**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

# **FORM 10-QSB/A**

# **(AmendedQuarterly Report)**

**x****                             ****Quarterly report under Section 13or 15(d) of the Securities Exchange Act of1934.**

**For thequarterly period ended July 31, 2006**

**OR**

**o****                                ****Transition report under Section13 or 15(d) of the Exchange Act.**

**For thetransition period from                        to                        .**

## **Commission file number 001-13543**

## **AngeionCorporation**

(Exact name ofsmall business issuer as specified in its charter)

| **Minnesota**                    |   | **41-1579150**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

# **350 Oak Grove Parkway, Saint Paul, Minnesota55127-8599**

(Address ofprincipal executive offices)

**(651) 484-4874**

(Issuer’stelephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the issuer was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes  x      No  o

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

Yes  o       No  x

Check whether the registrantfiled 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 under a planconfirmed by a court.

Yes  x      No  o

The Company had 3,630,677shares of common stock, $0.10 par value, outstanding as of September 8, 2006.

 

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**EXPLANATORY STATEMENT**

This Form 10-QSB/A amendsand restates the Company’s Form 10-QSB for the quarter ended July 31, 2006,initially filed with the Securities and Exchange Commission (the “SEC”) onSeptember 11, 2006 (the “Original Filing”), and is being filed to reflect therestatement of the financial statements and other financial information of theCompany for the third fiscal 2006 quarter and nine months ended July 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 principle regardingthe 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)resulting from the reorganization until exhausted and thereafter been reportedas an increase 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 $261,000 and $435,000 forthe three and nine months ended July 31, 2006, respectively,

·                  Increasedtax expense related to discontinued operations by $97,000 for the nine monthsended July 31, 2006, and

·                  Decreased goodwill by $328,000, decreasedintangible assets by $393,000, increased other current liabilities and accruedexpenses by $17,000 and decreased deferred income tax liabilities by $207,000as of July 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. We refer to these as Other Adjustments, which were immaterial,individually and in the aggregate, to the previously issued financialstatements.

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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.  FinancialStatements.**

**ANGEIONCORPORATION AND SUBSIDIARIES**

**ConsolidatedBalance Sheets**

**July 31,2006 and October 31, 2005**

(unaudited,in thousands except share and per share data)
| ** **                                                                                                                                   | ** ** | **Restated  July 31,  2006** | ** ** | **October 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                   |       |                              |       |                       |       |
| **Current assets:**                                                                                                                          |       |                              |       |                       |       |
| Cash and cash  equivalents                                                                                                                   |       | $                                 | 2,461      |                       | $          | 1,072 |   |
| Cash restricted  for discontinued operations                                                                                                 |       | —                            |       | 400                        |       |
| Accounts  receivable, net of allowance for doubtful accounts of $177 and $210,  respectively                                                 |       | 6,037                             |       | 4,100                      |       |
| Inventories                                                                                                                                  |       | 5,603                             |       | 3,455                      |       |
| Prepaid expenses  and other current assets                                                                                                   |       | 234                               |       | 280                        |       |
| Current assets  of discontinued operations                                                                                                   |       | —                            |       | 700                        |       |
| Total current  assets                                                                                                                        |       | 14,335                            |       | 10,007                     |       |
|                                                                                                                                         |       |                              |       |                       |       |
| Property and equipment,  net of accumulated depreciation of $1,799 and $1,598, respectively                                                  |       | 1,106                             |       | 1,035                      |       |
| Intangible assets, net                                                                                                                       |       | 4,496                             |       | 5,498                      |       |
| Goodwill                                                                                                                                     |       | —                            |       | 328                        |       |
| **Total Assets**                                                                                                                             | ** ** | **$**                             | **19,937** | ** **                 | **$**      | **16,868** | ** ** |
|                                                                                                                                         |       |                              |       |                       |       |
| **Liabilities  and Shareholders’ Equity**                                                                                               |       |                              |       |                       |       |
| **Current liabilities:**                                                                                                                     |       |                              |       |                       |       |
| Accounts payable                                                                                                                             |       | $                                 | 1,844      |                       | $          | 1,184 |   |
| Employee compensation                                                                                                                        |       | 1,724                             |       | 1,166                      |       |
| Advance payments  from customers                                                                                                             |       | 1,045                             |       | —                     |       |
| Deferred income                                                                                                                              |       | 958                               |       | 871                        |       |
| Warranty reserve                                                                                                                             |       | 275                               |       | 175                        |       |
| Other current  liabilities and accrued expenses                                                                                              |       | 313                               |       | 366                        |       |
| Current  liabilities of discontinued operations                                                                                              |       | —                            |       | 517                        |       |
| Total current  liabilities                                                                                                                   |       | 6,159                             |       | 4,279                      |       |
|                                                                                                                                         |       |                              |       |                       |       |
| **Long-term liabilities:**                                                                                                                   |       |                              |       |                       |       |
| Long-term  deferred income                                                                                                                   |       | 792                               |       | 319                        |       |
| Deferred income  taxes                                                                                                                       |       | 132                               |       | 337                        |       |
| Total long-term  liabilities                                                                                                                 |       | 924                               |       | 656                        |       |
| **Total Liabilities**                                                                                                                        |       | 7,083                             |       | 4,935                      |       |
|                                                                                                                                         |       |                              |       |                       |       |
| **Shareholders’ equity:**                                                                                                               |       |                              |       |                       |       |
| Common stock,  $0.10 par value, authorized 25,000,000 shares, issued and outstanding,  3,630,677 shares in 2006 and 3,609,325 shares in 2005 |       | 363                               |       | 361                        |       |
| Additional  paid-in capital                                                                                                                  |       | 17,812                            |       | 17,589                     |       |
| Deferred  compensation                                                                                                                       |       | —                            |       | (14                        | )          |
| Accumulated  deficit                                                                                                                         |       | (5,321                            | )          | (6,003                     | )          |
| Total  shareholders’ equity                                                                                                             |       | 12,854                            |       | 11,933                     |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                          | ** ** | **$**                             | **19,937** | ** **                 | **$**      | **16,868** | ** ** |

 

Seeaccompanying 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  July 31,** | ** ** | **Nine Months Ended  July 31,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                         | ** ** | **Restated  2006**                              | ** ** | **2005**                                       | ** ** | **Restated  2006** | ** ** | **2005** | ** ** |
| **Revenues**                                                       | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equipment and supply sales                                         |       | $                                               | 8,159      |                                           | $          | 5,363 |   | $ | 20,970 |   | $ | 15,015 |   |
| Service revenue                                                    |       | 638                                             |       | 695                                            |       | 1,972 |   | 2,105 |   |
|                                                               |       | 8,797                                           |       | 6,058                                          |       | 22,942 |   | 17,120 |   |
| **Cost of  goods sold**                                            |       |                                            |       |                                           |       |   |   |   |   |
| Cost of equipment and supplies                                     |       | 4,393                                           |       | 2,968                                          |       | 11,258 |   | 8,482 |   |
| Cost of service revenue                                            |       | 95                                              |       | 89                                             |       | 317 |   | 316 |   |
|                                                               |       | 4,488                                           |       | 3,057                                          |       | 11,575 |   | 8,798 |   |
|                                                               |       |                                            |       |                                           |       |   |   |   |   |
| **Gross  margin**                                                  |       | 4,309                                           |       | 3,001                                          |       | 11,367 |   | 8,322 |   |
|                                                               |       |                                            |       |                                           |       |   |   |   |   |
| **Operating  expenses:**                                           |       |                                            |       |                                           |       |   |   |   |   |
| Selling and marketing                                              |       | 2,013                                           |       | 1,744                                          |       | 5,818 |   | 5,309 |   |
| General and administrative                                         |       | 809                                             |       | 659                                            |       | 2,328 |   | 1,937 |   |
| Research and development                                           |       | 633                                             |       | 482                                            |       | 1,687 |   | 1,519 |   |
| Amortization of intangibles                                        |       | 203                                             |       | 203                                            |       | 609 |   | 609 |   |
|                                                               |       | 3,658                                           |       | 3,088                                          |       | 10,442 |   | 9,374 |   |
|                                                               |       |                                            |       |                                           |       |   |   |   |   |
| **Operating  income (loss)**                                       |       | 651                                             |       | (87                                            | )          | 925 |   | (1,052 | ) |
|                                                               |       |                                            |       |                                           |       |   |   |   |   |
| Interest income                                                    |       | 22                                              |       | 10                                             |       | 50 |   | 26 |   |
|                                                               |       |                                            |       |                                           |       |   |   |   |   |
| **Income  (loss) before taxes**                                    |       | 673                                             |       | (77                                            | )          | 975 |   | (1,026 | ) |
|                                                               |       |                                            |       |                                           |       |   |   |   |   |
| Provision for taxes                                                |       | 279                                             |       | —                                         |       | 464 |   | — |   |
|                                                               |       |                                            |       |                                           |       |   |   |   |   |
| **Income  (loss) from continuing operations**                      |       | 394                                             |       | (77                                            | )          | 511 |   | (1,026 | ) |
| **Gain  (loss) from discontinued operations, net of income taxes** |       | —                                          |       | (191                                           | )          | 171 |   | (191 | ) |
| **Net  income (loss)**                                             |       | $                                               | 394        |                                           | $          | (268 | ) | $ | 682 |   | $ | (1,217 | ) |
|                                                               |       |                                            |       |                                           |       |   |   |   |   |
| **Earnings  (loss) per share - basic**                             |       |                                            |       |                                           |       |   |   |   |   |
| Continuing operations                                              |       | $                                               | 0.11       |                                           | $          | (0.02 | ) | $ | 0.14 |   | $ | (0.29 | ) |
| Discontinued operations                                            |       | —                                          |       | (0.05                                          | )          | 0.05 |   | (0.05 | ) |
| Net income (loss)                                                  |       | $                                               | 0.11       |                                           | $          | (0.07 | ) | $ | 0.19 |   | $ | (0.34 | ) |
|                                                               |       |                                            |       |                                           |       |   |   |   |   |
| **Earnings  (loss) per share - diluted**                           |       |                                            |       |                                           |       |   |   |   |   |
| Continuing operations                                              |       | $                                               | 0.10       |                                           | $          | (0.02 | ) | $ | 0.14 |   | $ | (0.29 | ) |
| Discontinued operations                                            |       | —                                          |       | (0.05                                          | )          | 0.04 |   | (0.05 | ) |
| Net income (loss)                                                  |       | $                                               | 0.10       |                                           | $          | (0.07 | ) | $ | 0.18 |   | $ | (0.34 | ) |
|                                                               |       |                                            |       |                                           |       |   |   |   |   |
| **Weighted  average common shares outstanding**                    |       |                                            |       |                                           |       |   |   |   |   |
| **Basic**                                                          |       | 3,626                                           |       | 3,607                                          |       | 3,619 |   | 3,605 |   |
| **Diluted**                                                        |       | 3,789                                           |       | 3,607                                          |       | 3,755 |   | 3,605 |   |

 

Seeaccompanying notes to consolidated financial statements.

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**ANGEION CORPORATION AND SUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

(unaudited,in thousands)
| ** **                                                                                          | ** ** | **Nine Months Ended  July 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **Restated  2006**                             | ** ** | **2005** | ** ** |
| ** **                                                                                          | ** ** | ** **                                     | ** ** | **(Revised)** | ** ** |
| **Cash  Flows From Operating Activities:**                                                          |       |                                           |       |   |   |
| Net income (loss)                                                                                   |       | $                                              | 682        |   | $ | (1,217 | ) |
| (Gain) loss from discontinued operations                                                            |       | (171                                           | )          | 191 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                           |       |   |   |
| Depreciation and amortization                                                                       |       | 810                                            |       | 919 |   |
| Stock-based compensation                                                                            |       | 187                                            |       | 25 |   |
| Tax benefit from stock options exercised                                                            |       | 1                                              |       | — |   |
| Deferred income taxes                                                                               |       | 516                                            |       | — |   |
| Provision for doubtful accounts                                                                     |       | (2                                             | )          | (73 | ) |
| Changes in operating assets and liabilities:                                                        |       |                                           |       |   |   |
| Accounts receivable                                                                                 |       | (1,935                                         | )          | 253 |   |
| Inventories                                                                                         |       | (2,148                                         | )          | (502 | ) |
| Prepaid expenses and other current assets                                                           |       | 46                                             |       | 113 |   |
| Accounts payable                                                                                    |       | 660                                            |       | (429 | ) |
| Employee compensation                                                                               |       | 558                                            |       | 316 |   |
| Advance payments from customers                                                                     |       | 1,045                                          |       | — |   |
| Deferred income                                                                                     |       | 560                                            |       | 79 |   |
| Warranty reserve                                                                                    |       | 100                                            |       | — |   |
| Other current liabilities and accrued expenses                                                      |       | (53                                            | )          | 73 |   |
| Net cash provided by (used in) continuing operations                                                |       | 856                                            |       | (252 | ) |
| Cash provided by (used in) operating activities of  discontinued operations                         |       | 754                                            |       | (660 | ) |
| Net cash provided by (used in) operating activities                                                 |       | 1,610                                          |       | (912 | ) |
|                                                                                                |       |                                           |       |   |   |
| **Cash  Flows From Investing Activities:**                                                          |       |                                           |       |   |   |
| Purchase of property and equipment                                                                  |       | (272                                           | )          | (188 | ) |
| Net cash used in investing activities                                                               |       | (272                                           | )          | (188 | ) |
|                                                                                                |       |                                           |       |   |   |
| **Cash  Flows From Financing Activities:**                                                          |       |                                           |       |   |   |
| Proceeds from issuance of common stock                                                              |       | 51                                             |       | 14 |   |
| Net cash provided by financing activities of continuing  operations                                 |       | 51                                             |       | 14 |   |
| Cash provided by (used in) financing activities of discontinued  operations:                        |       |                                           |       |   |   |
| Promissory note payments                                                                            |       | (400                                           | )          | — |   |
| Cash restricted for discontinued operations                                                         |       | 400                                            |       | (400 | ) |
| Net cash provided by (used in) financing activities                                                 |       | 51                                             |       | (386 | ) |
|                                                                                                |       |                                           |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                                           |       | 1,389                                          |       | (1,486 | ) |
|                                                                                                |       |                                           |       |   |   |
| **Cash and  cash equivalents at beginning of period**                                               |       | 1,072                                          |       | 2,390 |   |
|                                                                                                |       |                                           |       |   |   |
| **Cash and cash equivalents at  end of period**                                                     | ** ** | **$**                                          | **2,461**  |   | **$** | **904** | ** ** |

 

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

During the nine months ended July 31, 2006, theCompany decreased goodwill $328,000 and intangible assets $393,000 with anoffsetting decrease to the deferred tax valuation allowance of $721,000 for theusage of pre-emergence bankruptcy net operating loss carry forwards.

Seeaccompanying notes to consolidated financial statements.

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

July31, 2006

(Unaudited)

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

The accompanyingconsolidated balance sheet as of July 31, 2006 and the consolidated statementsof operations for the three and nine months ended July 31, 2006 and theconsolidated statement cash flows for the nine months  ended July 31, 2006 have been restated.  The nature of the restatement and the effecton the financial statement line items are discussed in Note 11 to the Consolidated FinancialStatements, “Restatement of QuarterlyFinancial Statements.”

The consolidated balance sheet as of July 31, 2006, the consolidated statements of operations for the three and ninemonths ended July 31, 2006 and 2005,and the consolidated statements of cash flows for the nine months ended July31, 2006 and 2005, and the relatedinformation presented in these notes have been prepared by management inaccordance with U.S. generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-QSB and Rule 10-01of Regulation S-X, without audit. Accordingly, they do not include all of the information and notesrequired by U.S. generally accepted accounting principles for completefinancial statements.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation ofresults have been included.  Theconsolidated balance sheet at October 31, 2005 was derived from the auditedconsolidated financial statements as of that date.  Operating results for the three and ninemonths ended July 31, 2006 are notnecessarily indicative of the results that may be expected for the year endingOctober 31, 2006.  For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in Angeion Corporation’s Annual Report on Form 10-KSB for the yearended 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 and nine months ended July 31, 2006 and 2005, comprehensive income (loss) for Angeion Corporation wasequivalent to net income (loss) as reported.

Preparation of the consolidated financial statements in conformity withU.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities made in theconsolidated financial statements and accompanying notes.  Actual results could differ from thoseestimates.  Estimates include accountsreceivable, product warranty and inventory reserves, and depreciable lives ofproperty, 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, theselling price is fixed or determinable and collectibility is reasonablyassured.  The Company’s products are soldfor cash or on 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 to service contract revenue.  Revenuefrom installation and training services provided to domestic customers isdeferred until the service has been performed. The total amount of deferred revenue was $1,750,000 and $1,190,000 atJuly 31, 2006 and 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.

**Advance Payments from Customers.**  TheCompany typically does not receive advance payments from its customers inconnection with the sale of its products. The Company occasionally enters into an arrangement under which acustomer agrees to purchase a large quantity of product that is to be deliveredover a period of time.  Depending on thesize of these arrangements, the Company may negotiate an advance payment fromthese customers.  At July 31, 2006,advance payments from customers aggregated $1,045,000, of which $964,000 wasfrom a single customer for product to be shipped and services to be deliveredover the next several quarters.  Revenuerecognition for customer orders that include advance payments is consistentwith the Company’s revenue recognition policy described above.

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

In June 2006, the FASBissued FASB Interpretation No. 48, “*Accounting for Uncertaintyin Income Taxes*” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxesrecognized in accordance with SFAS No. 109, “*Accountingfor Income Taxes*.”  FIN 48prescribes a comprehensive model for the financial statement recognition,measurement, presentation and disclosure of uncertain tax positions taken orexpected to be taken on income tax returns. FIN 48 is effective for fiscal years beginning after December 15,2006.  The Company is currentlyevaluating the impact of adopting FIN 48 on its consolidated financialstatements.

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 Accounting Principles Board Opinion No. 25, *“Accountingfor Stock Issued to Employees,”* (“APB No. 25”) and its relatedimplementation guidance.  The Statementfocuses primarily on accounting for transactions in which an entity obtainsemployee services through share-based payment transactions.  SFAS No. 123R requires a public entity tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award (withlimited exceptions).  That cost will berecognized over the period during which an employee is required to provideservice in exchange for the award.  TheCompany will adopt the standard for fiscal 2007 using the modified prospectivemethod.  While the Company cannotprecisely determine the impact on net earnings as a result of the adoption ofSFAS No. 123R, estimated compensation expense related to prior periods can befound in “Stock Based Compensation” below. The ultimate amount of increased compensation expense will depend on anumber of factors, including the number of option shares granted,

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theirtiming and vesting period and the method used to calculate the fair value ofthe awards.  We have yet to determine theimpact of SFAS No. 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 periods’ financial statements of avoluntary change in accounting principle unless it is impractical.  SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December15, 2005.  Earlier application ispermitted for accounting changes and corrections of errors occurring in fiscalyears beginning after June 1, 2005.  Thestatement does not change the transition provisions of any existing accountingpronouncements, including those that are in a transition phase as of theeffective date of the statement.  TheCompany has adopted SFAS No. 154.  SeeNote 11 to the Consolidated Financial Statements, “Restatement of Quarterly Financial Statements,” for furtherdetails.

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

TheCompany applies the intrinsic-value method prescribed under APB No. 25 andrelated interpretations to account for the issuance of stock incentives toemployees and directors.  Accordingly, nocompensation expense related to employees’ and directors’ stock incentives hasbeen recognized in the consolidated financial statements.  In accordance with the provisions of SFAS No.123, “*Accounting for Stock-Based Compensation*,”the Company is required to present pro forma information reflectingcompensation cost for such issuances. Had the Company determined compensation costs based on the fair value atthe date of grant for options granted, the Company’s net income (loss) wouldhave been decreased or increased to the pro forma amounts indicated in thefollowing table:
|                                                                                                                                               | ** ** | **Three Months Ended **July 31, | ** ** | **Nine Months Ended **July 31, | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **Restated**                                        | ** ** | ** **                                         | ** ** | **Restated** | ** ** | ** ** | ** ** |
| **(In thousands, except for per share amounts)**                                                                | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  (loss)                                                                                                                            |       |                                                |       |                                               |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                                                   | 394        |                                               | $          | (268 | ) | $ | 682 |   | $ | (1,217 | ) |
| Add: Stock-based employee compensation expense  included in reported net income (loss), net of related tax effects                            |       | 32                                                  |       | 25                                                 |       | 118 |   | 25 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (258                                                | )          | (21                                                | )          | (286 | ) | (63 | ) |
| Pro forma                                                                                                                                     |       | $                                                   | 168        |                                               | $          | (264 | ) | $ | 514 |   | $ | (1,255 | ) |
|                                                                                                                                          |       |                                                |       |                                               |       |   |   |   |   |
| Net income  (loss) per share – basic                                                                                                     |       |                                                |       |                                               |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                                                   | 0.11       |                                               | $          | (0.07 | ) | $ | 0.19 |   | $ | (0.34 | ) |
| Pro forma                                                                                                                                     |       | $                                                   | 0.05       |                                               | $          | (0.07 | ) | $ | 0.14 |   | $ | (0.35 | ) |
|                                                                                                                                          |       |                                                |       |                                               |       |   |   |   |   |
| Net income  (loss) per share – diluted                                                                                                   |       |                                                |       |                                               |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                                                   | 0.10       |                                               | $          | (0.07 | ) | $ | 0.18 |   | $ | (0.34 | ) |
| Pro forma                                                                                                                                     |       | $                                                   | 0.04       |                                               | $          | (0.07 | ) | $ | 0.14 |   | $ | (0.35 | ) |

 

9

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The above table reflects the acceleration of vesting for 46,800 optionsduring the quarter ended July 31, 2006 due to the action taken by theCompensation Committee of the Board of Directors.  As further described below, this increased pretaxstock-based compensation expense under the intrinsic-value method during thethree and nine months ended July31, 2006 by $50,000.  In addition, this acceleration also increasedpretax stock-based compensation expense under the fair value method for thethree and nine months ended July 31, 2006 by $38,000.  The table also reflects the granting of93,000 options to purchase the Company’s common stock on May 25, 2006 to theCompany’s directors and officers.  Thesenew option grants were granted at an exercise price of $5.08 per share, theclosing price for the Company’s stock on May 25, 2006, and were immediatelyvested.  The fair value of these awardswas determined to be $370,000.

***Variable Stock Option Grants***

In September 2003 and July 2004, the Company granted employees’ optionswith an exercise price of $2.00 that vested at increasing rates as the Company’scommon stock traded for increasing prices for 20 of 30 consecutive days.  There were 78,000 and 75,000 of these optionsoutstanding at October 31, 2005 and July 31, 2006, respectively.  Notwithstanding the performance vestingschedule, these options were exercisable in full beginning October 1,2009.  The options became exercisableearlier if the Company’s stock traded at the following prices for 20 of 30consecutive trading days.

| 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 the unvestedoption grants using variable accounting in accordance with APB No. 25.  Accordingly, the Company determined theintrinsic value of unvested variable option grants at each balance sheet dateand recorded the changes in intrinsic value as deferred compensation.

During the second quarter of 2006, the Company’s stocktraded at or above $4.50 per share for more than 20 of 30 consecutive tradingdays and therefore 31,200, or 40% of these options vested.  On July18, 2006, the Compensation Committee of the Board of Directors immediatelyvested the remaining 46,800 options.  When the options were granted in 2003 and2004, the Company had not yet achieved profitability after emerging frombankruptcy.  As part of its overallstrategy, the Company granted options with exercise prices of $2.00, $6.23 and$7.79 per share, all above the $1.40 and $1.68 closing market prices for theCompany’s stock on the option grant dates. The $2.00 options were granted with the closing price exercisabilityprovisions to reward employees as the stock price achieved these higher levels,in order to align these employees’ interests with those of shareholders.  The Compensation Committee believes that thisgoal has been largely achieved.  TheCommittee concluded that the significant additional stock-based compensationexpense that the Company would incur in connection with the vesting of theadditional options would adversely affect the Company’s future earnings.

Upon vesting, theoptions are considered fixed plan awards with no further adjustment to theaggregate intrinsic value.  In addition,all previously recorded deferred compensation expense is charged to earningsupon vesting.  Stock based compensationexpense associated with these variable options was $50,000 and $187,000 for thethree and nine months ended July 31, 2006, respectively.  These amounts include all of the intrinsicvalue of the options that vested during the second and third quarters of 2006.

10

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The total additional non-cashexpense that the Company incurred in the third quarter of 2006 in connectionwith the accelerated vesting was $50,000.

**5.****                                      Inventories**

Inventoriesconsisted of the following at July 31,2006 and October 31, 2005:
| (In thousands) | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Raw materials       |       | $        | 2,043      |     | $          | 1,304 |   |
| Work-in-progress    |       | 539      |       | 186      |       |
| Finished goods      |       | 3,021    |       | 1,965    |       |
|                |       | $        | 5,603      |     | $          | 3,455 |   |

 

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

Intangible assetsconsisted of the following at July 31,2006 and October 31, 2005:
|                                      | ** ** | **Restated** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------|------------|------------|------------|
| **(In thousands)**              | ** ** | **2006**     | ** ** | **2005**   | ** ** |
| Intangible  assets:                  |       |         |       |       |       |
| Developed technology                 |       | $            | 6,900      |       | $          | 6,900 |   |
| Trade name (unamortized)             |       | 607          |       | 1,000      |       |
|                                 |       | 7,507        |       | 7,900      |       |
|                                 |       |         |       |       |       |
| Amortization -  developed technology |       | (3,011       | )          | (2,402     | )          |
|                                 |       | $            | 4,496      |       | $          | 5,498 |   |

 

Amortizationexpense was $609,000 for each of the nine-month periods ended July 31, 2006 and 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, trade name and developed technologyuntil 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 July31, 2006, which does not reflect the possible reduction discussed above,is as follows:
| (In thousands)                   | ** ** | **Amortization** | ** ** |
|---------------------------------------|------------|------------------|------------|
| Three months  ending October 31, 2006 |       | $                | 203        |   |
| 2007                                  |       | 779              |       |
| 2008                                  |       | 779              |       |
| 2009                                  |       | 778              |       |
| 2010                                  |       | 450              |       |
| Thereafter                            |       | 900              |       |
|                                  |       | $                | 3,889      |   |

 

11

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Goodwill and Trade name consisted of the following atJuly 31, 2006 and October 31, 2005:
| (In thousands)                                                                  | ** ** | **Goodwill** | ** ** | **Trade Name** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------|------------|---------------------|------------|
| Balance at  October 31, 2005                                                         |       | $            | 328        |                | $          | 1,000 |   |
| Reduction in  balance due to utilization of pre-emergence  bankruptcy NOL (restated) |       | (328         | )          | (393                | )          |
| Balance at July 31, 2006 (restated)                                                  |       | $            | —     |                | $          | 607 |   |

 

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

Sales of the Company’s equipment are subject to a warrantyobligation.  Equipment warrantiestypically extend for a period of twelve months from the date ofinstallation.  Standard warranty termsare included in customer contracts. Under the terms of these warranties, the Company is obligated to repairor replace any components or assemblies that it deems defective in workmanshipor materials.  The Company reserves theright to reject warranty claims where it determines that failure is due tonormal 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 onits products.  The Company adjusts thewarranty reserve based on the number and type of equipment that is subject towarranty, 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 nine months endedJuly 31, 2006 and 2005 was asfollows:
| (In thousands)           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Balance,  beginning of period |       | $        | 175        |     | $          | 155 |   |
| Warranty provisions           |       | 352      |       | 210      |       |
| Warranty claims               |       | (252     | )          | (210     | )          |
| Balance, end of period        |       | $        | 275        |     | $          | 155 |   |

 

**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 income(loss) per share except that the weighted average shares outstanding areincreased to include additional shares from the assumed exercise of stockoptions and warrants, if dilutive, using the treasury stock method.  The number of additional shares is calculatedby assuming that outstanding stock options or warrants were exercised and thatthe proceeds from the exercise were used to acquire shares of common stock atthe average market price during the reporting period.

Shares used in theearnings (loss) per share computations for the three and nine months ended July 31, 2006 and 2005 are as follows:
|                                                            | ** ** | **Three Months Ended July 31,** | ** ** | **Nine Months Ended   July 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**                                    | ** ** | **2006**                                            | ** ** | **2005**                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average  common shares outstanding – basic   |       | 3,626                                               |       | 3,607                                                |       | 3,619 |   | 3,605 |   |
| Dilutive effect of stock options                           |       | 163                                                 |       | —                                               |       | 136 |   | — |   |
| Weighted average common  shares outstanding – diluted |       | 3,789                                               |       | 3,607                                                |       | 3,755 |   | 3,605 |   |

 

12

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The dilutive effect ofstock options in the above table excludes all options for which the exerciseprice was higher than the average market price for the period.  The number of option shares excluded from thecalculation was 455,800 for the three and nine months ended July 31, 2006.  As a result of the net loss, there were nodilutive common shares outstanding for the three and nine months ended July 31, 2005, and accordingly, 482,800were excluded from the calculation.

The Company had warrantsoutstanding at July 31, 2006 and2005 to purchase 179,480 and 179,481 shares, respectively, of its common stockthat were considered antidilutive and therefore not considered to have beenexercised.

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

On April 12, 2006, Angeion Corporation and Medmarc Casualty InsuranceCompany (“Medmarc”) agreed to a settlement that resolved all matters withrespect to the pending lawsuit between the parties related to the recovery ofinsurance proceeds for a claim associated with the Company’s former ICDbusiness.  Medmarc made the settlementpayment to the Company on June 9, 2006 and each party agreed to dismiss withprejudice all claims against the other in the pending lawsuit.

As a result of the settlement with Medmarc, the Company recorded a$171,000 gain, net of $103,000 taxes, from discontinued operations for the ninemonths ended July 31, 2006. There were no adjustments made to discontinued operations during thethird quarter of 2006.  TheCompany expects that the only expense for discontinued operations in the futurewill be the purchase of product liability insurance for as long as the Companybelieves it necessary to cover ICDs that remain implanted in patients.  The current policy for product liabilityinsurance covering ICDs expires in July 2007.

The $191,000 lossfrom discontinued operations for the three and nine months ended July 31, 2005primarily consisted of legal expenses and the purchase of liability insurance coveragefor claims associated with the Company’s discontinued ICD products.

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

The Company has recorded a provision for taxes fromcontinuing operations of $279,000 and $464,000 for the three and nine monthsended July 31, 2006, respectively. The Company has also allocated $103,000 ofthe provision for taxes to discontinued operations for the nine months endedJuly 31, 2006.  The provision for taxeshas been calculated and presented in the statement of operations as if theCompany’s earnings 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 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 general businesstax credit carry forward of approximately $989,000 that is available to reducefuture federal income taxes, if any.  Ifnot used, these general business tax credits will expire in years 2006 through2014.  Approximately $515,000 of thegeneral business tax carry forward will expire over the next five years.  The Company also has $90,000 of alternativeminimum tax credit carry forwards that do not have expiration dates.  Under the Tax Reform Act of 1986, theutilization of these tax loss and tax credit carry forwards may be limited as aresult of significant changes in ownership. Even though theCompany has

13

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substantial federalnet operating loss carry forwards,any income is still subject to U.S. and State alternative minimum taxes anddeferred taxes on non-amortizable intangible assets other than goodwill.

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 third 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 $132,000 as of July 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 reducing the specified intangible assets (including goodwill)resulting from the reorganization until exhausted and thereafter been reportedas an increase to additional 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 $261,000 and $435,000 for the three andnine months ended July 31, 2006, respectively, increased tax expense related todiscontinued operations by $97,000 for the nine months ended July 31, 2006, anddecreased goodwill by $328,000, decreased intangible assets by $393,000,increased other current liabilities and accrued expenses by $17,000 anddecreased deferred income tax liabilities by $207,000 as of July 31, 2006 toproperly account for income taxes.

(2)  The Company has reclassified $145,000 and$341,000, for the three and nine months ended July 31, 2006, respectively, ofbonus expenses previously included in general and administrative expenses toother statement of operations expense captions to properly classify bonusexpense to the salary of the employee who earned the bonus.

14

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The Company has restated itsbalance sheet as of July 31, 2006, its statements of operations for the threeand nine months ended July 31, 2006 and statement of cash flows for the ninemonths ended July 31, 2006 for the impact of the above items as follows(adjustment number corresponds with the adjustments noted above):
| ** **                                       | ** ** | **As of July 31, 2006** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                       | ** ** | **As**                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Previously**                              | ** ** | **Adjustments** | ** ** | **As** | ** ** |
| **(In thousands)**                          | ** ** | **Reported**                                | ** ** | **Amount** | ** ** | **No.** | ** ** | **Restated** | ** ** |
| ***Balance  Sheet Data:***                       |       |                                        |       |   |   |   |   |   |   |
| Intangible  assets, net                          |       | $                                           | 4,889      |   | $ | (393 | ) | 1 |   | $ | 4,496 |   |
| Goodwill                                         |       | 328                                         |       | (328 | ) | 1 |   | — |   |
| Total Assets                                     |       | 20,658                                      |       | (721 | ) |   |   | 19,937 |   |
|                                             |       |                                        |       |   |   |   |   |   |   |
| Other current  liabilities and accrued expenses  |       | 296                                         |       | 17 |   | 1 |   | 313 |   |
| Total current liabilities                        |       | 6,142                                       |       | 17 |   |   |   | 6,159 |   |
| Deferred income  taxes                           |       | 339                                         |       | (207 | ) | 1 |   | 132 |   |
| Total long-term  liabilities                     |       | 1,131                                       |       | (207 | ) |   |   | 924 |   |
| Total  Liabilities                               |       | 7,273                                       |       | (190 | ) |   |   | 7,083 |   |
| Additional  paid-in capital                      |       | 17,811                                      |       | 1 |   | 1 |   | 17,812 |   |
| Accumulated  deficit                             |       | (4,789                                      | )          | (532 | ) | 1 |   | (5,321 | ) |
| Total  shareholders’ equity                 |       | 13,385                                      |       | (531 | ) |   |   | 12,854 |   |
| Total Liabilities and  Shareholders’ Equity |       | $                                           | 20,658     |   | $ | (721 | ) |   |   | $ | 19,937 |   |

 

15

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| ** **                                          | ** **   | **Three Months Ended July 31, 2006** | ** **   |
|-----------------------------------------------------|--------------|---------------------------------------------------------------|--------------|
| ** **                                          | ** **   | **As**                                                        | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                          | ** **   | **Previously**                                                | ** **   | **Adjustments** | ** ** | **As** | ** ** |
| **(In thousands)**                             | ** **   | **Reported**                                                  | ** **   | **Amount** | ** ** | **No.** | ** ** | **Restated** | ** ** |
| ***Statement  of Operations Data:***                | *** *** | *** ***                                                  | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Revenues:                                           |         |                                                          |         |   |   |   |   |   |   |
| Equipment and supply sales                          |         | $                                                             | 8,159        |   | $ | — |   |   |   | $ | 8,159 |   |
| Service revenue                                     |         | 638                                                           |         | — |   |   |   | 638 |   |
|                                                |         | 8,797                                                         |         | — |   |   |   | 8,797 |   |
| Cost of goods  sold:                                |         |                                                          |         |   |   |   |   |   |   |
| Cost of equipment and supply sales                  |         | 4,355                                                         |         | 38 |   | 2 |   | 4,393 |   |
| Cost of service revenue                             |         | 95                                                            |         | — |   |   |   | 95 |   |
|                                                |         | 4,450                                                         |         | 38 |   |   |   | 4,488 |   |
| Gross margin                                        |         | 4,347                                                         |         | (38 | ) |   |   | 4,309 |   |
| Operating  expenses:                                |         |                                                          |         |   |   |   |   |   |   |
| Selling and marketing                               |         | 1,936                                                         |         | 77 |   | 2 |   | 2,013 |   |
| General and administrative                          |         | 954                                                           |         | (145 | ) | 2 |   | 809 |   |
| Research and development                            |         | 603                                                           |         | 30 |   | 2 |   | 633 |   |
| Amortization of intangibles                         |         | 203                                                           |         | — |   |   |   | 203 |   |
|                                                |         | 3,696                                                         |         | (38 | ) |   |   | 3,658 |   |
| Operating income                                    |         | 651                                                           |         | — |   |   |   | 651 |   |
| Interest income                                     |         | 22                                                            |         | — |   |   |   | 22 |   |
| Income before  taxes                                |         | 673                                                           |         | — |   |   |   | 673 |   |
| Provision for  taxes                                |         | 18                                                            |         | 261 |   | 1 |   | 279 |   |
|                                                |         |                                                          |         |   |   |   |   |   |   |
| Income from  continuing operations                  |         | 655                                                           |         | (261 | ) |   |   | 394 |   |
| Gain from  discontinued operations, net of $0 taxes |         | —                                                        |         | — |   |   |   | — |   |
| Net income                                          |         | $                                                             | 655          |   | $ | (261 | ) |   |   | $ | 394 |   |
|                                                |         |                                                          |         |   |   |   |   |   |   |
| Earnings per  share – basic                    |         |                                                          |         |   |   |   |   |   |   |
| Continuing operations                               |         | $                                                             | 0.18         |   | $ | (0.07 | ) |   |   | $ | 0.11 |   |
| Discontinued operations                             |         | —                                                        |         | — |   |   |   | — |   |
| Net Income                                          |         | $                                                             | 0.18         |   | $ | (0.07 | ) |   |   | $ | 0.11 |   |
| Earnings per  share - diluted                       |         |                                                          |         |   |   |   |   |   |   |
| Continuing operations                               |         | $                                                             | 0.17         |   | $ | (0.07 | ) |   |   | $ | 0.10 |   |
| Discontinued operations                             |         | —                                                        |         | — |   |   |   | — |   |
| Net Income                                          |         | $                                                             | 0.17         |   | $ | (0.07 | ) |   |   | $ | 0.10 |   |

 

16

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| ** **                                            | ** **   | **Nine Months Ended July 31, 2006** | ** **   |
|-------------------------------------------------------|--------------|--------------------------------------------------------------|--------------|
| ** **                                            | ** **   | **As**                                                       | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** **   | **Previously**                                               | ** **   | **Adjustments** | ** ** | **As** | ** ** |
| **(In thousands)**                               | ** **   | **Reported**                                                 | ** **   | **Amount** | ** ** | **No.** | ** ** | **Restated** | ** ** |
| ***Statement  of Operations Data:***                  | *** *** | *** ***                                                 | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Revenues:                                             |         |                                                         |         |   |   |   |   |   |   |
| Equipment and supply sales                            |         | $                                                            | 20,970       |   | $ | — |   |   |   | $ | 20,970 |   |
| Service revenue                                       |         | 1,972                                                        |         | — |   |   |   | 1,972 |   |
|                                                  |         | 22,942                                                       |         | — |   |   |   | 22,942 |   |
| Cost of goods  sold:                                  |         |                                                         |         |   |   |   |   |   |   |
| Cost of equipment and supply sales                    |         | 11,165                                                       |         | 93 |   | 2 |   | 11,258 |   |
| Cost of service revenue                               |         | 317                                                          |         | — |   |   |   | 317 |   |
|                                                  |         | 11,482                                                       |         | 93 |   |   |   | 11,575 |   |
| Gross margin                                          |         | 11,460                                                       |         | (93 | ) |   |   | 11,367 |   |
| Operating  expenses:                                  |         |                                                         |         |   |   |   |   |   |   |
| Selling and marketing                                 |         | 5,633                                                        |         | 185 |   | 2 |   | 5,818 |   |
| General and administrative                            |         | 2,669                                                        |         | (341 | ) | 2 |   | 2,328 |   |
| Research and development                              |         | 1,624                                                        |         | 63 |   | 2 |   | 1,687 |   |
| Amortization of intangibles                           |         | 609                                                          |         | — |   |   |   | 609 |   |
|                                                  |         | 10,535                                                       |         | (93 | ) |   |   | 10,442 |   |
| Operating income                                      |         | 925                                                          |         | — |   |   |   | 925 |   |
| Interest income                                       |         | 50                                                           |         | — |   |   |   | 50 |   |
| Income before  taxes                                  |         | 975                                                          |         | — |   |   |   | 975 |   |
| Provision for  taxes                                  |         | 29                                                           |         | 435 |   | 1 |   | 464 |   |
|                                                  |         |                                                         |         |   |   |   |   |   |   |
| Income from  continuing operations                    |         | 946                                                          |         | (435 | ) |   |   | 511 |   |
| Gain from  discontinued operations, net of $103 taxes |         | 268                                                          |         | (97 | ) | 1 |   | 171 |   |
| Net income                                            |         | $                                                            | 1,214        |   | $ | (532 | ) |   |   | $ | 682 |   |
|                                                  |         |                                                         |         |   |   |   |   |   |   |
| Earnings per  share – basic                      |         |                                                         |         |   |   |   |   |   |   |
| Continuing operations                                 |         | $                                                            | 0.26         |   | $ | (0.12 | ) |   |   | $ | 0.14 |   |
| Discontinued operations                               |         | 0.08                                                         |         | (0.03 | ) |   |   | 0.05 |   |
| Net Income                                            |         | $                                                            | 0.34         |   | $ | (0.15 | ) |   |   | $ | 0.19 |   |
| Earnings per  share - diluted                         |         |                                                         |         |   |   |   |   |   |   |
| Continuing operations                                 |         | $                                                            | 0.25         |   | $ | (0.11 | ) |   |   | $ | 0.14 |   |
| Discontinued operations                               |         | 0.07                                                         |         | (0.03 | ) |   |   | 0.04 |   |
| Net Income                                            |         | $                                                            | 0.32         |   | $ | (0.14 | ) |   |   | $ | 0.18 |   |

 

17

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| ** **                                                        | ** **   | **Nine Months Ended July 31, 2006** | ** **   |
|-------------------------------------------------------------------|--------------|--------------------------------------------------------------|--------------|
| ** **                                                        | ** **   | **As**                                                       | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                        | ** **   | **Previously**                                               | ** **   | **Adjustments** | ** ** | **As** | ** ** |
| **(In thousands)**                                           | ** **   | **Reported**                                                 | ** **   | **Amount** | ** ** | **No.** | ** ** | **Restated** | ** ** |
| ***Statement  of Cash Flows Data:***                              | *** *** | *** ***                                                 | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Cash Flows From  Operating Activities:                            |         |                                                         |         |   |   |   |   |   |   |
| Net income                                                        |         | $                                                            | 1,214        |   | $ | (532 | ) | 1 |   | $ | 682 |   |
| Gain from discontinued operations                                 |         | (268                                                         | )            | 97 |   | 1 |   | (171 | ) |
| Tax benefit from stock options exercised                          |         | —                                                       |         | 1 |   | 1 |   | 1 |   |
| Deferred income taxes                                             |         | 2                                                            |         | 514 |   | 1 |   | 516 |   |
|                                                              |         |                                                         |         |   |   |   |   |   |   |
| Other current liabilities and accrued expenses                    |         | (70                                                          | )            | 17 |   | 1 |   | (53 | ) |
| Net cash provided  by continuing operations                       |         | 759                                                          |         | 97 |   |   |   | 856 |   |
| Cash provided by  operating activities of discontinued operations |         | 851                                                          |         | (97 | ) | 1 |   | 754 |   |
| Net cash provided by  operating activities                        |         | $                                                            | 1,610        |   | $ | — |   |   |   | $ | 1,610 |   |

 

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**Item 2.****           Management’s Discussionand Analysis.**

# **Forward-Looking Statements and Risk Factors**

The discussion above contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  These statements by theirnature involve substantial risks and uncertainties.  Our actual results may differ materiallydepending on a variety of factors including: 

·                  Our ability to successfully operateour business including our ability to develop, improve, and update ourcardiorespiratory diagnostic products,

·                  Our ability to effectivelymanufacture and ship products in required quantities to meet customer demands,

·                  Our ability to successfully defendthe Company from product liability claims related to our cardiorespiratorydiagnostic products and claims associated with our prior cardiac stimulationproducts,

·                  Our ability to protect our intellectualproperty,

·                  Our ability to develop and maintainan effective system of internal controls and procedures and disclosure controlsand 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**

The Company is amedical device manufacturer with reported product revenues of $23.8 million forthe 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%.

The Company, through its Medical Graphics Corporation subsidiary,designs and markets non-invasive cardiorespiratory diagnostic systems that aresold under the MedGraphics and New Leaf brand and trade names.  These cardiorespiratory diagnostic systemshave a wide range of applications in healthcare, wellness and health andfitness.

Healthcare professionals use these cardiorespiratory diagnostic systemsproducts to diagnose shortness of breath and lung diseases such as asthma andemphysema, and manage related treatment. Through breath-by-breathanalysis, some of the Company’s cardiorespiratory diagnostic systems measurefitness or conditioning levels to help physicians diagnose heart diseases suchas heart failure and coronary disease. Other health professionals use cardiorespiratory diagnostic systems tomeasure calorie consumption and to prescribe safe and effective exercise inrehabilitation, weight management, general fitness, and athleticperformance.  All of these applicationsare accomplished by measuring air flow and the concentrations of inhaled andexhaled gases such as oxygen and carbon dioxide while a person is at rest, orexercising on a bike or treadmill. Professionals use this same assessment of gases and air flow todetermine nutritional requirements of critically ill patients in a hospital orto design a weight loss program for members in a health club wishing to assessthe number of calories they should consume and burn daily.

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Revenues consistof equipment and supply sales and service revenues.  Equipment and supply sales reflect sales ofnon-invasive cardiorespiratory diagnostic equipment and aftermarket sales ofperipherals and supplies.  Servicerevenues reflect revenues from extended service contracts, non-warranty servicevisits and additional training.

Total revenue forthe third quarter of 2006 was $8.8 million, an increase of 45.2% from $6.1million in 2005.  Operating expenses forthe third quarter of 2006 were $3.7 million, an increase of 18.5% from $3.1million in 2005.  Income from continuingoperations for the three months ended July 31, 2006 was $394,000, or $0.10 per diluted share,compared to a loss of $77,000, or $0.02 per diluted share, for the same periodin 2005.  Net income for the three monthsended July 31, 2006 was $394,000 or $0.10 per diluted share, compared to a netloss of $268,000, or $0.07 per diluted share, for the same period in 2005,which included a $191,000 loss from discontinued operations.

For the nine months ended July 31, 2006, total revenue increased 34.0% to $22.9million from $17.1 million for the same period in 2005.  Operating expenses for the nine months ended July31, 2006 increased11.4% to $10.4million from $9.4 million for the same period in 2005.  Income from continuing operations for the nine months ended July 31,2006 was $511,000, or $0.14 per dilutedshare, compared to a loss of $1.0 million, or $0.29 per diluted share, for thesame period in 2005.  Net income for thenine months ended July 31, 2006was $682,000, or $0.18 per diluted share, and included a $171,000 gain fromdiscontinued operations.  Net loss forthe nine months ended July 31, 2005was $1.2 million, or $0.34 per diluted share, and included a $191,000 loss fromdiscontinued operations.

In its pressrelease dated January 9, 2006, the Company included the following as some ofits objectives and goals for fiscal 2006:
| · |   | A drive toward achieving and sustaining  profitability;                                                                                                                                                                                                                                                                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | A fourth consecutive year of double-digit  year-over-year revenue growth;                                                                                                                                                                                                                                                      |
| · |   | The introduction of new cardiorespiratory diagnostic  products;                                                                                                                                                                                                                                                                |
| · |   | Continuation of the expansion of our domestic and  international sites offering New Leaf brand active metabolic assessments; and                                                                                                                                                                                               |
| · |   | Further expansion of the New Leaf brand products for  weight management, exercise and athletic performance.                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                           |
|   |   | After nine months, the Company has made significant  progress against these objectives and goals.                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                           |
| · |   | The third quarter of 2006 marked the Company’s  fourth consecutive profitable quarter;                                                                                                                                                                                                                                    |
| · |   | The Company achieved double-digit year-over-year  revenue growth for the ninth quarter in a row. With year-over-year revenue  growth for the nine months ended July 31, 2006 of 34.0%, the Company’s annual  goal is clearly within reach. Third quarter 2006 revenue of $8.8 million is  another record revenue quarter; |
| · |   | While important progress  in the development of new cardiorespiratory diagnostic products has  been made, the Company is now planning to introduce these new products in  2007;                                                                                                                                                |
| · |   | The Company has grown the number of new sites  offering New Leaf brand active metabolic assessments and generated a record  number of new consumers participating in the New Leaf Active Metabolic  Training TM program; and                                                                                              |
| · |   | The New Leaf branded *Energy*SmartTM  online nutrition, meal planning and tracking system was launched in February  2006. This program is designed to help consumers from weight conscious adults  and children to recreational and elite athletes properly “fuel” and train  their metabolism.                  |

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**Restatementof Financial 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 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 taxes by $261,000 and $435,000 for the three and nine monthsended July 31, 2006, respectively,

·                  Increasedtax expense related to discontinued operations by $97,000 for the nine monthsended July 31, 2006, and

·                  Decreased goodwill by $328,000, decreasedintangible assets by $393,000, increased other current liabilities and accruedexpenses by $17,000 and decreased deferred income tax liabilities by $207,000as of July 31, 2006.

In addition to theadjustments discussed above, this restatement includes adjustments for thereclassification of bonus expenses previously included in general and administrativeexpenses to other statement of operations expense captions to properly classifybonus expense to the salary of the employee who earned the bonus. We refer tothese as Other Adjustments, which were immaterial, individually and in theaggregate, to the previously issued financial statements.

See Note 11 to theConsolidated Financial Statements, “Restatement of Quarterly Financial Statements,” in this Form 10-QSB/Afor additional discussion of the accounting for income taxes and the use of pre-emergence bankruptcy NOLs.

**Revenue**

The increase intotal revenue of 45.2% for the third quarter of 2006 marked the Company’slargest year-over-year quarterly increase.  Domestic product revenue for the third quarterof 2006 has

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increased by 27.0%.  International product revenue increased146.0% while service revenue decreased 8.2% as a result of the 12-monthwarranty included with new system sales.

For the ninemonths ended July 31,2006, year-over-year total revenue increased by 34.0%.  Domestic product revenue has increased by28.4%.  International product revenueincreased 88.0% while service revenue decreased 6.3% due to the amount of newsystems sold that include a 12-month warranty.

Sales of theUltima PF cardiorespiratory diagnostic system are contributing significantly toboth domestic and international revenue growth. Third quarterrevenue grew as a result of new equipment and service sales to one of ourclinical research customers.  The Companysells its cardiorespiratory diagnostic systems and services to this customer for use in conducting safety andefficacy clinical trial studies both in the United States andinternationally.  This customer accountedfor 37.7% and 18.4% of revenue for the three and nine months ended July 31,2006, respectively.  The Company expectsrevenue from this customer to continue in the next two quarters at levels thatexceed 10% of revenues.

Although sales tothe single customer had an important impact on the third quarter, it should benoted that 2006 year-to-date revenue without that customer exceeded revenuereported for the same period in 2005. When you subtract the revenue associated with this single customer,revenue for the nine months ended July 31, 2006 increased by $1.6 million or9.3% to $18.7 million compared to $17.1 million for the same period in 2005.

Service revenue decreased$57,000 during the third quarter of 2006 compared to the same quarter in2005.  For the nine months ended July 31, 2006, service revenuedecreased $133,000 compared to the same period in 2005.  These decreases are due to the numberof new systems purchased that include 12-month warranties, which reduces ourextended service contract revenue.  TheCompany believes this is temporary and will change as newly installed equipmentbecomes eligible for extended service contracts or billable service calls.

**Gross Margin**

Gross margin percentagefor the three month period ended July 31, 2006 of 49.0% of revenue wascomparable to 49.5% for the same period in 2005.  For the nine months ended July 31, 2006,gross margin percentage increased to 49.5% from 48.6% for the same period in2005.  The Company’s gross marginpercentage for the last two sequential quarters has been consistent and hasalso been comparable to gross margin percentages reported for the same periodsin 2005.  The Company anticipates similargross margin performance in this year’s fourth quarter and 2007’s firstquarter.

**Selling and Marketing**

Selling andmarketing expenses for the three months ended July 31, 2006 increased by 15.4%to $2.0 million compared to $1.7 million for the same period in 2005.  For the nine months ended July 31, 2006,selling and marketing expenses increased by 9.6% to $5.8 million compared to$5.3 million for the same period in 2005.

Third quarter 2006selling and marketing expenses related to new sales and sales supportpersonnel, travel and customer support expenses increased in the aggregate by$116,000.  In addition, the cost ofequipment sales demonstrations to potential customers increased by $39,000 tocontribute to the overall increase in selling and marketing expenses for thequarter.

For the ninemonths ended July 31, 2006, selling and marketing expenses related to new salesand sales support personnel and travel increased by $174,000.  In addition, increased expenses for

22

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commissions, equipmentdemonstrations and trade shows of $65,000, $59,000 and $46,000, respectively,are components of the overall increase in selling and marketing expenses forthe nine months ended July 31, 2006.

**General and Administrative**

General andadministrative expenses for the three months ended July 31, 2006 increased by$150,000 to $809,000 compared to $659,000 for the same period in 2005.  For the nine months ended July 31, 2006,general and administrative expenses increased by $391,000 to $2.3 millioncompared to $1.9 million for the same period in 2005.

General andadministrative expenses included non-cash expenses of $50,000 and $187,000 forthe three and nine months ended July 31, 2006, respectively, for stock-basedcompensation associated with variable options compared to $25,000 for bothcomparable periods in 2005.  The Company’sCompensation Committee accelerated the vesting of all unvested variableoptions.  Consequently, there will be nofurther expenses for these options.  SeeNote 4 to the Consolidated Financial Statements, “Stock-Based Compensation,” inthis Form 10-QSB/A for additional discussion of variable options.

In addition, therewas a $71,000 difference in general and administrative expenses due todecreases of $2,000 and $73,000 in the accrual for doubtful accounts for thenine months ended July 31, 2006 and 2005, respectively.  These decreases generally lower the allowancefor doubtful accounts that is no longer necessary because of improved cashcollections for past due customer accounts. Future changes to the provision for doubtful accounts are directlyrelated to payment patterns and outstanding balances of a few customerstogether with variations in the total balance of outstanding receivables.

Professional feesdecreased by $49,000 and $96,000 for the three and nine months ended July 31,2006.  Directors’ compensation increasedby $15,000 and $34,000 and consulting expenses increased by $24,000 and $58,000for the same three and nine month periods, offsetting the decrease inprofessional fees.

General andadministrative expenses also included $15,000 in consulting expenses associatedwith Sarbanes-Oxley compliance for the third quarter of 2006 compared to$21,000 for the same period in 2005.  Forthe nine months ended July 31, general and administrative expenses included$49,000 for Sarbanes-Oxley compliance in 2006 compared to $74,000 for the sameperiod in 2005.

**Research and Development**

Research and developmentexpenses for the three months ended July 31, 2006 increased $151,000 to$633,000 from $482,000 for the same period in 2005.  For the nine months ended July 31, 2006,research and development expenses increased $168,000 to $1.7 million comparedto $1.5 million for the same period in 2005.

Research and developmentexpenses for new personnel increased by $74,000 and $71,000 for the three andnine months ended July 31, 2006, respectively. These expenses account for the majority of the increase in research anddevelopment costs for the respective periods. The Company’s current new product development initiatives includeproducts targeted for asthma, allergy and primary care physicians, health &fitness club professionals as well as international markets.  Initial product development phases have beencompleted and these new products are planned for release in 2007.  In addition, the Company is also developingnew designs and new components for use in existing cardiorespiratory diagnosticproducts.

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**Amortization of Intangibles**

Amortization ofdeveloped technology was $203,000 for each of the three month periods endedJuly 31, 2006 and 2005 and $609,000 for each of the nine-month periods endedJuly 31, 2006 and 2005.  As furtherdescribed in Note 6 above, as the Company utilizes pre-emergence bankruptcy netoperating loss carry forwards, 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.

**Interest Income**

Interest income for the three months ended July 31, 2006 increased to $22,000 from $10,000 for thesame period in 2005.  For the ninemonths ended July 31, 2006, interest income increased to $50,000 as compared to$26,000 for the same period in2005.  The increase in interest income isprincipally due to an increase in interest rates.

**Provision for Taxes**

The Company isrequired to present the provision for taxes for 2006 as if it were fullytaxable in accordance with SOP 90-7.  TheCompany has utilized its pre-emergencebankruptcy NOLs in the calculation of its income taxes payable but is required to pay only U.S. andState alternative minimum taxes (“AMT”) because it has substantial federalnet operating loss carry forwards.  The tax benefit for using pre-emergencebankruptcy NOLs has been recorded as a reduction of goodwill and intangibleassets in the nine months ended July 31, 2006. See Note 11 to the Consolidated Financial Statements, “Restatement of Financial Statements,”in this Form 10-QSB/A for additional discussion of the accounting for incometaxes and the use of pre-emergencebankruptcy NOLs.

**DiscontinuedOperations**

The net gain fromdiscontinued operations of $171,000 for the nine months ended July 31, 2006reflects the net difference after recording the agreed upon insurance recoveryand the associated legal fees that were contingent upon the recovery togetherwith other additionalconsulting fees and miscellaneous litigation expenses.  The Company has allocated $103,000 of theprovision for taxes to discontinued operations for the nine-month period endedJuly 31, 2006.  The $191,000 lossfrom discontinued operations for the three and nine months ended July 31, 2005primarily consisted of legal expenses and the purchase of liability insurancecoverage for claims associated with the Company’s discontinued ICDproducts.  See Note 9 to the ConsolidatedFinancial Statements, “Discontinued Operations and Related Litigation,” in thisForm 10-QSB for additional discussion of the litigation settlement withMedmarc.

**Liquidity and Capital Resources**

The Company hasfinanced its liquidity needs over the past several years through revenuegenerated by the operations of its wholly owned subsidiary, Medical GraphicsCorporation, and through the use of cash balances.

The Company had cash andcash equivalents of $2.5 million and working capital of $8.2 million as of July31, 2006.  During the nine months endedJuly 31, 2006, the Company generated $856,000 in cash from continuingoperations in part because its net income of $682,000 included non-cashexpenses of $810,000 for depreciation and amortization, $187,000 forstock-based compensation and $516,000 of deferred income taxes.

24

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Cash was generated byincreases of $1.0 million in advance payments from customers, $660,000 inaccounts payable, $558,000 in employee compensation and $560,000 in deferredincome.  Advance payments from customersare associated with orders for equipment received from a new customer.  Cash was used for increases of $2.1 millionand $1.9 million in inventories and accounts receivable, respectively.  The increases in both inventories and accountspayable are necessary to support the new customer’s orders forcardiorespiratory diagnostic equipment.

On June 9, 2006, the Company received the settlement payment fromMedmarc for the insurance recoveryrelated to expenses associated with previously discontinued ICDproducts.  As a result, the Companygenerated $754,000 in cash from operating activities of discontinuedoperations.  The cash received fromoperating activities of discontinued operations was net of the legal fees,consulting and other expenses related to the ELA Medical settlement and Medmarclitigation.

During the ninemonths ended July 31, 2006, the Company used $272,000 in cash for the purchaseof property and equipment.  The Companyhas no material commitments for capital expenditures for fiscal year 2006.

In connection withthe June 30, 2005 $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 made on June30, 2006.  These payments are reflectedin the Consolidated Statement of Cash Flows for the nine months ended July 31,2006 as promissory note payments within Cash Flows from Financing Activities.  The promissory note was backed up with an irrevocablebank letter of credit.  The Company wasrequired to collateralize the irrevocable bank letter of credit with cash thatwas classified as cash restricted for discontinued operations at October 31,2005.

The Company believes thatits liquidity and capital resource needs for the next 12 months will be metthrough its current cash and cash equivalents and cash flows from operations.

### **Item3.  Controls and Procedures.**

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

Management, with theparticipation of the Company’s chief executive officer, Rodney A. Young, andchief financial officer, Dale H. Johnson, evaluated the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures, asdefined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as ofJuly 31, 2006.  In this evaluation, theCompany originally concluded that its disclosure controls and procedures wereeffective as of July 31, 2006, as disclosed in the Company’s Form 10-QSB filedon September 11, 2006.

In connection with therestatement, management, under the direction of its chief executive officer andchief financial officer, reevaluated the disclosure controls and procedures anddue 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 July 31, 2006.

The material weakness in internal control over financialreporting related to the Company’s accounting for income taxes.  Specifically, the Company did not have, andthrough its engagement of third party outside advisers did not acquire,adequate technical expertise to effectively oversee and review the Company’saccounting for the utilization of pre-emergence bankruptcy NOL carry forwardsin accordance with AICPA Statement of Position 90-7, *Financial Reporting by Entities in Reorganization*

25

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*under the Bankruptcy Code*.  As a result, the Company restated the financialinformation included in the first three quarters of the year ended October 31,2006, including the three and nine months ended July 31, 2006, as includedherein, to correct a material error in accounting for income taxes.

Due to this material weakness in internal control overfinancial reporting, the Company performed other procedures related to thepresentation of income taxes and the use of pre-emergence bankruptcy NOL carryforwards in preparing its restated consolidated financial statements as of andfor the three and nine months ended July 31, 2006 to ensure that theseconsolidated financial statements were presented fairly, in all materialrespects, in accordance with U.S. generally accepted accounting principles.

*(b)**Changes in Internal Control over Financial Reporting*

There was no change in the Company’s internal controlover financial reporting during the quarter ended July 31, 2006 that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

As of the date ofthe filing of this Quarterly Report on Form 10-QSB/A for the third fiscalquarter of 2006, the material weakness described above has not beenremediated.  The Company is taking stepsto ensure that it remediates the material weakness by implementing enhancedcontrol procedures over accounting for income taxes.  These steps include education and training ofCompany management and staff to improve technical expertise with respect toincome tax accounting.  The Company isalso evaluating whether to replace or augment its current third party taxconsulting resources to assist with the Company’s evaluation of complex issuesconcerning tax accounting to assist management in developing its judgments withrespect to these issues.

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**PART II -OTHER INFORMATION**

**Item 1.  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.  Management believesthat the settlement of all litigation would not have a material effect on theresults of operations or liquidity of the Company.

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

# ***Recent Sales of UnregisteredSecurities***

The Company had nounregistered sales of equity securities during the three months ended July 31,2006.

##### ***Small Business Issuer Purchases of Equity Securities***

The Company didnot purchase any equity securities during the three months ended July 31, 2006.

### **Item3.  Defaults Upon Senior Securities.**

None

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

On May 25, 2006,the Company held its Annual Meeting of Shareholders.  At the meeting, the following action wastaken:

# **Election of Directors**

The followingpersons were elected to the Company’s Board of Directors, receiving the votesset forth opposite their names:
| Name                 | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|----------------------|------------|--------------------|------------|-------------------------|------------|
| Arnold A.  Angeloni  |       | 3,450,686          |       | 16,930                  |       |
| K. James Ehlen, M.D. |       | 3,462,873          |       | 4,743                   |       |
| John C. Penn         |       | 3,463,488          |       | 4,128                   |       |
| Rodney A. Young      |       | 3,463,481          |       | 4,135                   |       |

 

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# **Ratify the Appointment of KPMG LLP as independentregistered public accounting firm for the Company for the fiscal year endingOctober 31, 2006**

The shareholdersratified the appointment of KPMG LLP as the Company’s independent registeredpublic accounting firm for the fiscal year ending October 31, 2006.  The proposal was ratified by the followingvote:

| For            |   | 3,464,788 |   |
|----------------|--------|-----------|--------|
| Against        |   | 1,122     |   |
| Abstain        |   | 1,706     |   |
| Broker Nonvote |   | 0         |   |

 

**Item 5.  Other Information.**

None

**Item 6.  Exhibits.**

(a)                                  Thefollowing 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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