**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

# **FORM10-QSB**

**x****        Quarterly report underSection 13 or 15(d) of the Securities Exchange Act of 1934.**

**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 filenumber 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 OakGrove Parkway, Saint Paul, Minnesota 55127-8599**

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

Yes x  No o

 

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

 

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**PART I - FINANCIAL INFORMATION**

**Item1.  Financial Statements.**

 

**ANGEION CORPORATION AND SUBSIDIARIES**

**Consolidated Balance Sheets**

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

(unaudited,in thousands except share and per share data)

 
| ** **                                                                                                                                   | ** ** | **July 31,** | ** ** | **October 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2006**          | ** ** | **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 $1,598, respectively                                                  |       | 1,106             |       | 1,035                |       |
| Intangible assets, net                                                                                                                       |       | 4,889             |       | 5,498                |       |
| Goodwill                                                                                                                                     |       | 328               |       | 328                  |       |
| **Total Assets**                                                                                                                             |       | **$**             | **20,658** | ** **           | **$**      | **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                                                                                              |       | 296               |       | 366                  |       |
| Current  liabilities of discontinued operations                                                                                              |       | —            |       | 517                  |       |
| Total current  liabilities                                                                                                                   |       | 6,142             |       | 4,279                |       |
|                                                                                                                                         |       |              |       |                 |       |
| **Long-term liabilities:**                                                                                                                   |       |              |       |                 |       |
| Long-term  deferred income                                                                                                                   |       | 792               |       | 319                  |       |
| Deferred income  taxes                                                                                                                       |       | 339               |       | 337                  |       |
| Total long-term  liabilities                                                                                                                 |       | 1,131             |       | 656                  |       |
| **Total liabilities**                                                                                                                        |       | 7,273             |       | 4,935                |       |
|                                                                                                                                         |       |              |       |                 |       |
| **Shareholders’ equity:**                                                                                                               |       |              |       |                 |       |
| Common stock,  $0.10 par value, authorized 25,000,000 shares, issued and outstanding,  3,630,677 shares in 2006 and 3,609,325 shares in 2005 |       | 363               |       | 361                  |       |
| Additional  paid-in capital                                                                                                                  |       | 17,811            |       | 17,589               |       |
| Deferred  compensation                                                                                                                       |       | —            |       | (14                  | )          |
| Accumulated  deficit                                                                                                                         |       | (4,789            | )          | (6,003               | )          |
| Total shareholders’  equity                                                                                                             |       | 13,385            |       | 11,933               |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                          |       | **$**             | **20,658** | ** **           | **$**      | **16,868** | ** ** |

 

See accompanying notes to consolidatedfinancial statements.

 

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**ANGEION CORPORATION AND SUBSIDIARIES**

**Consolidated Statements of Operations**

(unaudited,in thousands except per share amounts)

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **July 31,**                | ** ** | **July 31,**               | ** ** |
| ** **                                                         | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **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                                     |       | 4,355                            |       | 2,968                           |       | 11,165 |   | 8,482 |   |
| Cost of service revenue                                            |       | 95                               |       | 89                              |       | 317 |   | 316 |   |
| ** **                                                         |       | 4,450                            |       | 3,057                           |       | 11,482 |   | 8,798 |   |
| ** **                                                         | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Gross  margin**                                                  |       | 4,347                            |       | 3,001                           |       | 11,460 |   | 8,322 |   |
| ** **                                                         | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  expenses:**                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling and marketing                                              |       | 1,936                            |       | 1,744                           |       | 5,633 |   | 5,309 |   |
| General and administrative                                         |       | 954                              |       | 659                             |       | 2,669 |   | 1,937 |   |
| Research and development                                           |       | 603                              |       | 482                             |       | 1,624 |   | 1,519 |   |
| Amortization of intangibles                                        |       | 203                              |       | 203                             |       | 609 |   | 609 |   |
| ** **                                                         |       | 3,696                            |       | 3,088                           |       | 10,535 |   | 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                                                |       | 18                               |       | —                          |       | 29 |   | — |   |
| ** **                                                         | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  (loss) from continuing operations**                      |       | 655                              |       | (77                             | )          | 946 |   | (1,026 | ) |
| **Gain  (loss) from discontinued operations, net of income taxes** | ** ** | —                           | ** ** | (191                            | )          | 268 | ** ** | (191 | ) |
| **Net  income (loss)**                                             |       | $                                | 655        |                            | $          | (268 | ) | $ | 1,214 |   | $ | (1,217 | ) |
| ** **                                                         | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Earnings  (loss) per share - basic**                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Continuing operations                                              |       | $                                | 0.18       |                            | $          | (0.02 | ) | $ | 0.26 |   | $ | (0.29 | ) |
| Discontinued operations                                            |       | —                           |       | (0.05                           | )          | $ | 0.08 |   | (0.05 | ) |
| Net income (loss)                                                  |       | $                                | 0.18       |                            | $          | (0.07 | ) | $ | 0.34 |   | $ | (0.34 | ) |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **Earnings  (loss) per share - diluted**                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Continuing operations                                              |       | $                                | 0.17       |                            | $          | (0.02 | ) | $ | 0.25 |   | $ | (0.29 | ) |
| Discontinued operations                                            |       | —                           |       | (0.05                           | )          | $ | 0.07 |   | (0.05 | ) |
| Net income (loss)                                                  |       | $                                | 0.17       |                            | $          | (0.07 | ) | $ | 0.32 |   | $ | (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**

**Consolidated Statements of Cash Flows**

(unaudited,in thousands)

 
| ** **                                                                                           | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                           | ** ** | **July 31,**               | ** ** |
| ** **                                                                                           | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| ** **                                                                                           | ** ** | ** **                      | ** ** | **(Revised)** | ** ** |
| **Cash Flows From Operating  Activities:**                                                           |       |                            |       |   |   |
| Net income  (loss)                                                                                   |       | $                               | 1,214      |   | $ | (1,217 | ) |
| (Gain) loss from  discontinued operations                                                            |       | (268                            | )          | 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 |   |
| Deferred income  taxes                                                                               |       | 2                               |       | — |   |
| 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                                                      |       | (70                             | )          | 73 |   |
| Net cash  provided by (used in) continuing operations                                                |       | 759                             |       | (252 | ) |
| Cash provided by  (used in) operating activities of discontinued operations                          |       | 851                             |       | (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** | ** ** |

 

See accompanying notes to consolidated financial statements.

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

July31, 2006

(Unaudited)

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

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 interim financialinformation and with the instructions to Form 10-QSB and Rule 10-01 ofRegulation 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.

Certain amounts in the Company’s consolidatedfinancial statements as of October 31, 2005 have been reclassified to conform to the 2006 presentation.  These reclassifications had no effect on netincome (loss) or shareholders’ equity.  See Note 9 to the Consolidated FinancialStatements, “Discontinued Operations and Related Litigation,” in this Form10-QSB for additional discussion of presentation of cash flows from discontinuedoperations.

**2.****            ****RevenueRecognition**

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 

5

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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.****            ****NewAccounting Pronouncements**

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 currently evaluatingthe impact of adopting FIN 48 on its consolidated financial statements.

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.  Theadoption of SFAS No. 154 is not expected to have a material effect on theCompany’s consolidated financial statements.

**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, | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| **(In thousands, except for per share amounts)**                                                                | ** ** | **2006**                                      | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  (loss)                                                                                                                            |       |                                          |       |                                         |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                                             | 655        |                                         | $          | (268 | ) | $ | 1,214 |   | $ | (1,217 | ) |
| Add: Stock-based employee compensation expense  included in reported net income (loss), net of related tax effects                            |       | 49                                            |       | 25                                           |       | 183 |   | 25 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (362                                          | )          | (21                                          | )          | (406 | ) | (63 | ) |
| Pro forma                                                                                                                                     |       | $                                             | 342        |                                         | $          | (264 | ) | $ | 991 |   | $ | (1,255 | ) |
|                                                                                                                                          |       |                                          |       |                                         |       |   |   |   |   |
| Net income  (loss) per share – basic                                                                                                     |       |                                          |       |                                         |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                                             | 0.18       |                                         | $          | (0.07 | ) | $ | 0.34 |   | $ | (0.34 | ) |
| Pro forma                                                                                                                                     |       | $                                             | 0.09       |                                         | $          | (0.07 | ) | $ | 0.27 |   | $ | (0.35 | ) |
|                                                                                                                                          |       |                                          |       |                                         |       |   |   |   |   |
| Net income  (loss) per share – diluted                                                                                                   |       |                                          |       |                                         |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                                             | 0.17       |                                         | $          | (0.07 | ) | $ | 0.32 |   | $ | (0.34 | ) |
| Pro forma                                                                                                                                     |       | $                                             | 0.09       |                                         | $          | (0.07 | ) | $ | 0.26 |   | $ | (0.35 | ) |

 

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 

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describedbelow, this increased pretax stock-based compensation expense under theintrinsic-value method during the three and nine months ended July 31, 2006 by $50,000.  In addition,this acceleration also increased pretax stock-based compensation expense underthe fair value method for the three and nine months ended July 31, 2006 by$38,000.  The table also reflects thegranting of 93,000 options to purchase the Company’s common stock on May 25,2006 to the Company’s directors and officers. These new option grants were granted at an exercise price of $5.08 pershare, the closing price for the Company’s stock on May 25, 2006, and wereimmediately vested.  The fair value ofthese awards was determined to be $331,000.

***Variable Stock Option Grants***

In September 2003 andJuly 2004, the Company granted employees’ options with an exercise price of$2.00 that vested at increasing rates as the Company’s common stock traded forincreasing 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.  The Committeeconcluded that the significant additional stock-based compensation expense thatthe Company would incur in connection with the vesting of the additionaloptions 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 of2006.  The total additional non-cash expensethat the Company incurred in the third quarter of 2006 in connection with theaccelerated vesting was $50,000.

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**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**

Intangible assetsconsisted of the following at July 31,2006 and October 31, 2005:
| (In thousands)                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Intangible  assets:                  |       |     |       |     |       |
| Developed technology                 |       | $        | 6,900      |     | $          | 6,900 |   |
| Trade name (unamortized)             |       | 1,000    |       | 1,000    |       |
|                                 |       | 7,900    |       | 7,900    |       |
|                                 |       |     |       |     |       |
| Amortization -  developed technology |       | (3,011   | )          | (2,402   | )          |
|                                 |       | $        | 4,889      |     | $          | 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.  Estimated amortization expense for theremainder of fiscal year 2006 and for each of the succeeding years based on theintangible assets as of July 31,2006 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      |   |

 

**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 of installation.  Standard warranty terms are included incustomer contracts.  Under the terms ofthese warranties, the Company is obligated to repair or replace any componentsor assemblies that it deems defective in workmanship or materials.  The Company reserves the right to rejectwarranty claims where it determines that failure is due to normal wear,customer modifications, improper maintenance or misuse.  The Company maintains a warranty reserve thatreflects the estimated expenses that it will incur to honor the warranties onits products.  The Company adjusts thewarranty reserve based on the number and type of equipment that is subject towarranty, adjusted for the 

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remaining months of warranty coverage. The warranty reserve adjustment reflects the Company’s historicalwarranty experience based on type of equipment. Warranty activity for the nine months ended July 31, 2006 and 2005 wasas follows:

 
| (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 EndedJuly 31,** | ** ** | **Nine Months EndedJuly 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 |   |

 

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.

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As a result of thesettlement with Medmarc, the Company recorded a $268,000 gain, net of $6,000for alternative minimum taxes, from discontinued operations for the nine monthsended July 31, 2006.  There were noadjustments made to discontinued operations during the third quarter of2006.  The Company expects that the onlyexpense for discontinued operations in the future will be the purchase ofproduct liability insurance for as long as the Company believes it necessary tocover ICDs that remain implanted in patients. The current policy for product liability insurance covering ICDs expiresin 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 insurancecoverage for claims associated with the Company’s discontinued ICD products.

**Presentationof Cash Flows from Discontinued Operations.**  Effective with the quarter ended July 31,2006, the Company retroactively revised the presentation of operating andfinancing cash flows attributable to discontinued operations for fiscal 2005and for the nine months ended July 31, 2005, which in prior periods wasreported within operating cash flows.

The followingtable shows the revisions that have been made to the Consolidated Statements ofCash Flows for the nine months ended July 31, 2005 and the year ended October31, 2005 to reflect the restriction of $400,000 of cash for the fiscal 2006payments on the promissory note to ELA Medical:
|                                                                       | ** ** | **As Reported** | ** ** | ** **    | ** ** | **Revised** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------|------------|---------------|------------|-------------|------------|
| **(In thousands)**                                               | ** ** | **2005**             | ** ** | **Revisions** | ** ** | **2005**    | ** ** |
| **Nine  months ended July 31, 2005**                                  | ** ** | ** **           | ** ** | ** **    | ** ** | ** **  | ** ** |
|                                                                  |       |                 |       |          |       |        |       |
| Cash Flows From  Operating Activities:                                |       |                 |       |          |       |        |       |
| Net cash used in continuing operations                                |       | $                    | (252       | )             | $          | —      |       | $ | (252 | ) |
| Cash restricted for discontinued operations                           |       | (400                 | )          | 400           |       | —      |       |
| Cash used in operating activities of discontinued  operations         |       | (660                 | )          | —        |       | (660        | )          |
| Net cash used in operating activities                                 |       | $                    | (1,312     | )             | $          | 400         |       | $ | (912 | ) |
|                                                                  |       |                 |       |          |       |        |       |
| Cash Flows From  Financing Activities:                                |       |                 |       |          |       |        |       |
| Net cash provided by financing activities from  continuing operations |       | $                    | 14         |          | $          | —      |       | $ | 14 |   |
| Cash restricted for discontinued operations                           |       | —               |       | (400          | )          | (400        | )          |
| Net cash provided by (used in) financing activities                   |       | $                    | 14         |          | $          | (400        | )          | $ | (386 | ) |

 

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|                                                                       | ** ** | **As Reported** | ** ** | ** **    | ** ** | **Revised** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------|------------|---------------|------------|-------------|------------|
| **(In thousands)**                                               | ** ** | **2005**             | ** ** | **Revisions** | ** ** | **2005**    | ** ** |
| **Year  ended October 31, 2005**                                      |       |                 |       |          |       |        |       |
|                                                                  |       |                 |       |          |       |        |       |
| Cash Flows From  Operating Activities:                                |       |                 |       |          |       |        |       |
| Net cash provided by continuing operations                            |       | $                    | 89         |          | $          | —      |       | $ | 89 |   |
| Cash restricted for discontinued operations                           |       | (400                 | )          | 400           |       | —      |       |
| Cash used in operating activities of discontinued  operations         |       | (804                 | )          | —        |       | (804        | )          |
| Net cash used in operating activities                                 |       | $                    | (1,115     | )             | $          | 400         |       | $ | (715 | ) |
|                                                                  |       |                 |       |          |       |        |       |
| Cash Flows From  Financing Activities:                                |       |                 |       |          |       |        |       |
| Net cash provided by financing activities from  continuing operations |       | $                    | 14         |          | $          | —      |       | $ | 14 |   |
| Cash restricted for discontinued operations                           |       | —               |       | (400          | )          | (400        | )          |
| Net cash  provided by (used in) financing activities                  |       | $                    | 14         |          | $          | (400        | )          | $ | (386 | ) |

 

**10.****         ****Income Taxes**

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

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**Item 2.****    Management’s Discussion and Analysis.**

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

Statementsincluded in this Quarterly Report on Form 10-QSB that are not historical orcurrent facts are “forward-looking statements” made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  The words “believe,” “expect,” “will,” “can,”“estimate,” “anticipate,” and similar expressions are intended to identifyforward-looking statements. Forward-looking statements are subject to certain risks anduncertainties that could cause actual results to differ materially includingthe following: (i) theCompany’s ability to successfully operate its business including its ability todevelop, improve and update its cardiorespiratory diagnostic products soldunder the MedGraphics and New Leaf product brand names, (ii) the Company’sability to effectively manufacture and ship its products in anticipatedrequired quantities to meet customer demands, (iii) the Company’s ability tosuccessfully defend itself from product liability claims related to itscardiorespiratory diagnostic products and claims associated with its priorcardiac stimulation products, (iv) the Company’s ability to protect itsintellectual property, and (v) the Company’s dependence on third-party vendors.

From time to time,the Company through its management may make oral forward-lookingstatements.  The Company undertakes noobligation to update any forward-looking statement.  Additional information with respect to therisks and uncertainties faced by the Company may be found in, and the priordiscussion is qualified in its entirety by, the other risk factors that aredescribed from time to time in the Company’s Securities and Exchange Commissionreports, including but not limited to the Annual Report on Form 10-KSB for theyear ended October 31, 2005, and subsequently 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 and fitness.

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.

Revenues consistof equipment and supply sales and service revenues.  Equipment and supply sales reflect sales ofnon-invasive cardiorespiratory diagnostic equipment and aftermarket sales of

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peripherals andsupplies.  Service revenues reflectrevenues from extended service contracts, non-warranty service visits andadditional 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 second quarter of 2006 were $3.7 million, an increase of 19.7% from $3.1million in 2005.  Income from continuingoperations for the three months ended July 31, 2006 was $655,000, or $0.17 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 $655,000 or $0.17 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 endedJuly 31, 2006, total revenue increased 34.0% to $22.9 million from $17.1million for the same period in 2005. Operating expenses for the nine months ended July 31, 2006 increased12.4% to $10.5 million from $9.4 million for the same period in 2005.  Income from continuing operations for thenine months ended July 31, 2006 was $946,000, or $0.25 per diluted share, comparedto a loss of $1.0 million, or $0.29 per diluted share, for the same period in2005.  Net income for the nine monthsended July 31, 2006 was $1.2 million, or $0.32 per diluted share, and includeda $268,000 gain from discontinued operations. Net loss for the nine months ended July 31, 2005 was $1.2 million, or$0.34 per diluted share, and included a $191,000 loss from discontinuedoperations.

 

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 andsustaining profitability;

·                  A fourth consecutive year ofdouble-digit year-over-year revenue growth;

·                  The introduction of newcardiorespiratory diagnostic products;

·                  Continuation of the expansion of ourdomestic and international sites offering New Leaf brand active metabolicassessments; and

·                  Furtherexpansion of the New Leaf brand products for weight management, exercise andathletic performance.

After nine months,the Company has made significant progress against these objectives and goals.

·                  The third quarter of 2006 marked theCompany’s fourth consecutive profitable quarter;

·                  TheCompany achieved double-digit year-over-year revenue growth for the ninthquarter in a row.  With year-over-yearrevenue growth for the nine months ended July 31, 2006 of 34.0%, the Company’s annual goal is clearly withinreach.  Third quarter 2006 revenue of$8.8 million is another record revenue quarter;

·                  Whileimportant progress in the development of new cardiorespiratorydiagnostic products has been made, the Company is now planning to introducethese new products in 2007;

·                  The Company has grown the number ofnew sites offering New Leaf brand active metabolic assessments and generated arecord number of new consumers participating in the New Leaf Active MetabolicTraining TM program; and

·                  The New Leaf branded *Energy*SmartTMonline nutrition, meal planning and tracking system was launched in February2006.  This program is designed to helpconsumers from weight conscious adults and children to recreational and eliteathletes properly “fuel” and train their metabolism.

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**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 quarter of 2006 has increased by27.0%.  International product revenueincreased 146.0% while service revenue decreased 8.2% as a result of the12-month warranty 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 quarter revenue grew as a result of new equipment and servicesales to one of our clinical research customers.  The Company sells its cardiorespiratory diagnostic systems and servicesto this customer for use in conducting safety and efficacy clinical trialstudies both in the United States and internationally.  This customer accounted for 37.7% and 18.4%of revenue for the three and nine months ended July 31, 2006, respectively.  The Company expects revenue from thiscustomer to continue in the next two quarters at levels that exceed 10% ofrevenues.

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 revenue decreased $133,000 compared to the same period in2005.  These decreases are due to the number of new systemspurchased that include 12-month warranties, which reduces our extended servicecontract revenue.  The Company believesthis is temporary and will change as newly installed equipment becomes eligiblefor extended service contracts or billable service calls.

**Gross Margin**

Gross margin percentagefor the three month period ended July 31, 2006 of 49.4% 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 50.0% 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 11.0%to $1.9 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 6.1% to $5.6 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

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cost of equipment salesdemonstrations to potential customers increased by $39,000 to contribute to theoverall increase in selling and marketing expenses for the quarter.

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 commissions,equipment demonstrations and trade shows of $65,000, $59,000 and $46,000,respectively, are components of the overall increase in selling and marketingexpenses for the nine months ended July 31, 2006.

**General and Administrative**

General andadministrative expenses for the three months ended July 31, 2006 increased by$295,000 to $954,000 compared to $659,000 for the same period in 2005.  For the nine months ended July 31, 2006,general and administrative expenses increased by $732,000 to $2.7 millioncompared to $1.9 million for the same period in 2005.

The increase ingeneral and administrative expenses for both the three and nine months endedJuly 31, 2006 reflects increased accruals for employee incentive plans due tothe expected achievement of defined incentive plan objectives for 2006.  Employee incentive plan expenses increased by$233,000 to $258,000 for the three months ended July 31, 2006 compared to$25,000 for the same period in 2005.  Forthe nine months ended July 31, 2006, employee incentive plan expenses increasedby $429,000 to $606,000 compared to $177,000 for the same period in 2005.  Management believes that general andadministrative expenses for the fourth quarter of 2006 will be higher than thesame period of 2005 for the same reason, increased accruals for employeeincentive plans.

General andadministrative expenses also included non-cash expenses of $50,000 and $187,000for the three and nine months ended July 31, 2006, respectively, forstock-based compensation associated with variable options compared to $25,000for both comparable periods in 2005.  TheCompany’s Compensation Committee accelerated the vesting of all unvestedvariable options.  Consequently, therewill be no further expenses for these options. See Note 4 to the Consolidated Financial Statements, “Stock-BasedCompensation,” in this Form 10-QSB for additional discussion of variableoptions.

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.

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**Research and Development**

Research and developmentexpenses for the three months ended July 31, 2006 increased $121,000 to$603,000 from $482,000 for the same period in 2005.  For the nine months ended July 31, 2006,research and development expenses increased $105,000 to $1.6 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.

**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.

**Interest Income**

Interest income for thethree months ended July 31, 2006 increased to $22,000 from $10,000 for the sameperiod in 2005.  For the nine monthsended July 31, 2006, interest income increased to $50,000 as compared to$26,000 for the same period in 2005.  Theincrease in interest income is principally due to an increase in interestrates.

 

**Provision for Taxes**

The Companyrecorded a provision for income taxes to reflect U.S. and State alternative minimum taxes (“AMT”).  The Company is required to pay AMT eventhough it has substantial federal net operating loss carry forwards.  SeeNote 10 to the Consolidated Financial Statements, “Income Taxes,” in this Form10-QSB for additional discussion of income taxes.

**DiscontinuedOperations**

The net gain fromdiscontinued operations of $268,000 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 $191,000 loss from discontinuedoperations for the three and nine months ended July 31, 2005 primarilyconsisted of legal expenses and the purchase of liability insurance coveragefor claims associated with the Company’s discontinued ICD products.  See Note 9 to the Consolidated FinancialStatements, “Discontinued Operations and Related Litigation,” in this Form10-QSB for additional discussion of the litigation settlement with Medmarc.

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**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 $759,000 in cash from continuingoperations in part because its net income of $1.2 million included $810,000 ofdepreciation and amortization.

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 andaccounts payable are necessary to support the new customer’s orders forcardiorespiratory diagnostic equipment.

On June 9, 2006, theCompany received the settlement payment from Medmarc for the insurance recoveryrelated to expenses associated with previously discontinued ICD products.  As a result, the Company generated $851,000in cash from operating activities of discontinued operations.  The cash received from operating activitiesof discontinued operations was net of the legal fees, consulting and otherexpenses related to the ELA Medical settlement and Medmarc litigation.

 

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, the Companyexecuted a $400,000 promissory note that required a payment of $200,000 thatwas made on December 31, 2005 and another $200,000 payment made on June 30,2006.  These payments are reflected inthe Consolidated Statement of Cash Flows for the nine months ended July 31,2006 as promissory note payments within Cash Flows from FinancingActivities.  The promissory note wasbacked up with an irrevocable bank letter of credit.  The Company was required to collateralize theirrevocable bank letter of credit with cash that was classified as cashrestricted for discontinued operations at October 31, 2005.  See Note 9 to the Consolidated FinancialStatements, “Discontinued Operations and Related Litigation,” in this Form10-QSB for additional discussion.

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)****           Evaluationof Disclosure Controls and Procedures**

Management, withthe participation of the Company’s chief executive officer, Rodney A. Young,and chief financial officer, Dale H. Johnson, has evaluated the effectivenessof the design and operation of the disclosure controls and procedures, asdefined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as of theend of the period covered by this report. Management has concluded that the Company’s disclosure controls andprocedures are effective to ensure that information required to be disclosed inthe reports that the Company files under the Exchange Act is recorded,processed,

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summarized and reportedwithin the time periods specified in the rules and forms of the SEC and thatthe disclosure controls are also effective to ensure that information requiredto be disclosed in the Company’s Exchange Act reports is accumulated andcommunicated to management, including the chief executive officer and chieffinancial officer, to allow timely decisions regarding required disclosure.

**(b)****          ****Changes in Internal Controls**

There have been nosignificant changes in internal control over financial reporting that occurredduring the fiscal quarter covered by this report that have materially affected,or are reasonably likely to materially affect, the registrant’s internalcontrol over financial reporting.

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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.

##### **SmallBusiness 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).                                                         |
| 99.1 | Press release dated September 11, 2006 reporting  Angeion Corporation’s results of operations for the three and nine months  ended July 31, 2006. |

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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:  | September 11,  2006                    |   | /s/ Rodney A. Young |   |
|   | Rodney A. Young                        |
|   | President and  Chief Executive Officer |
|   | (Principal  Executive Officer)         |
|   |                                   |
|   |                                   |
| Date:  | September 11,  2006                    |   | /s/ Dale H. Johnson |   |
|   | Dale H. Johnson                        |
|   | Chief Financial  Officer               |
|   | (Chief  Accounting Officer)            |

 

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