**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

# **FORM10-QSB**

| **x**      | ** ** | **Quarterly report under Section 13 or 15(d) of  the Securities Exchange Act of 1934.**                                                                                                                                                                                                                            |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                               |
| ** ** |       | **For the  quarterly period ended January 31, 2007**                                                                                                                                                                                                                                                               |
| ** ** |       | ** **                                                                                                                                                                                                                                                                                                         |
|       |       | **OR**                                                                                                                                                                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                                                               |
| **o**      | ** ** | **Transition report under Section 13 or 15(d) of  the Exchange Act.**                                                                                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                               |
|       |       | **For the  transition 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 of principalexecutive 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 3,878,345shares of common stock, $0.10 par value, outstanding as of March 5, 2007.

 

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**PART I - FINANCIAL INFORMATION**

**Item 1.  FinancialStatements.**

**ANGEION CORPORATION AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**January 31, 2007 and October 31, 2006**

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

 
| ** **                                                                                                                                   | ** ** | **January 31,** | ** ** | **October 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2007**             | ** ** | **2006**             | ** ** |
| **Assets**                                                                                                                                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Current assets:**                                                                                                                          | ** ** | ** **           | ** ** | ** **           | ** ** |
| Cash and cash  equivalents                                                                                                                   |       | $                    | 4,671      |                 | $          | 4,069 |   |
| Accounts receivable,  net of allowance for doubtful   accounts of $110 and $133, respectively                                                |       | 7,592                |       | 6,799                |       |
| Inventories                                                                                                                                  |       | 5,329                |       | 5,737                |       |
| Prepaid expenses and other  current assets                                                                                                   |       | 281                  |       | 285                  |       |
| Total current assets                                                                                                                         |       | 17,873               |       | 16,890               |       |
| ** **                                                                                                                                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| Property and equipment,  net of accumulated   depreciation of $1,964 and $1,883, respectively                                                |       | 1,020                |       | 1,096                |       |
| Intangible assets, net                                                                                                                       |       | 3,415                |       | 3,767                |       |
| **Total Assets**                                                                                                                             | ** ** | **$**                | **22,308** | ** **           | **$**      | **21,753** | ** ** |
| ** **                                                                                                                                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Liabilities  and Shareholders’ Equity**                                                                                               | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Current liabilities:**                                                                                                                     | ** ** | ** **           | ** ** | ** **           | ** ** |
| Accounts payable                                                                                                                             |       | $                    | 1,531      |                 | $          | 1,575 |   |
| Employee compensation                                                                                                                        |       | 1,576                |       | 2,068                |       |
| Advance payments from  customers                                                                                                             |       | 833                  |       | 1,234                |       |
| Deferred income                                                                                                                              |       | 1,228                |       | 1,125                |       |
| Warranty reserve                                                                                                                             |       | 365                  |       | 335                  |       |
| Other current  liabilities and accrued expenses                                                                                              |       | 496                  |       | 349                  |       |
| Total current  liabilities                                                                                                                   |       | 6,029                |       | 6,686                |       |
| ** **                                                                                                                                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Long-term liabilities:**                                                                                                                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| Long-term deferred  income                                                                                                                   |       | 765                  |       | 757                  |       |
| **Total Liabilities**                                                                                                                        |       | 6,794                |       | 7,443                |       |
| ** **                                                                                                                                   | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Shareholders’ equity:**                                                                                                               | ** ** | ** **           | ** ** | ** **           | ** ** |
| Common stock, $0.10 par  value, authorized 25,000,000 shares, issued and outstanding, 3,872,845 shares  in 2007 and 3,792,306 shares in 2006 |       | 387                  |       | 379                  |       |
| Additional paid-in  capital                                                                                                                  |       | 19,204               |       | 18,497               |       |
| Accumulated deficit                                                                                                                          |       | (4,077               | )          | (4,566               | )          |
| Total shareholders’  equity                                                                                                             |       | 15,514               |       | 14,310               |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                          | ** ** | **$**                | **22,308** | ** **           | **$**      | **21,753** | ** ** |

 

See accompanying notes toconsolidated financial statements.

 

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**ANGEION CORPORATION ANDSUBSIDIARIES**

**Consolidated Statements of Earnings**

(unaudited, inthousands except per share amounts)
| ** **                                              | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **January 31,**             | ** ** |
| ** **                                              | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Revenues**                                            |       |                             |       |   |   |
| Equipment and supply sales                              |       | $                                | 9,888      |   | $ | 6,247 |   |
| Service revenue                                         |       | 731                              |       | 686 |   |
|                                                    |       | 10,619                           |       | 6,933 |   |
| **Cost of  goods sold**                                 |       |                             |       |   |   |
| Cost of equipment and supplies                          |       | 5,220                            |       | 3,281 |   |
| Cost of service revenue                                 |       | 112                              |       | 123 |   |
|                                                    |       | 5,332                            |       | 3,404 |   |
|                                                    |       |                             |       |   |   |
| **Gross  margin**                                       |       | 5,287                            |       | 3,529 |   |
| ** **                                              |       |                             |       |   |   |
| **Operating  expenses:**                                |       |                             |       |   |   |
| Selling and marketing                                   |       | 2,475                            |       | 1,953 |   |
| General and administrative                              |       | 1,160                            |       | 713 |   |
| Research and development                                |       | 675                              |       | 483 |   |
| Amortization of intangibles                             |       | 195                              |       | 203 |   |
|                                                    |       | 4,505                            |       | 3,352 |   |
| ** **                                              |       |                             |       |   |   |
| **Operating  income**                                   |       | 782                              |       | 177 |   |
| Interest income                                         |       | 36                               |       | 9 |   |
|                                                    |       |                             |       |   |   |
| **Income  before taxes**                                |       | 818                              |       | 186 |   |
| Provision for taxes                                     |       | 329                              |       | 100 |   |
|                                                    |       |                             |       |   |   |
| **Income  from continuing operations**                  |       | 489                              |       | 86 |   |
| **Loss  from discontinued operations, net of $0 taxes** |       | —                           |       | (4 | ) |
| **Net  income**                                         |       | $                                | 489        |   | $ | 82 |   |
| ** **                                              |       |                             |       |   |   |
| **Earnings  per share - basic**                         |       |                             |       |   |   |
| Continuing operations                                   |       | $                                | 0.13       |   | $ | 0.02 |   |
| Discontinued operations                                 |       | —                           |       | — |   |
| Net income per share                                    |       | $                                | 0.13       |   | $ | 0.02 |   |
|                                                    |       |                             |       |   |   |
| **Earnings  per share - diluted**                       |       |                             |       |   |   |
| Continuing operations                                   |       | $                                | 0.12       |   | $ | 0.02 |   |
| Discontinued operations                                 |       | —                           |       | — |   |
| Net income per share                                    |       | $                                | 0.12       |   | $ | 0.02 |   |
|                                                    |       |                             |       |   |   |
| **Weighted  average common shares outstanding**         |       |                             |       |   |   |
| **Basic**                                               |       | 3,838                            |       | 3,611 |   |
| **Diluted**                                             |       | 4,249                            |       | 3,635 |   |

 

See accompanying notes toconsolidated financial statements.

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**ANGEIONCORPORATION AND SUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

(unaudited, in thousands)

 
| ** **                                                                                                                                                                                                                                                       | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                                                                                       | ** ** | **January 31,**             | ** ** |
| ** **                                                                                                                                                                                                                                                       | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Cash  Flows From Operating Activities:**                                                                                                                                                                                                                       |       |                             |       |   |   |
| Net income                                                                                                                                                                                                                                                       |       | $                                | 489        |   | $ | 82 |   |
| Loss from discontinued operations                                                                                                                                                                                                                                |       | —                           |       | 4 |   |
| Adjustments to reconcile net income to net cash provided  by (used in) operating activities:                                                                                                                                                                     |       |                             |       |   |   |
| Depreciation and amortization                                                                                                                                                                                                                                    |       | 276                              |       | 266 |   |
| Stock-based compensation                                                                                                                                                                                                                                         |       | 3                                |       | 56 |   |
| Tax benefit from stock options exercised                                                                                                                                                                                                                         |       | (117                             | )          | — |   |
| Deferred income taxes                                                                                                                                                                                                                                            |       | 157                              |       | 100 |   |
| Changes in operating assets and liabilities:                                                                                                                                                                                                                     |       |                             |       |   |   |
| Accounts receivable                                                                                                                                                                                                                                              |       | (793                             | )          | (283 | ) |
| Inventories                                                                                                                                                                                                                                                      |       | 408                              |       | (391 | ) |
| Prepaid expenses and other current assets                                                                                                                                                                                                                        |       | 4                                |       | 167 |   |
| Accounts payable                                                                                                                                                                                                                                                 |       | (44                              | )          | 175 |   |
| Employee compensation                                                                                                                                                                                                                                            |       | (492                             | )          | 34 |   |
| Advance payments from customers                                                                                                                                                                                                                                  |       | (401                             | )          | — |   |
| Deferred income                                                                                                                                                                                                                                                  |       | 111                              |       | 22 |   |
| Warranty reserve                                                                                                                                                                                                                                                 |       | 30                               |       | 8 |   |
| Other current liabilities and accrued expenses                                                                                                                                                                                                                   |       | 264                              |       | (22 | ) |
| Net cash provided by (used in) continuing operations                                                                                                                                                                                                             |       | (105                             | )          | 218 |   |
|                                                                                                                                                                                                                                                             |       |                             |       |   |   |
| Cash used in operating activities of discontinued  operations                                                                                                                                                                                                    |       | —                           |       | (104 | ) |
| Net cash provided by (used in) operating activities                                                                                                                                                                                                              |       | (105                             | )          | 114 |   |
|                                                                                                                                                                                                                                                             |       |                             |       |   |   |
| **Cash  Flows From Investing Activities:**                                                                                                                                                                                                                       |       |                             |       |   |   |
| Purchase of property and equipment                                                                                                                                                                                                                               |       | (5                               | )          | (35 | ) |
| Net cash used in investing activities                                                                                                                                                                                                                            |       | (5                               | )          | (35 | ) |
|                                                                                                                                                                                                                                                             |       |                             |       |   |   |
| **Cash  Flows From Financing Activities:**                                                                                                                                                                                                                       |       |                             |       |   |   |
| Proceeds from issuance of common stock under  employee stock purchase plan                                                                                                                                                                                       |       | 18                               |       | 9 |   |
| Proceeds from the exercise of stock options                                                                                                                                                                                                                      |       | 377                              |       | — |   |
| Proceeds from the exercise of warrants                                                                                                                                                                                                                           |       | 200                              |       | — |   |
| Tax benefit from stock options exercised                                                                                                                                                                                                                         |       | 117                              |       | — |   |
| Net cash provided by financing activities of continuing  operations                                                                                                                                                                                              |       | 712                              |       | 9 |   |
| Cash provided by (used in) financing activities of discontinued  operations:                                                                                                                                                                                     |       |                             |       |   |   |
| Promissory note payment                                                                                                                                                                                                                                          |       | —                           |       | (200 | ) |
| Cash restricted for discontinued operations                                                                                                                                                                                                                      |       | —                           |       | 200 |   |
| Net cash provided by financing activities                                                                                                                                                                                                                        |       | 712                              |       | 9 |   |
|                                                                                                                                                                                                                                                             |       |                             |       |   |   |
| **Net  increase in cash and cash equivalents**                                                                                                                                                                                                                   |       | 602                              |       | 88 |   |
|                                                                                                                                                                                                                                                             |       |                             |       |   |   |
| **Cash  and cash equivalents at beginning of period**                                                                                                                                                                                                            |       | 4,069                            |       | 1,072 |   |
|                                                                                                                                                                                                                                                             |       |                             |       |   |   |
| **Cash  and cash equivalents at end of period**                                                                                                                                                                                                                  | ** ** | **$**                            | **4,671**  | ** ** | **$** | **1,160** | ** ** |
| **Supplemental  disclosure of non-cash investing activities:**                                                                                                                                                                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| During the three months ended January 31, 2007, the  Company decreased intangible assets $157,000 with an offsetting decrease to  the deferred tax valuation allowance of $157,000 for the usage of pre-emergence  bankruptcy net operating loss carry forwards. |       |                             |       |   |   |

 
| See accompanying notes to  consolidated financial statements. |   |   |   |   |   |
|---------------------------------------------------------------|--------|--------|--------|--------|--------|

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

January31, 2007

(Unaudited)

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

The consolidated balance sheet as of January 31, 2007, the consolidated statements of earnings and cash flows for the threemonths ended January 31, 2007 and2006, and the related information presented in these notes have been preparedby management in accordance with U.S. generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-QSB andRule 10-01 of 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, 2006 was derived from the auditedconsolidated financial statements as of that date.  Operating results for the three months ended January31, 2007 are not necessarily indicative ofthe results that may be expected for the year ending October 31, 2007.  For further information, refer to theconsolidated financial statements and notes thereto included in Angeion Corporation’sAnnual Report on Form 10-KSB for the year ended October 31, 2006.

Comprehensive income is a measure of allnon-owner changes in shareholders’ equity and includes items such as netincome, certain foreign currency translation items, minimum pension liabilityadjustments and changes in the value of available-for-sale securities.  For the three months ended January 31, 2007 and 2006, comprehensive income for Angeion Corporation was equivalentto net income 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 acceptance of the system, revenue is deferred until all customeracceptance criteria have been met. Estimated warranty obligations are 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.  Thetotal amount of deferred service contract revenue was $1,421,000 and $1,274,000at January 31, 2007 and October 31, 2006, respectively.  Revenue from 

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installationand training services provided to customers is deferred until the service hasbeen performed.  The amount of deferredinstallation and training revenue was $333,000 and $362,000 at January 31, 2007and October 31, 2006, respectively.

Whena sale involves multiple deliverables, such as equipment, installation servicesand training, the amount of the consideration from an arrangement is allocatedto each respective element based on the residual method and recognized asrevenue when revenue recognition criteria for each element is met.  Consideration allocated to deliveredequipment is equal to the total arrangement consideration less the fair valueof installation and training.  The fairvalue of installation and training services is based on specific objectiveevidence, including third-party invoices.

The Company has onecustomer that accountedfor 23.8% of revenues for the three months ended January 31, 2007 and norevenue for the same period in 2006.

***Advance Payments from Customers***

The Company typically doesnot receive advance payments from its customers in connection with the sale ofits products.  The Company occasionallyenters into an arrangement under which a customer agrees to purchase a largequantity of product that is to be delivered over a period of time.  Depending on the size of these arrangements,the Company may negotiate an advance payment from these customers.  At January 31, 2007, advance payments fromcustomers aggregated $833,000, of which $679,000 was from a single customer forproducts to be shipped during fiscal year 2007. Advance payments to customers at October 31, 2006 aggregated $1,234,000,of which $1,144,000 was from a single customer. Revenue recognition for customer orders that include advance payments isconsistent with the Company’s revenue recognition policy described above.

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

In June 2006, the FASB issued FASB InterpretationNo. 48, “*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*” (“FIN 48”).  FIN 48 prescribes a comprehensive model forthe financial statement recognition, measurement, presentation and disclosureof uncertain tax positions taken or expected to be taken on income taxreturns.  FIN 48 is effective for fiscalyears beginning after December 15, 2006. The Company is currently evaluating the impact of adopting FIN 48 on itsconsolidated financial statements.  TheCompany will adopt FIN 48 on November 1, 2007.

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.

In September 2006, the Staff of the SEC issued StaffAccounting Bulletin (“SAB”) No. 108, *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements* (“SAB No. 108”).  SAB No. 108 provides guidance on theconsideration of the 

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effects of prior year misstatements in quantifyingcurrent year misstatements for the purpose of determining whether the currentyear’s financial statements are materially misstated.  SAB No. 108 is effective for fiscal yearsending after November 15, 2006.  The Company’sadoption of SAB No. 108 as of November 1, 2006 did not have a material impacton its financial statements.

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

EffectiveNovember 1, 2006, the Company adopted the provisions of FASB Statement No. 123(revised 2004), *“Share-Based Payment”* (“SFAS No.123(R)”) which replaced SFAS No. 123, *“Accounting forStock-Based Compensation”* (“SFAS No. 123”) and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25, *“Accounting for StockIssued to Employees”* (“APB Opinion No. 25”).  Under the fair value recognition provisionsof SFAS No. 123(R), the Company measures stock-based compensation cost at thegrant date based on the fair value of the award and recognizes the compensationexpense over the requisite service period, which is generally the vestingperiod.  The Company elected themodified-prospective method of adopting SFAS No. 123(R), under which priorperiods are not retroactively restated. The provisions of SFAS No. 123(R) apply to awards granted, modified orcancelled after the November 1, 2006 effective date.  Stock-based compensation expense fornon-vested awards granted prior to the effective date is being recognized overthe remaining service period using the fair-value based compensation costestimated for SFAS No. 123 pro forma disclosures.  Total stock-based compensation expenseincluded in our statement of earnings for the three months ended January 31,2007 was $3,000.

***Stock Options***

Under theAngeion Corporation 2002 Stock Option Plan (“2002 Stock Option Plan”), theCompany had reserved 800,000 shares of its common stock for issuance uponexercise of stock options of which 9,200 shares were available for futuregrants as of January 31, 2007.  As ofJanuary 31, 2007, options for 790,800 shares had been granted and 221,400shares had been issued upon exercise of options.  The Company has no outstanding stock optionsoutside of the 2002 Stock Option Plan.

The 2002Stock Option Plan provides that incentive stock options and nonqualified stockoptions to purchase shares of common stock may be granted at prices determinedby the Compensation Committee, except that the purchase price of incentivestock options may not be less than 100% of the fair market value of the stockat date of grant.  All options expire nolater than ten years from date of grant and are subject to various vestingschedules.

***Employee Stock Purchase Plan***

The AngeionCorporation 2003 Employee Stock Purchase Plan (“Stock Plan”) allowsparticipating employees to purchase shares of the Company’s common stock at adiscount through payroll deductions.  TheStock Plan is available to all employees subject to certain eligibilityrequirements.  Terms of the Stock Planprovide that participating employees may purchase the Company’s common stock ona voluntary after tax basis.  Employeesmay purchase the Company’s common stock at a price that is no less than thelower of 85% of the fair market value of one share of common stock at thebeginning or end of each stock purchase period or phase.  The Company increased the price at whichoptions are issued to 95% of the market value effective January 1, 2007.  The Plan is carried out in six-month phases,with phases beginning on January 1 and July 1 of each calendar year.  For the phase that ended on December 31,2006, employees purchased 4,462 shares at a price of $4.08 per share in thefirst quarter of fiscal year 2007.  As ofJanuary 31, 2007, the Company has withheld approximately $2,786 from employeesparticipating in the phase that began on January 1, 2007.  At January 31, 2007, approximately 72,351shares of common stock were available for future purchase under the Stock Plan.

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***Valuation Assumptions***

The Companyuses the Black-Scholes option pricing model (“Black-Scholes model”) todetermine the fair value of stock options as of the grant date.  The fair value of stock options under theBlack-Scholes model requires management to make assumptions regarding projectedemployee stock option exercise behaviors, risk-free interest rates, volatilityof the Company’s stock price and expected dividends.

The expenserecognized for shares purchased under the Stock Plan is equal to the fair valueof stock options as of the grant date.

Thefollowing table provides the weighted average fair value of options granted toemployees and the related assumptions used in the Black-Scholes model:
|                                                | ** ** | **Three   Months   Ended   January 31,  2007** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Weighted average fair value of options granted |       | $                                                                  | 5.18       |   |
|                                           |       |                                                               |       |
| Assumptions  used:                             |       |                                                               |       |
| Expected life (years) (a)                      |       | .5                                                                 |       |
| Risk-free interest rate (b)                    |       | 4.97                                                               | %          |
| Volatility(c)                                  |       | 135.66                                                             | %          |
| Dividend yield (d)                             |       | 0                                                                  | %          |
|                                                |            |                                                                    |            |  |

 

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a)              *Expected life*: The Company analyzes historical employeeexercise and termination data to estimate the expected life assumption. TheCompany believes that historical data currently represents the best estimate ofthe expected life of a new employee option.

b)             *Risk-free interest rate*: The rate is based on the U.S. Treasuryzero-coupon yield curve on the grant date for a maturity similar to theexpected life of the options.

c)              *Risk-free interest rate*: The rate is based on the U.S. Treasuryzero-coupon yield curve on the grant date for a maturity similar to theexpected life of the options.

d)             *Dividend yield*: The dividend yield rate is not considered inthe model, as the Company has not established a dividend policy for the stock.

***Stock-Based Compensation Expense***

Prior toadopting SFAS No. 123(R), the Company accounted for stock options under APBOpinion No. 25 using the intrinsic value method and the impact based on thefair value method on the Company’s net earnings was disclosed on a pro formabasis in the footnotes to the consolidated financial statements.  In these pro forma disclosures, the Companyrecognized stock option compensation expense based on the stated vestingperiod.  There was no stock-basedcompensation expense capitalized into ending inventory as it was deemedimmaterial.

ApplyingSFAS No. 123(R), the amount of stock-based compensation expense recognizedduring a period is based on the portion of the awards that are ultimatelyexpected to vest.  The Company 

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estimates pre-vestingforfeitures at the time of grant by analyzing historical data and revises thoseestimates in subsequent periods if actual forfeitures differ from thoseestimates.  Ultimately, the total expenserecognized over the vesting period will equal the awards that actually vest.

Thefollowing table presents the statement of earnings classification of pre-taxstock-based compensation expense, for options and restricted stock awards,recognized for the three months ended January 31, 2007:
| (In thousands)         | ** ** | **Three   Months   Ended   January 31,  2007** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------|------------|
| Cost of goods  sold         |       | $                                                                  | —     |   |
| Selling and  marketing      |       | 2                                                                  |       |
| General and  administrative |       | 1                                                                  |       |
| Research and  development   |       | —                                                             |       |
|                        |       | $                                                                  | 3          |   |

 

Thefollowing table illustrates the effect on net income and net income per sharefor the three months ended January 31, 2006, if the Company had applied thefair value recognition provisions of SFAS No. 123(R) to its stock-basedemployee compensation:
| (In thousands, except per share amounts)                                    | ** ** | **Three   Months   Ended   January 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Net income, as  reported                                                                             |       | $                                                                  | 82         |   |
| Add: Stock-based  compensation expense included in net income under intrinsic value method (a)       |       | 35                                                                 |       |
| Less:  Stock-based compensation expense determined under fair value based method for  all awards (a) |       | (3                                                                 | )          |
|                                                                                                 |       | $                                                                  | 114        |   |
|                                                                                                 |       |                                                               |       |
| Net income per  share – basic and diluted                                                       |       |                                                               |       |
| As reported                                                                                          |       | $                                                                  | 0.02       |   |
| Pro forma                                                                                            |       | 0.03                                                               |       |

 

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a)              Compensationexpense is net of related tax effects

***Tax Impacts of Stock-Based Compensation***

Prior tothe adoption of SFAS No. 123(R), benefits of tax deductions in excess ofrecognized share-based compensation expense were reported on the consolidatedstatement of cash flows as operating cash flows.  Under SFAS No. 123(R), these excess taxbenefits are reported as financing cash flows. Although total cash flows under SFAS No. 123(R) remain unchanged fromwhat would have been reported under prior accounting standards, net operatingcash flows are reduced and net financing cash 

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flows are increased due tothe adoption of SFAS No. 123(R).  For thethree months ended January 31, 2007, there were excess tax benefits of$117,000, which are classified as financing cash flows.  For the three months ended January 31, 2006,there were no excess tax benefits.

***Stock Options***

Thefollowing table summarizes stock option activity during the three months endedJanuary 31, 2007:
|                                  | ** ** | **Options** | ** ** | **Weighted  Average   Exercise   Price** | ** ** |
|----------------------------------|------------|-------------|------------|----------------------------------------------------|------------|
| Outstanding at  October 31, 2006 |       | 624,187     |       | $                                                  | 5.03       |   |
| Granted                          |       | 1,536       |       | 11.62                                              |       |
| Exercised                        |       | 54,787      |       | 7.21                                               |       |
| Canceled / forfeited             |       | —      |       | —                                             |       |
| Outstanding at January  31, 2007 |       | 570,936     |       | $                                                  | 4.84       |   |

 

Thefollowing table summarizes information concerning stock options outstanding asof January 31, 2007:
| Options Outstanding                | ** ** | **Options Exercisable** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life (years)** | ** ** | **Number  Subject to  Exercise** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                                    |       |                         |       |   |   |   |   |   |   |   |   |
| $                                       | 2.00       |                         | 57,400     |   | $ | 2.00 |   | 6.68 |   | 57,400 |   | $ | 2.00 |   |
| 2.53                                    |       | 180,000                      |       | 2.53 |   | 8.62 |   | 180,000 |   | 2.53 |   |
| 5.08                                    |       | 88,500                       |       | 5.08 |   | 9.32 |   | 88,500 |   | 5.08 |   |
| 6.23                                    |       | 110,500                      |       | 6.23 |   | 6.96 |   | 110,500 |   | 6.23 |   |
| 7.79                                    |       | 133,000                      |       | 7.79 |   | 6.68 |   | 133,000 |   | 7.79 |   |
| 11.62                                   |       | 1,536                        |       | 11.62 |   | .42 |   | — |   | — |   |
|                                    |       |                         |       |   |   |   |   |   |   |   |   |
| Total                                   |       | 570,936                      |       | $ | 4.84 |   | 7.46 |   | 569,400 |   | $ | 4.82 |   |
|                                         |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

The totalintrinsic value of options exercised during the three months ended January 31,2007 was $368,000.  The total intrinsicvalue of options outstanding and exercisable at January 31, 2007 was$6,286,000, which was calculated using the closing stock price at the end ofthe fiscal quarter less the option price of in the money options.  The Company issues new shares when stockoptions are exercised.  Cash receivedfrom the exercise of stock options for the three months ended January 31, 2007was $377,000 and the related tax benefit realized was $117,000.  Unrecognized compensation expense related tooutstanding stock options as of January 31, 2007 was $3,000 and is expected tobe recognized over a weighted average period of two months and will be adjustedfor any future changes in estimated forfeitures.

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**5.****             Inventories**

Inventoriesconsisted of the following at January 31,2007 and October 31, 2006:
| (In thousands) | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Raw materials       |       | $        | 1,902      |     | $          | 2,239 |   |
| Work-in-progress    |       | 282      |       | 294      |       |
| Finished goods      |       | 3,145    |       | 3,204    |       |
|                |       | $        | 5,329      |     | $          | 5,737 |   |

 

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

Intangible assetsconsisted of the following at January 31,2007 and October 31, 2006:
| (In thousands)                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Intangible assets:                  |       |     |       |     |       |
| Developed technology                |       | $        | 6,824      |     | $          | 6,900 |   |
| Trade name (unamortized)            |       | —   |       | 81       |       |
|                                |       | 6,824    |       | 6,981    |       |
|                                |       |     |       |     |       |
| Amortization - developed technology |       | (3,409   | )          | (3,214   | )          |
|                                |       | $        | 3,415      |     | $          | 3,767 |   |

 

Amortizationexpense was $195,000 and $203,000 for the three months ended January 31, 2007 and 2006, respectively.

Intangible assetsare being amortized using the straight-line method over the estimated usefullives of the assets, which range from seven to ten years.  The Company utilizes pre-emergence bankruptcynet operating loss carry forwards (“NOLs”) to reduce trade name and developedtechnology as required by SOP 90-7.  Tothe extent that utilization of these NOLs reduces the cost of developedtechnology, future amortization expense will be reduced.  Estimated amortization expense for theremainder of fiscal year 2007 and for each of the succeeding years based on theintangible assets as of January 31,2007, which does not reflect the possible future reductions discussed above, isas follows:
| (In thousands)                  | ** ** | **Amortization** | ** ** |
|--------------------------------------|------------|------------------|------------|
| Nine months  ending October 31, 2007 |       | $                | 571        |   |
| 2008                                 |       | 762              |       |
| 2009                                 |       | 762              |       |
| 2010                                 |       | 440              |       |
| 2011                                 |       | 440              |       |
| 2012                                 |       | 440              |       |
|                                 |       | $                | 3,415      |   |

 

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Developed technology and trade name consisted of the following atJanuary 31, 2007 and October 31,2006:
| (In thousands)                                                             | ** ** | **Developed  Technology** | ** ** | **Trade Name** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------|------------|----------------|------------|
| Balance at  October 31, 2006                                               |       | $                         | 6,900      |           | $          | 81 |   |
| Reduction in  balance due to utilization of pre-emergence  bankruptcy NOLs |       | (76                       | )          | (81            | )          |
| Balance at January 31, 2007                                                |       | $                         | 6,824      |           | $          | — |   |

 

**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 three months endedJanuary 31, 2007 and 2006 was asfollows:
| (In thousands)           | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Balance,  beginning of period |       | $        | 335        |     | $          | 175 |   |
| Warranty  provisions          |       | 176      |       | 86       |       |
| Warranty claims               |       | (146     | )          | (78      | )          |
| Balance, end of  period       |       | $        | 365        |     | $          | 183 |   |

 

**8.****             NetEarnings per Share**

Basic earnings per shareis computed by dividing net income by the weighted average shares outstandingduring the reporting period.  Dilutedearnings per share is computed similarly to basic earnings per share exceptthat the weighted average shares outstanding are increased to includeadditional shares from the assumed exercise of stock options and warrants, ifdilutive, using the treasury stock method. The number of additional shares is calculated by assuming thatoutstanding stock options or warrants were exercised and that the proceeds fromthe exercise were used to acquire shares of common stock at the average marketprice during the reporting period.

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Shares used in theearnings per share computations for the three months ended January 31, 2007 and 2006 are as follows:
|                                                            | ** ** | **Three Months Ended   January 31,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **(In thousands)**                                    | ** ** | **2007**                                                 | ** ** | **2006** | ** ** |
| Weighted average  common shares outstanding – basic   |       | 3,838                                                    |       | 3,611 |   |
| Dilutive effect of stock options                           |       | 411                                                      |       | 24 |   |
| Weighted average  common shares outstanding – diluted |       | 4,249                                                    |       | 3,635 |   |

 

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.  All stock options outstanding at January 31,2007 were considered dilutive and therefore included in the above calculationwhile the number of stock options excluded from the calculation was 362,800 forthe three months ended January 31,2006.

The Company had warrantsoutstanding at January 31, 2007 and2006 to purchase 150,174 and 179,481 shares, respectively, of its commonstock.  All of the outstanding warrantshave an exercise price of $7.79 per share and, unless exercised, will expire onOctober 31, 2007.  The warrantsoutstanding at January 31, 2007 were considered dilutive and, therefore,included in the above calculation.  Thewarrants outstanding at January 31, 2006 were considered antidilutive and,therefore, not considered to have been exercised.

**9.****             IncomeTaxes**

The Company has recorded a provision for taxes fromcontinuing operations of $329,000 for the three months ended January 31,2007.  The provision for taxes has beencalculated and presented in the statement of earnings as if the Company’searnings were fully taxable.  The amount of income taxes payable is determinedafter utilizing the Company’s NOLs, including its pre-emergence bankruptcyNOLs.  Under American Institute of Certified Public Accountants Statement ofPosition 90-7, *Financial Reporting byEntities in Reorganization Under the Bankruptcy Code* (“SOP 90-7”),the tax benefit for the utilization of these pre-emergence bankruptcy NOL carry forwards must berecognized as a reduction of intangibles rather than a reduction of theprovision for taxes in the statement of earnings.

The Company had a federal net operating loss carryforward at October 31, 2006 of approximately $26.9 million.  This amount is the remaining utilizable carryforward following the application of a limit due to an ownership change underInternal Revenue Code Section 382 that occurred during the fourth quarter offiscal year 2006.  This carry forward isavailable to offset a portion of taxes payable in future years.  If not used, this carry forward will expirein years 2007 through 2025. Approximately $10.3 million of this carry forward will expire over thenext five years.  The Company also has$116,000 of alternative minimum tax credit carry forwards that do not haveexpiration dates.  Even though the Company has substantial federalnet operating loss carry forwards, anyincome may still be subject to U.S. and State alternative minimum taxes.

The Company hasrecorded a full valuation allowance against its net deferred tax asset based onits belief that it was more likely than not that the asset would not berealized in the future.  Although thisdetermination was made in a prior fiscal year and is still applicable as ofJanuary 31, 2007, the Company will continue to assess the need for a fullvaluation allowance in future quarters. Under SOP 90-7, a substantial portion of any future reversal of thevaluation allowance will first reduce any intangible assets 

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and then be credited directly to additional paid-incapital.  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 earnings.  Any additional valuation allowance reversalwill be used to reduce intangible assets to zero, with the remainder beingcredited to additional paid-in capital, including $327,000 related to excessstock option tax deductions.

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**Item 2.****    Management’s Discussion andAnalysis.**

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

The discussion belowcontains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements by their nature involve substantial risks anduncertainties.  Our actual results maydiffer materially depending on a variety of factors including: (i) our abilityto successfully operate our business including our ability to develop, improve,and update our cardiorespiratory diagnostic products, (ii) our ability toensure constant margins for products in light of fluctuating revenues from ourclinical research customers, (iii) our ability to effectively manufacture andship products in required quantities to meet customer demands, (iv) our abilityto successfully defend the Company from product liability claims related to ourcardiorespiratory diagnostic products and claims associated with our priorcardiac stimulation products, (v) our ability to protect our intellectualproperty, (vi) our ability to develop and maintain an effective system ofinternal controls and procedures and disclosure controls and procedures, and(vii) our dependence 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, 2006, andsubsequently filed reports.

# **Overview**

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 functional capacity 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 exhaled 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 setting who wishto assess the number of calories they should consume and burn daily.  The Company’s products are also used bypharmaceutical and medical device companies conducting safety and efficacyclinical trials.

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.  Service revenuesreflect revenues from extended service contracts, non-warranty service visitsand additional training.

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**Results of Operations**

The followingtable sets forth certain items from the Company’s Consolidated Statements ofEarnings expressed as a percentage of revenues for the periods indicated:
|                                    | ** ** | **Three Months Ended  January 31,** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
|                               |       |                                               |       |   |   |
| Revenues                           |       | 100.0                                              | %          | 100.0 | % |
| Cost of goods  sold                |       | 50.3                                               |       | 49.1 |   |
| Gross margin                       |       | 49.7                                               |       | 50.9 |   |
|                               |       |                                               |       |   |   |
| Operating  expenses:               |       |                                               |       |   |   |
| Selling and marketing              |       | 23.3                                               |       | 28.2 |   |
| General and administrative         |       | 10.9                                               |       | 10.3 |   |
| Research and development           |       | 6.4                                                |       | 7.0 |   |
| Amortization of intangibles        |       | 1.8                                                |       | 2.9 |   |
|                               |       | 42.4                                               |       | 48.4 |   |
| Operating income                   |       | 7.3                                                |       | 2.5 |   |
| Interest income                    |       | .3                                                 |       | .1 |   |
| Income before  taxes               |       | 7.6                                                |       | 2.6 |   |
| Provision for taxes                |       | 3.1                                                |       | 1.4 |   |
| Income from  continuing operations |       | 4.5                                                |       | 1.2 |   |
| Loss from discontinued operations  |       | —                                             |       | (0.1 | ) |
| Net income                         |       | 4.5                                                | %          | 1.1 | % |

 

The Companyreported product revenues of $33.7 million for the year ended October 31,2006.  Domestic product sales and servicerevenues accounted for 70.3% of revenue for the year ended October 31, 2006while international product sales accounted for the remaining 29.7%.

Total revenue forthe first quarter of 2007 was $10.6 million, an increase of 53.2% from $6.9million in 2006.  Operating expenses forthe first quarter of 2007 were $4.5 million, an increase of 34.4% from $3.4million in the first quarter of 2006. Net income for the three months ended January 31, 2007 was $489,000, or $0.11 per diluted share,compared to net income of $82,000, or $0.02 per diluted share, for the sameperiod in 2006.  Net income for the threemonths ended January 31, 2006included a $4,000 loss from discontinued operations.

The Companycontinues to apply SOP 90-7 in its financial reporting related to income taxes,which requires the Company to present the provision for taxes on its statementof earnings as if it were fully taxed.  Therefore, the $329,000 provision for taxes inthe first quarter of fiscal 2007 has been calculated and presented in thestatement of earnings as if the Company’s earnings were fully taxable.  The actual amount of income taxes payable bythe Company differs substantially from the Company’s provision for taxes, as itis determined after utilizing the Company’s pre-emergence bankruptcy NOLs. Thecomponents of the Company’s first quarter 2007 provision for taxes aresummarized as follows:

·                                          Establisheda provision for taxes of $329,000 in the statement of earnings,

·                                          Decreasedtrade name and developed technology carrying value on the balance sheet by$81,000 and $76,000, respectively, from the utilization of pre-emergencebankruptcy NOLs,

·                                          Increasedadditional paid-in capital by $117,000 related to tax benefits realized fromstock option exercises, and

·                                          Establishedincome taxes payable of $55,000, which is the net of the three items listedabove.

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The $55,000 incometaxes payable is the Company’s estimate of its cash payments for the firstquarter of 2007 earnings.  See Note 9 tothe Consolidated Financial Statements, “Income Taxes,” in this Form 10-QSB foradditional discussion of the accounting for income taxes and the use ofpre-emergence bankruptcy NOLs.

**Revenue**

For the threemonths ended January 31,2007, year-over-year total revenue increased by 53.2%.  Domestic product revenue has increased 56.3%,international product revenue increased 66.6% and service revenue increased6.6%.

Sales of theUltima PF cardiorespiratory diagnostic system are contributing significantly toboth domestic and international revenue growth. First 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 23.8% of revenue for the three months ended January 31, 2007 and norevenue for the same period in 2006.  The Company expects revenue from thiscustomer to continue throughout fiscal 2007 and into fiscal 2008.

Excluding sales tothis customer, revenue for the three months ended January 31, 2007 increased by $1.2million or 14.3% to $8.1 million compared to $6.9 million for the same periodin 2006.

Service revenue increased$45,000 or 6.6% during the first quarter of 2007 compared to the same quarterin 2006.  Revenue from extended service contracts andnon-warranty service visits both increased in 2007 compared to 2006, reversinga trend experienced during the last few years.  The Company believes that the increasedinstalled customer base generated from increased sales in 2005 and 2006 contributedto these increases.

**Gross Margin**

Gross margin percentagefor the three month period ended January 31, 2007 decreased to 49.8% of revenuecompared to 50.9% for the same period in 2006. The Company’s gross margin percentage for the last three sequentialquarters has been consistent and has also been comparable to the gross marginpercentage reported for fiscal year 2006. Although the Company hasrealized manufacturing efficiencies associated with increasedmanufacturing volumes and general process improvement initiatives, they havebeen offset by negotiated price discounts for our largest customer.

**Selling and Marketing**

Selling andmarketing expenses for the three months ended January 31, 2007 increased by26.7% to $2.5 million compared to $2.0 million for the same period in 2006.

Selling andmarketing expenses related to new sales and sales support personnel, travel andcustomer support expenses increased by 32% or $359,000 during the first quarterof 2007 compared to the same period in 2006. The Company has increased the number of personnel to support itsworld-wide sales initiatives and to support a larger installed customer baseresulting from sales increases during the past year.  In addition, commission expenses increase by$97,000 due to higher commissionable revenue. All other components of selling and marketing expenses increased by$66,000 for the first quarter of 2007 compared to 2006.

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**General and Administrative**

General andadministrative expenses for the three months ended January 31, 2007 increasedby $447,000 to $1.2 million compared to $713,000 for the same period in 2006.

Professional feesincreased by $234,000 for the three months ended January 31, 2007 principallydue to the one-time cost of restating the Company’s Forms 10-QSB for the firstthree quarters of 2006.  Personnelrelated expenses increased by $208,000 for the first quarter of 2007 comparedto 2006.  Non-cash stock-basedcompensation expenses were $56,000 for the first quarter of 2006 compared to$3,000 in 2007 to partially offset these increases.  In addition, there was a $38,000 decrease ingeneral and administrative expenses due to a decrease of $23,000 in theprovision for doubtful accounts for the three months ended January 31, 2007compared to a $15,000 increase of the provision for doubtful accounts for thesame period in 2006.  These decreasesgenerally lower the allowance for doubtful accounts because of improved cashcollections of past due customer accounts. Future changes to the provision for doubtful accounts will be directlyrelated to payment patterns and outstanding balances of a few customerstogether with variations in the total balance of outstanding receivables.

General andadministrative expenses also included $29,000 in consulting expenses associatedwith Sarbanes-Oxley compliance for the first quarter of 2007 compared to$15,000 for the same period in 2006.

**Research and Development**

Research and developmentexpenses for the three months ended January 31, 2007 increased $192,000 to$675,000 from $483,000 for the same period in 2006.

Costs related to newpersonnel contributed to a $154,000 increase in personnel related expenses forthe three months ended January 31, 2007 compared to the same period in2006.  These expenses account for themajority of the increase in research and development costs for thequarter.  The Company’s current newproduct development initiatives include products targeted for asthma, allergyand primary care physicians, health and fitness club professionals, as well asinternational markets.  These newproducts are currently completing clinical evaluation and are planned forrelease in fiscal 2007.  In addition, theCompany is also developing new functionality and new components for use inexisting products.

**Amortization of Intangibles**

Amortization ofdeveloped technology was $195,000 for the three months ended January 31, 2007compared to $203,000 for the same period in 2006.  The decrease is attributed to a technologylicense that became fully amortized in 2006.

As furtherdescribed in Note 9 to the Consolidated Financial Statements, “Income Taxes,”in this Form 10-QSB, as the Company utilizes pre-emergence bankruptcy NOL carryforwards, the Company will reduce the cost of developed technology until thenet carrying cost is zero.  To the extentthat utilization of these NOLs reduces the cost of developed technology, futureamortization expense will be reduced.

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**Interest Income**

Interest income for the three months ended January 31, 2007 increased to $36,000 from $9,000 for the sameperiod in 2006.  The increase in interestincome is principally due to an increase in interest rates and an increase incash and cash equivalents.

**Provision for Taxes**

The Company isrequired to present the provision for taxes as if it were fully taxable inaccordance with SOP 90-7.  The Companyhas 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 federaland state NOL carry forwards.  During the quarter ended January 31, 2007,the Company used tax benefits of $157,000 related to using pre-emergencebankruptcy NOLs, which has been recorded as a reduction of intangible assets.  See Note 9 to the ConsolidatedFinancial Statements, “Income Taxes,”in this Form 10-QSB for additional discussion of the accounting for incometaxes and the use of pre-emergencebankruptcy NOLs.

**DiscontinuedOperations**

The $4,000 lossfrom discontinued operations for the three months ended January 31, 2006included additionalconsulting fees and miscellaneous litigation expenses.  On April 12, 2006, the Company and MedmarcCasualty Insurance Company agreed to a settlement that resolved all matterswith respect to the pending lawsuit between the parties related to the recoveryof insurance proceeds for a claim associated with the Company’s former ICDbusiness.

**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 $4.7 million and working capital of $11.8 million as ofJanuary 31, 2007.  During the threemonths ended January 31, 2007, the Company used $105,000 of cash for continuingoperations.  Cash was generated in partbecause of net income of $489,000 that included non-cash expenses of $276,000for depreciation and amortization and $157,000 of deferred income taxes.

Cash was generated by adecrease of $408,000 in inventories and an increase of $264,000 in othercurrent liabilities and accrued expenses. Cash was used for an increase of $793,000 in accounts receivable anddecreases of $492,000 and $401,000 in employee compensation and advancepayments from customers, respectively. The decrease in employee compensation occurred as the Company paidannual bonuses for 2006 during the first quarter of 2007 and those bonuspayments exceeded prior year bonuses by $870,000.  Advanced payments from customers vary withthe timing of orders and the related customer delivery requirements.  Account receivable balances naturally varywith the timing of large payments and shipment of large customer orders.

During the threemonths ended January 31, 2007, the Company used $5,000 in cash for the purchaseof property and equipment.  The Companyhas no material commitments for capital expenditures for fiscal year 2007.

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Cash of $712,000was generated from financing activities that included the exercise of optionsand warrants to purchase the Company’s common stock and issuance of commonstock under the Employee Stock Purchase Plan. In addition, the Company realized $117,000 in tax benefits from stock optionsexercised during the first quarter of 2007.

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 DisclosureControls and Procedures*

Management, with theparticipation of the Company’s chief executive officer, Rodney A. Young, andchief financial officer, Dale H. Johnson, has evaluated the effectiveness ofthe design and operation of the disclosure controls and procedures, as definedin Rules 13a-15(e) under the Securities Exchange Act of 1934, as of the end ofthe period covered by this report.  In this evaluation, the Company concludedthat, due to the identification of a material weakness in internal control overfinancial reporting related to the Company’s accounting for income taxes, asdescribed below and as previously reported in its Form 10-KSB for the yearended October 31, 2006, the Company’s disclosure controls and procedures werenot effective as of January 31, 2007.

The material weakness in internal control over financial reportingrelated 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 Reportingby Entities in Reorganization under the Bankruptcy Code*.  As a result, the Company restated thefinancial information included in the first three quarters of the year endedOctober 31, 2006, to correct a material error in accounting for income taxes.

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

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.

On January 29, 2007, we reported in the Company’s Form 10-KSB for theyear ended October 31, 2006 that the material weakness described above had notbeen remediated.  As of the date of thefiling of this Form 10-QSB for the three months ended January 31, 2007, thematerial weakness described above has not been remediated.  The Company is taking steps to ensure that itremediates the material weakness by implementing enhanced control proceduresover accounting for income taxes.  Thesesteps include:

·                  education and training of Company managementand staff to improve technical expertise with respect to income tax accounting,

 

·                  expansion of documentation supporting income taxprovision calculations, and

 

·                  evaluationof the efficacy of establishing checklists regarding the preparation of incometax provisions.

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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***

In the three months ended January 31, 2007, we issued 25,727 shares ofour common stock pursuant to exercise of Warrants that were issued to formerAngeion shareholders in connection with our emergence from bankruptcy onOctober 25, 2002.  We received proceedsof approximately $200,000 from these sales and used the proceeds for generalcorporate purposes.  The sales are exemptfrom registration pursuant to Section 1145(a) of the Bankruptcy Code (Title 11,United States Code).

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

The Company didnot purchase any equity securities during the three months ended January 31,2007.

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

None

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

None

**Item 5.  Other Information.**

None

**Item 6.  Exhibits.**

(a)           The following exhibitsare included herein:

31                                    Certificationspursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and15d-14 of the Exchange Act).

32                                    Certificationspursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).99.1

99.1                           Pressrelease dated March 12, 2007 reporting Angeion Corporation results ofoperations for the three months ended January 31, 2007.

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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:  | March 12, 2007 |                                  |   | /s/ Rodney A. Young |   |
|   |           | Rodney A. Young                       |
|   |           | President and Chief Executive Officer |
|   |           | (Principal Executive Officer)         |
|   |           |                                  |
|   |           |                                  |
| Date:  | March 12, 2007 |                                  |   | /s/ Dale H. Johnson |   |
|   |           | Dale H. Johnson                       |
|   |           | Chief Financial Officer               |
|   |           | (Chief Accounting Officer)            |

 

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