment, presentment, protest, notice of dishonor, nonpayment or nonperformance on any and all forms of

the Obligations; (b) notice of acceptance of this Guaranty and notice of any liability to which it may apply; (c) all other notices and demands of any kind and description relating to the Obligations now or hereafter provided for by any agreement, statute, law, rule or regulation; and (d) any and all defenses of the Borrower pertaining to the Obligations except for the defense of discharge by payment. The Guarantor shall not be exonerated with respect to the Guarantor’s liabilities under this Guaranty by any act or thing except irrevocable payment and performance of the Obligations, it being the purpose and intent of this Guaranty that the Obligations constitute the direct and primary obligations of the Guarantor and that the covenants, agreements and all obligations of the Guarantor hereunder be absolute, unconditional and irrevocable. The Guarantor shall be and remain liable for any deficiency remaining after foreclosure of any mortgage, deed of trust or security agreement securing all or any part of the Obligations, whether or not the liability of the Borrower or any other Person for such deficiency is discharged pursuant to statute, judicial decision or otherwise. The acceptance of this Guaranty by the Lender is not intended and does not release any liability previously existing of any guarantor or surety of any indebtedness of the Borrower to the Lender.

Section 5. Other Transactions . The Lender is expressly authorized (a) to exchange, surrender or release with or without consideration any or all collateral and security which may at any time be placed with it by the Borrower or by any other Person, or to forward or deliver any or all such collateral and security directly to the Borrower for collection and remittance or for credit, or to collect the same in any other manner without notice to the Guarantor and (b) to amend, modify, extend or supplement the Credit Agreement, any note or other instrument evidencing the Obligations or any part thereof and any other agreement with respect to the Obligations, waive compliance by the Borrower or any other Person with the respective terms thereof and settle or compromise any of the Obligations without notice to the Guarantor and without in any manner affecting the absolute liabilities of the Guarantor hereunder. No invalidity, irregularity or unenforceability of all or any part of the Obligations or of any security therefor or other recourse with respect thereto shall affect, impair or be a defense to this Guaranty. The liabilities of the Guarantor hereunder shall not be affected or impaired by any failure, delay, neglect or omission on the part of the Lender to realize upon any of the Obligations of the Borrower to the Lender, or upon any collateral or security for any or all of the Obligations, nor by the taking by the Lender of (or the failure to take) any other guaranty or guaranties to secure the Obligations, nor by the taking by the Lender of (or the failure to take or the failure to perfect its security interest in or other lien on) collateral or security of any kind. No act or omission of the Lender, whether or not such action or failure to act varies or increases the risk of, or affects the rights or remedies of the Guarantor shall affect or impair the obligations of the Guarantor hereunder. The Guarantor acknowledges that this Guaranty is in effect and binding without reference to whether this Guaranty is signed by any other Person or Persons, that possession of this Guaranty by the Lender shall be conclusive evidence of due delivery hereof by the Guarantor and that this Guaranty shall continue in full force and effect, both as to the Obligations then existing and/or thereafter created, notwithstanding the release of or extension of time to any other guarantor of the Obligations or any part thereof.

Section 6. Actions Not Required . The Guarantor hereby waives any and all right to cause a marshalling of the assets of the Borrower or any other action by any court or other governmental body with respect thereto or to cause the Lender to proceed against any security for the Obligations or any other recourse which the Lender may have with respect thereto and

further waives any and all requirements that the Lender institute any action or proceeding at law or in equity, or obtain any judgment, against the Borrower or any other Person, or with respect to any collateral security for the Obligations, as a condition precedent to making demand on or bringing an action or obtaining and/or enforcing a judgment against, the Guarantor upon this Guaranty. The Guarantor further acknowledges that time is of the essence with respect to the Guarantor’s obligations under this Guaranty. Any remedy or right hereby granted which shall be found to be unenforceable as to any Person or under any circumstance, for any reason, shall in no way limit or prevent the enforcement of such remedy or right as to any other Person or circumstance, nor shall such unenforceability limit or prevent enforcement of any other remedy or right hereby granted.

Section 7. No Subrogation . Notwithstanding any payment or payments made by the Guarantor hereunder, the Guarantor waives all rights of subrogation to any of the rights of the Lender against the Borrower or any other Person liable for payment of any of the Obligations or any collateral security or guaranty or right of offset held by the Lender for the payment of the Obligations, and the Guarantor waives all rights to seek any recourse to or contribution or reimbursement from the Borrower or any other Person liable for payment of any of the Obligations in respect of payments made by the Guarantor hereunder.

Section 8. Application of Payments . Any and all payments upon the Obligations made by the Guarantor or by any other Person, and/or the proceeds of any or all collateral or security for any of the Obligations, may be applied by the Lender on such items of the Obligations as the Lender may elect.

Section 9. Recovery of Payment . If any payment received by the Lender and applied to the Obligations is subsequently set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of the Borrower or any other obligor), the Obligations to which such payment was applied shall for the purposes of this Guaranty be deemed to have continued in existence, notwithstanding such application, and this Guaranty shall be enforceable as to such Obligations as fully as if such application had never been made. References in this Guaranty to amounts “irrevocably paid” or to “irrevocable payment” refer to payments that cannot be set aside, recovered, rescinded or required to be returned for any reason.

Section 10. Borrower’s Financial Condition . The Guarantor is familiar with the financial condition of the Borrower, and the Guarantor has executed and delivered this Guaranty based on the Guarantor’s own judgment and not in reliance upon any statement or representation of the Lender. The Lender shall have no obligation to provide the Guarantor with any advice whatsoever or to inform the Guarantor at any time of the Lender’s actions, evaluations or conclusions on the financial condition or any other matter concerning the Borrower.

Section 11. Remedies . All remedies afforded to the Lender by reason of this Guaranty are separate and cumulative remedies and it is agreed that no one of such remedies, whether or not exercised by the Lender, shall be deemed to be in exclusion of any of the other remedies available to the Lender and no one of such remedies shall in any way limit or prejudice any other legal or equitable remedy which the Lender may have hereunder and with respect to the

Obligations. Mere delay or failure to act shall not preclude the exercise or enforcement of any rights and remedies available to the Lender.

Section 12. Bankruptcy of the Borrower . The Guarantor expressly agrees that the liabilities and obligations of the Guarantor under this Guaranty shall not in any way be impaired or otherwise affected by the institution by or against the Borrower or any other Person of any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or any other similar proceedings for relief under any bankruptcy law or similar law for the relief of debtors and that any discharge of any of the Obligations pursuant to any such bankruptcy or similar law or other law shall not diminish, discharge or otherwise affect in any way the obligations of the Guarantor under this Guaranty, and that upon the institution of any of the above actions, such obligations shall be enforceable against the Guarantor.

Section 13. Costs and Expenses . The Guarantor will pay or reimburse the Lender on demand for all reasonable out-of-pocket expenses paid or incurred by the Lender, including in each case filing and recording costs and fees, charges and disbursements of outside counsel to the Lender (determined on the basis of such counsel’s generally applicable rates, which may be higher than the rates such counsel charges the Lender in certain matters) and/or the allocated costs of in-house counsel incurred from time to time, arising out of or in connection with the collection and enforcement of this Guaranty against the Guarantor or arising out of or in connection with any failure of the Guarantor to fully and timely perform the obligations of the Guarantor hereunder.

Section 14. Waivers and Amendments . This Guaranty can be waived, modified, amended, terminated or discharged only explicitly in a writing signed by the Lender. A waiver so signed shall be effective only in the specific instance and for the specific purpose given.

Section 15. Notices . Any notice or other communication to any party in connection with this Guaranty shall be in writing and shall be sent by manual delivery, telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex or facsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed.

Section 16. Guarantor Acknowledgements . The Guarantor hereby acknowledges that (a) counsel has advised the Guarantor in the negotiation, execution and delivery of this Guaranty, (b) the Lender has no fiduciary relationship to the Guarantor the relationship being solely that of debtor and creditor, and (c) no joint venture exists between the Guarantor and the Lender.

Section 17. Representations and Warranties . Electromed Financial, LLC hereby represents and warrants to the Lender that it is a limited liability company organized, validly existing and in good standing under the laws of the State of Minnesota and has the power and authority and the legal right to own and operate its properties and to conduct the business in which it is currently engaged. Electromed Financial, LLC further represents and warrants to the Lender that:


	(a) It has the power and authority and the legal right to execute and deliver, and to perform its obligations under, this Guaranty and has taken all necessary action required by its form of organization to authorize such execution, delivery and performance.

	(b) This Guaranty constitutes its legal, valid and binding obligation enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

	(c) The execution, delivery and performance of this Guaranty will not (i) violate any provision of any law, statute, rule or regulation or any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to it, (ii) violate or contravene any provision of its organizational documents, or (iii) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument to which it is a party or by which it or any of its properties may be bound or result in the creation of any lien thereunder. It is not in default under or in violation of any such law, statute, rule or regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, loan or credit agreement or other agreement, lease or instrument in any case in which the consequences of such default or violation could have a material adverse effect on its business, operations, properties, assets or condition (financial or otherwise).

	(d) No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on its part to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, this Guaranty.

	(e) There are no actions, suits or proceedings pending or, to its knowledge, threatened against or affecting it or any of its properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which, if determined adversely to it, would have a material adverse effect on its business, operations, property or condition (financial or otherwise) or on its ability to perform its obligations hereunder.

	(f) It expects to derive benefits from the transactions resulting in the creation of the Obligations. The Lender may rely conclusively on the continuing warranty, hereby made, that it continues to be benefited by the Lender’s extension of credit accommodations to the Borrower and the Lender shall have no duty to inquire into or confirm the receipt of any such benefits, and this Guaranty shall be effective and enforceable by the Lender without regard to the receipt, nature or value of any such benefits.

Section 18. Continuing Guaranty; Assignments under Credit Agreement . This Guaranty shall (a) remain in full force and effect until irrevocable payment in full of the Obligations and the expiration of the obligations, if any, of the Lender to extend credit accommodations to the Borrower, (b) be binding upon the Guarantor, its successors and assigns and (c) inure to the benefit of, and be enforceable by, the Lender and its successors, transferees, and assigns. Without limiting the generality of the foregoing clause (c), the Lender may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement to any other Persons to the extent and in the manner provided in the Credit Agreement and may similarly transfer all or any portion of its rights under this Guaranty to such Persons.

Section 19. Reaffirmation . The Guarantor agrees that when so requested by the Lender from time to time it will promptly execute and deliver to the Lender a written reaffirmation of this Guaranty in such form as the Lender may require.

Section 20. Revocation . Notwithstanding any other provision hereof, the Guarantor may revoke this Guaranty prospectively as to future transactions by written notice to that effect actually received by the Lender. No such revocation shall release, impair or affect in any manner any liability hereunder with respect to Obligations created, contracted, assumed or incurred prior to receipt by the Lender of written notice of revocation, or Obligations created, contracted, assumed or incurred after receipt of such notice pursuant to any contract entered into by the Lender prior to receipt of such notice, or any renewals or extensions thereof, theretofore or thereafter made, or any interest accrued or accruing on such Obligations, or all other costs, expenses and attorneys’ fees arising from such Obligations.

Section 21. Governing Law and Construction . THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS GUARANTY SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS. Whenever possible, each provision of this Guaranty and any other statement, instrument or transaction contemplated hereby or relating hereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Guaranty or any other statement, instrument or transaction contemplated hereby or relating hereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty or any other statement, instrument or transaction contemplated hereby or relating hereto.

Section 22. Consent to Jurisdiction . AT THE OPTION OF THE LENDER, THIS GUARANTY MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE GUARANTOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE GUARANTOR COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS GUARANTY, THE LENDER AT ITS OPTION SHALL BE

ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.

Section 23. Waiver of Jury Trial . EACH OF THE GUARANTOR AND THE LENDER, BY ITS ACCEPTANCE OF THIS GUARANTY, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY.

Section 24. Counterparts . This Guaranty may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument.

Section 25. General . All representations and warranties contained in this Guaranty or in any other agreement between the Guarantor and the Lender shall survive the execution, delivery and performance of this Guaranty and the creation and payment of the Obligations. Captions in this Guaranty are for reference and convenience only and shall not affect the interpretation or meaning of any provision of this Guaranty.

[The remainder of this page has been left blank intentionally.]

IN WITNESS WHEREOF, the Guarantor has executed this Guaranty as of the date first above written.


	GUARANTOR:

	ELECTROMED FINANCIAL, LLC


	By
	Name: Robert D. Hansen
	Title: Chief Manager and Chief Executive Officer

Address:

500 Sixth Avenue NW
New Prague, MN 56071
ATTN: Robert D. Hansen
Fax Number: 952-758-1941

Address for the Lender :

U.S. Bank National Association
BC-MN-H03W
800 Nicollet Mall
Minneapolis, MN 55402-4302
ATTN: Daniel J. Miller
Fax Number: 612-303-2252

[Signature Page to Guaranty]

Exhibit 10.10

ENVIRONMENTAL AND ADA INDEMNIFICATION AGREEMENT

This ENVIRONMENTAL AND ADA INDEMNIFICATION AGREEMENT (this “Agreement,” which term shall include any amendment, modification, supplement, extension, renewal, replacement, or restatement hereof)is made as of December 9, 2009, by ELECTROMED, INC., a corporation organized under the laws of the State of Minnesota (“Mortgagor”), in favor of U.S. BANK NATIONAL ASSOCIATION, a national banking association (“Lender”).

RECITALS

A. Lender and Mortgagor have entered into that certain Credit Agreement of even date herewith (the “Credit Agreement,” which term shall include any amendment, modification, supplement, extension, renewal, replacement, or restatement thereof), pursuant to which Lender has agreed to extend certain credit accommodations to Mortgagor, which are secured in part by a Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement of even date herewith (the “Mortgage,” which term shall include any amendment, modification, supplement, extension, renewal, replacement, or restatement thereof) pertaining to certain land described in the Mortgage and improvements thereon (collectively the “Property”) owned by Mortgagor and located in Scott County, Minnesota.

B. Lender has refused to extend the credit accommodations to Mortgagor unless this Agreement is executed and delivered by Mortgagor.

NOW, THEREFORE, in consideration of Lender’s agreement to extend certain credit accommodations to Mortgagor, Mortgagor hereby warrants and represents to, and covenants and agrees with, Lender as follows:

1. Definitions . As used in this Agreement, the following terms shall have the following meanings:


	(a) “Accessibility Regulation” means a Law relating to accessibility of facilities or properties for disabled, handicapped and/or physically challenged persons, including, without limitation, the Americans With Disabilities Act of 1991, as amended.

	(b) “Environmental Regulation” means a Law relating to the environment and/or to human health or safety, or governing, regulating or pertaining to the generation, treatment, storage, handling, transportation, use or disposal of any Hazardous Substance.

	(c) “Hazardous Substance” means any substance or material defined in or governed or regulated by any Environmental Regulation as a dangerous, toxic or hazardous pollutant, contaminant, chemical, waste, material or substance, and also expressly includes urea-formaldehyde, polychlorinated biphenyls, dioxin, radon, lead-based paint, asbestos, asbestos containing materials, nuclear fuel or waste, radioactive materials, explosives, carcinogens and petroleum products, including but not limited to crude oil or any fraction thereof, natural gas, natural gas liquids, gasoline and synthetic gas, and any other waste, material, substance, pollutant or contaminant the presence of which on, in,


	about or under the Property would subject the owner or operator thereof to any damages, penalties, fines or liabilities under any applicable Environmental Regulation.

	(d) “Law” means any federal, state or local law, statute, code, ordinance, rule, regulation or requirement.

Other capitalized terms used in this Agreement but not defined herein shall have the meanings assigned to such terms in the Credit Agreement.

2. Warranties and Representations . Mortgagor warrants and represents to Lender that to Mortgagor’s knowledge, and except as otherwise described in documents identified on Exhibit A attached hereto:


	(a) There is not located on, in, about or under the Property any Hazardous Substances except for Hazardous Substances of the type ordinarily used, stored or manufactured in connection with the operation of the Property as it is presently operated, and such existing Hazardous Substances have been and are used, stored and manufactured in compliance with all Environmental Regulations. The Property is operated as manufacturing facility.

	(b) The Property is not presently used, and has not in the past been used, as a landfill, dump, disposal facility or gasoline station, or for industrial, manufacturing or military purposes, or for the storage, generation, production, manufacture, processing, treatment, disposal, handling, transportation or deposit of any Hazardous Substances.

	(c) There has not in the past been, and no present threat now exists of, a spill, discharge, emission or release of a Hazardous Substance in, upon, under, over or from the Property or from any other property which would have an impact on the Property.

	(d) The Property is in compliance with, and there are no past or present investigations, administrative proceedings, litigation, regulatory hearings or other actions completed, proposed, threatened or pending, alleging noncompliance with or violation of, any Environmental Regulations respecting the Property, or relating to any required environmental permits covering the Property.

	(e) Mortgagor has disclosed to Lender all reports and investigations commissioned by or in the possession or control of Mortgagor and relating to Hazardous Substances and the Property.

	(f) There are not now, nor have there ever been, any above ground or underground storage tanks located in or under the Property. All storage tanks identified on Exhibit A have been registered and/or permitted as required by Environmental Regulations, and evidence of such registration and/or permitting has been given to Lender. There are no wells on or under the Property.

3. Covenants and Agreements . Mortgagor covenants and agrees as follows:


	(a) Except for substances normally used for maintenance or operation of the Property which are used, stored and disposed of in accordance with all applicable Environmental Regulations, Mortgagor shall not, nor shall it permit others to, place, store, locate, generate, produce, create, process, treat, handle, transport, incorporate, discharge, emit, spill, release, deposit or dispose of any Hazardous Substance in, upon, under, over or from the Property. Mortgagor shall cause all Hazardous Substances found on or under the Property, which are not permitted under the foregoing sentence, to be properly removed therefrom and properly disposed of at Mortgagor’s cost and expense. Mortgagor shall not install or permit to be installed any underground storage tank on or under the Property. Mortgagor shall give written notice to Lender prior to a change in the operations on the Property.

	(b) In the event that (i) Lender reasonably believes that a violation of an Environmental Regulation may have occurred in connection with the Property; (ii) Lender receives notice from Mortgagor or otherwise has knowledge that an event described in subparagraph 3(d) has occurred; (iii) Lender reasonably believes that a representation or warranty of Mortgagor in Paragraph 2 was untrue in any material respect when made or has become untrue in any material respect; (iv) Lender receives notice from Mortgagor or otherwise has knowledge of a change in operations on the Property and Lender reasonably believes that the new operations may entail the presence of more or different Hazardous Substances on the Property; or (v) Lender reasonably believes that Hazardous Substances are present on the Property which were not previously known by Lender to be present on the Property; then, in any such event, Mortgagor shall at its cost obtain and deliver to Lender an environmental review, audit, assessment and/or report relating to the Property or shall have any previously delivered materials updated and/or amplified, by an engineer or scientist selected by Mortgagor and acceptable to Lender; if Mortgagor fails to do so within forty-five (45) days after such request is made, Lender shall have the right to do so, in which event Mortgagor shall reimburse Lender for the cost incurred by Lender in doing so within ten (10) days following demand therefor by Lender.

	(c) Mortgagor shall comply with all Accessibility Regulations which are applicable to the Property. In the event that (i) Lender reasonably believes that a material violation of an Accessibility Regulation may have occurred in connection with the Property; or (ii) Lender receives notice from Mortgagor or otherwise has knowledge that an event described in subparagraph 3(d) and pertaining to Accessibility Regulations has occurred; then, in any such event, Mortgagor shall at its cost obtain and deliver to Lender an Accessibility Regulation compliance report relating to the Property or shall have any previously delivered materials updated and/or amplified, by a qualified consultant selected by Mortgagor and acceptable to Lender; if Mortgagor fails to do so within forty- five (45) days after such request is made, Lender shall have the right to do so, in which event Mortgagor shall reimburse Lender for the cost incurred by Lender in doing so within ten (10) days following demand therefor by Lender.

	(d) Mortgagor shall, promptly after obtaining actual knowledge thereof, give notice to Lender of: (i) any activity in violation of any applicable Environmental Regulations relating to the Property, (ii) any governmental or regulatory actions instituted or


	threatened under any Environmental Regulations or any Accessibility Regulations affecting the Property, (iii) all claims made or threatened by any third party against the Mortgagor or the Property relating to any Hazardous Substance or a violation of any Environmental Regulations or any Accessibility Regulations, (iv) discovery by Mortgagor of any occurrence or condition on or under the Property or on or under any real property adjoining or in the vicinity of the Property which could subject Mortgagor, Lender or the Property to a claim under any Environmental Regulations or Accessibility Regulations. Any such notice shall include copies of any written materials received by Mortgagor.

	(e) Any investigation or any remedial or corrective action taken with respect to the Property shall be done under the supervision of a qualified consultant, engineer, or scientist acceptable to Lender who shall, at Mortgagor’s cost and at the completion of such investigation or action, provide a written report of such investigation or action to Lender. Mortgagor shall also provide Lender with a copy of any interim reports prepared in connection with any such investigation or action.

	(f) If the Property has, or is suspected to have, asbestos or asbestos containing materials (“ACM”) which, due to its condition or location or due to any planned building renovation or demolition, is recommended to be abated by repair, encapsulation, removal or other action, Mortgagor shall promptly carry out the recommended abatement action. If the recommended abatement includes removal of ACM, Mortgagor shall cause the same to be removed and disposed of offsite by a licensed and experienced asbestos removal contractor, all in accordance with Environmental Regulations. Upon completion of the recommended abatement action, Mortgagor shall deliver to Lender a certificate, signed by an officer of Mortgagor and the consultant overseeing the abatement action, certifying to Lender that the work has been completed in compliance with all applicable laws, ordinances, codes and regulations (including without limitation those regarding notification, removal and disposal) and that no airborne fibers beyond permissible exposure limits remain on site. Mortgagor shall develop and implement an Operations and Maintenance Program (as contemplated by Environmental Protection Agency guidance document entitled “Managing Asbestos In Place; A Building Owner’s Guide to Operations and Maintenance Programs for Asbestos-Containing Materials”) for managing in place any ACM at or in the Property. Mortgagor shall deliver a complete copy of such Operations and Maintenance Program to Lender and certify to Lender that such Program has been implemented.

	(g) After an Event of Default (as defined in the Credit Agreement), Lender shall have the right, after ten (10) days’ prior written notice to Mortgagor, to have an environmental review, audit, assessment, testing program and/or report with respect to the Property performed or prepared by an environmental engineering firm selected by Lender. Mortgagor shall reimburse Lender for the cost incurred for each such action within ten (10) days following demand therefor by Lender.

4. Indemnity . Mortgagor shall indemnify Lender, any participant of Lender, its and their directors, officers, employees, agents, contractors, licensees, invitees, and the respective heirs, legal representatives, successors and assigns of all such persons and parties (hereinafter

collectively referred to as “Indemnified Parties”) against, shall hold the Indemnified Parties harmless from, and shall reimburse the Indemnified Parties for, any and all loss, damage, liability, cost and expense directly or indirectly incurred by the Indemnified Parties, including reasonable attorneys’ and consultants’ fees, resulting from: (a) the presence or discovery of any Hazardous Substance in, upon, under or over, or emanating from, the Property, whether or not Mortgagor is responsible therefor, and whether or not it was placed, located, deposited or released by Mortgagor; and/or (b) any violation of any Environmental Regulation or any Accessibility Regulation. Mortgagor agrees that the Indemnified Parties shall have no responsibility for, and Mortgagor hereby releases the Indemnified Parties from responsibility for, damage or injury to human health, property, the environment or natural resources caused by Hazardous Substances and for abatement, clean-up, detoxification, removal or disposal of, or otherwise with respect to, Hazardous Substances. The indemnity contained in this paragraph 4 shall be deemed continuing for the benefit of the Indemnified Parties, including any purchaser at a foreclosure or other sale under the Mortgage, any transferee of the title from Lender, and any subsequent owner of the Property, and shall survive the satisfaction or release of the Mortgage, any foreclosure of or other sale under the Mortgage and/or any acquisition of title to the Property or any part thereof by Lender, or anyone claiming by, through or under Lender, by deed in lieu of foreclosure or otherwise, and also shall survive the repayment or any other satisfaction of the Obligations. Notwithstanding the foregoing, the indemnity contained in this paragraph 4 shall not apply with respect to any loss, damage, liability, cost or expense which Mortgagor proves by a preponderance of the evidence was caused solely by or resulted solely from any act or omission of any Person (as defined in the Credit Agreement), other than the Mortgagor or an agent, employee, invitee or contractor of the Mortgagor, which occurred after Lender or anyone claiming by, through or under Lender acquired title to the Property by foreclosure of the Mortgage or deed in lieu of foreclosure or otherwise and control of the Property. Any amounts covered by the foregoing indemnification shall bear interest from the date incurred at the default rate set forth in the Credit Agreement), and shall be payable on demand. Mortgagor agrees that its obligations under this Agreement are separate from, independent of, and in addition to its obligations under the Mortgage and other documents which secure the Obligations.

5. Liability . The liability of Mortgagor under this Agreement shall not be subject to any limitations on liability set forth in the Mortgage or any other document evidencing or securing the Obligations. Without limitation, the obligations and liability of Mortgagor under this Agreement shall in no way be waived, released, discharged, reduced, mitigated or otherwise affected by Lender’s extending credit accommodations with knowledge of the matters described in documents identified on Exhibit A attached hereto, or of the presence of any Hazardous Substance on, in, about or under the Property or any property adjoining or in the vicinity of the Property, or of any violation of any Environmental Regulation or any Accessibility Regulation or any condition or state of facts or circumstances which with notice or lapse of time or both might ripen into such a violation, or by any neglect, delay or forbearance of Lender in demanding, requiring or enforcing payment or performance of the obligations and liability of Mortgagor hereunder, or by the receivership, bankruptcy, insolvency or dissolution of Mortgagor or any affiliate thereof. No action or proceeding brought or instituted under this Agreement, and no recovery made as a result thereof, shall be a bar or a defense to any further action or proceeding under any other agreement. Mortgagor shall pay all reasonable out-of-pocket expenses incurred by the Lender and the other Indemnified Parties, including the reasonable fees, charges and disbursements of outside counsel for the Lender (determined on the basis of such counsel’s

generally applicable rates, which may be higher than the rates such counsel charges the Lender in certain matters) and/or the allocated costs of in-house counsel incurred from time to time, in connection with the enforcement of the Indemnified Parties’ rights under this Agreement, including those incurred in any case, action, proceeding or claim under the Federal Bankruptcy Code or any successor statute.

6. Notices . Any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent in accordance with the provisions of the Mortgage.

7. Governing Law and Construction . The validity, construction and enforceability of this Agreement shall be governed by the laws of the State of Minnesota, without giving effect to conflict of laws or principles thereof, but giving effect to federal laws of the United States applicable to national banks. Whenever possible, each provision of this Agreement and any other statement, instrument or transaction contemplated hereby or relating hereto, shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto.

8. Consent to Jurisdiction . At the option of Lender, this Agreement may be enforced in any Federal Court or Minnesota State Court sitting in Minneapolis or St. Paul, Minnesota; and Mortgagor consents to the jurisdiction and venue of any such Court and waives any argument that venue in such forums is not convenient. In the event Mortgagor commences any action in another jurisdiction or venue under any tort or contract theory arising directly or indirectly from the relationship created by this Agreement, Lender at its option shall be entitled to have the case transferred to one of the jurisdictions and venues above-described, or if such transfer cannot be accomplished under applicable law, to have such case dismissed without prejudice.

9. Waiver of Jury Trial . Mortgagor and Lender irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or any of the Loan Documents (as defined in the Credit Agreement) or the transactions contemplated hereby or thereby.

10. Binding Effect; Gender . This Agreement shall inure to the benefit of Lender, and the Indemnified Parties, and shall bind Mortgagor and Mortgagor’s successors and assigns. The obligations of Mortgagor under this Agreement shall be enforceable in all events against Mortgagor, and Mortgagor’s successors and assigns, and each of them, jointly and severally. The use of any gender herein shall include all other genders.

[The remainder of this page has been left blank intentionally.]

IN WITNESS WHEREOF, Mortgagor has executed this Agreement as of the date first above written.


	ELECTROMED, INC.

	By:
	Name: Robert D. Hansen
	Title: Chief Executive Officer

[Signature Page to Environmental and ADA Indemnification Agreement]

EXHIBIT A

(Description of Environmental Reports)

Phase I Environmental Site Assessment Report prepared by Vieau Associates Inc., dated September 8, 2009.

Exhibit 10.11

ASSIGNMENT

WHEREAS, we, _____________________ (hereinafter “ASSIGNOR”), have invented, and are the joint owners of, _____________________ having certain novel features and various configurations disclosed and claimed in United States patent application _____________________ filed _____________________, referred to as the “the Application”; and

WHEREAS, Electromed, Inc. (hereinafter “ASSIGNEE”), a corporation organized and existing under and by virtue of the laws of the State of Minnesota, and having its principal place of business at 502 Sixth Avenue NW, New Prague, Minnesota, is desirous of acquiring the entire interest in the invention and the Application and in any improvements thereto;

NOW, THEREFORE, in consideration of One Dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, ASSIGNOR by these presents does sell, assign and transfer unto ASSIGNEE, its successors, assigns and legal representatives, the full and exclusive right to the invention as described in the aforesaid Application and to any and all patents, registrations, and the like, resulting from the Application, in the United States and all foreign countries, together with the right of priority under the International Convention for the Protection of Industrial Property, Inter-American Convention Relating to Patents, Designs and Industrial Models, and any other international agreements to which the United States adheres, and hereby authorize and request the Commissioner for Patents to issue to ASSIGNEE Letters Patent on the pending Application for the sole use and benefit of ASSIGNEE, its successors, assigns and legal representatives,

AND HEREBY AGREES to transfer a like interest upon request of ASSIGNEE, its successors, assigns and legal representatives, and without further remuneration, in and to any improvements and applications for patents based thereon, growing out of or relating to the invention; and to provide all reasonable assistance and execute any papers deemed essential by ASSIGNEE, its successors, assigns and legal representatives, to ASSIGNEE's full protection and title to the invention hereby transferred,

AGREEING, FURTHERMORE, upon request of ASSIGNEE, and without further remuneration, to execute any and all papers desired by ASSIGNEE for the filing and granting of foreign applications and the perfecting of title thereto in ASSIGNEE.

EXECUTED this _____ day of __________________________________________.

Exhibit 10.12

NEW EMPLOYMENT AGREEMENT

This New Employment Agreement (“Agreement”) is effective as of January 1, 2010 (the “Effective Date”), by and among Electromed, Inc., a Minnesota corporation (the “Corporation”), and Robert D. Hansen (“Employee”).

RECITALS


A.	Employee is the co-founder of the Corporation and has been employed since the Corporation’s inception in 1992.

B.	Employee is currently employed by the Corporation in the capacity of Chairman and Chief Executive Officer.

C.	The Corporation highly values the efforts, abilities, and accomplishments of the Employee on behalf of the Corporation and recognizes that his future services are vital to the Corporation’s continued growth and profits and that the loss of his services would be a substantial loss for the Corporation and, as such, the Corporation wishes to provide incentives for the Employee to continue to remain with the Corporation.

D.	The Corporation and Employee desire to enter into this Agreement, and it is the intention of the Corporation and Employee that this Agreement entirely supersedes any prior agreements with respect hereto.

AGREEMENT

In consideration of the above recitals and the mutual promises set forth in this Agreement, the parties agree as follows:

1. Nature and Capacity of Employment . The Corporation hereby agrees to employ the Employee as its Chief Executive Officer, subject to the direction of the Board of Directors of the Corporation and pursuant to the terms and conditions set forth in this Agreement. The Employee hereby accepts employment under the terms and conditions set forth in this Agreement. The Employee agrees to perform or be available to perform the functions of this position, pursuant to the terms of this Agreement.

2. Term of Employment . The term of the Employee’s employment hereunder shall commence on the Effective Date of this Agreement and shall continue thereafter through the last day of Calendar Year 2013 (“ Initial Expiration Date ”), unless terminated earlier in accordance with Paragraph 4 of this Agreement. The term of this Agreement and the Employee’s employment hereunder shall automatically renew for successive one year periods beyond the Initial Expiration Date, unless at least ninety (90) days prior to the anniversary date of this Agreement either party hereto gives written notice to the other party that it does not intend to renew this Agreement for the coming Calendar Year. During any Renewal Term, this Agreement may be terminated pursuant to the terms of Paragraph 4 of this Agreement.

Exhibit 10.12


	3. Compensation and Benefits.

	3.1 Base Salary . As of the Effective Date, the Corporation agrees to pay the Employee an annualized base salary of $209,000.00, which amount shall be earned by the Employee on a pro rata basis as the Employee performs services and which shall be paid according to the Corporation’s normal payroll practices. For the Calendar Year ending in December 31, 2011 and thereafter during the term of this Agreement or any Renewal Term, the Board of Directors acting reasonably shall determine the amount of Base Salary payable pursuant to this Paragraph 3.1.

	3.2. Annual Bonus . For the Calendar Year ending December 31, 2010, provided that the gross sales revenue of the Corporation reaches at least $10,000,000, the Employee shall receive an Annual Bonus as follows: For every $250,000 above $10,000,000 of gross sales revenue reached by the Corporation for the Calendar Year ending December 31, 2010, the Employee shall receive an additional amount of $2,500. Notwithstanding anything to the contrary set forth herein, the Employee shall not be entitled to any Annual Bonus if the gross sales revenue for the Calendar Year ending December 31, 2010, is less than $10,000,000. Unless an exception is approved by the Board of Directors, the Employee’s Annual Bonus, if any, will be paid to the Employee in equal bi-monthly installments throughout the first ten months of the subsequent Calendar Year according to the Corporation’s normal payroll practices. For the Calendar Year ending December 31, 2011 and thereafter during the term of this Agreement or any Renewal Term, the Board of Directors acting reasonably shall determine the amount of, and related gross sales revenue levels for, the Annual Bonus payable pursuant to this Paragraph 3.2.

	3.3. Deferred Compensation . Employee shall not be entitled to deferred compensation and by signing this Agreement, Employee knowingly waives and forfeits any existing rights to deferred compensation under the Corporation’s Deferred Compensation Plan effective January 1, 2010.

	3.4. Employee Benefits . During the Employee’s employment with the Corporation, the Employee shall be entitled to participate in the retirement plans, health plans, and all other employee benefits made available by the Corporation, as they may be changed from time to time. The Employee acknowledges and agrees that he will be subject to all eligibility requirements and all other provisions of these benefits plans, and that the Corporation is under no obligation to the Employee to establish and maintain any employee benefit plan in which the Employee may participate. The terms and provisions of any employee benefit plan of the Corporation are matters within the exclusive province of the Corporation’s Board of Directors, subject to applicable law.

	3.5. Paid Time Off . The Corporation agrees that the Employee shall be entitled to Paid Time Off (“PTO”) of up to six (6) weeks per year without reduction of the minimum annual base salary payable to the Employee pursuant to Paragraph 3.1 of this Agreement. PTO which is unused at the end of any Calendar year will carry over to the next Calendar year.

	3.6. Life Insurance : The Corporation shall maintain a term life insurance policy on the Employee’s life in a principal amount equal to at least $1,000,000.00. The Corporation

Exhibit 10.12


	shall pay all annual premiums on the policy during the Term or any Renewal Term and the Employee will have the right to designate and change beneficiaries in his discretion.

	3.7. Other Benefits : During the Term or Renewal Term, the Corporation shall directly provide an automobile and a cell phone or wireless handheld device for the Employee’s use. The Corporation shall also provide a corporate credit card for approved business expenses and shall otherwise reimburse the Employee for, or pay directly, all reasonable business expenses incurred by the Employee in the performance of his duties under this Agreement, provided that the Employee incurs and accounts for such expenses in accordance with all Corporation policies and directives in effect from time to time.

4. Termination of Employment Prior to the End of the Term or Renewal Term . The Employee’s employment may be terminated prior to the expiration of the Term or a Renewal Term as follows:

	4.1. For Cause Termination, Without Severance . Notwithstanding anything contained herein to the contrary, the Corporation may discharge the Employee for Cause and terminate this Agreement immediately upon written notice to the Employee. For the purposes of this Agreement, “Cause” shall mean the occurrence of any of the following:

		(i) gross misconduct by the Employee which the Corporation’s Board of Directors determines is (or will be if continued) demonstrably and materially damaging to the Corporation; or

		(ii) fraud, misappropriation, or embezzlement by the Employee; or

		(iii) conviction of a felony crime or a crime of moral turpitude; or

		(iv) conduct in the course of employment that the Corporation’s Board of Directors determines is unethical; or

		(v) the material breach of this Agreement by the Employee.

	If the Corporation terminates the Employee’s employment for Cause pursuant to this Paragraph 4.1, the Employee shall not be entitled to severance pay under Paragraph 4.2 or to any bonus or incentive compensation of any kind.

	4.2. Without Cause, With Severance . The Corporation may terminate the Employee’s employment immediately at any time and for any reason without Cause upon providing notice to the Employee. However, in such event the Corporation shall pay the Employee any earned and unpaid bonus, if any, on a pro rata basis for the period through the Employee’s termination date. The amount of such bonus, if any, shall be calculated based on the Corporation’s annualized gross sales revenue as of the last day of Employee’s employment and shall be paid in a lump sum approximately sixty (60) days after termination. In addition, provided that the Employee meets all of the conditions set forth in this paragraph for receiving severance pay, the Corporation shall pay the Employee severance pay in a lump sum equal to one year’s base salary within sixty (60) days after termination. The Employee shall only be entitled to receive the severance pay described herein if the Employee signs and does not rescind a Confidential Separation Agreement at the time of termination in a form prepared by

Exhibit 10.12


	the Corporation that includes: (i) agreement to a general release of any and all legal claims; (ii) return of all of the Corporation’s property in the Employee’s possession; and (iii) agreement not to disparage the Corporation and its representatives.

	4.3. Resignation by The Employee Due to Change of Control, With Severance . For purposes of this Agreement, “Change of Control” means:

	i.	A “change in ownership,” as described in Section 1.409A-3(i)(5)(v) of the Treasury Regulations.

	ii.	A “change in effective control,” as described in Section 1.409A-3(i)(5)(vi) of the Treasury Regulations.

	iii.	A “change in ownership of a substantial portion of the assets,” as described in Section 1.409A-3(i)(5)(vii) of the Treasury Regulations.

	The Employee shall have the right to terminate the Employee’s employment for any reason within six (6) months following a Change of Control in the Corporation upon providing thirty (30) days advance written notice to the Corporation. The Corporation may then elect either (a) to have the Employee continue performing work for the Corporation throughout the 30 day notice period; or (b) to accept the Employee’s resignation effective immediately.

	In the event of the Employee’s termination of employment with the Corporation following a Change of Control under this Paragraph 4.3, the Corporation shall pay the Employee any earned and unpaid bonus or incentive compensation, if any, on a pro rata basis for the period through the Employee’s termination date. The amount of such bonus, if any, shall be calculated based on the Corporation’s annualized gross sales revenue as of the last day of Employee’s employment and shall be paid in a lump sum approximately sixty (60) days after termination. In addition, provided that the Employee meets all of the conditions set forth in this paragraph for receiving severance pay, the Corporation shall pay the Employee severance pay in a lump sum equal to two year’s base salary within sixty (60) days after termination. The Employee shall only be entitled to receive the severance pay described herein if the Employee signs and does not rescind a Confidential Separation Agreement at the time of termination in a form prepared by the Corporation that includes: (i) agreement to a general release of any and all legal claims; (ii) return of all of the Corporation’s property in the Employee’s possession; and (iii) agreement not to disparage the Corporation and its representatives.

	4.4. Other Resignation by Employee, Without Severance . The Employee may resign the Employee’s position upon providing ninety (90) days advance, written notice to the Corporation. The Corporation may then elect either (a) to have the Employee continue performing work for the Corporation throughout the 90 day notice period; or (b) to accept the Employee’s resignation effective immediately. In the event of the Employee’s termination of employment with the Corporation under this Paragraph 4.4, the Employee shall not be paid any severance pay as provided in Paragraph 4.2, but shall be paid any earned and unpaid bonus, if any, on a pro rata basis for the period through the Employee’s termination date. The amount of such bonus, if any, shall be calculated based on the Corporation’s annualized gross sales

Exhibit 10.12


	revenue as of the last day of Employee’s employment and shall be paid in a lump sum approximately sixty (60) days after termination.

	4.5. Because of Death, Disability or Incapacity of The Employee, Without Severance . In the event of the Employee’s death, this Agreement shall terminate immediately. If the Employee is unable to perform the Employee’s duties and responsibilities for more than ninety (90) days in any consecutive twelve (12) month period by reason of physical or mental disability or incapacity, the Corporation may terminate the Employee’s employment upon thirty (30) days advance written notice to the Employee. This Paragraph does not relieve the Corporation of any duty to reasonably accommodate a qualifying disability under the Americans with Disabilities Act, any legal duty under the Family Medical Leave Act, or any of its other duties pursuant to applicable law. If the Employee’s employment is terminated pursuant to this Paragraph, the Employee shall not be entitled to severance pay under Paragraph 4.2, but shall be paid any earned and unpaid bonus, if any, on a pro rata basis for the period through the Employee’s termination date. The amount of such bonus, if any, shall be calculated based on the Corporation’s annualized gross sales revenue as of the last day of Employee’s employment and shall be paid in a lump sum approximately sixty (60) days after termination.

	5. Miscellaneous.

	5.1. Integration . This Agreement embodies the entire agreement and understanding among the parties relative to subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter.

	5.2. Applicable Law . This Agreement and the rights of the parties shall be governed by and construed and enforced in accordance with the laws of the state of Minnesota.

	5.3. Payments . All amounts paid under this Agreement shall be subject to normal withholdings or such other treatment as required by law.

	5.4. Counterparts . This Agreement may be executed in several counterparts and as so executed shall constitute one agreement binding on the parties hereto.

	5.5. Binding Effect . Except as herein or otherwise provided to the contrary, this Agreement shall be binding upon and inure to the benefit of the Corporation and its successors, assigns and personal representatives without any requirement of the consent of the Employee for assignment of its rights or obligations hereunder.

	5.6. Modification . This Agreement shall not be modified or amended except by a written instrument signed by the parties.

	5.7. Severability . The invalidity or partial invalidity of any portion of this Agreement shall not invalidate the remainder thereof, and said remainder shall remain in fully force and effect.

	5.8. Opportunity to Obtain Advice of Counsel . The Employee acknowledges that the Employee has been advised by the Corporation to obtain legal advice prior to executing this

Exhibit 10.12


	Agreement, and that the Employee had sufficient opportunity to do so prior to signing this Agreement.

	5.9 Public Company Savings Clause . Notwithstanding anything in this Agreement to the contrary, if any of the payments described in this Agreement are subject to the requirements of Code Section 409A and the Corporation determines that Employee is a “specified employee” as defined in Code Section 409A as of the date of Employee’s termination of employment, such payments shall not be paid or commence earlier than the first day of the seventh month following the date of Employee’s termination of employment. In addition, notwithstanding anything in this Agreement to the contrary, the Corporation expressly reserves the right to amend this Agreement to the extent necessary to comply with Code Section 409A, as it may be amended from time to time, and the regulations, notices and other guidance of general applicability issued thereunder.

THIS AGREEMENT was voluntarily and knowingly executed by the parties as of date and year first set forth above.


ELECTROMED, INC.		EMPLOYEE:

By:	/s/ Terry Belford	/s/ Robert D. Hansen
		Robert D. Hansen

Exhibit 10.13

NEW EMPLOYMENT AGREEMENT

RECITALS


A.	Employee is currently employed by the Corporation in the capacity of Chief Financial Officer.

B.	The Corporation wishes to provide incentives for the Employee to continue to remain with the Corporation.

C.	The Corporation and Employee desire to enter into this Agreement, and it is the intention of the Corporation and Employee that this Agreement entirely supersedes any prior agreements with respect hereto.

AGREEMENT

In consideration of the above recitals and the mutual promises set forth in this Agreement, the parties agree as follows:

1. Nature and Capacity of Employment . The Corporation hereby agrees to employ the Employee as its Chief Financial Officer, subject to the direction of the Board of Directors of the Corporation and pursuant to the terms and conditions set forth in this Agreement. The Employee hereby accepts employment under the terms and conditions set forth in this Agreement. The Employee agrees to perform or be available to perform the functions of this position, pursuant to the terms of this Agreement.

3. Compensation and Benefits .

3.1. Base Salary . As of the Effective Date, the Corporation agrees to pay the Employee an annualized base salary of $146,000.00, which amount shall be earned by the Employee on a pro rata basis as the Employee performs services and which shall be paid according to the Corporation’s normal payroll practices. For the Calendar Year ending in December 31, 2011 and thereafter during the term of this Agreement or any Renewal Term, the

Exhibit 10.13


	Board of Directors acting reasonably shall determine the amount of Base Salary payable pursuant to this Paragraph 3.1.

	3.2. Annual Bonus . For the Calendar Year ending December 31, 2010, provided that the gross sales revenue of the Corporation reaches at least $10,000,000, the Employee shall receive an Annual Bonus as follows: For every $250,000 above $10,000,000 of gross sales revenue reached by the Corporation for the Calendar Year ending December 31, 2010, the Employee shall receive an additional $1,875. Notwithstanding anything to the contrary set forth herein, the Employee shall not be entitled to any Annual Bonus if the gross sales revenue for the Calendar Year ending December 31, 2010, is less than $10,000,000. Unless an exception is approved by the Board of Directors, the Employee’s Annual Bonus, if any, will be paid to the Employee in equal bi-monthly installments throughout the first ten months of the subsequent Calendar Year according to the Corporation’s normal payroll practices. For the Calendar Year ending December 31, 2011 and thereafter during the term of this Agreement or any Renewal Term, the Board of Directors acting reasonably shall determine the amount of, and related gross sales revenue levels for, the Annual Bonus payable pursuant to this Paragraph 3.2.

	3.3. Deferred Compensation . The Employee shall not be entitled to deferred compensation and by signing this Agreement, Employee knowingly waives and forfeits any existing rights to deferred compensation under the Corporation’s Deferred Compensation Plan effective January 1, 2010.

	3.4. Employee Benefits . During the Employee’s employment with the Corporation, the Employee shall be entitled to participate in the retirement plans, health plans, and all other employee benefits made available by the Corporation, and as they may be changed from time to time. The Employee acknowledges and agrees that he will be subject to all eligibility requirements and all other provisions of these benefits plans, and that the Corporation is under no obligation to the Employee to establish and maintain any employee benefit plan in which the Employee may participate. The terms and provisions of any employee benefit plan of the Corporation are matters within the exclusive province of the Corporation’s Board of Directors, subject to applicable law.

	3.5. Paid Time Off . The Corporation agrees that the Employee shall be entitled to Paid Time Off (“PTO”) of up to three (3) weeks per year without reduction of the minimum annual base salary payable to the Employee pursuant to Paragraph 3.1 of this Agreement. PTO which is unused at the end of any Calendar year will carry over to the next Calendar year.

	3.6. Other Benefits : During the Term or Renewal Term, the Corporation shall directly pay the cost of a cell phone or wireless handheld device for the Employee’s use. Additionally, during the Term or any Renewal Term, the Corporation shall promptly reimburse the Employee, upon receipt of appropriate documentation, for any reasonable automobile lease payments up to an amount of $375 per month. The Corporation shall also provide a corporate credit card for approved business expenses and shall otherwise reimburse the Employee for, or pay directly, all reasonable business expenses incurred by the Employee in the performance of his duties under this Agreement, provided that the Employee incurs and accounts for such expenses in accordance with all Corporation policies and directives in effect from time to time.

Exhibit 10.13

4. Termination of Employment Prior to the End of the Term or Renewal Term . The Employee’s employment may be terminated prior to the expiration of the Term or a Renewal Term as follows:


	4.1. For Cause Termination, Without Severance . Notwithstanding anything contained herein to the contrary, the Corporation may discharge the Employee for Cause and terminate this Agreement immediately upon written notice to the Employee. For the purposes of this Agreement, “Cause” shall mean the occurrence of any of the following:

	(i) gross misconduct by the Employee which the Corporation’s Board of Directors determines is (or will be if continued) demonstrably and materially damaging to the Corporation; or

	(ii) fraud, misappropriation, or embezzlement by the Employee; or

	(iii) conviction of a felony crime or a crime of moral turpitude; or

	(iv) conduct in the course of employment that the Corporation’s Board of Directors determines is unethical; or

	(v) the material breach of this Agreement by the Employee.

	If the Corporation terminates the Employee’s employment for Cause pursuant to this Paragraph 4.1, the Employee shall not be entitled to severance pay under Paragraph 4.2 or to any bonus or incentive compensation of any kind.

	4.2. Without Cause, With Severance . The Corporation may terminate the Employee’s employment immediately at any time and for any reason without Cause upon providing notice to the Employee. However, in such event the Corporation shall pay the Employee any earned and unpaid bonus, if any, on a pro rata basis for the period through the Employee’s termination date. The amount of such bonus, if any, shall be calculated based on the Corporation’s annualized gross sales revenue as of the last day of Employee’s employment and shall be paid in a lump sum approximately sixty (60) days after termination. In addition, provided that the Employee meets all of the conditions set forth in this paragraph for receiving severance pay, the Corporation shall pay the Employee severance pay in a lump sum equal to one year’s base salary within sixty (60) days after termination. The Employee shall only be entitled to receive the severance pay described herein if the Employee signs and does not rescind a Confidential Separation Agreement at the time of termination in a form prepared by the Corporation that includes: (i) agreement to a general release of any and all legal claims; (ii) return of all of the Corporation’s property in the Employee’s possession; and (iii) agreement not to disparage the Corporation and its representatives.

	4.3. Resignation by the Employee Due to Change of Control, With Severance . For purposes of this Agreement, “Change of Control” means:


		i. A “change in ownership,” as described in Section 1.409A-3(i)(5)(v) of the Treasury Regulations.

Exhibit 10.13


		ii. A “change in effective control,” as described in Section 1.409A-3(i)(5)(vi) of the Treasury Regulations.

		iii. A “change in ownership of a substantial portion of the assets,” as described in Section 1.409A-3(i)(5)(vii) of the Treasury Regulations.


	Employee shall have the right to terminate the Employee’s employment for any reason within six (6) months following a Change of Control in the Corporation upon providing thirty (30) days advance written notice to the Corporation. The Corporation may then elect either (a) to have the Employee continue performing work for the Corporation throughout the 30 day notice period; or (b) to accept the Employee’s resignation effective immediately.

	In the event of the Employee’s termination of employment with the Corporation following a Change of Control under this Paragraph 4.3, the Corporation shall pay the Employee any earned and unpaid bonus or incentive compensation, if any, on a pro rata basis for the period through the Employee’s termination date. The amount of such bonus, if any, shall be calculated based on the Corporation’s annualized gross sales revenue as of the last day of Employee’s employment and shall be paid in a lump sum approximately sixty (60) days after termination. In addition, provided that the Employee meets all of the conditions set forth in this paragraph for receiving severance pay, the Corporation shall pay the Employee severance pay in a lump sum equal to two years’ base salary within sixty (60) days after termination. The Employee shall only be entitled to receive the severance pay described herein if the Employee signs and does not rescind a Confidential Separation Agreement at the time of termination in a form prepared by the Corporation that includes: (i) agreement to a general release of any and all legal claims; (ii) return of all of the Corporation’s property in the Employee’s possession; and (iii) agreement not to disparage the Corporation and its representatives.

	4.4. Other Resignation by the Employee, Without Severance. The Employee may resign the Employee’s position upon providing ninety (90) days advance, written notice to the Corporation. The Corporation may then elect either (a) to have the Employee continue performing work for the Corporation throughout the 90 day notice period; or (b) to accept the Employee’s resignation effective immediately. In the event of the Employee’s termination of employment with the Corporation under this Paragraph 4.4, the Employee shall not be paid any severance pay as provided in Paragraph 4.2, but shall be paid any earned and unpaid bonus, if any, on a pro rata basis for the period through the Employee’s termination date. The amount of such bonus, if any, shall be calculated based on the Corporation’s annualized gross sales revenue as of the last day of Employee’s employment and shall be paid in a lump sum approximately sixty (60) days after termination.

	4.5. Because of Death, Disability or Incapacity of the Employee, Without Severance . In the event of the Employee’s death, this Agreement shall terminate immediately. If the Employee is unable to perform the Employee’s duties and responsibilities for more than ninety (90) days in any consecutive twelve (12) month period by reason of physical or mental disability or incapacity, the Corporation may terminate the Employee’s employment upon thirty (30) days advance written notice to the Employee. This Paragraph does not relieve the Corporation of any duty to reasonably accommodate a qualifying disability under the Americans with Disabilities Act, any legal duty under the Family Medical Leave Act, or any of its other duties pursuant to applicable law. If the Employee’s employment is terminated

Exhibit 10.13


		pursuant to this Paragraph, the Employee shall not be entitled to severance pay under Paragraph 4.2, but shall be paid any earned and unpaid bonus, if any, on a pro rata basis for the period through the Employee’s termination date. The amount of such bonus, if any, shall be calculated based on the Corporation’s annualized gross sales revenue as of the last day of Employee’s employment and shall be paid in a lump sum approximately sixty (60) days after termination.

		5. Miscellaneous.

		5.1. Integration . This Agreement embodies the entire agreement and understanding among the parties relative to subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter, including but not limited to any earlier employment agreements of the Employee.

		5.2. Applicable Law . This Agreement and the rights of the parties shall be governed by and construed and enforced in accordance with the laws of the state of Minnesota.

		5.3. Payments . All amounts paid under this Agreement shall be subject to normal withholdings or such other treatment as required by law.

		5.4. Counterparts . This Agreement may be executed in several counterparts and as so executed shall constitute one agreement binding on the parties hereto.

		5.5. Binding Effect . Except as herein or otherwise provided to the contrary, this Agreement shall be binding upon and inure to the benefit of the Corporation and its successors, assigns and personal representatives without any requirement of the consent of the Employee for assignment of its rights or obligations hereunder.

		5.6. Modification . This Agreement shall not be modified or amended except by a written instrument signed by the parties.

		5.7. Severability . The invalidity or partial invalidity of any portion of this Agreement shall not invalidate the remainder thereof, and said remainder shall remain in fully force and effect.

		5.8. Opportunity to Obtain Advice of Counsel . The Employee acknowledges that the Employee has been advised by the Corporation to obtain legal advice prior to executing this Agreement, and that the Employee had sufficient opportunity to do so prior to signing this Agreement.

		5.9 Public Company Savings Clause . Notwithstanding anything in this Agreement to the contrary, if any of the payments described in this Agreement are subject to the requirements of Code Section 409A and the Corporation determines that Employee is a “specified employee” as defined in Code Section 409A as of the date of Employee’s termination of employment, such payments shall not be paid or commence earlier than the first day of the seventh month following the date of Employee’s termination of employment. In addition, notwithstanding anything in this Agreement to the contrary, the Corporation expressly reserves the right to amend this Agreement to the extent necessary to comply with Code

Exhibit 10.13


		Section 409A, as it may be amended from time to time, and the regulations, notices and other guidance of general applicability issued thereunder.

THIS AGREEMENT was voluntarily and knowingly executed by the parties as of date and year first set forth above.


ELECTROMED, INC.		EMPLOYEE:

By:	/s/ Robert D. Hansen	/s/ Terry Belford
		Terry Belford

Exhibit 10.14

NON-COMPETITION, NON-SOLICITATION, AND CONFIDENTIALITY
AGREEMENT

This NON-COMPETITION, NON-SOLICITATION, AND CONFIDENTIALITY AGREEMENT (the “ Agreement ”) is effective as of the 1 ^st day of January, 2010, by and between Electromed, Inc. (the “ Corporation ”) and Robert Hansen (the “ Employee ”).

RECITALS

A. The Employee is currently employed by the Corporation in a capacity in which the Employee may create or have access to proprietary confidential and/or trade secret information of the Corporation; and

B. The Corporation has expended substantial time and resources to develop proprietary confidential and/or trade secret information and to develop valuable relationships and goodwill within its industry; and

C. The Employee recognizes that the Corporation operates in a highly competitive environment and the importance to the Corporation of ensuring the Employee’s loyalty and protecting the Corporation’s actual and prospective customers, business relations, employees, and confidential information; and

D. The Employee has entered into this Agreement in consideration of the Corporation and Employee entering into the New Employment Agreement of even date which provides, among other things, for continued employment, added compensation, training and benefits, added severance in the event of a change of control as defined in the New Employment Agreement, and in consideration of being given access to Corporation’s proprietary confidential and/or trade secret information, the receipt and sufficiency of which consideration is hereby acknowledged by the Employee.

AGREEMENT

In consideration of the above recitals and the promises set forth in this Agreement, the parties agree as follows:

1. Protection of Confidential Information .

1.1 Definition of Confidential Information . As used in this Agreement, the term “Confidential Information” shall mean any information which the Employee learns or develops during the Employee’s employment with the Corporation that derives independent economic value from being not generally known or readily ascertainable by other persons who could obtain economic value from its disclosure or use, and includes, but is not limited to, trade secrets, financial information, personnel information, and information relating to such matters as existing or contemplated products, services, profit margins, fee schedules, pricing, design, processes, formulae, business plans, sales techniques, marketing techniques, training manuals and materials, policies or practices related to the Corporation’s business, personnel or other matters, computer databases, computer programs, software and other technology, customer lists

and requirements, vendor lists, or supply information. Confidential Information includes such information of the Corporation, its customers, vendors, and other third parties or entities with whom the Corporation does business. Any information disclosed to the Employee or to which the Employee has access during the time of the Employee’s employment that the Employee reasonably considers to be Confidential Information, or which the Corporation treats as Confidential Information, will be presumed Confidential Information.

1.2 Restrictions on Use or Disclosure of Confidential Information . The Employee shall keep the Confidential Information in absolute confidence both during the Employee’s employment with the Corporation and after the termination of the Employee’s employment, regardless of the reason for such termination. The Employee agrees that the Employee will not, at any time, disclose to others, use for the benefit of any entity or person other than the Corporation, or otherwise take or copy any such Confidential Information, whether or not developed by the Employee, except as required in the Employee’s duties to the Corporation.

1.3 Return of Confidential Information and the Corporation’s Property . When the Employee’s employment terminates with the Corporation, regardless of the reason for such termination, the Employee will promptly turn over to the Corporation in good condition all Corporation property in the Employee’s possession or control, including but not limited to all originals, copies of, or electronically stored documents or other materials containing Confidential Information, regardless of who prepared them. In the case of electronically stored information retained by the Employee outside of the Corporation’s electronic systems, the Employee will promptly make a hard copy of such information in paper, audio recording, disc format, or other format as appropriate, turn that hard copy over to the Corporation, and then destroy the Employee’s electronically stored information.

2. Noncompetition/Non-Solicitation .

2.1. Acknowledgement by the Employee . The Employee acknowledges that (a) the Employee’s services to be performed for the Corporation are of a special and unique nature; (b) the Corporation operates in a highly competitive environment and would be substantially harmed if the Employee were to compete with the Corporation or divulge its confidential information; (c) the Employee has received valuable and sufficient consideration for entering into this Agreement, including but not limited to employment with the Corporation, and the receipt of Confidential Information; and (d) the provisions of this Section 2, including all of its subparts, are reasonable and necessary to protect the Corporation’s business.

2.2. “Corporate Product” Defined . For purposes of this Agreement, “Corporate Product” means any product or service (including any component thereof and any research to develop information useful in connection with a product or service) that has been or is being designed, developed, manufactured, marketed, or sold by the Corporation or with respect to which the Employee has acquired Confidential Information.

The Employee understands and acknowledges that, at the present time, Corporate Products includes the SmartVest® Airway Clearance System and related products. The Employee understands and acknowledges that the foregoing description of Corporate Products

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may change, and the provisions of this Section 2 and all of its subparts shall apply to the Corporate Products of the Corporation in effect upon the termination of the Employee’ s employment with the Corporation.

2.3 “Competitive Product” Defined . For purposes hereof, “Competitive Product” means any product or service (including any components thereof and any research to develop information useful in connection with the product or service) that is being designed, developed, manufactured, marketed, or sold by any person or entity other than the Corporation that is of the same general type, performs similar functions, or is used for the same purpose as a Corporate Product or about which the Employee has acquired Confidential Information.

2.4 Noncompete Obligations . The Employee agrees that, during the Employee’s employment with the Corporation and for a period of twelve (12) months following the Employee’s termination of employment with the Corporation, regardless of the reason for termination, the Employee will not, directly or indirectly, render services to any person or entity that designs, develops, manufactures, markets, or sells a Competitive Product in any geographic area where the Corporation designs, develops, manufactures, markets, or sells a Corporate Product. It is expressly understood, however, that the Employee is free to work for a competitor of the Corporation provided that such employment does not include any responsibilities for or in connection with a Competitive Product.

The Employee understands and acknowledges that, at the present time, the geographic market of the Corporation includes North America. The Employee understands and acknowledges that the foregoing description of the Corporation’s geographic market may change, and the provisions of this Section 2 and all of its subparts shall apply to the geographic market of the Corporation in effect upon the termination of the Employee’s employment with the Corporation.

2.5 No Solicitation of Customers . During the Employee’s employment with the Corporation and for a period of twelve (12) months after the Employee’s termination of employment with the Corporation, regardless of the reason for such termination, the Employee agrees that the Employee shall not, directly or indirectly, solicit business from, work for, or otherwise interfere with or attempt to interfere with the Corporation’s relationship with any customer or prospective customer of the Corporation.

2.6 No Solicitation of Employees or Business Contacts . During the Employee’s employment with the Corporation and for a period of twelve (12) months after the Employee’s termination of employment with the Corporation, regardless of the reason for such termination, the Employee agrees that the Employee shall not, directly or indirectly, take any action to encourage, solicit or recruit any current or former employee, consultant, independent contractor, subcontractor, supplier, vendor, or other business relation of the Corporation to terminate their relationship with the Corporation.

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2.7 Disclosure of Obligations . The Employee agrees that, during the Employee’s employment with the Corporation and for a period of twelve (12) months after the Employee’s termination of employment with the Corporation, regardless of the reason for such termination, the Employee shall, prior to accepting employment or any other business relationship with any other person or entity, inform that person or entity of the Employee’s obligations under this Section 2, including all of its subparts.

3. Compliance and Remedies . The Employee recognizes that if the Employee violates this Agreement, including but not limited to Paragraphs 1 and 2 of this Agreement, irreparable damage will result to the Corporation that could not adequately be remedied by monetary damages. As a result, the Employee hereby agrees that notwithstanding any other dispute resolution provisions of this Agreement, in the event of any breach by the Employee of this Agreement, including but not limited to Paragraphs 1 and 2 of this Agreement, the Corporation shall be entitled, in addition to any other legal or equitable remedies available to it, to an injunction to restrain the Employee’s violation of any portion of this Agreement.

4. Miscellaneous .

4.1 Integration . This Agreement embodies the entire agreement and understanding among the parties relative to subject matter hereof and supersedes all prior agreements, understandings, or past practices, whether written or oral, relating to such subject matter.

4.2 Survival of Sections 1 and 2 . Employee’s obligations set forth in Sections 1 and 2 of this Agreement, including all of these sections’ subparts, shall survive the termination of this Agreement and Employee’s termination of employment with the Corporation, regardless of the reason for such terminations.

4.3 Applicable Law; Venue . This Agreement and the rights of the parties shall be governed by and construed and enforced in accordance with the laws of the state of Minnesota, without regard to any state’s choice of law principles or rules. The venue for any action hereunder shall be in the state of Minnesota, whether or not such venue is or subsequently becomes inconvenient, and the parties consent to the jurisdiction of the courts of the state of Minnesota, county of Hennepin, and the federal district courts of Minnesota.

4.4 Counterparts . This Agreement may be executed in several counterparts and as so executed shall constitute one agreement binding on the parties hereto.

4.5 Modification by the Parties . This Agreement shall not be modified or amended except by a written instrument signed by the parties. In addition, no waiver of any provision of this Agreement shall be binding unless set forth in a writing signed by the party effecting the waiver. Any waiver shall be limited to the circumstance or event specifically referenced in the written waiver document and shall not be deemed a waiver of any other term of this Agreement or of the same circumstance or event upon any recurrence thereof.

4.6 Severability; Blue Pencil . The invalidity or partial invalidity of any portion of this Agreement shall not invalidate the remainder thereof, and said remainder shall remain in full force and effect. Moreover, if one or more of the provisions contained in this Agreement shall, for any reason, be held to be excessively broad as to scope, activity, subject or otherwise, so as to

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be unenforceable at law, such provision or provisions shall be construed by the appropriate judicial body by limiting or reducing it or them, so as to be enforceable to the maximum extent compatible with then applicable law.

4.7 Headings . The section headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date herein first above written.


ELECTROMED, INC.

/s/ Terry Belford
By:	Terry Belford
	Its:	CFO


EMPLOYEE:

/s/ Robert D. Hansen

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Exhibit 10.15

NON-COMPETITION, NON-SOLICITATION, AND CONFIDENTIALITY
AGREEMENT

RECITALS

AGREEMENT

In consideration of the above recitals and the promises set forth in this Agreement, the parties agree as follows:

1. Protection of Confidential Information .

2. Noncompetition/Non-Solicitation .

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4. Miscellaneous .

4.4 Counterparts . This Agreement may be executed in several counterparts and as so executed shall constitute one agreement binding on the parties hereto.

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4.7 Headings . The section headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date herein first above written.


ELECTROMED, INC.

/s/ Robert D. Hansen
By:	Robert D. Hansen
	Its:	Chairman and CEO


EMPLOYEE:

/s/ Terry Belford

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Exhibit 10.16

PURCHASE AGREEMENT

THIS PURCHASE AGREEMENT, dated as of March 2, 2010, is between Robert D. Hansen, whose business address is 500 Sixth Avenue Northwest, New Prague, MN 56071 (“Seller”) and Electromed, Inc. a Minnesota corporation, whose business address is also 500 Sixth Avenue Northwest, New Prague, MN 56071 (“Buyer”).

RECITALS:

A. The Seller owns a five percent (5%) interest (the “5% Interest”) in Electromed Financial, LLC, a Minnesota limited liability company (the “LLC”).

B. The Buyer owns a ninety-five percent (95%) interest in the LLC and desires to acquire Seller’s 5% Interest thereby making Buyer the 100% owner.

C. As majority owner of the LLC, the Buyer is thoroughly familiar with the financial condition, business and affairs of the LLC.

Accordingly, the parties agree as follows:

1. Sale of Interest . The Seller agrees to sell the 5% Interest to the Buyer, and the Buyer agrees to purchase the 5% Interest from the Seller, as of the date hereof, for the sum of $125,000.00.

2. No Certificate of Ownership . Buyer and Seller each acknowledge that there are no certificates representing ownership interests of the LLC. Accordingly, this Agreement alone represents the sale and transfer of the 5% Interest.

3. Closing . The Buyer and Seller acknowledge that the closing has occurred as of the above date at the above address, and execution of this Agreement by the parties is complete evidence thereof.

4. Representations and Warranties of the Seller . The Seller hereby represents and warrants to the Buyer as follows:

(a)	Title to Interest . The Seller is the beneficial owner of the 5% Interest, free and clear of all liens, encumbrances and claims of every kind, and the delivery of the 5% Interest by the Seller to the Buyer will transfer valid title to the 5% Interest, free and clear of all liens, charges, encumbrances and claims of every kind.

(b)	Authority . The Seller has the full legal right, power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby.

5. Representations and Warranties of the Buyer . The Buyer represents and warrants to the Seller as follows:

(a)	Authority . The Buyer has the full legal right, power and authority to execute, deliver and perform this Agreement and consummate the transactions contemplated hereby. This Agreement has been duly authorized and validly executed and delivered by, and constitutes the valid and binding agreement of the Buyer, enforceable against the Buyer in accordance with its terms.

(b)	Information . The Buyer has been the majority owner of the LLC since its inception and is thoroughly familiar with the financial, business and affairs of the LLC.

6. Miscellaneous .

(a)	Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota.

(b)	Entire Agreement; Successors and Assignment . This Agreement sets forth the entire agreement and understanding of the parties in respect of the transactions contemplated hereby.

(c)	Further Assurances . Each party to this Agreement will execute such further documents or instruments and take such further actions as may reasonably be requested by the other party to this Agreement to effect the purposes of this Agreement.

(d)	Counterparts . This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute one instrument.

(e)	Notice . Any notice under this Agreement may be delivered at the address first written above for each party.

IN WITNESS WHEREOF, the parties duly executed this Agreement as of the day and year first written above.

		SELLER:


		/s/ Robert D. Hansen
		Robert D. Hansen


		BUYER:


		/s/ Terry M. Belford
		Electromed, Inc.

		By:	Terry M. Belford

		Its:	Chief Financial Officer

Exhibit 21.1

SUBSIDIARIES OF ELECTROMED, INC.

The table below sets forth all subsidiaries of Electromed, Inc. and the state of organization of each.

Subsidiary	State of Incorporation
Electromed Financial, LLC	Minnesota

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the use in this Registration Statement on Form S-1 of Electromed, Inc. and Subsidiary of our report dated April 30, 2010, relating to our audits of the consolidated financial statements, appearing in the Prospectus, which is part of this Registration Statement.

We also consent to the reference to our firm under the captions “Experts” in such Prospectus.

/s/ McGladrey & Pullen, LLP

Minneapolis, MN

April 30, 2010