**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

# **FORM 10-QSB/A**

**(Amended Quarterly Report)**

**x****        Quarterlyreport under Section 13 or 15(d) of the Securities Exchange Act of 1934.**

**For the quarterly period ended January 31, 2006**

**OR**

**o****                                ****Transitionreport under Section 13 or 15(d) of the Exchange Act.**

**For the transition period from            to            .**

## **Commissionfile number 001-13543**

## **Angeion Corporation**

(Exact name of small business issuer as specified inits charter)

| **Minnesota**                                                |   | **41-1579150**       |
|--------------------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                             |   | (I.R.S. Employer     |
| incorporation or  organization)                              |   | Identification  No.) |
|                                                         |   |                 |
| **350 Oak  Grove Parkway, Saint Paul, Minnesota 55127-8599** |
| (Address of  principal executive offices)                    |
|                                                         |
| **(651)  484-4874**                                          |
| (Issuer’s  telephone number, including area code)       |

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theissuer was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes  x    No  o

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

Yes  o    No  x

Check whether theregistrant filed all documents and reports required to be filed by Section 12,13 or 15(d) of the Exchange Act of 1934 after distribution of securities undera plan confirmed by a court.

Yes  x    No  o

The Company had3,613,352 shares of common stock, $0.10 par value, outstanding as of March 1,2006.

 

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**EXPLANATORY STATEMENT**

This Form 10-QSB/A amendsand restates the Company’s Form 10-QSB for the quarter ended January 31, 2006,initially filed with the Securities and Exchange Commission (the “SEC”) onMarch 6, 2006 (the “Original Filing”), and is being filed to reflect therestatement of the financial statements and other financial information of theCompany for the first fiscal 2006 quarter ended January 31, 2006.

In connection with the auditof the Company’s consolidated financial statements as of and for the year endedOctober 31, 2006, the Company concluded that its consolidated financialstatements for the first, second and third quarters of fiscal year 2006 shouldbe restated as a result of a misapplication of an accounting principleregarding the accounting for income taxes in those financial statements.  The restatement does not change income beforetaxes and will have no cash impact on the results of these three periods.

During the first, second andthird quarters of fiscal 2006 the Company did not correctly apply GenerallyAccepted Accounting Principles (“GAAP”) relating to accounting for theutilization of pre-emergence bankruptcy net operating loss (“NOL”) carryforwards.  The Company has determinedthat during the first three quarters of the fiscal year, it should have appliedAmerican Institute of Certified Public Accountants Statement of Position 90-7, *Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code* (“SOP 90-7”) to the utilization of itspre-emergence bankruptcy NOL carry forwards. Angeion was in Chapter 11 Bankruptcy Reorganization from June 2002 toOctober 2002.

Under SOP 90-7, the benefitsrealized from pre-emergence bankruptcy NOLs should not have been reflected onthe Company’s consolidated statements of operations as a reduction in theprovision for taxes.  Instead, thebenefits should have been reflected in the consolidated financial statementsfirst by reducing the specified intangible assets (including goodwill) resultingfrom the reorganization until exhausted and thereafter been reported as anincrease to additional paid-in capital.

It is important to note thatthe application of this accounting principle changes only the financialreporting related to income taxes.  Theamount of income taxes payable is determined after utilizing the Company’spre-emergence bankruptcy NOLs and does not change cash flows.

Therefore, the Company has:

·                  Increasedthe provision for tax from continuing operations by $94,000 for the threemonths ended January 31, 2006, and

·                  Decreased goodwill by $189,000, decreasedother current liabilities and accrued expenses by $5,000 and decreased deferredincome tax liabilities by $90,000 as of January 31, 2006.

See Note 11 to theConsolidated Financial Statements, “Restatementof Quarterly Financial Statements,” for further details.

In addition to theadjustments discussed above, this restatement includes adjustments for thereclassification of bonus expenses previously included in general andadministrative expenses to other statement of operations expense captions toproperly classify bonus expense to the salary of the employee who earned thebonus and the Company’s revisions of certain discontinued operating cash flowsto a financing cash flow.  We refer tothese as Other Adjustments, which were immaterial, individually and in theaggregate, to the previously issued financial statements.

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For the convenience of the reader, this Form 10-QSB/A sets forth theOriginal Filing in its entirety. However, this Form 10-QSB/A only amends and restates certain informationin Items 1, 2 and 3 of Part I of the Original Filing, in each case solely as aresult of and to reflect the restatement, and no other information in theOriginal Filing is amended.  Theforegoing items have not been updated to reflect other events occurring afterthe Original Filing or to modify or update those disclosures affected bysubsequent events.  Among other things,forward looking statements made in the Original Filing have not been revised toreflect events, results or developments that occurred or facts that becameknown to the Company after the date of the Original Filing (other than therestatement), and these forward looking statements should be read in theirhistorical context.  In addition,pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing hasbeen amended to include certifications re-executed as of the date of this Form10-QSB/A from the Company’s Chief Executive Officer and Chief Financial Officeras required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.  The certifications of the Chief ExecutiveOfficer and Chief Financial Officer are attached to this Form 10-QSB/A asexhibits 31 and 32.

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**PART I - FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

**ANGEION CORPORATION AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**January 31, 2006 and October 31, 2005**

(unaudited, in thousands except share and per share data)
| ** **                                                                                                                                   | ** ** | **Restated  January 31,  2006** | ** ** | **October 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                   | ** ** | ** **                           | ** ** | ** **                 | ** ** |
| ** **                                                                                                                                   |       |                                 |       |                       |       |
| **Current assets:**                                                                                                                          |       |                                 |       |                       |       |
| Cash and cash  equivalents                                                                                                                   |       | $                                    | 1,160      |                       | $          | 1,072 |   |
| Cash restricted  for discontinued operations                                                                                                 |       | 200                                  |       | 400                        |       |
| Accounts  receivable, net of allowance for doubtful accounts of $225 and $210,  respectively                                                 |       | 4,383                                |       | 4,100                      |       |
| Inventories                                                                                                                                  |       | 3,846                                |       | 3,455                      |       |
| Prepaid expenses  and other current assets                                                                                                   |       | 113                                  |       | 280                        |       |
| Current assets  of discontinued operations                                                                                                   |       | 696                                  |       | 700                        |       |
| Total current  assets                                                                                                                        |       | 10,398                               |       | 10,007                     |       |
| ** **                                                                                                                                   |       |                                 |       |                       |       |
| Property and equipment,  net of accumulated depreciation of $1,661 and $1,598, respectively                                                  |       | 1,007                                |       | 1,035                      |       |
| Intangible assets, net                                                                                                                       |       | 5,295                                |       | 5,498                      |       |
| Goodwill                                                                                                                                     |       | 139                                  |       | 328                        |       |
| **Total Assets**                                                                                                                             | ** ** | **$**                                | **16,839** | ** **                 | **$**      | **16,868** | ** ** |
| ** **                                                                                                                                   |       |                                 |       |                       |       |
| **Liabilities  and Shareholders’ Equity**                                                                                               |       |                                 |       |                       |       |
| **Current liabilities:**                                                                                                                     |       |                                 |       |                       |       |
| Accounts payable                                                                                                                             |       | $                                    | 1,359      |                       | $          | 1,184 |   |
| Employee  compensation                                                                                                                       |       | 1,200                                |       | 1,166                      |       |
| Deferred income                                                                                                                              |       | 784                                  |       | 871                        |       |
| Warranty reserve                                                                                                                             |       | 183                                  |       | 175                        |       |
| Other current  liabilities and accrued expenses                                                                                              |       | 344                                  |       | 366                        |       |
| Current  liabilities of discontinued operations                                                                                              |       | 213                                  |       | 517                        |       |
| Total current  liabilities                                                                                                                   |       | 4,083                                |       | 4,279                      |       |
| ** **                                                                                                                                   |       |                                 |       |                       |       |
| **Long-term liabilities:**                                                                                                                   |       |                                 |       |                       |       |
| Long-term  deferred income                                                                                                                   |       | 428                                  |       | 319                        |       |
| Deferred income  taxes                                                                                                                       |       | 248                                  |       | 337                        |       |
| Total long-term  liabilities                                                                                                                 |       | 676                                  |       | 656                        |       |
| **Total Liabilities**                                                                                                                        |       | 4,759                                |       | 4,935                      |       |
| ** **                                                                                                                                   |       |                                 |       |                       |       |
| **Shareholders’ equity:**                                                                                                               |       |                                 |       |                       |       |
| Common stock,  $0.10 par value, authorized 25,000,000 shares, issued and outstanding,  3,613,352 shares in 2006 and 3,609,325 shares in 2005 |       | 361                                  |       | 361                        |       |
| Additional  paid-in capital                                                                                                                  |       | 17,752                               |       | 17,589                     |       |
| Deferred  compensation                                                                                                                       |       | (112                                 | )          | (14                        | )          |
| Accumulated  deficit                                                                                                                         |       | (5,921                               | )          | (6,003                     | )          |
| Total  shareholders’ equity                                                                                                             |       | 12,080                               |       | 11,933                     |       |
| **Total Liabilities and  Shareholders’ Equity**                                                                                         | ** ** | **$**                                | **16,839** | ** **                 | **$**      | **16,868** | ** ** |

 

See accompanying notes to consolidated financial statements.

 

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**ANGEION CORPORATION AND SUBSIDIARIES**

**ConsolidatedStatements of Operations**

(unaudited, in thousands except per share amounts)
| ** **                                              | ** ** | **Three Months Ended  January 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                              | ** ** | **Restated  2006**                                 | ** ** | **2005** | ** ** |
| **Revenues**                                            | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Equipment and supply sales                              |       | $                                                  | 6,247      |   | $ | 4,285 |   |
| Service revenue                                         |       | 686                                                |       | 745 |   |
| ** **                                              |       | 6,933                                              |       | 5,030 |   |
| **Cost of  goods sold**                                 |       |                                               |       |   |   |
| Cost of equipment and supplies                          |       | 3,281                                              |       | 2,596 |   |
| Cost of service revenue                                 |       | 123                                                |       | 101 |   |
| ** **                                              |       | 3,404                                              |       | 2,697 |   |
| ** **                                              |       |                                               |       |   |   |
| **Gross  margin**                                       |       | 3,529                                              |       | 2,333 |   |
| ** **                                              |       |                                               |       |   |   |
| **Operating  expenses:**                                |       |                                               |       |   |   |
| Selling and marketing                                   |       | 1,953                                              |       | 1,707 |   |
| General and administrative                              |       | 713                                                |       | 664 |   |
| Research and development                                |       | 483                                                |       | 478 |   |
| Amortization of intangibles                             |       | 203                                                |       | 203 |   |
| ** **                                              |       | 3,352                                              |       | 3,052 |   |
| ** **                                              |       |                                               |       |   |   |
| **Operating  income (loss)**                            |       | 177                                                |       | (719 | ) |
| ** **                                              |       |                                               |       |   |   |
| Interest income                                         |       | 9                                                  |       | 8 |   |
| ** **                                              |       |                                               |       |   |   |
| **Income  (loss) before taxes**                         |       | 186                                                |       | (711 | ) |
| ** **                                              |       |                                               |       |   |   |
| Provision for taxes                                     |       | 100                                                |       | — |   |
| ** **                                              |       |                                               |       |   |   |
| **Income  (loss) from continuing operations**           |       | 86                                                 |       | (711 | ) |
| **Loss  from discontinued operations, net of $0 taxes** |       | (4                                                 | )          | — |   |
| **Net  income (loss)**                                  |       | $                                                  | 82         |   | $ | (711 | ) |
| ** **                                              |       |                                               |       |   |   |
| **Earnings  (loss) per share - basic**                  |       |                                               |       |   |   |
| Continuing operations                                   |       | $                                                  | 0.02       |   | $ | (0.20 | ) |
| Discontinued operations                                 |       | —                                             |       | — |   |
| Net income (loss)                                       |       | $                                                  | 0.02       |   | $ | (0.20 | ) |
| ** **                                              |       |                                               |       |   |   |
| **Earnings  (loss) per share - diluted**                |       |                                               |       |   |   |
| Continuing operations                                   |       | $                                                  | 0.02       |   | $ | (0.20 | ) |
| Discontinued operations                                 |       | —                                             |       | — |   |
| Net income (loss)                                       |       | $                                                  | 0.02       |   | $ | (0.20 | ) |
| ** **                                              |       |                                               |       |   |   |
| **Weighted  average common shares outstanding**         |       |                                               |       |   |   |
| **Basic**                                               |       | 3,611                                              |       | 3,603 |   |
| **Diluted**                                             |       | 3,635                                              |       | 3,603 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**ANGEION CORPORATION AND SUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

(unaudited,in thousands)
| ** **                                                                                          | ** ** | **Three Months Ended  January 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **Restated  2006**                                 | ** ** | **2005** | ** ** |
| **Cash  Flows From Operating Activities:**                                                          |       |                                               |       |   |   |
| Net income (loss)                                                                                   |       | $                                                  | 82         |   | $ | (711 | ) |
| Loss from discontinued operations                                                                   |       | 4                                                  |       | — |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                               |       |   |   |
| Depreciation and amortization                                                                       |       | 266                                                |       | 323 |   |
| Stock-based compensation                                                                            |       | 56                                                 |       | — |   |
| Deferred income taxes                                                                               |       | 100                                                |       | — |   |
| Changes in operating assets and liabilities:                                                        |       |                                               |       |   |   |
| Accounts receivable                                                                                 |       | (283                                               | )          | 709 |   |
| Inventories                                                                                         |       | (391                                               | )          | (44 | ) |
| Prepaid expenses and other current assets                                                           |       | 167                                                |       | 90 |   |
| Accounts payable                                                                                    |       | 175                                                |       | (415 | ) |
| Employee compensation                                                                               |       | 34                                                 |       | 6 |   |
| Deferred income                                                                                     |       | 22                                                 |       | (93 | ) |
| Warranty reserve                                                                                    |       | 8                                                  |       | 2 |   |
| Other current liabilities and accrued expenses                                                      |       | (22                                                | )          | 76 |   |
| Net cash provided by (used in) continuing operations                                                |       | 218                                                |       | (57 | ) |
|                                                                                                |       |                                               |       |   |   |
| Cash used in operating activities of discontinued  operations                                       |       | (104                                               | )          | (22 | ) |
| Net cash provided by (used in) operating activities                                                 |       | 114                                                |       | (79 | ) |
|                                                                                                |       |                                               |       |   |   |
| **Cash  Flows From Investing Activities:**                                                          |       |                                               |       |   |   |
| Purchase of property and equipment                                                                  |       | (35                                                | )          | (49 | ) |
| Net cash used in investing activities                                                               |       | (35                                                | )          | (49 | ) |
|                                                                                                |       |                                               |       |   |   |
| **Cash  Flows From Financing Activities:**                                                          |       |                                               |       |   |   |
| Proceeds from issuance of common stock                                                              |       | 9                                                  |       | 7 |   |
| Net cash provided by financing activities of continuing  operations                                 |       | 9                                                  |       | 7 |   |
| Cash provided by (used in) financing activities of discontinued  operations:                        |       |                                               |       |   |   |
| Promissory note payment                                                                             |       | (200                                               | )          | — |   |
| Cash restricted for discontinued operations                                                         |       | 200                                                |       | — |   |
| Net cash provided by financing activities                                                           |       | 9                                                  |       | 7 |   |
|                                                                                                |       |                                               |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                                           |       | 88                                                 |       | (121 | ) |
|                                                                                                |       |                                               |       |   |   |
| **Cash  and cash equivalents at beginning of period**                                               |       | 1,072                                              |       | 2,390 |   |
|                                                                                                |       |                                               |       |   |   |
| **Cash  and cash equivalents at end of period**                                                     | ** ** | **$**                                              | **1,160**  | ** ** | **$** | **2,269** | ** ** |

 

**Supplementaldisclosure of non-cash investing activities:**

During the quarter ended January 31, 2006, the Companydecreased goodwill and the deferred tax valuation allowance by $189,000 fromthe usage of pre-emergence bankruptcy net operating loss carry forwards.

See accompanying notes toconsolidated financial statements.

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

January31, 2006

(Unaudited)

**1.****                                     ****Basis of Presentation**

The accompanyingconsolidated balance sheet as of January 31, 2006 and the consolidatedstatements of operations and cash flows for the three months ended January 31,2006 have been restated.  The nature ofthe restatement and the effect on the financial statement line items arediscussed in Note 11 tothe Consolidated Financial Statements, “Restatementof Quarterly Financial Statements.”

The consolidated balance sheet as of January 31, 2006, the consolidated statements of operations and cash flows for thethree months ended January 31, 2006and 2005, and the related information presented in these notes have beenprepared by management in accordance with U.S. generally accepted accountingprinciples for interim financial information and with the instructions to Form10-QSB and Rule 10-01 of Regulation S-X, without audit.  Accordingly, they do not include all of theinformation and notes required by U.S. generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments considered necessary for a fairpresentation of results have been included. The consolidated balance sheet at October 31, 2005 was derived from theaudited consolidated financial statements as of that date.  Operating results for the three months ended January31, 2006 are not necessarily indicative ofthe results that may be expected for the year ending October 31, 2006.  For further information, refer to theconsolidated financial statements and notes thereto included in Angeion Corporation’sAnnual Report on Form 10-KSB for the year ended October 31, 2005.

Comprehensive income is a measure of allnon-owner changes in shareholders’ equity and includes items such as net income(loss), certain foreign currency translation items, minimum pension liabilityadjustments and changes in the value of available-for-sale securities.  For the three months ended January 31, 2006 and 2005, comprehensive income (loss) for Angeion Corporation wasequivalent to net income (loss) as reported.

Preparation of theconsolidated financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities made in the consolidated financial statementsand accompanying notes.  Actual resultscould differ from those estimates. Estimates include accounts receivable, product warranty and inventoryreserves, and depreciable lives of property, equipment and intangible assets.

**2.****                                     ****Revenue Recognition**

In accordance with the SEC’sStaff Accounting Bulletin No. 104, “*Revenue Recognition,*”the Company recognizes revenue when persuasive evidence of an arrangementexists, transfer of title has occurred or services have been rendered, the sellingprice is fixed or determinable and collectibility is reasonably assured.  The Company’s products are sold for cash oron credit terms requiring payment based on the shipment date.  Credit terms can vary between customers dueto many factors, but are generally 30-60 days. Revenue, net of discounts, is recognized upon shipment or delivery tocustomers in accordance with written sales terms.  Standard sales terms do not include customeracceptance conditions, future credits, rebates, price protection or generalrights of return.  The terms of sales toboth domestic customers and international distributors are identical.  In instances when a customer order specifiesfinal

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acceptanceof the system, revenue is deferred until all customer acceptance criteria havebeen met.  Estimated warranty obligationsare recorded upon shipment.

Service contract revenue isbased on a stated contractual rate and is deferred and recognized ratably overthe service period, which is typically from one to four years.  In accordance with paragraph 4, of theEmerging Issues Task Force abstract 00-21, “*Revenue Arrangements withMultiple Deliverables,*” the Company applies Financial AccountingStandards Board (“FASB”) Technical BulletinNo. 90-1 for service contract revenue.  Theamount of deferred service contract revenue was $1,025,000 and $942,000 atJanuary 31, 2006 and October 31, 2005, respectively.  Revenue from installation and trainingservices provided to domestic customers is deferred until the service has beenperformed.  The amount of deferredinstallation and training revenue was $187,000 and $248,000 at January 31, 2006and October 31, 2005, respectively.

When a sale involves multiple deliverables, such as equipment,installation services and training, the amount of the consideration from anarrangement is allocated to each respective element based on the residualmethod and recognized as revenue when revenue recognition criteria for eachelement is met.  Consideration allocatedto delivered equipment is equal to the total arrangement consideration less thefair value of installation and training. The fair value of installation and training services is based onspecific objective evidence, including third-party invoices.

**3.****                                     ****New AccountingPronouncements**

In November 2004, the FASB issued Statement of Financial AccountingStandards No. 151, “*Inventory Costs, anamendment of ARB No. 43, Chapter 4*,” (“SFAS No. 151”) whichclarifies the types of costs that should be expensed rather than capitalized asinventory.  This statement also clarifiesthe circumstances under which fixed overhead costs associated with operatingfacilities involved in inventory processing should be capitalized.  The provisions of SFAS No. 151 are effectivefor fiscal years beginning after June 15, 2005 and the Company adopted thisstandard as of November 1, 2006.  Theadoption of this statement did not have a material impact on the Company’sconsolidated financial position or results of operations.

The FASB issued SFAS No. 123 (Revised 2004), “*Share-BasedPayment*,” (“SFAS No. 123R”) in December 2004.  SFAS No. 123R is a revision of FASB Statement123, “*Accounting for Stock-Based Compensation*”and supersedes APB No. 25 and its related implementation guidance.  The Statement focuses primarily on accountingfor transactions in which an entity obtains employee services throughshare-based payment transactions.  SFASNo. 123R requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant-datefair value of the award (with limited exceptions).  That cost will be recognized over the periodduring which an employee is required to provide service in exchange for theaward.  The Company will adopt thestandard for fiscal 2007 using the modified prospective method.  While the Company cannot precisely determinethe impact on net earnings as a result of the adoption of SFAS No. 123R,estimated compensation expense related to prior periods can be found in “StockBased Compensation” below.  The ultimateamount of increased compensation expense will depend on the number of optionshares granted, their timing and vesting period and the method used tocalculate the fair value of the awards, among other factors.  We have yet to determine the impact of SFASNo. 123R on the Company’s consolidated financial statements.

In June 2005, the FASB issued SFAS No. 154, “*AccountingChanges and Error Corrections*,” (“SFAS No. 154”) a replacement ofAPB Opinion No. 20 and FASB Statement No. 3. The statement applies to all voluntary changes in accounting principle,and changes the requirements of accounting for and reporting a change inaccounting principle.  SFAS No. 154requires retrospective application to prior

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periods’financial statements of a voluntary change in accounting principle unless it isimpractical.  SFAS No. 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.  Earlierapplication is permitted for accounting changes and corrections of errorsoccurring in fiscal years beginning after June 1, 2005.  The statement does not change the transitionprovisions of any existing accounting pronouncements, including those that arein a transition phase as of the effective date of the statement.  The Company has adopted SFAS No. 154.  See Note 11 to the Consolidated FinancialStatements, “Restatement of QuarterlyFinancial Statements,” for further details.

**4.****                                     ****Stock Based Compensation**

TheCompany applies the intrinsic-value method prescribed under AccountingPrinciples Board Opinion No. 25, *“Accounting for StockIssued to Employees,”* (“APB No. 25”) and related interpretations toaccount for the issuance of stock incentives to employees and directors.  Accordingly, no compensation expense relatedto employees’ and directors’ stock incentives has been recognized in theconsolidated financial statements.  Inaccordance with the provisions of SFAS No. 123, “*Accountingfor Stock-Based Compensation*,” the Company is required to presentpro forma information reflecting compensation cost for such issuances.  Had the Company determined compensation costsbased on the fair value at the date of grant for options granted, the Company’snet income (loss) would have been increased to the pro forma amounts indicatedin the following table:

|                                                                                                                                               | ** ** | **Three Months Ended January 31,**                                                          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **Restated**                                                                                                    | ** ** | ** ** | ** ** |
| **(In thousands, except for per share amounts)**                                                                | ** ** | **2006**                                                                                                        | ** ** | **2005** | ** ** |
| Net income  (loss):                                                                                                                           |       |                                                                                                            |       |   |   |
| As reported                                                                                                                                   |       | $                  82 |       | $               (711 | ) |
| Add: Stock-based employee compensation expense included  in reported net income (loss), net of related tax effects                            |       | 35                                                                                                              |       | — |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (3                                                                                                              | )          | (21 | ) |
| Pro forma                                                                                                                                     |       | $                114            |       | $               (732 | ) |
| Net income  (loss) per share – basic and diluted                                                                                         |       |                                                                                                            |       |   |   |
| As reported                                                                                                                                   |       | $               0.02                 |       | $              (0.20 | ) |
| Pro forma                                                                                                                                     |       | $               0.03                 |       | $              (0.20 | ) |

 

***Variable Stock Option Grants***

The Company has grantedto its employees 78,000 options with an exercise price of $2.00 that vest atincreasing rates as the Company’s common stock trades for increasing prices for20 of 30 consecutive days. Notwithstanding the performance vesting schedule, these options may beexercised in full beginning October 1, 2009. The options will become exercisable earlier if the Company’s stocktrades at the following prices for 20 of 30 consecutive trading days.

 

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| Closing Price | ** ** | **Percent of  Options  Exercisable** | ** ** |
|--------------------|------------|-------------------------------------------|------------|
| $4.00              |       | 15                                        | %          |
| 4.50               |       | 40                                        |       |
| 5.00               |       | 60                                        |       |
| 5.50               |       | 80                                        |       |
| 6.00               |       | 100                                       |       |

 

Because the vesting for these grants is dependent on achieving thesecommon stock price milestones, the Company has accounted for these optiongrants using variable accounting in accordance with APB No. 25.  Accordingly, the Company estimates the valueof variable option grants at each balance sheet date and records the changes inintrinsic value as deferred compensation. Although no options vest until October 1, 2009 or until the Company’sstock trades at $4.00 per share for 20 of 30 consecutive days, and then only15% would vest, these outstanding options are nevertheless deemed to haveintrinsic value because the closing price of the Company’s stock at January 31, 2006 was $4.23 per share.  Stock based compensation associated withthese variable options for the three months ended January 31, 2006 was $56,000. This amount is equal to the intrinsic value of the options at January 31, 2006 pro-rated from their grant date to thetime-based vesting date of October 1, 2009. As of January 31, 2006, the Company has recorded deferred compensationof $112,000 relating to these variable stock options.

**5.****                                      Inventories**

Inventoriesconsisted of the following at January 31, 2006 and October 31, 2005:
| (In thousands) | ** ** | **2006**                                                           | ** ** | **2005**                                                           | ** ** |
|---------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Raw materials       |       | $          1,766 |       | $          1,304 |       |
| Work-in-progress    |       | 454                                                                |       | 186                                                                |       |
| Finished goods      |       | 1,626                                                              |       | 1,965                                                              |       |
|                |       | $          3,846 |       | $          3,455 |       |

 

**6.****                                      Intangible Assets and Goodwill**

Intangible assetsconsisted of the following at January 31, 2006 and October 31, 2005:
| (In thousands)                  | ** ** | **2006**                                                           | ** ** | **2005**                                                           | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Intangible  assets:                  |       |                                                               |       |                                                               |       |
| Developed technology                 |       | $          6,900 |       | $          6,900 |       |
| Trade name (unamortized)             |       | 1,000                                                              |       | 1,000                                                              |       |
|                                 |       | 7,900                                                              |       | 7,900                                                              |       |
|                                 |       |                                                               |       |                                                               |       |
| Amortization -  developed technology |       | (2,605                                                             | )          | (2,402                                                             | )          |
|                                 |       | $          5,295 |       | $          5,498 |       |

 

Amortizationexpense was $203,000 for each of the three month periods ended January 31, 2006and 2005.

Intangible assetsare being amortized using the straight-line method over the estimated usefullives of the assets that range from three to ten years.  If the Company utilizes pre-emergencebankruptcy net operating loss carryforwards (“NOLs”), the Company willsequentially reduce the cost of goodwill,

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trade name and developedtechnology until the net carrying cost of these assets is zero.  To the extent that utilization of these NOLsreduces the cost of developed technology, future amortization expense will bereduced.  Estimated amortization expensefor the remainder of fiscal year 2006 and for each of the succeeding yearsbased on the intangible assets as of January 31, 2006, which does not reflectthe possible reduction discussed above, is as follows:
| (In thousands)                  | ** ** | **Amortization**                                                       | ** ** |
|--------------------------------------|------------|------------------------------------------------------------------------|------------|
| Nine months  ending October 31, 2006 |       | $           609 |       |
| 2007                                 |       | 779                                                                    |       |
| 2008                                 |       | 779                                                                    |       |
| 2009                                 |       | 778                                                                    |       |
| 2010                                 |       | 450                                                                    |       |
| Thereafter                           |       | 900                                                                    |       |
|                                 |       | $        4,295                 |       |

 

Goodwill consisted of the following at January 31, 2006 and October 31,2005:
| (In thousands)                                                                   | ** ** | **Goodwill**                                                     | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| Balance at  October 31, 2005                                                          |       | $          328 |       |
| Reduction in  balance due to utilization of pre-emergence  bankruptcy NOLs (restated) |       | (189                                                             | )          |
| Balance at January 31,  2006 (restated)                                               |       | $          139 |       |

 

**7.****                                      Warranty Reserve**

Sales of the Company’s equipment are subject to a warranty.  Equipment warranties typically extend for aperiod of twelve months from the date of installation.  Standard warranty terms are included incustomer contracts.  Under the terms ofthese warranties, the Company is obligated to repair or replace any componentsor assemblies that it deems defective in workmanship or materials.  The Company reserves the right to rejectwarranty claims where it determines that failure is due to normal wear,customer modifications, improper maintenance or misuse.  The Company maintains a warranty reserve thatreflects the estimated expenses that it will incur to honor the warranties on itsproducts.  The Company adjusts the warrantyreserve based on the number and type of equipment that is subject to warranty,adjusted for the remaining months of warranty coverage.  The warranty reserve adjustment reflects theCompany’s historical warranty experience based on type of equipment.  Warranty activity for the three months ended January31, 2006 and 2005 was as follows:
| (In thousands)           | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|
| Balance,  beginning of period |       | $ 175 |       | $ 155 |       |
| Warranty provisions           |       | 86         |       | 66         |       |
| Warranty claims               |       | (78        | )          | (64        | )          |
| Balance, end of period        |       | $ 183 |       | $ 157 |       |

 

**8.****                                      NetIncome (Loss) per Share**

Basic income (loss) pershare is computed by dividing net income (loss) by the weighted average sharesoutstanding during the reporting period. Diluted income (loss) per share is computed similarly to basic loss pershare except that the weighted average shares outstanding are increased toinclude additional shares from the assumed exercise of stock options andwarrants, if dilutive.  The number ofadditional shares is calculated by assuming that outstanding stock options orwarrants were exercised and

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that the proceedsfrom the exercise were used to acquire shares of common stock at the averagemarket price during the reporting period. As a result of the net loss, there were no dilutive common sharesoutstanding for the three months ended January 31, 2005.

Shares used in theearnings per share computations for the three months ended January 31, 2006 and2005 are as follows:
| (In thousands)                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| Weighted average  common shares outstanding – basic |       | 3,611    |       | 3,603    |       |
| Dilutive effect of stock options                         |       | 24       |       | —   |       |
| Weighted average common  shares outstanding - diluted    |       | 3,635    |       | 3,603    |       |

 

The dilutive effect ofstock options in the above table excludes all options for which the exerciseprice was higher than the closing market price of $4.23 per share as of January31, 2006.  The number of option sharesexcluded from the calculation was 362,800 and 482,800 for the three monthsended January 31, 2006 and 2005, respectively.

The Company had warrantsoutstanding at January 31, 2006 and 2005 to purchase 179,481 shares of itscommon stock that were considered antidilutive and therefore not considered tohave been exercised.

**9.****                                      DiscontinuedOperations and Related Litigation**

On June 30, 2005, the Company entered into settlement agreements withELA Medical, Inc. and ELA Medical S.A.S. (together “ELA”) that ended the legaldispute and lawsuit by ELA against the Company and resolved all issues betweenthe Company and ELA related to a recall of the Company’s implantablecardioverter defibrillators (“ICDs”) sold to ELA prior to March 2000.  The Company accounts for the ICD business asa discontinued operation and amounts in the financial statements and relatednotes for all periods shown reflect discontinued operations accounting.

Under the terms of a settlement agreement and release regarding LYRAICDs, ELA agreed to settle its $2,047,000 cross-claim against the Company inreturn for an Offer of Judgment on the cross-claim in favor of ELA and againstthe Company in the amount of $1,400,000. In full satisfaction of the Judgment, the Company agreed to pay ELA the$1,400,000 judgment amount as follows:

1.               The Company paid ELA $400,000 on June 30,2005.

2.               The Company executed a $400,000 promissorynote in favor of ELA that is secured by an irrevocable letter of credit.  Terms of the promissory note included equalpayments of $200,000 due on December 31, 2005 and June 30, 2006.

3.               The Company assigned to ELA certain of theCompany’s intellectual property exclusively related to the Company’sdiscontinued ICD products, including patents and related technology that ELAand the Company agreed have a fair market value of at least $600,000.

The Company entered into a secondagreement on June 30, 2005 under which it paid an additional $40,000 forresolution of ICD issues not related to the lawsuit.  The second settlement agreement resolved amatter with respect to Sentinel ICDs formerly manufactured by the Company andamended a 1999 withdrawal agreement under which the Company withdrew from ajoint venture with ELA.  In connectionwith the Sentinel settlement agreement, ELA agreed that it would be responsiblefor any warranty coverage, technical service and regulatory compliance servicewith respect to any “recalled”

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ICDs in the future.  Prior to entering this settlement agreement,ELA already was responsible for warranty coverage, technical service andregulatory compliance service for all ICDs except for all costs and expenses thatwere “recall costs.”

As previously disclosed in the Company’s Annual Report on Form 10-KSBfor the year ended October 31, 2005, the Company is seeking recovery for theELA settlement plus related professional fees from Medmarc Casualty InsuranceCompany.  On January 20, 2006, the Companyand Medmarc argued summary judgment motions in United States District Court onissues related to Medmarc’s responsibility to reimburse the Company for its$1.4 million settlement with ELA and its legal fees paid in defendingthe lawsuit.  In an order dated February17, 2006, the Court granted, inpart, the Company’s motion for summary judgment.

In summary, the Court ruled:

1.               The June 2005 settlement between Angeion andELA Medical under which Angeion agreed to pay ELA $1.4 million to settle theclaims of ELA arising out of the recall of Angeion’s ICDs was reasonable,non-collusive and made in good faith;

2.               Medmarc has a duty to indemnify Angeion forthe $1.4 million settlement, plus interest from June 30, 2005;

3.               The Court stated that 32 of the 160 ICDs thatwere explanted did not meet specified voltage levels to warrant recall andtherefore the “device costs” and “ELA expenses” associated with these 32 ICDswere not covered by the policy.  TheCourt stated it could not make a specific determination with respect to thatportion, if any, of the $1.4 million settlement that pertains to device costsand ELA expenses with respect to these 32 ICDs. This matter, therefore, remains subject to future determination by theCourt or resolution by Angeion and Medmarc.

4.               Angeion is entitled to recover from Medmarccosts and fees in the amount of $49,000 incurred in defending ELA’s claims.

The Companyintends to vigorously pursue the recovery of its settlement costs and expensesagainst Medmarc.  The ultimate amount ofrecovery from the insurer is subject to future development, includingnegotiations between the parties and other legal proceedings.

During the first quarter of 2006, the Companydetermined that there were no changes in facts or circumstances that wouldrequire adjustment to the $696,000 of current assets of discontinued operationsas of January 31, 2006.

During the quarter ended January 31, 2006, the Companyincurred additional expenses of $4,000 related to the Medmarc matter.  Sincethe first $200,000 payment due under the promissory note was made in December2005, the current liability of discontinued operations is $213,000 at January31, 2006 and now includes the $4,000 of additional expenses as well as theremaining $200,000 due to ELA on June 30, 2006 under the promissory note.

SeeNote 11 to the Consolidated Financial Statements, “Restatement of Quarterly Financial Statements,” for revisionsassociated with the presentation of cash flows from discontinued operations.

**10.****                               IncomeTaxes (Restated)**

The Company has recorded a provision for taxes fromcontinuing operations of $100,000 for the three months ended January 31,2006.  The provision for taxes has beencalculated and presented in the statement of operations as if the Company’searnings were fully taxable.  The amount of income taxes payable isdetermined after utilizing the Company’s pre-emergence bankruptcy NOLs.  UnderAmerican Institute of Certified Public Accountants Statement of

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Position 90-7, *Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code* (“SOP 90-7”), the tax benefit forthe utilization of these loss carry forwards must be recognized as a reductionof intangibles rather than a reduction of the provision for taxes in thestatement of operations.  See Note 11 to the Consolidated FinancialStatements, “Restatement of QuarterlyFinancial Statements,” for further details.

The Company had a federal net operating loss carryforward at October 31, 2005 of approximately $130.6 million, which is availableto reduce income taxes payable in future years. If not used, this carry forward will expire in years 2006 through2025.  Approximately $72.5 million ofthis carry forward will expire over the next five years.  In addition, the Company has a generalbusiness tax credit carry forward of approximately $989,000 that is availableto reduce future Federal income taxes, if any. If not used, these general business tax credits will expire in years2006 through 2014.  Approximately$515,000 of the general business tax carry forward will expire over the nextfive years.  The Company also has $90,000of alternative minimum tax credit carry forwards that do not have expirationdates.  Under the Tax Reform Act of 1986,the utilization of these tax loss and tax credit carry forwards may be limitedas a result of significant changes in ownership.  Even though the Company has substantial federal net operatingloss carry forwards, any income isstill subject to U.S. and State Alternative Minimum Taxes.

The Company has recorded afull valuation allowance against its net deferred tax asset, excluding theeffect of deferred tax liability which is unable to be used as a source ofincome against these deferred tax assets, based on its belief that it is morelikely than not that the asset will not be realized in the future.  This determination was made in a prior fiscalyear and is still applicable for the first quarter of 2006.  The Company will continue to assess the needfor a full valuation allowance in future quarters.  The Company has recognized a deferred taxliability of $248,000 as of January 31, 2006 related to an indefinite livedintangible that is being amortized for tax purposes.  Under SOP 90-7, a substantial portion of anyfuture reversal of the valuation allowance will first reduce any intangibleassets and then be credited directly to additional paid-in capital.  After the exhaustion of pre-emergence bankruptcy NOLs, approximately $2.3 million of the valuationallowance is related to post-bankruptcy NOLs and would be available to reducethe provision for taxes in the statement of operations.

**11.****                              ****Restatement of QuarterlyFinancial Statements**

In connection with the auditof the Company’s consolidated financial statements as of and for the year endedOctober 31, 2006, the Company concluded that its consolidated financialstatements for the first, second and third quarters of fiscal year 2006 shouldbe restated as a result of a misapplication of an accounting principleregarding the accounting for income taxes in those financial statements.  The restatement does not change income beforetaxes and will have no cash impact on the results of these three periods.

During the first, second andthird quarters of fiscal 2006 the Company did not correctly apply GenerallyAccepted Accounting Principles (“GAAP”) relating to accounting for theutilization of pre-emergence bankruptcy net operating loss (“NOL”) carryforwards.  The Company has determinedthat during the first three quarters of the fiscal year, it should have appliedSOP 90-7 to the utilization of its pre-emergence bankruptcy NOL carryforwards.  Angeion was in Chapter 11Bankruptcy Reorganization from June 2002 to October 2002.

Under SOP 90-7, the benefitsrealized from pre-emergence bankruptcy NOLs should not have been reflected onthe Company’s consolidated statements of operations as a reduction in theprovision for taxes.  Instead, thebenefits should have been reflected in the consolidated financial statementsfirst by

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reducingthe specified intangible assets (including goodwill) resulting from thereorganization until exhausted and thereafter been reported as an increase toadditional paid-in capital.

The following adjustmentshave been recorded to the previously issued financial statements:

(1)  The Company has increased the provision fortaxes from continuing operations by $94,000 for the three months ended January31, 2006, decreased goodwill by $189,000, decreased other current liabilitiesand accrued expenses by $5,000 and decreased deferred income tax liabilities by$90,000 as of January 31, 2006 to properly account for income taxes.

(2)  The Company has reclassified $60,000 for thethree months ended January 31, 2006 of bonus expenses previously included ingeneral and administrative expenses to other statement of operations expensecaptions to properly classify bonus expense to the salary of the employee whoearned the bonus.

(3)  The Company revised the presentationof operating and financing cash flows attributable to discontinued operationsfor the three months ended January 31, 2006. The revision reflects the restriction of $200,000 of cash and the fiscal2006 payment on the promissory note to ELA Medical as financing activities,rather than operating activities as previously reported.

The Company has restated itsbalance sheet as of January 31, 2006 and its statements of operations and cashflows for the three months ended January 31, 2006 for the impact of the aboveitems as follows (adjustment number corresponds with the adjustments notedabove):
| ** **                                       | ** ** | **As of January 31, 2006** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                       | ** ** | **As**                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Previously**                                 | ** ** | **Adjustments** | ** ** | **As** | ** ** |
| **(In thousands)**                          | ** ** | **Reported**                                   | ** ** | **Amount** | ** ** | **No.** | ** ** | **Restated** | ** ** |
| ***Balance  Sheet Data:***                       |       |                                           |       |   |   |   |   |   |   |
| Goodwill                                         |       | 328                                            |       | (189 | ) | 1 |   | 139 |   |
| Total Assets                                     |       | 17,028                                         |       | (189 | ) |   |   | 16,839 |   |
|                                             |       |                                           |       |   |   |   |   |   |   |
| Other current  liabilities and accrued expenses  |       | 349                                            |       | (5 | ) | 1 |   | 344 |   |
| Total current liabilities                        |       | 4,088                                          |       | (5 | ) |   |   | 4,083 |   |
| Deferred income  taxes                           |       | 338                                            |       | (90 | ) | 1 |   | 248 |   |
| Total long-term  liabilities                     |       | 766                                            |       | (90 | ) |   |   | 676 |   |
| Total  Liabilities                               |       | 4,854                                          |       | (95 | ) |   |   | 4,759 |   |
| Accumulated  deficit                             |       | (5,827                                         | )          | (94 | ) | 1 |   | (5,921 | ) |
| Total  shareholders’ equity                 |       | 12,174                                         |       | (94 | ) |   |   | 12,080 |   |
| Total Liabilities and  Shareholders’ Equity |       | $  17,028                            |       | $      (189 | ) |   |   | $   16,839 |   |

 

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| ** **                                            | ** ** | **Three Months Ended January 31, 2006** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **As**                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Previously**                                                   | ** ** | **Adjustments** | ** ** | **As** | ** ** |
| **(In thousands)**                               | ** ** | **Reported**                                                     | ** ** | **Amount** | ** ** | **No.** | ** ** | **Restated** | ** ** |
| ***Statement  of Operations Data:***                  |       |                                                             |       |   |   |   |   |   |   |
| Revenues:                                             |       |                                                             |       |   |   |   |   |   |   |
| Equipment and supply sales                            |       | $      6,247                       |       | $           — |   |   |   | $      6,247 |   |
| Service revenue                                       |       | 686                                                              |       | — |   |   |   | 686 |   |
|                                                  |       | 6,933                                                            |       | — |   |   |   | 6,933 |   |
| Cost of goods  sold:                                  |       |                                                             |       |   |   |   |   |   |   |
| Cost of equipment and supply sales                    |       | 3,262                                                            |       | 19 |   | 2 |   | 3,281 |   |
| Cost of service revenue                               |       | 123                                                              |       | — |   |   |   | 123 |   |
|                                                  |       | 3,385                                                            |       | 19 |   |   |   | 3,404 |   |
| Gross margin                                          |       | 3,548                                                            |       | (19 | ) |   |   | 3,529 |   |
| Operating  expenses:                                  |       |                                                             |       |   |   |   |   |   |   |
| Selling and marketing                                 |       | 1,923                                                            |       | 30 |   | 2 |   | 1,953 |   |
| General and administrative                            |       | 773                                                              |       | (60 | ) | 2 |   | 713 |   |
| Research and development                              |       | 472                                                              |       | 11 |   | 2 |   | 483 |   |
| Amortization of intangibles                           |       | 203                                                              |       | — |   |   |   | 203 |   |
|                                                  |       | 3,371                                                            |       | (19 | ) |   |   | 3,352 |   |
| Operating income                                      |       | 177                                                              |       | — |   |   |   | 177 |   |
| Interest income                                       |       | 9                                                                |       | — |   |   |   | 9 |   |
| Income before  taxes                                  |       | 186                                                              |       | — |   |   |   | 186 |   |
| Provision for  taxes                                  |       | 6                                                                |       | 94 |   | 1 |   | 100 |   |
|                                                  |       |                                                             |       |   |   |   |   |   |   |
| Income from  continuing operations                    |       | 180                                                              |       | (94 | ) |   |   | 86 |   |
| (Loss) from  discontinued operations, net of $0 taxes |       | (4                                                               | )          | — |   |   |   | (4 | ) |
| Net income                                            |       | $         176       |       | $          (94 | ) |   |   | $           82 |   |
|                                                  |       |                                                             |       |   |   |   |   |   |   |
| Earnings per  share – basic                      |       | $        0.05            |       | $       (0.03 | ) |   |   | $        0.02 |   |
| Earnings per share -  diluted                         |       | $        0.05            |       | $       (0.03 | ) |   |   | $        0.02 |   |

 

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| ** **                                                    | ** ** | **Three Months Ended January 31, 2006**                 | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **As**                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Previously**                                                                   | ** ** | **Adjustments** | ** ** | **As** | ** ** |
| **(In thousands)**                                       | ** ** | **Reported**                                                                     | ** ** | **Amount** | ** ** | **No.** | ** ** | **Restated** | ** ** |
| ***Statement  of Cash Flows Data:***                          |       |                                                                             |       |   |   |   |   |   |   |
| Cash Flows From  Operating Activities:                        |       |                                                                             |       |   |   |   |   |   |   |
| Net income                                                    |       | $         176                       |       | $          (94 | ) | 1 |   | $           82 |   |
| Deferred income taxes                                         |       | 1                                                                                |       | 99 |   | 1 |   | 100 |   |
|                                                          |       |                                                                             |       |   |   |   |   |   |   |
| Other current liabilities and accrued expenses                |       | (17                                                                              | )          | (5 | ) | 1 |   | (22 | ) |
| Net cash  provided by continuing operations                   |       | 218                                                                              |       | — |   |   |   | 218 |   |
| Restricted cash  released for discontinued operations         |       | 200                                                                              |       | (200 | ) | 3 |   | — |   |
| Cash used in  operating activities of discontinued operations |       | (304                                                                             | )          | 200 |   | 3 |   | (104 | ) |
| Net cash  provided by operating activities                    |       | $         114                       |       | $           — |   |   |   | $         114 |   |
| Cash Flows From Financing  Activities:                        |       |                                                                             |       |   |   |   |   |   |   |
| Proceeds from issuance of commons stock                       |       | 9                                                                                |       | — |   |   |   | 9 |   |
| Promissory note payment                                       |       | —                                                                           |       | (200 | ) | 3 |   | (200 | ) |
| Cash restricted for discontinued operations                   |       | —                                                                           |       | 200 |   | 3 |   | 200 |   |
| Net cash  provided by financing activities                    |       | $             9 |       | $           — |   |   |   | $             9 |   |

 

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**Item 2.****           Management’s Discussionand Analysis or Plan of Operation.**

# **Forward-LookingStatements and Risk Factors**

The discussion abovecontains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements by their nature involve substantial risks anduncertainties.  Our actual results maydiffer materially depending on a variety of factors, including:

 

·                  Our ability tosuccessfully operate our business including our ability to develop, improve,and update our cardiorespiratory diagnostic products,

·                  Our ability toeffectively manufacture and ship products in required quantities to meetcustomer demands,

·                  Our ability tosuccessfully defend the Company from product liability claims related to ourcardiorespiratory diagnostic products and claims associated with our priorcardiac stimulation products,

·                  Our ability toprotect our intellectual property,

·                  Our ability todevelop and maintain an effective system of internal controls and proceduresand disclosure controls and procedures, and

·                  Ourdependence on third-party vendors.

Additionalinformation with respect to the risks and uncertainties faced by the Companymay be found in, and the following discussion is qualified in its entirety by,the other risk factors that are described from time to time in the Company’sSecurities and Exchange Commission reports, including but not limited to theAnnual Report on Form 10-KSB for the year ended October 31, 2005, andsubsequently filed reports.

# **Overview**

TheCompany is a medical products company with reported revenue of $23.8 millionfor the year ended October 31, 2005. Domestic product sales and service revenues accounted for 83.5% ofrevenue for the year ended October 31, 2005 while international product salesaccounted for the remaining 16.5%.

TheCompany, through its Medical Graphics Corporation subsidiary, designsnon-invasive diagnostic systems under the MedGraphics trade name that assisthealth care professionals in the prevention, early detection and cost-effectivetreatment of heart and lung disease.  Italso markets a version of some of these products under the New Leaf brand tohealth and fitness clubs and personal trainers to assist them in developingexercise programs to help their clients meet their personal goals.  Revenues consist of equipment and supplysales and service revenues.  Equipmentand supply sales reflect sales of Medical Graphics’ non-invasivecardiorespiratory diagnostic equipment, sales of New Leaf health and fitnessproducts, and aftermarket sales of peripherals and supplies.  Service revenues reflect revenues fromextended service contracts, non-warranty service visits and training.

Totalrevenue for the first quarter of 2006 was $6.9 million, an increase of 37.8%from $5.0 million in 2005.  Net incomefor the three months ended January 31, 2006 was $82,000, or $0.02 per share, compared toa net loss of $711,000, or $0.20 per share, for the same period in 2005.  Net income for the three months ended January31, 2006 included a $4,000 loss from discontinued operations.

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TheCompany stated the following objectives and goals for 2006 in its press releasedated January 9, 2006:

·                  A drive towardachieving and sustaining profitability;

·                  A fourthconsecutive year of double-digit year-over-year revenue growth;

·                  The introductionof new cardiorespiratory diagnostic products;

·                  Continuation ofthe expansion of our domestic and international sites offering New Leaf ActiveMetabolic Assessments;

·                  Furtherexpansion of the New Leaf products for weight management, exercise and athleticperformance; and

·                  Thecontinuation of efforts to recover the ELA Medical settlement costs and relatedexpenses from the insurance carrier.

Progressis evident regarding all of the Company’s 2006 objectives.  The first quarter of 2006 net earnings markstwo consecutive quarters of profitability, something not achieved since1999.  First quarter 2006 revenue growth alsorepresents our seventh consecutive quarter of double-digit year-over-yearrevenue growth.  First quarter revenue of$6.9 million also represented a record revenue quarter, which surpasses theprevious record of $6.7 million set only in the fourth quarter of fiscal 2005. Looking forward, while the Company may see some variations in the amountof revenue increases that it achieves from quarter to quarter, we arecontinuing to focus on the goals of another year of double-digit year-over-yearrevenue growth and our drive toward achieving and sustaining profitability.

Thefirst quarter saw progress made in the research and development of several newproducts intended for potential growth opportunities identified with both ourdomestic and international cardiorespiratory markets.  The first quarter of 2006 also resulted inthe addition of new sites offering New Leaf Active Metabolic Assessments.  On February 6, 2006, we announced the release of *Energy*Smart,the newest addition to our growing list of New Leaf branded health and fitnessproducts.  *Energy*Smartis an online meal planning and tracking program sold through New Leaf healthand fitness partners for their clients and members.  The program provides a “dietary roadmapTM” toenergize and train an individual’s metabolism and create a healthier lifestyle.

Finally,on January 20, 2006, the Company and Medmarc argued summary judgment motions inUnited States District Court on issues of confirming Medmarc’s responsibilityto reimburse the Company for its $1.4 million settlement with ELA and its legalfees paid in defending the lawsuit.  Inan order dated February 17, 2006, the Court granted, in large part, the Company’s motionfor summary judgment.  The Court determinedthat the Company was entitled to recover from Medmarc the $1.4 million paid tosettle the claim of ELA, subject to potential exclusion of certain costs, andthat the Company is entitled to recover from Medmarc costs and fees in theamount of $49,000 incurred in defending ELA’s claim.  See Note 9 to the Consolidated FinancialStatements, “Discontinued Operations and Related Litigation,” in this Form10-QSB for additional discussion of the settlement with ELA and Medmarclitigation.

**Restatement of Financial Statements**

Inconnection with the audit of the Company’s consolidated financial statements asof and for the year ended October 31, 2006, the Company concluded that itsconsolidated financial statements for the first, second and third quarters of fiscalyear 2006 should be restated as a result of a misapplication of an accountingprinciple regarding the accounting for income taxes in those financialstatements.  The restatement does notchange income before taxes and will have no cash impact on the results of thesethree periods.

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Duringthe first, second and third quarters of fiscal 2006 the Company did notcorrectly apply Generally Accepted Accounting Principles (“GAAP”) relating toaccounting for the utilization of pre-emergence bankruptcy net operating loss (“NOL”)carry forwards.  The Company hasdetermined that during the first three quarters of the fiscal year, it shouldhave applied American Institute of Certified Public Accountants Statement ofPosition 90-7, *Financial Reporting byEntities in Reorganization Under the Bankruptcy Code* (“SOP 90-7”) tothe utilization of its pre-emergence bankruptcy NOL carry forwards.  Angeion was in Chapter 11 BankruptcyReorganization from June 2002 to October 2002.

UnderSOP 90-7, the benefits realized from pre-emergence bankruptcy NOLs should nothave been reflected on the Company’s consolidated statements of operations as areduction inthe provision for taxes. Instead, the benefits should have been reflected in the consolidatedfinancial statements first by reducing the specified intangible assets(including goodwill) resulting from the reorganization until exhausted andthereafter been reported as an increase to additional paid-in capital.

Itis important to note that the application of this accounting principle changesonly the financial reporting related to income taxes.  The amount of income taxes payable isdetermined after utilizing the Company’s pre-emergence bankruptcy NOLs and doesnot change cash flows.

Therefore, the Company has:

·                  Increased the provision for taxes by $94,000for the three months ended January 31, 2006, and

·                  Decreasedgoodwill by $189,000, decreased other current liabilities and accrued expensesby $5,000 and decreased deferred income tax liabilities by $90,000 as ofJanuary 31, 2006.

Inaddition to the adjustments discussed above, this restatement includesadjustments for the reclassification of bonus expenses previously included ingeneral and administrative expenses to other statement of operations expensecaptions to properly classify bonus expense to the salary of the employee whoearned the bonus and the Company’s revision of certain discontinued operatingcash flows to a financing cash flow.  Werefer to these as Other Adjustments, which were immaterial, individually and inthe aggregate, to the previously issued financial statements.

SeeNote 11 to the Consolidated Financial Statements, “Restatement of Quarterly Financial Statements,”in this Form 10-QSB/A for additional discussion of the accounting for incometaxes and the use of pre-emergencebankruptcy NOLs.

# **Resultsof Operations**

TheCompany recorded net income of $82,000 for the three months ended January 31,2006 compared to a net loss of $711,000 for the same period in 2005.  Net income for the three months ended January31, 2006 included a$4,000 loss from discontinued operations.

**Revenue**

Totalrevenue increased by 37.8% to $6.9 million from $5.0 million for the threemonths ended January 31, 2006 and 2005, respectively.  Domestic product revenue increased by 41.9%to $5.0 million in 2006 compared to $3.6 million in 2005.  International product revenue increased 64.7%to $1.2 million in 2006 compared to $730,000 in 2005.  Service revenue decreased 7.9% to $686,000 in2006 from $745,000 in 2005.

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Demandfor cardiorespiratory product systems and New Leaf products has remained strongduring the first quarter of 2006.  Salesof the Company’s Elite Series systems have remained strong as customerscontinue to replace their older 1085 Series equipment.  Sales of the new Ultima PF and Ultima PFXcardiorespiratory systems also contributed to both domestic and internationalrevenue growth.  The Company is pleasedwith customer acceptance of these new products that began shipping during April2005.  The Company’s New Leaf health andfitness products also contributed to domestic growth during the first quarterdue to broadening consumer acceptance. The addition of sites from both chain and independent health clubscontributed to growth during the quarter. Customer orders for cardiorespiratory product systems continue to bestrong with no near term signs suggesting that order rates will decline.

Firstquarter revenue also increased due to customer orders received late in 2005that could not be manufactured and shipped until 2006 because of raw materiallead times.  The Company has increasedits raw material purchasing commitments in order to meet customer expectationsfor delivery of new systems.

Service revenuedecreased $59,000 or 7.9% during the first quarter of 2006 compared to the samequarter in 2005 due to the relatively aggressive pace that customers arereplacing older equipment with the Company’s new models, thereby reducingrevenue from extended service contracts and non-warranty service visits onolder equipment.

**GrossMargin**

Gross marginpercentage for the three months ended January 31, 2006 increased to 50.9% ofrevenue compared to 46.4% for the same period in 2005.  The overall improvement in gross marginpercentages is due to improved manufacturing efficiencies associated withincreased volume together with improved gross margins on the Company’s newproducts.

**Sellingand Marketing**

Sellingand marketing expenses for the three months ended January 31, 2006 increased by14.4% to $2.0 million compared to $1.7 million for the same period in2005.  The 41.9% increase in domesticsales for the first three months of 2006 resulted in a $137,000 or 57% increasein commission expenses.  In addition,$68,000 of the increase was planned incremental trade show spending for thefirst quarter of 2006 compared to the first quarter of 2005.

**Generaland Administrative**

Generaland administrative expenses for the three months ended January 31, 2006increased by 7.4% to $713,000 compared to $664,000 for the same period in2005.  General and administrativeexpenses for the first quarter of 2006 included $56,000 for stock-basedcompensation associated with variable options compared to no expense in thisarea for 2005.  In addition, there was a$50,000 increase in general and administrative expenses due to a $15,000increase in the provision for doubtful accounts for 2006 compared to a $35,000decrease in the provision for doubtful accounts for 2005.  See Note 4 to the Consolidated FinancialStatements, “Stock-Based Compensation,” in this Form 10-QSB/A for additionaldiscussion of variable options.

Generaland administrative expenses also included $15,000 and $31,500 in consultingexpenses associated with Sarbanes-Oxley compliance costs, for the first quarterof 2006 and 2005, respectively.

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**Researchand Development**

Research anddevelopment expenses for the three months ended January 31, 2006 increased by1.0% to $483,000 from $478,000 for the same period in 2005.  The Company is currently working on newproducts intended for use by international markets, asthma, allergy and primarycare physicians that are planned for release late in 2006 or early 2007.  In addition, the Company is also implementingnew designs and new components for use in its existing systems that have lowercosts and are more efficient in the manufacturing process.

**Amortizationof Intangibles**

Amortizationof developed technology was $203,000 for each of the three month periods endedJanuary 31, 2006 and 2005.  As furtherdescribed in Note 6 above, as the Company utilizes pre-emergence bankruptcy netoperating loss carryforwards, the Company will sequentially reduce the cost oftrade names and developed technology until the net carrying cost is zero.  To the extent that utilization of these NOLsreduces the cost of developed technology, future amortization expense will bereduced.

**Provisionfor Taxes**

The Company is required to present the provision fortaxes for 2006 as if it were fully taxable in accordance with SOP 90-7.  The Company has utilized its pre-emergence bankruptcy NOLs in the calculationof its income taxes payable butis required to pay only U.S. and State Alternative Minimum Taxes (“AMT”) becauseit has substantial federal net operating loss carry forwards.  Thetax benefit for using pre-emergence bankruptcy NOLs has been recorded as areduction of goodwill in the first quarter of 2006.  See Note 11 to the ConsolidatedFinancial Statements, “Restatement ofFinancial Statements,” in this Form 10-QSB/A for additional discussionof the accounting for income taxes and the use of pre-emergence bankruptcy NOLs.

**DiscontinuedOperations**

The$4,000 loss from discontinued operations for the three months ended January 31,2006 included additionalconsulting fees and miscellaneous litigation expenses.  See Note 9 to the ConsolidatedFinancial Statements, “Discontinued Operations and Related Litigation,” in thisForm 10-QSB for additional discussion of the settlement with ELA and theMedmarc litigation.

**Liquidityand Capital Resources**

TheCompany has financed its liquidity needs over the past several years throughrevenue generated by the operations of its wholly owned subsidiary, MedicalGraphics Corporation, through revenue from license agreements for patented ICDtechnology and through the use of cash balances.

The Company had cashand cash equivalents of $1.4 million, including $200,000 of cash restricted fordiscontinued operations, and working capital of $6.3 million as of January 31,2006.  During the three months endedJanuary 31, 2006, the Company generated $218,000 in cash from continuingoperations primarily because its net income of $82,000 included non-cashexpenses of $266,000 for depreciation and amortization, $56,000 for stock-basedcompensation and $100,000 of deferred income taxes.  Cash was generated by a decrease of $167,000in prepaid expenses and other current assets and an increase of $175,000 inaccounts payable.  Cash was used forincreases of $391,000 and $283,000 in inventories and accounts receivable,respectively.  The increase in bothaccounts receivable and inventory is necessary to support the Company’s growthin revenue.

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TheCompany used $104,000 in cash for operating activities of discontinuedoperations, which included legal fees and consulting expenses and otherexpenses related to the ELA Medical settlement and Medmarc litigation.

Duringthe three months ended January 31, 2006, the Company used $35,000 in cash forthe purchase of property and equipment. The Company has no material commitments for capital expenditures forfiscal year 2006.

Inconnection with the $1.4 million settlement agreement with ELA Medical, theCompany executed a $400,000 promissory note that required a payment of $200,000that was made on December 31, 2005 and another $200,000 payment due on June 30,2006.  This payment is reflected in theConsolidated Statement of Cash Flows for the quarter ended January 31,2006 as a promissory note payment within Cash Flows from Financing Activities. Thepromissory note is backed up with an irrevocable bank letter of credit.  The Company is required to collateralize theirrevocable bank letter of credit with $200,000 of cash that is classified ascash restricted for discontinued operations at January 31, 2006.

TheCompany believes that its liquidity and capital resource needs for fiscal year 2006will be met through its current cash and cash equivalents and cash flows fromoperations.

### **Item 3. Controls and Procedures.**

*(a)*** ***Evaluation of Disclosure Controls and Procedures*

Management, withthe participation of the Company’s chief executive officer, Rodney A. Young,and chief financial officer, Dale H. Johnson, evaluated the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures,as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as ofJanuary 31, 2006.  In this evaluation,the Company originally concluded that its disclosure controls and procedureswere effective as of January 31, 2006, as disclosed in the Company’s Form10-QSB filed on March 6, 2006.

In connection withthe restatement, management, under the direction of its chief executive officerand chief financial officer, reevaluated the disclosure controls and proceduresand due to the identification of a material weakness in internal control overfinancial reporting related to the Company’s accounting for income taxes, asdescribed below, concluded that the Company’s disclosure controls andprocedures were not effective as of January 31, 2006.

The material weakness ininternal control over financial reporting related to the Company’s accountingfor income taxes.  Specifically, theCompany did not have, and through its engagement of third party outsideadvisers did not acquire, adequate technical expertise to effectively overseeand review the Company’s accounting for the utilization of pre-emergencebankruptcy NOL carry forwards in accordance with AICPA Statement of Position90-7, *Financial Reporting by Entities inReorganization under the Bankruptcy Code*.  As a result, the Company restated thefinancial information included in the first three quarters of the year endedOctober 31, 2006, including the quarter ended January 31, 2006, as includedherein, to correct a material error in accounting for income taxes.

Due to this materialweakness in internal control over financial reporting, the Company performedother procedures related to the presentation of income taxes and the use ofpre-emergence bankruptcy NOL carry forwards in preparing its restatedconsolidated financial statements as of and for the quarter ended January 31,2006 to ensure that these consolidated financial statements were presentedfairly, in all material respects, in accordance with U.S. generally acceptedaccounting principles.

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*(b)**Changes in Internal Control over FinancialReporting*

There was no change inthe Company’s internal control over financial reporting during the quarterended January 31, 2006 that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

As of the date of thefiling of this Quarterly Report on Form 10-QSB/A for the first fiscal quarterof 2006, the material weakness described above has not been remediated.  The Company is taking steps to ensure that itremediates the material weakness by implementing enhanced control proceduresover accounting for income taxes.  Thesesteps include education and training of Company management and staff to improvetechnical expertise with respect to income tax accounting.  The Company is also evaluating whether toreplace or augment its current third party tax consulting resources to assistwith the Company’s evaluation of complex issues concerning tax accounting toassist management in developing its judgments with respect to these issues.

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**PART II - OTHER INFORMATION**

**Item1.  Legal Proceedings.**

The Company is subject to certain claims andlawsuits that have been filed in the ordinary course of business.  From time to time, the Company brings suitagainst others to enforce patent rights or to collect debts in the ordinarycourse of business.  Except for thelitigation discussed below, management believes that the settlement of alllitigation would not have a material effect on the results of operations orliquidity of the Company.

As disclosed in Item 3 of the Form 10-KSB for theyear ended October 31, 2005, the Company is involved in a lawsuit brought byMedmarc Insurance Company in United States District Court for the District ofMinnesota involving a claim for indemnification by ELA Medical and the Company’sclaim for insurance coverage from Medmarc in the matter Medmarc CasualtyInsurance Company v. Angeion Corporation, ELA Medical, Inc. and ELA Medical SA.

The following material developments in that matterhave occurred:

On January 20, 2006, the Company and Medmarc arguedsummary judgment motions in United States District Court on issues ofconfirming Medmarc’s responsibility to reimburse the Company for its $1.4million settlement with ELA and its legal fees paid in defending the lawsuit.

In an Order dated February 17, 2006, the Court granted,in large part, Angeion’s motion for summary judgment in the pending lawsuit.

In summary, the Court ruled:
| 1. | The  June 2005 settlement between Angeion and ELA under which Angeion agreed to  pay ELA $1.4 million to settle the claims of ELA arising out of the recall of  Angeion’s ICDs was reasonable, non-collusive and made in good faith;

                                                                                                                                                                                                                                                                                                                                                      |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2. | Medmarc  has a duty to indemnify Angeion for the $1.4 million settlement, plus  interest from June 30, 2005;

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3. | A  total of 32 of the 160 ICDs that were explanted did not meet specified  voltage levels to warrant recall and therefore the “device costs” and “ELA  expenses” associated with these 32 ICDs were not covered by the policy.  The Court stated it could not make a  specific determination with respect to that portion, if any, of the $1.4  million settlement that pertains to device costs and ELA expenses with  respect to these 32 ICDs.  This matter,  therefore, remains subject to future determination by the Court or resolution  by Angeion and Medmarc. |
| 4. | Angeion  is entitled to recover from Medmarc costs and fees in the amount of $49,353  incurred in defending ELA’s claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

Although the Court’s Order has left a few mattersunresolved, Angeion believes that issuance of this Order validates Angeion’sactions.  In connection with the matter,Angeion also intends to ask the Court to require Medmarc to reimburse Angeionfor its legal expenses incurred in connection with defending the action broughtby Medmarc and establishing the duty to defend and the duty to indemnify.

A Court-mandated settlementconference has been set for April 12, 2006. If Angeion and Medmarc do not settle the remaining issues, Angeionanticipates that they will be heard by the Court during the first half ofcalendar 2006.  Any Court decision may besubject to appeal.

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**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds.**

# ***RecentSales of Unregistered Securities***

TheCompany had no unregistered sales of equity securities during the three monthsended January 31, 2006.

##### ***Small Business Issuer Purchases ofEquity Securities***

TheCompany did not purchase any equity securities during the three months endedJanuary 31, 2006.

### **Item 3. Defaults Upon Senior Securities.**

None

**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

None

**Item5.  Other Information.**

At aregular meeting of the Board of Directors on March 1, 2006, the followingactions were taken.

# ***Compensation of Officers***

Thecompensation of Rodney A. Young, President and Chief Executive Officer, wasincreased from $250,000 to $275,000 effective April 1, 2006.  Mr. Young’s compensation was last adjustedeffective July 3, 2005.  In addition, theannual compensation of Dale H. Johnson, Chief Financial Officer, was increasedfrom $136,504 to $150,154 effective April 1, 2006.  Mr. Johnson’s compensation was last adjustedeffective April 10, 2005.

**Item6.  Exhibits.**
| (a)    | The following exhibits are included herein: |
|--------|---------------------------------------------|
|   |                                        |
|   | 31                                          |   | Certifications pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act). |
|   | 32                                          |   | Certifications pursuant Section 906 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |

 

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**SIGNATURES**

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   |             | Angeion Corporation                    |   |
|--------|------------------|----------------------------------------|--------|
|   |             | (Registrant)                           |
|   |             |                                   |
|   |             |                                   |
|   |             |                                   |
| Date:  | January 29, 2007 |                                   |   | /s/ Rodney A. Young |   |
|   |             | Rodney A. Young                        |
|   |             | President and  Chief Executive Officer |
|   |             | (Principal  Executive Officer)         |
|   |             |                                   |
|   |             |                                   |
|   |             |                                   |
| Date:  | January 29, 2007 |                                   |   | /s/ Dale H. Johnson |   |
|   |             | Dale H. Johnson                        |
|   |             | Chief Financial  Officer               |
|   |             | (Chief  Accounting Officer)            |

 

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