**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,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 July 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 ofprincipal executive offices)

**(651) 484-4874**

(Issuer’stelephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the issuer was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.
| Yes | x |   No | o |
|-----|---|-----------|---|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).
| Yes | o |   No | x |
|-----|---|-----------|---|

 

Check whether theregistrant filed all documents and reports required to be filed by Section 12,13 or 15(d) of the Exchange Act of 1934 after distribution of securities undera plan confirmed by a court.
| Yes | x |   No | o |
|-----|---|-----------|---|

 

The Company had 4,087,698 shares of common stock, $0.10 par value,outstanding as of August 31, 2007.

 

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**PART I - FINANCIAL INFORMATION**

**Item 1. Financial Statements****.**

**ANGEION CORPORATION AND SUBSIDIARIES**

**Consolidated Balance Sheets**

(unaudited, in thousands except share and per share data)
| ** **                                                                                                                                   | ** ** | **July 31,** | ** ** | **October 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2007**          | ** ** | **2006**             | ** ** |
| **Assets**                                                                                                                                   | ** ** | ** **        | ** ** | ** **           | ** ** |
| **Current assets:**                                                                                                                          |       |              |       |                 |       |
| Cash and cash  equivalents                                                                                                                   |       | $                 | 5,058      |                 | $          | 4,069 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $59 and $133,  respectively                                                  |       | 8,658             |       | 6,799                |       |
| Inventories                                                                                                                                  |       | 5,333             |       | 5,737                |       |
| Prepaid expenses  and other current assets                                                                                                   |       | 363               |       | 285                  |       |
| Total current  assets                                                                                                                        |       | 19,412            |       | 16,890               |       |
|                                                                                                                                         |       |              |       |                 |       |
| Property and equipment,  net of accumulated depreciation of $2,147 and $1,883, respectively                                                  |       | 1,264             |       | 1,096                |       |
| Intangible assets, net                                                                                                                       |       | 2,806             |       | 3,767                |       |
| **Total Assets**                                                                                                                             | ** ** | **$**             | **23,482** | ** **           | **$**      | **21,753** | ** ** |
|                                                                                                                                         |       |              |       |                 |       |
| **Liabilities  and Shareholders’ Equity**                                                                                               | ** ** | ** **        | ** ** | ** **           | ** ** |
| **Current liabilities:**                                                                                                                     |       |              |       |                 |       |
| Accounts payable                                                                                                                             |       | $                 | 1,243      |                 | $          | 1,575 |   |
| Employee  compensation                                                                                                                       |       | 2,042             |       | 2,068                |       |
| Advance payments  from customers                                                                                                             |       | 224               |       | 1,234                |       |
| Deferred revenue                                                                                                                             |       | 1,601             |       | 1,125                |       |
| Warranty reserve                                                                                                                             |       | 271               |       | 335                  |       |
| Other current  liabilities and accrued expenses                                                                                              |       | 316               |       | 349                  |       |
| Total current  liabilities                                                                                                                   |       | 5,697             |       | 6,686                |       |
|                                                                                                                                         |       |              |       |                 |       |
| **Long-term liabilities:**                                                                                                                   |       |              |       |                 |       |
| Long-term  deferred revenue                                                                                                                  |       | 769               |       | 757                  |       |
| **Total Liabilities**                                                                                                                        |       | 6,466             |       | 7,443                |       |
|                                                                                                                                         |       |              |       |                 |       |
| **Shareholders’ equity:**                                                                                                               |       |              |       |                 |       |
| Common stock,  $0.10 par value, authorized 25,000,000 shares, issued and outstanding,  4,087,698 shares in 2007 and 3,792,306 shares in 2006 |       | 409               |       | 379                  |       |
| Additional  paid-in capital                                                                                                                  |       | 20,227            |       | 18,497               |       |
| Accumulated  deficit                                                                                                                         |       | (3,620            | )          | (4,566               | )          |
| Total  shareholders’ equity                                                                                                             |       | 17,016            |       | 14,310               |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                          | ** ** | **$**             | **23,482** | ** **           | **$**      | **21,753** | ** ** |

 

Seeaccompanying notes to consolidated financial statements.

 

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**ANGEION CORPORATION AND SUBSIDIARIES**

**ConsolidatedStatements of Earnings**

(unaudited, in thousands except per share amounts)
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **July 31,**                | ** ** | **July 31,**               | ** ** |
| ** **                                                   | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenues**                                                 |       |                             |       |                            |       |   |   |   |   |
| Equipment and supply sales                                   |       | $                                | 8,051      |                            | $          | 8,159 |   | $ | 27,086 |   | $ | 20,970 |   |
| Service revenue                                              |       | 819                              |       | 638                             |       | 2,363 |   | 1,972 |   |
|                                                         |       | 8,870                            |       | 8,797                           |       | 29,449 |   | 22,942 |   |
| **Cost of  goods sold**                                      |       |                             |       |                            |       |   |   |   |   |
| Cost of equipment and supplies                               |       | 4,342                            |       | 4,393                           |       | 14,373 |   | 11,258 |   |
| Cost of service revenue                                      |       | 106                              |       | 95                              |       | 341 |   | 317 |   |
|                                                         |       | 4,448                            |       | 4,488                           |       | 14,714 |   | 11,575 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| **Gross  margin**                                            |       | 4,422                            |       | 4,309                           |       | 14,735 |   | 11,367 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| **Operating  expenses:**                                     |       |                             |       |                            |       |   |   |   |   |
| Selling and marketing                                        |       | 2,634                            |       | 2,013                           |       | 7,645 |   | 5,818 |   |
| General and administrative                                   |       | 937                              |       | 809                             |       | 2,984 |   | 2,328 |   |
| Research and development                                     |       | 707                              |       | 633                             |       | 2,075 |   | 1,687 |   |
| Amortization of intangibles                                  |       | 172                              |       | 203                             |       | 557 |   | 609 |   |
|                                                         |       | 4,450                            |       | 3,658                           |       | 13,261 |   | 10,442 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| **Operating  income (loss)**                                 |       | (28                              | )          | 651                             |       | 1,474 |   | 925 |   |
| Interest income                                              |       | 48                               |       | 22                              |       | 131 |   | 50 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| **Income  before taxes**                                     |       | 20                               |       | 673                             |       | 1,605 |   | 975 |   |
| Provision for taxes                                          |       | 16                               |       | 279                             |       | 659 |   | 464 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| **Income  from continuing operations**                       |       | 4                                |       | 394                             |       | 946 |   | 511 |   |
| **Gain  from discontinued operations, net of $103 of taxes** |       | —                           |       | —                          |       | — |   | 171 |   |
| **Net  income**                                              |       | $                                | 4          |                            | $          | 394 |   | $ | 946 |   | $ | 682 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| **Earnings  per share - basic**                              |       |                             |       |                            |       |   |   |   |   |
| Continuing operations                                        |       | $                                | —     |                            | $          | 0.11 |   | $ | 0.24 |   | $ | 0.14 |   |
| Discontinued operations                                      |       | —                           |       | —                          |       | — |   | 0.05 |   |
| Net income per share                                         |       | $                                | —     |                            | $          | 0.11 |   | $ | 0.24 |   | $ | 0.19 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| **Earnings  per share - diluted**                            |       |                             |       |                            |       |   |   |   |   |
| Continuing operations                                        |       | $                                | —     |                            | $          | 0.10 |   | $ | 0.22 |   | $ | 0.14 |   |
| Discontinued operations                                      |       | —                           |       | —                          |       | — |   | 0.04 |   |
| Net income per share                                         |       | $                                | —     |                            | $          | 0.10 |   | $ | 0.22 |   | $ | 0.18 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| **Weighted  average common shares outstanding**              | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                                                    |       | 4,077                            |       | 3,626                           |       | 3,953 |   | 3,619 |   |
| **Diluted**                                                  |       | 4,262                            |       | 3,789                           |       | 4,263 |   | 3,755 |   |

 

See accompanying notes toconsolidated financial statements.

3

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**ANGEIONCORPORATION AND SUBSIDIARIES**

**Consolidated Statements of Cash Flows**

(unaudited, in thousands)
| ** **                                                                                   | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **July 31,**               | ** ** |
| ** **                                                                                   | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| **Cash  Flows From Operating Activities:**                                                   | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                               | 946        |   | $ | 682 |   |
| Gain from discontinued operations                                                            |       | —                          |       | (171 | ) |
| Adjustments to reconcile net income to net cash provided  by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                                |       | 821                             |       | 810 |   |
| Stock-based compensation                                                                     |       | 10                              |       | 187 |   |
| Tax benefit from stock options exercised                                                     |       | (236                            | )          | 1 |   |
| Deferred income taxes                                                                        |       | 404                             |       | 516 |   |
| Changes in operating assets and liabilities:                                                 |       |                            |       |   |   |
| Accounts receivable                                                                          |       | (1,859                          | )          | (1,937 | ) |
| Inventories                                                                                  |       | 404                             |       | (2,148 | ) |
| Prepaid expenses and other current assets                                                    |       | (78                             | )          | 46 |   |
| Accounts payable                                                                             |       | (332                            | )          | 660 |   |
| Employee compensation                                                                        |       | (26                             | )          | 558 |   |
| Advance payments from customers                                                              |       | (1,010                          | )          | 1,045 |   |
| Deferred income                                                                              |       | 488                             |       | 560 |   |
| Warranty reserve                                                                             |       | (64                             | )          | 100 |   |
| Other current liabilities and accrued expenses                                               |       | 203                             |       | (53 | ) |
| Net cash provided by (used in) continuing operations                                         |       | (329                            | )          | 856 |   |
| Cash provided by operating activities of  discontinued operations                            |       | —                          |       | 754 |   |
| Net cash provided by (used in) operating activities                                          |       | (329                            | )          | 1,610 |   |
|                                                                                         |       |                            |       |   |   |
| **Cash  Flows From Investing Activities:**                                                   | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                                           |       | (432                            | )          | (272 | ) |
| Net cash used in investing activities                                                        |       | (432                            | )          | (272 | ) |
|                                                                                         |       |                            |       |   |   |
| **Cash  Flows From Financing Activities:**                                                   | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Proceeds from issuance of common stock under  employee stock purchase plan                   |       | 33                              |       | 19 |   |
| Proceeds from the exercise of stock options                                                  |       | 1,223                           |       | 32 |   |
| Proceeds from the exercise of warrants                                                       |       | 258                             |       | — |   |
| Tax benefit from stock options exercised                                                     |       | 236                             |       | — |   |
| Net cash provided by financing activities of continuing  operations                          |       | 1,750                           |       | 51 |   |
| Cash provided by (used in) financing activities of discontinued  operations:                 |       |                            |       |   |   |
| Promissory note payment                                                                      |       | —                          |       | (400 | ) |
| Cash restricted for discontinued operations                                                  |       | —                          |       | 400 |   |
| Net cash provided by financing activities                                                    |       | 1,750                           |       | 51 |   |
|                                                                                         |       |                            |       |   |   |
| **Net  increase in cash and cash equivalents**                                               |       | 989                             |       | 1,389 |   |
|                                                                                         |       |                            |       |   |   |
| **Cash  and cash equivalents at beginning of period**                                        |       | 4,069                           |       | 1,072 |   |
|                                                                                         |       |                            |       |   |   |
| **Cash  and cash equivalents at end of period**                                              | ** ** | **$**                           | **5,058**  | ** ** | **$** | **2,461** | ** ** |

 

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

During the nine monthsended July 31, 2007 and 2006, the Company decreased intangible assets by$404,000 and $721,000, respectively, with an offsetting decrease to thedeferred tax valuation allowance of $404,000 and $721,000, respectively,for the usage of pre-emergence bankruptcy net operating loss carry forwards.

 

See accompanyingnotes to consolidated financial statements.

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

July31, 2007

(Unaudited)

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

The consolidated balance sheet as of July 31, 2007, the consolidated statements of earnings for the three and nine monthsended July 31, 2007 and 2006, andcash flows for the nine months ended July 31, 2007 and 2006, and the related information presented in thesenotes have been prepared by management in accordance with U.S. generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-QSB and Rule 10-01 of Regulation S-X, withoutaudit.  Accordingly, they do not includeall of the information and notes required by U.S. generally accepted accountingprinciples for complete financial statements. In the opinion of management, all adjustments considered necessary for afair presentation of results have been included.  The consolidated balance sheet at October 31,2006 was derived from the audited consolidated financial statements as of thatdate.  Operating results for the threeand nine months ended July 31, 2007are not necessarily indicative of the results that may be expected for the yearending October 31, 2007.  For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in Angeion Corporation’s Annual Report on Form 10-KSB for the yearended October 31, 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 and nine months ended July 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 theallowance for doubtful accounts, product warranty and inventory reserves, theprovision for taxes, and depreciable lives of property, equipment andintangible 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 arrangement exists,transfer of title has occurred or services have been rendered, the sellingprice is fixed or determinable and collectibility is reasonably assured.  The Company’s products are sold for cash oron credit terms requiring payment based on the shipment date.  Credit terms can vary between customers dueto many factors, but are generally 30-60 days. Revenue, net of discounts, is recognized upon shipment or delivery tocustomers in accordance with written sales terms.  Standard sales terms do not include customeracceptance conditions, future credits, rebates, price protection or generalrights of return.  The terms of sales toboth domestic customers and international distributors are identical.  In instances when a customer order specifiesfinal 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 over theservice period, which is typically from one to four years.  The total amount of deferred service contractrevenue was $2,054,000 and $1,520,000 at July 31, 2007 and October 31, 2006,respectively.  Revenue from installation and trainingservices provided to customers is deferred until the 

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servicehas been performed.  The amount ofdeferred installation and training revenue was $316,000 and $362,000 at July31, 2007 and 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 11.1% and 20.0% of revenues for the three and nine months ended July 31,2007, respectively, and 37.7% and 18.4% of revenue for the three andnine months ended July 31, 2006, respectively.

***Advance Payments from Customers***

The Company typically does not receive advance payments from itscustomers in connection with the sale of its products.  The Company occasionally enters into anarrangement under which a customer agrees to purchase a large quantity ofproduct 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 July 31, 2007, advance payments fromcustomers aggregated $224,000, of which $138,000 was from a singlecustomer.  Advance payments fromcustomers at October 31, 2006 aggregated $1,234,000, of which $1,144,000 wasfrom a single customer.  Revenue recognitionfor customer orders that include advance payments is consistent with the Company’srevenue recognition policy described above.

**3.****            ****New Accounting Pronouncements**

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 and did not realize a material impact on itsfinancial position or results of operations.

In June 2006, the FASB issued FASB InterpretationNo. 48, “*Accounting for Uncertainty in Income Taxes – an interpretationof 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 tax returns.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  InMay 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, “*Definition of Settlement in FASB Interpretation No. 48,”*(“FSP FIN 48-1”).  FSP FIN 48-1 providesguidance on how to determine whether a tax position is effectively settled forthe purpose of recognizing previously unrecognized tax benefits.  The Company is currently evaluating theimpact of adopting FIN 48 on its consolidated financial statements.  The Company will adopt FIN 48 on November 1,2007.

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In September 2006, the Staffof the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements,”*(“SAB No. 108”).  SAB No. 108 providesguidance on the consideration of the effects of prior year misstatements inquantifying current year misstatements for the purpose of determining whetherthe current year’s financial statements are materially misstated.  SAB No. 108 is effective for fiscal yearsending after November 15, 2006.  TheCompany is reviewing the impact of SAB No. 108 and plans to adopt it in thefourth quarter of 2007.

In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”).  This new standard provides guidance for usingfair value to measure assets and liabilities and information about the extentto which companies’ measure assets and liabilities at fair value, theinformation used to measure fair value, and the effect of fair valuemeasurements on earnings.  This frameworkis intended to provide increased consistency in how fair value determinationsare made under various existing accounting standards which permit, or in somecases require, estimates of fair market value. SFAS No. 157 also expands financial statement disclosure requirementsabout a company’s use of fair value measurements, including the effect of suchmeasures on earnings.  The provisions ofSFAS No. 157 are effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. While the Company is currently evaluating the provisions of SFAS 157,the adoption is not expected to have a material impact on its consolidatedfinancial 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 recognized over theremaining service period using the fair-value based compensation cost estimatedfor SFAS No. 123 pro forma disclosures. Total stock-based compensation expense included in the Company’sstatement of earnings for the three and nine months ended July 31, 2007 was$3,000 and $10,000, respectively.  Thiscompensation expense was solely due to options granted under the AngeionCorporation 2003 Employee Stock Purchase Plan.

***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 remain available for futuregrants as of July 31, 2007.  As of July31, 2007, options for 790,800 shares had been granted and 426,850 shares hadbeen issued upon exercise of options. The Company has no outstanding stock options outside of the 2002 StockOption 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.

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***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 June 30, 2007, employeespurchased 1,918 shares at a price of $7.70 per share.  As of July 31, 2007, the Company has withheldapproximately $4,000 from employees participating in the phase that began onJuly 1, 2007.  At July 31, 2007,approximately 70,433 shares of common stock were available for future purchaseunder the Stock Plan.

***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:

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|                                                 | ** ** | **Nine Months   Ended July 31,  2007** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------|------------|
| Weighted average  fair value of options granted |       | $                                                          | 1.94       |   |
|                                            |       |                                                       |       |
| Assumptions  used:                              |       |                                                       |       |
| Expected life (years) (a)                       |       | 0.5                                                        |       |
| Risk-free interest rate (b)                     |       | 4.81                                                       | %          |
| Volatility (c)                                  |       | 64.50                                                      | %          |
| 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)          *Volatility:* The expectedvolatility of the Company’s common stock is calculated by using the historicaldaily volatility of the Company’s stock price calculated over a period of timerepresentative of the expected 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 estimatespre-vesting forfeitures at the time of grant by analyzing historical data andrevises those estimates in subsequent periods if actual forfeitures differ fromthose estimates.  Ultimately, the totalexpense recognized over the vesting period will equal the awards that actuallyvest.

Thefollowing table presents the statement of earnings classification of pre-taxstock-based compensation expense recognized for the three and nine months endedJuly 31, 2007:
| (In thousands)         | ** ** | **Three Months   Ended  July 31, 2007** | ** ** | **Nine Months   Ended  July 31, 2007** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Cost of goods  sold         |       | $                                                           | 1          |                                                       | $          | 1 |   |
| Selling and  marketing      |       | 2                                                           |       | 6                                                          |       |
| General and  administrative |       | —                                                      |       | 2                                                          |       |
| Research and  development   |       | —                                                      |       | 1                                                          |       |
|                        |       | $                                                           | 3          |                                                       | $          | 10 |   |

 

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Thefollowing table illustrates the effect on net income and net income per sharefor the three and nine months ended July 31, 2006, if the Company had appliedthe fair value recognition provisions of SFAS No. 123(R) to its stock-basedemployee compensation:
| (In thousands, except per share amounts)                                    | ** ** | **Three Months   Ended  July 31, 2006** | ** ** | **Nine Months   Ended  July 31, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Net income, as  reported                                                                             |       | $                                                           | 394        |                                                       | $          | 682 |   |
| Add: Stock-based  compensation expense included in net income under intrinsic value method (a)       |       | 32                                                          |       | 118                                                        |       |
| Less:  Stock-based compensation expense determined under fair value based method for  all awards (a) |       | (258                                                        | )          | (286                                                       | )          |
| Pro forma net  income                                                                                |       | $                                                           | 168        |                                                       | $          | 514 |   |
|                                                                                                 |       |                                                        |       |                                                       |       |
| Net income per share – basic                                                                    |       |                                                        |       |                                                       |       |
| As reported                                                                                          |       | $                                                           | 0.11       |                                                       | $          | 0.19 |   |
| Pro forma                                                                                            |       | 0.05                                                        |       | 0.14                                                       |       |
|                                                                                                 |       |                                                        |       |                                                       |       |
| Net income per share – diluted                                                                  |       |                                                        |       |                                                       |       |
| As reported                                                                                          |       | 0.10                                                        |       | 0.18                                                       |       |
| Pro forma                                                                                            |       | 0.04                                                        |       | 0.14                                                       |       |

 

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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 flows are increased due to theadoption of SFAS No. 123(R).  For thenine months ended July 31, 2007, there were excess tax benefits of $236,000,which are classified as financing cash flows.

***Stock Options***

Thefollowing table summarizes stock option activity during the nine months endedJuly 31, 2007:
|                                  | ** ** | **Options** | ** ** | **Weighted   Average   Exercise   Price** | ** ** |
|----------------------------------|------------|-------------|------------|----------------------------------------------------------|------------|
| Outstanding at  October 31, 2006 |       | 624,187     |       | $                                                        | 5.03       |   |
| Granted                          |       | 3,277       |       | 6.48                                                     |       |
| Exercised                        |       | (261,773    | )          | 4.81                                                     |       |
| Canceled / forfeited             |       | —      |       | —                                                   |       |
| Outstanding at July 31,  2007    |       | 365,691     |       | $                                                        | 5.20       |   |

 

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The followingtable summarizes information concerning stock options outstanding as of July31, 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       |                          | 11,650     |   | $ | 2.00 |   | 6.19 |   | 11,650 |   | $ | 2.00 |   |
| 2.53                                          |       | 97,000                        |       | 2.53 |   | 8.13 |   | 97,000 |   | 2.53 |   |
| 5.08                                          |       | 84,000                        |       | 5.08 |   | 8.82 |   | 84,000 |   | 5.08 |   |
| 6.23                                          |       | 84,500                        |       | 6.23 |   | 6.55 |   | 84,500 |   | 6.23 |   |
| 7.79                                          |       | 86,800                        |       | 7.79 |   | 6.19 |   | 86,800 |   | 7.79 |   |
| 7.70                                          |       | 1,741                         |       | 1.94 |   | 0.17 |   | — |   | — |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |
| Total                                         |       | 365,691                       |       | $ | 5.20 |   | 7.12 |   | 363,950 |   | $ | 5.22 |   |
|                                               |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |

 

The totalintrinsic value of options exercised during the three and nine months endedJuly 31, 2007 was $275,000 and $2.3 million, respectively.  The total intrinsic value of optionsoutstanding and exercisable at July 31, 2007 was $1.0 million, which wascalculated using the closing stock price at the end of the fiscal quarter lessthe option price of in the money options. The Company issues new shares when stock options are exercised.  Cash received from the exercise of stock optionsfor the three and nine months ended July 31, 2007 was $131,000 and $1.3million, respectively.  The related taxbenefit for the three and nine months ended July 31, 2007 was $81,000 and$236,000, respectively.  Unrecognizedcompensation expense related to outstanding stock options as of July 31, 2007was $2,000 and is expected to be recognized over a weighted average period ofthree months and will be adjusted for any future changes in estimatedforfeitures.

**5.****             Inventories**

Inventoriesconsisted of the following at July 31, 2007 and October 31, 2006:
| (In thousands) | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Raw materials       |       | $        | 2,209      |     | $          | 2,239 |   |
| Work-in-progress    |       | 376      |       | 294      |       |
| Finished goods      |       | 2,748    |       | 3,204    |       |
|                |       | $        | 5,333      |     | $          | 5,737 |   |

 

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

Intangible assetsconsisted of the following at July 31, 2007 and October 31, 2006:
| (In thousands)                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Intangible  assets:                  |       |     |       |     |       |
| Developed technology                 |       | $        | 6,577      |     | $          | 6,900 |   |
| Trade name (unamortized)             |       | —   |       | 81       |       |
|                                 |       | 6,577    |       | 6,981    |       |
|                                 |       |     |       |     |       |
| Amortization -  developed technology |       | (3,771   | )          | (3,214   | )          |
|                                 |       | $        | 2,806      |     | $          | 3,767 |   |

 

Amortizationexpense was $557,000 and $609,000 for the nine months ended July 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 July31, 2007, which does not reflect the possible future reductions from theuse of pre-emergence bankruptcy NOLs discussed above, is as follows:
| (In thousands)                   | ** ** | **Amortization** | ** ** |
|---------------------------------------|------------|------------------|------------|
| Three months  ending October 31, 2007 |       | $                | 176        |   |
| 2008                                  |       | 704              |       |
| 2009                                  |       | 704              |       |
| 2010                                  |       | 408              |       |
| 2011                                  |       | 407              |       |
| 2012                                  |       | 407              |       |
|                                  |       | $                | 2,806      |   |

 

Developed technology and trade name consisted of the following at July 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 | ** ** | (323                      | )          | (81                 | )          |
| Balance at July 31, 2007                                                   |       | $                         | 6,577      |                | $          | — |   |

 

**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 

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reservesthe right to reject warranty claims where it determines that failure is due tonormal wear, customer modifications, improper maintenance or misuse.  The Company maintains a warranty reserve thatreflects the estimated expenses that it will incur to honor the warranties onits products.  The Company adjusts thewarranty reserve based on the number and type of equipment that is subject towarranty, adjusted for the remaining months of warranty coverage.  The warranty reserve adjustment reflects theCompany’s historical warranty experience based on type of equipment.  Warranty activity for the nine months ended July 31, 2007 and 2006 was as follows:
| (In thousands)           | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Balance,  beginning of period |       | $        | 335        |     | $          | 175 |   |
| Warranty provisions           |       | 414      |       | 352      |       |
| Warranty claims               |       | (478     | )          | (252     | )          |
| Balance, end of period        |       | $        | 271        |     | $          | 275 |   |

 

**8.****             Net Earnings perShare**

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.

Shares used in theearnings per share computations for the three and nine months ended July 31, 2007 and 2006 are as follows:
|                                                            | ** ** | **Three Months Ended   July 31,** | ** ** | **Nine Months Ended   July 31,** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(In thousands)**                                    | ** ** | **2007**                                              | ** ** | **2006**                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average  common shares outstanding – basic   |       | 4,077                                                 |       | 3,626                                                |       | 3,953 |   | 3,619 |   |
| Dilutive effect  of stock options                          |       | 185                                                   |       | 163                                                  |       | 310 |   | 136 |   |
| Weighted average common  shares outstanding – diluted |       | 4,262                                                 |       | 3,789                                                |       | 4,263 |   | 3,755 |   |

 

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 July 31,2007 were considered dilutive and therefore included in the above calculationwhile 455,800 stock options were excluded from the calculation for the threeand nine months ended July 31, 2006.

The Company had warrantsoutstanding at July 31, 2007 and 2006 to purchase 142,689 and 179,480 shares,respectively, of its common stock.  Allof the outstanding warrants have an exercise price of $7.79 per share and,unless exercised, will expire on October 31, 2007.  The warrants outstanding at July 31, 2007were considered dilutive and, therefore, included in the abovecalculation.  The warrants outstanding atJuly 31, 2006 were considered antidilutive and, therefore, were excluded fromdiluted earnings per share.

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**9.****                                      IncomeTaxes**

The Company has recorded a provision for taxes fromcontinuing operations of $16,000 and $659,000 for the three and nine monthsended July 31, 2007, respectively.  Theprovision for taxes has been calculated and presented in the statement ofearnings as if the Company’s earnings were fully taxable.  The amount of income taxes payable is determined after utilizing theCompany’s NOLs, including its pre-emergence bankruptcy NOLs.  UnderAmerican Institute of Certified Public Accountants Statement of Position 90-7, *Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code* (“SOP 90-7”), the tax benefit forthe utilization of these pre-emergence bankruptcyNOL carry forwards must be recognized as a reduction of intangiblesrather than a reduction of the provision for taxes in the statement ofearnings.

The Company had a federal net operating loss carryforward at October 31, 2006 of approximately $22.1 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 2008 through 2025. Approximately $7.6 million of this carry forward will expire over thenext five years.  The Company also has$92,000 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.

Prior to October 31, 2006,the Company had recorded a full valuation allowance against its net deferredtax asset based on its belief that it was more likely than not that the assetwould not be realized in the future. Although this determination was made in a prior fiscal year and is stillapplicable as of July 31,2007, the Company will continue to assess the need for a full valuationallowance in future quarters.  Under SOP90-7, a substantial portion of any future reversal of the valuation allowancewill first reduce intangible assets arising from the Company’s 2002 emergencefrom bankruptcy and then be credited directly to additional paid-incapital.  After the exhaustion of pre-emergence bankruptcy NOLs, approximately $2.3 million of the valuationallowance that is related to post-bankruptcy NOLs will be available to reducethe provision for taxes in the statement of earnings and, thereafter, $936,000related to excess stock option tax deductions would be recognized as additionalpaid-in capital when realized in the Company’s income tax return.

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

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

The discussionbelow contains 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 and successfully sellthese products into existing and new markets, (ii) our ability to achieveconstant margins for products and consistent and predictable operating expensesin light of variable revenues from our clinical research customers, (iii) ourability to effectively manufacture and ship products in required quantities tomeet customer demands, (iv) our ability to successfully defend ourselves fromproduct liability claims related to our cardiorespiratory diagnostic productsand claims associated with our prior cardiac stimulation products, (v) ourability to protect our intellectual property, (vi) our ability to develop andmaintain an effective system of internal controls and procedures and disclosurecontrols 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 the Annual Report on Form10-KSB for the year ended October 31, 2006, and subsequently filed Form 10-QSBand Form 8-K 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, disease preventionas well as health and fitness improvement.

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 and fitness professionals use cardiorespiratory diagnosticsystems to measure functional capacity and to prescribe safe and effectiveexercise in rehabilitation, 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.  Servicerevenues reflect revenues from extended service contracts, non-warranty servicevisits and 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  July 31,** | ** ** | **Nine Months Ended  July 31,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                        | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                               |       |                                            |       |                                           |       |   |   |   |   |
| Revenues                           |       | 100.0                                           | %          | 100.0                                          | %          | 100.0 | % | 100.0 | % |
| Cost of goods  sold                |       | 50.1                                            |       | 51.0                                           |       | 50.0 |   | 50.5 |   |
| Gross margin                       |       | 49.9                                            |       | 49.0                                           |       | 50.0 |   | 49.5 |   |
|                               |       |                                            |       |                                           |       |   |   |   |   |
| Operating  expenses:               |       |                                            |       |                                           |       |   |   |   |   |
| Selling and marketing              |       | 29.7                                            |       | 22.9                                           |       | 26.0 |   | 25.4 |   |
| General and administrative         |       | 10.6                                            |       | 9.2                                            |       | 10.1 |   | 10.1 |   |
| Research and development           |       | 8.0                                             |       | 7.2                                            |       | 7.0 |   | 7.4 |   |
| Amortization of intangibles        |       | 1.9                                             |       | 2.3                                            |       | 1.9 |   | 2.7 |   |
|                               |       | 50.2                                            |       | 41.6                                           |       | 45.0 |   | 45.6 |   |
| Operating income  (loss)           |       | (0.3                                            | )          | 7.4                                            |       | 5.0 |   | 3.9 |   |
| Interest income                    |       | 0.5                                             |       | 0.3                                            |       | 0.4 |   | 0.2 |   |
| Income before  taxes               |       | 0.2                                             |       | 7.7                                            |       | 5.4 |   | 4.1 |   |
| Provision for taxes                |       | 0.2                                             |       | 3.2                                            |       | 2.2 |   | 2.0 |   |
| Income from  continuing operations |       | 0.0                                             |       | 4.5                                            |       | 3.2 |   | 2.1 |   |
| Gain from discontinued operations  |       | —                                          |       | —                                         |       | — |   | 0.7 |   |
| Net income                         |       | 0.0                                             | %          | 4.5                                            | %          | 3.2 | % | 2.8 | % |

 

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 third quarter of 2007 was $8.9 million, an increase of 0.8% from $8.8million in 2006.  Operating expenses forthe third quarter of 2007 were $4.5 million, an increase of 21.7% from $3.7million in 2006.  Net income for thethree months ended July 31, 2007 was $4,000, or $0.00 per diluted share,compared to net income of $394,000, or $0.10 per diluted share, for the sameperiod in 2006.

For the ninemonths ended July 31, 2007, total revenue was $29.4 million, an increase of28.4% from $22.9 million in 2006. Year-to-date operating expenses for 2007 were $13.3 million, an increaseof 27.0% from $10.4 million for the same period of 2006.  Net income for the nine months ended July 31,2007 was $946,000, or$0.22 per diluted share, compared to net income of $682,000, or $0.18 perdiluted share, for the same period in 2006. Net income for the nine months ended July 31, 2006 included a $171,000 gain from discontinuedoperations that was net of $103,000 for income taxes.

For the balance of fiscal 2007, we expect strong year-end contributionsfrom all areas of our business, with solid revenue from our MedGraphicshospital and physician office customers and our New Leaf customers.  As noted below under “Revenue,” we expectrevenue from our largest clinical research customer will continue in fiscal2007 and 2008, but at a reduced level due to the completion of the systemsinstallation and training phase of its current clinical studies.  Although year-over-year clinical researchrevenues will decrease as a result of the reduced revenue from our largeclinical research 

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customer,we expect to report increased year-over-year revenues in the fourth quarter of2007 from both our hospital and physician office customers and our health andfitness club customers.  In addition, wecontinue to pursue additional opportunities by marketing our products to newclinical research study customers to expand our future growth outside of salesto our traditional customers.

Subsequent to theend of the third quarter, the Company implemented actions to reduce expenses infuture quarters by eliminating infrastructure added in fiscal 2006 and 2007 tohandle the systems installation and training requirements for one largeclinical research customer.  The Companyexpects these actions to decrease expenses by approximately $1.0 million on anannual basis.

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 provision for taxes for all periods has been calculatedand presented in the statement of earnings as if the Company’s earnings werefully taxable.  The actual amount ofincome taxes payable by the Company differs substantially from the Company’sprovision for taxes, as it is determined after utilizing the Company’spre-emergence bankruptcy NOLs.  Thecomponents of the Company’s provision for taxes for the three and nine monthsended July 31, 2007 are summarized as follows:

·                  Establisheda provision for taxes of $16,000 and $659,000 for the three and nine monthsended July 31, 2007 in the statement of earnings,

·                  Decreasedtrade name carrying value on the balance sheet by $81,000 as of July 31, 2007from the utilization of pre-emergence bankruptcy NOLs,

·                  Decreaseddeveloped technology carrying value on the balance sheet by $323,000 as of July31, 2007 from the utilization of pre-emergence bankruptcy NOLs,

·                  Increasedadditional paid-in capital by $236,000 as of July 31, 2007 related to taxbenefits realized from stock option exercises, and

·                  Establishedincome taxes payable of $19,000 as of July 31, 2007, which is the net of theitems listed above.

The $19,000 ofincome taxes payable is the Company’s estimate of its cash payments for thefirst three quarters of 2007 earnings. See Note 9 to the Consolidated Financial Statements, “Income Taxes,” inthis Form 10-QSB for additional discussion of the accounting for income taxesand the use of pre-emergence bankruptcy NOLs.

**Revenue**

For the threemonths ended July31, 2007 compared to 2006, total revenue increased by 0.8%.  Domestic product revenue increased 13.0%,international product revenue decreased 29.0% and service revenue increased28.4%.  For the nine months ended July31, 2007, year-over-year total revenue increased by 28.4%.  Domestic product revenue increased 27.1%,international product revenue increased 35.3% and service revenue increased19.8%.

Sales of theUltima and Elite Series systems have contributing significantly to bothdomestic and international revenue growth. These two product lines accounted for most of the third quarter revenuegrowth and, along with the Ultima PF to one of our clinical research customers,growth for the nine months ended July 31, 2007.  TheCompany sells its cardiorespiratory diagnostic systems and services to this customer for use inconducting safety and efficacy clinical trials both in the United States andinternationally.  This customer accountedfor 11.1% and 20.0% of revenue for the three and nine months ended July 31,2007, respectively and 37.7% and 18.4% of revenue for the three and nine monthsended 

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July 31, 2006,respectively.  The Company expects revenue from thiscustomer to continue throughout fiscal 2008, but at a reduced level dueto the completion of the systems installation phase of its current clinicalstudies.

Excluding sales tothis customer, revenue for the three and nine months ended July 31, 2007 increased by $2.4million and $4.9 million, or 43.8% and 25.9%, respectively, compared to thesame periods in 2006.

Revenuefrom extended service contracts and non-warranty service visits both increasedin 2007 compared to 2006, reversing a trend experienced during the lastfew years.  These increases are due to alarger installed customer base that resulted from increased sales in 2005 and2006, as well as non-warranty service visits for clinical research customers.

**Gross Margin**

Gross margin percentagefor the three month period ended July 31, 2007 increased to 49.9% of revenuecompared to 49.0% for the same period in 2006. For the nine months ended July 31, 2007, gross margin percentageincreased to 50.0% of revenue compared to 49.5% for the same period in2006.  The Company has realized manufacturing efficiencies associatedwith increased manufacturing volumes and general process improvementinitiatives, but they have been in part offset by price discounts required byour largest clinical research customer.

**Selling and Marketing**

Selling andmarketing expenses for the three months ended July 31, 2007 increased by 30.8%to $2.6 million compared to $2.0 million for the same period in 2006.  For the nine months ended July 31, 2007,selling and marketing expenses increased by 31.4% or $1.8 million to $7.6million from $5.8 million for the same period in 2006.

Selling andmarketing expenses related to new sales and sales support personnel, travel andcustomer support expenses increased by 17.4% and 26%, or $233,000 and $970,000for the three and nine months ended July 31, 2007, respectively, compared tothe same periods in 2006.  These increasesare a result of the Company increasing 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, the Company has increased expensesby $122,000 and $273,000 for the three and nine months ended July 31, 2007,respectively, associated with establishing a new representative branch officein Milan, Italy for marketing and technical support to its Europeandistribution partners.  Approximately$50,000 of this year-to-date increase represented one-time office start upcosts.  Finally, commission expensesincreased by $141,000 and $321,000 for the three and nine months ended July 31,2007 compared to the same periods in 2006 due to higher commissionable revenue.

**General and Administrative**

General andadministrative expenses for the three months ended July 31, 2007 increased by15.8% or $128,000 to $937,000 compared to $809,000 for the same period in2006.  For the nine months ended July 31,2007, general and administrative expenses increased by 28.2% or $656,000 to$3.0 million from $2.3 million for the same period in 2006.

Personnel relatedexpenses, including consulting expenses, increased by $305,000 for the ninemonths ended July 31, 2007 compared to the same period in 2006 due tocompensation increases and increased use of outside consultants.

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Professional fees increased by $72,000 and $324,000 for the three andnine months ended July 31, 2007 compared to the same periods in 2006.  The third quarter included increased legalfees associated with a special shareholder meeting and one-time fees related toestablishing a new international distribution partner.  The year-to-date increase in professionalfees also includes the one-time cost of restating the Company’s Forms 10-QSBfor the first three quarters of 2006.

In addition, there were $4,000 and $15,000 decreases in general andadministrative expenses for the three and nine months ended July 31, 2007 ascompared to the same period in 2006 due to changes in the allowance fordoubtful accounts.  This overall decreaseof the allowance for doubtful accounts reflects improved cash collections ofpast due customer accounts.  Futurechanges to the provision for doubtful accounts will be directly related tovariations in the totalbalance of outstanding receivables.

Overall 2006 general and administrative expense increases werepartially offset by non-cash stock-based compensation expenses of $50,000 and$187,000 incurred during the three and nine months ended July 31, 2006.  The non-cash stock-based compensationexpenses incurred in 2006 resulted from options subject to variable accountingthat were fully vested during the third quarter of 2006.  The Company has no unvested options at July31, 2007.

General and administrative expenses also included $65,000 in consultingexpenses associated with Sarbanes-Oxley compliance for the third quarterof 2007 compared to $15,000 for the same period in 2006.  For the nine months ended July 31, generaland administrative expenses included $109,000 for Sarbanes-Oxley compliancecosts in 2007 compared to $49,000 for the same period in 2006.

**Research and Development**

Research and developmentexpenses for the three months ended July 31, 2007 increased by 11.7% or $74,000to $707,000 from $633,000 for the same period in 2006.  For the nine months ended July 31, 2007,research and development expenses increased by 23.0% or $388,000 to $2.1million from $1.7 million for the same period in 2006.

Costs related to new personnelcontributed to increases of $23,000 and $250,000 in personnel related expensesfor the three and nine months ended July 31, 2007, respectively, compared tothe same periods in 2006.  In addition,project expenses associated with new products increased by $36,000 and $117,000for the three and nine months ended July 31, 2007, respectively, compared tothe same periods in 2006.  The Company’scurrent new product development initiatives include products targeted forhospital intensive care units, cardiology, dietary, asthma, allergy and primarycare physicians, health and fitness club professionals, as well asinternational markets.  These newproducts are currently completing clinical evaluation and are planned forrelease in fiscal 2007 and in fiscal 2008. In addition, the Company is also developing new functionality and newtechnologies for use in existing products.

**Amortization of Intangibles**

Amortization ofdeveloped technology was $172,000 for the three months ended July 31, 2007compared to $203,000 for the same period in 2006.  For the nine months ended July 31, 2007,amortization of developed technology was $557,000 compared to $609,000 for thesame period in 2006.  The decreases areattributed to a technology license that became fully amortized in 2006 and toreductions in developed technology associated with the use of pre-emergencebankruptcy NOL carry forwards.

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 

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will reduce the value ofdeveloped technology until the net carrying value is zero.  To the extent that utilization of these NOLsreduces the value of developed technology, future amortization expense will bereduced.

**Interest Income**

Interest income for the three months ended July 31, 2007 increased to $48,000 from $22,000 for thesame period in 2006.  For the ninemonths ended July 31, 2007, interest income increased to $131,000 compared to$50,000 for the same period in 2006.  The increase in interest income isprincipally due to an increase in interest rates and an increase in cash andcash 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 three months ended July 31, 2007,the Company restored tax benefits of $63,000 related to pre-emergencebankruptcy NOLs, which has been recorded as an increase of intangible assets andduring the nine months ended July 31, 2007, the Company used tax benefits of $404,000, related topre-emergence bankruptcy NOLs, which has been recorded as a reduction ofintangible assets.  The restoration oftax benefits in the third quarter of 2007 resulted from a change in estimate ofthe attributes of tax benefits to be realized by the Company in fiscal2007.  For the three and nine monthsended July 31, 2006, the Company used tax benefits of $316,000 and $721,000,respectively, related to using pre-emergence bankruptcy NOLs, which wererecorded as a reduction of intangible assets. See Note 9 to the Consolidated Financial Statements, “Income Taxes,” in this Form 10-QSB foradditional discussion of the accounting for income taxes and the use of pre-emergence bankruptcy NOLs.

**DiscontinuedOperations**

The net gain fromdiscontinued operations of $171,000 for the nine months ended July 31, 2006reflects the net difference after recording an agreed upon insurance recoverydescribed below and the associated legal fees that were contingent upon therecovery together with other additional consulting fees and miscellaneous litigationexpenses.  The Company allocated $103,000of the provision for taxes to discontinued operations for the nine months endedJuly 31, 2006.  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.

TheCompany had cash and cash equivalents of $5.1 million and working capital of$13.7 million as of July 31, 2007. During the nine months ended July 31, 2007, the Company used $329,000 ofcash for continuing operations.

Cashwas generated from net income of $946,000 that included non-cash expenses of$821,000 for depreciation and amortization and $404,000 of deferred incometaxes.  Cash was also generated by a 

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decrease of $404,000 ininventories and an increase of $488,000 in deferred income.  The changes in inventories is due to lowerlevels of revenue and the increase in deferred income reflects new servicecontracts associated with previous sales to the Company’s large clinicalresearch customer.

Cashwas used for an increase of $1.9 million in accounts receivable and decreasesof $1.0 million and $332,000 in advance payments from customers and accountspayable, respectively.  Accountsreceivable balances naturally vary with the timing of large payments and shipmentof large customer orders.  The increasein accounts receivable reflects year-over-year revenue growth of over 28% forthe nine months ended July 31, 2007 and the timing of a $1.0 million paymentreceived from the Company’s large customer shortly after the end of thequarter.  Advance payments from customersvary with the timing of orders and the related customer deliveryrequirements.  The decrease in advancepayments from customers reflects a reduction in these payments associated withthe Company’s one large customer as deliveries are completed against thiscustomer’s orders.

During the ninemonths ended July 31, 2007, the Company used $432,000 in cash for the purchaseof property and equipment.  The Companycurrently has no material commitments for capital expenditures for theremainder of fiscal year 2007 or 2008.

Cash of $1.7million was generated from financing activities that included the exercise ofoptions and warrants to purchase the Company’s common stock and issuance ofcommon stock under the Employee Stock Purchase Plan.  In addition, the Company realized $236,000 intax benefits from stock options exercised during the nine months ended July 31,2007.

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 Disclosure Controls and Procedures*

Management,with the participation of the Company’s chief executive officer, Rodney A.Young, and chief financial officer, Dale H. Johnson, has evaluated theeffectiveness of the design and operation of the disclosure controls andprocedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of1934, as of the end of the period covered by this report.

In prior periods, a material weakness in internal control overfinancial reporting related to the Company’s accounting for income taxes wasidentified.  Specifically, the Companydid not have, and through its engagement of third-party outside advisers didnot acquire, adequate technical expertise to effectively oversee and review theCompany’s accounting for the utilization of pre-emergence bankruptcy NOL carryforwards in accordance with AICPA Statement of Position 90-7, *Financial Reporting by Entities in Reorganization under the BankruptcyCode*.  As a result, theCompany restated the financial information included in the first three quartersof the year ended October 31, 2006, to correct a material error in accountingfor income taxes.  As a result of thismaterial weakness, the Company concluded that its disclosure controls andprocedures were not effective as of October 31, 2006 and January 31, 2007.

Subsequent to January 31, 2007, the Company implemented new procedures,including improved documentation and analysis regarding the accounting forincome taxes.  The Company has concludedthat these new procedures remediated the above noted material weakness at April30, 2007 and July 31, 2007.

Accordingly, in connection with this Form 10-QSB, under the direction ofour Chief Executive Officer and Chief Financial Officer, the Company hasevaluated its disclosure controls and procedures 

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currentlyin effect as of July 31, 2007, including the remedial actions discussed above,and has concluded that, as of such date, its disclosure controls and proceduresare effective.

*(b)**Changesin Internal Control over Financial Reporting*

Other than the aboveimplemented new procedures regarding the accounting for income taxes, therehave been no significant changes in internal control over financial reportingthat occurred during the fiscal quarter covered by this report that havematerially affected, or are reasonably likely to affect materially the Company’sinternal control over financial reporting.

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**PART II -OTHER INFORMATION**

**Item 1.  Legal Proceedings.**

The Company is subject to certain claims andlawsuits that have been filed in the ordinary course of business.  From time to time, the Company brings suitagainst others to enforce patent rights or to collect debts in the ordinarycourse of business.  Management believesthat the settlement of all litigation would not have a material effect on theresults of operations or liquidity of the Company.

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

# ***Recent Sales of UnregisteredSecurities***

In the three and nine months ended July 31, 2007, we issued 181 and33,212 shares, respectively, of our common stock pursuant to exercise ofWarrants that were issued to former Angeion shareholders in connection with ouremergence from bankruptcy on October 25, 2002. We received proceeds of approximately $1,410 and $258,000 for the threeand nine months ended July 31, 2007, respectively, from these sales and usedthe proceeds for general corporate purposes. The sales are exempt from registration pursuant to Section 1145(a) ofthe 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 July 31, 2007.

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

None

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

None

**Item 5.  Other Information.**

As reported in a Form 8-K dated August 22, 2007, at a Special Meetingof Shareholders held on August 22, 2007, the shareholders approved the AngeionCorporation 2007 Stock Incentive Plan (the “2007 Plan”) and approved theadoption of Amended and Restated Articles of Incorporation.  In connection with the adoption of the 2007Plan, the Company granted to the five non-employee directors of the Companyseven-year options to purchase a total of 70,000 shares at a price of $6.60 pershare.

In addition, at the regularly-scheduled Board meeting held prior to theshareholders’ meeting, the Company’s Compensation Committee granted seven-yearstock options to purchase a total of 9,200 shares under the Angeion Corporation2002 Stock Option Plan (“2002 Plan”) to 23 employees of the Company.  As a result of these grants, a total of373,150 shares are now subject to outstanding grants under the 2002 Plan at anaverage weighted price of $5.25 per share. As a result of the adoption of the 2007 Plan at the shareholders’meeting, no future grants may be made under the 2002 Plan, including anyoptions that expire or are cancelled under the 2002 Plan.

The Board and Compensation Committee took no action with respect togrants of any stock options or restricted stock grants to employees under the2007 Plan, but intend to review the current levels of employee and officeroption holdings and possibly take action to grant stock options or restrictedstock 

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grantsunder the 2007 Plan in the fourth quarter of fiscal 2007 or the first quarterof fiscal 2008.  Prior to the grant ofoptions under the 2002 Plan and the 2007 Plan on August 22, 2007, no optionshad been granted by Angeion in the fiscal year beginning November 1, 2006.

**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 September 13, 2007 reporting Angeion Corporation results ofoperations for the three and nine months ended July 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: September  13, 2007 |   | /s/ Rodney A. Young                    |   |
|                      |   | Rodney A. Young                        |
|                      |   | President and  Chief Executive Officer |
|                      |   | (Principal  Executive Officer)         |
|                      |   |                                   |
|                      |   |                                   |
| Date: September  13, 2007 |   | /s/ Dale H. Johnson                    |   |
|                      |   | Dale H. Johnson                        |
|                      |   | Chief Financial  Officer               |
|                      |   | (Chief  Accounting Officer)            |

 

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