**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

# **FORM 10-QSB/A**

# **(AmendedQuarterly Report)**

| **x**                                              |   | **Quarterly report under Section 13 or 15(d) of  the Securities Exchange Act of 1934.** |
|----------------------------------------------------|--------|-----------------------------------------------------------------------------------------|
| ** **                                         |   | ** **                                                                              |
| **For the  quarterly period ended April 30, 2006** |
| ** **                                         |
| **OR**                                             |
| ** **                                         |
| **o**                                              |   | **Transition report under Section 13 or 15(d) of  the Exchange Act.**                   |

 

**For thetransition periodfrom                   to                   .**

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

## **AngeionCorporation**

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

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

 

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

(Address of principalexecutive offices)

**(651) 484-4874**

(Issuer’stelephone number, including area code)

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

Yes  x                                   No  o

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

Yes  o                                     No  x

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

Yes  x                                   No  o

The Company had 3,623,352shares of common stock, $0.10 par value, outstanding as of June 5, 2006.

 

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**EXPLANATORY STATEMENT**

This Form 10-QSB/A amendsand restates the Company’s Form 10-QSB for the quarter ended April 30, 2006,initially filed with the Securities and Exchange Commission (the “SEC”) on June14, 2006 (the “Original Filing”), and is being filed to reflect the restatementof the financial statements and other financial information of the Company forthe second fiscal 2006 quarter and six months ended April 30, 2006.

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

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

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

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

Therefore, the Company has:

·                  Increasedthe provision for tax from continuing operations by $80,000 and $174,000 forthe three and six months ended April 30, 2006, respectively,

·                  Increasedtax expense related to discontinued operations by $97,000 for both periodsended April 30, 2006, and

·                  Decreased goodwill by $328,000, decreasedintangible assets by $77,000, decreased other current liabilities and accruedexpenses by $7,000 and decreased deferred income tax liabilities by $128,000 asof April 30, 2006.

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

In addition to the adjustmentsdiscussed above, this restatement includes adjustments for the reclassificationof bonus expenses previously included in general and administrative expenses toother statement of operations expense captions to properly classify bonusexpense to the salary of the employee who earned the bonus and the Company’srevision of certain discontinued operating cash flows to a

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financing cash flow.  We refer to these as Other Adjustments, whichwere immaterial, individually and in the aggregate, to the previously issuedfinancial statements.

For the convenience of the reader, this Form 10-QSB/A sets forth theOriginal Filing in its entirety. However, this Form 10-QSB/A only amends and restates certaininformation in Items 1, 2 and 3 of Part I of the Original Filing, in each casesolely as a result of and to reflect the restatement, and no other informationin the Original Filing is amended.  Theforegoing items have not been updated to reflect other events occurring afterthe Original Filing or to modify or update those disclosures affected bysubsequent events.  Among other things,forward looking statements made in the Original Filing have not been revised toreflect events, results or developments that occurred or facts that becameknown to the Company after the date of the Original Filing (other than therestatement), and these forward looking statements should be read in theirhistorical context.  In addition,pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing hasbeen amended to include certifications re-executed as of the date of this Form10-QSB/A from the Company’s Chief Executive Officer and Chief Financial Officeras required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.  The certifications of the Chief Executive Officerand Chief Financial Officer are attached to this Form 10-QSB/A as exhibits31 and 32.

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**PART I - FINANCIAL INFORMATION**

**Item 1.  FinancialStatements.**

**ANGEIONCORPORATION AND SUBSIDIARIES**

**ConsolidatedBalance Sheets**

**April 30,2006 and October 31, 2005**

(unaudited,in thousands except share and per share data)
| ** **                                                                                                                                   | ** ** | **Restated  April 30,  2006** | ** ** | **October 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                   |       |                               |       |                       |       |
| **Current assets:**                                                                                                                          |       |                               |       |                       |       |
| Cash and cash  equivalents                                                                                                                   |       | $                                  | 2,957      |                       | $          | 1,072 |   |
| Cash restricted  for discontinued operations                                                                                                 |       | 200                                |       | 400                        |       |
| Accounts  receivable, net of allowance for doubtful accounts of $165 and $210,  respectively                                                 |       | 4,319                              |       | 4,100                      |       |
| Inventories                                                                                                                                  |       | 4,840                              |       | 3,455                      |       |
| Prepaid expenses  and other current assets                                                                                                   |       | 210                                |       | 280                        |       |
| Current assets  of discontinued operations                                                                                                   |       | 1,500                              |       | 700                        |       |
| Total current  assets                                                                                                                        |       | 14,026                             |       | 10,007                     |       |
|                                                                                                                                         |       |                               |       |                       |       |
| Property and equipment,  net of accumulated depreciation of $1,724 and $1,598, respectively                                                  |       | 1,105                              |       | 1,035                      |       |
| Intangible assets, net                                                                                                                       |       | 5,015                              |       | 5,498                      |       |
| Goodwill                                                                                                                                     |       | —                             |       | 328                        |       |
| **Total Assets**                                                                                                                             | ** ** | **$**                              | **20,146** | ** **                 | **$**      | **16,868** | ** ** |
|                                                                                                                                         |       |                               |       |                       |       |
| **Liabilities  and Shareholders’ Equity**                                                                                               |       |                               |       |                       |       |
| **Current liabilities:**                                                                                                                     |       |                               |       |                       |       |
| Accounts payable                                                                                                                             |       | $                                  | 2,369      |                       | $          | 1,184 |   |
| Employee  compensation                                                                                                                       |       | 1,232                              |       | 1,166                      |       |
| Advance payments  from customers                                                                                                             |       | 1,165                              |       | —                     |       |
| Deferred income                                                                                                                              |       | 917                                |       | 871                        |       |
| Warranty reserve                                                                                                                             |       | 213                                |       | 175                        |       |
| Other current  liabilities and accrued expenses                                                                                              |       | 411                                |       | 366                        |       |
| Current  liabilities of discontinued operations                                                                                              |       | 725                                |       | 517                        |       |
| Total current  liabilities                                                                                                                   |       | 7,032                              |       | 4,279                      |       |
|                                                                                                                                         |       |                               |       |                       |       |
| **Long-term liabilities:**                                                                                                                   |       |                               |       |                       |       |
| Long-term  deferred income                                                                                                                   |       | 509                                |       | 319                        |       |
| Deferred income  taxes                                                                                                                       |       | 211                                |       | 337                        |       |
| Total long-term  liabilities                                                                                                                 |       | 720                                |       | 656                        |       |
| **Total Liabilities**                                                                                                                        |       | 7,752                              |       | 4,935                      |       |
|                                                                                                                                         |       |                               |       |                       |       |
| **Shareholders’ equity:**                                                                                                               |       |                               |       |                       |       |
| Common stock,  $0.10 par value, authorized 25,000,000 shares, issued and outstanding,  3,623,352 shares in 2006 and 3,609,325 shares in 2005 |       | 362                                |       | 361                        |       |
| Additional  paid-in capital                                                                                                                  |       | 17,825                             |       | 17,589                     |       |
| Deferred  compensation                                                                                                                       |       | (78                                | )          | (14                        | )          |
| Accumulated  deficit                                                                                                                         |       | (5,715                             | )          | (6,003                     | )          |
| Total  shareholders’ equity                                                                                                             |       | 12,394                             |       | 11,933                     |       |
| **Total Liabilities and Shareholders’ Equity**                                                                                          | ** ** | **$**                              | **20,146** | ** **                 | **$**      | **16,868** | ** ** |

 

Seeaccompanying notes to consolidated financial statements.

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**ANGEION CORPORATION AND SUBSIDIARIES**

**ConsolidatedStatements of Operations**

(unaudited,in thousands except per share amounts)
| ** **                                                           | ** ** | **Three Months Ended  April 30,** | ** ** | **Six Months Ended  April 30,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                           | ** ** | **Restated  2006**                               | ** ** | **2005**                                       | ** ** | **Restated  2006** | ** ** | **2005** | ** ** |
| **Revenues**                                                         | ** ** | ** **                                       | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equipment and supply sales                                           |       | $                                                | 6,564      |                                           | $          | 5,367 |   | $ | 12,811 |   | $ | 9,652 |   |
| Service revenue                                                      |       | 648                                              |       | 665                                            |       | 1,334 |   | 1,410 |   |
|                                                                 |       | 7,212                                            |       | 6,032                                          |       | 14,145 |   | 11,062 |   |
| **Cost of  goods sold**                                              |       |                                             |       |                                           |       |   |   |   |   |
| Cost of equipment and supplies                                       |       | 3,584                                            |       | 2,918                                          |       | 6,865 |   | 5,514 |   |
| Cost of service revenue                                              |       | 99                                               |       | 126                                            |       | 222 |   | 227 |   |
|                                                                 |       | 3,683                                            |       | 3,044                                          |       | 7,087 |   | 5,741 |   |
|                                                                 |       |                                             |       |                                           |       |   |   |   |   |
| **Gross  margin**                                                    |       | 3,529                                            |       | 2,988                                          |       | 7,058 |   | 5,321 |   |
|                                                                 |       |                                             |       |                                           |       |   |   |   |   |
| **Operating  expenses:**                                             |       |                                             |       |                                           |       |   |   |   |   |
| Selling and marketing                                                |       | 1,852                                            |       | 1,858                                          |       | 3,805 |   | 3,565 |   |
| General and administrative                                           |       | 806                                              |       | 614                                            |       | 1,519 |   | 1,278 |   |
| Research and development                                             |       | 571                                              |       | 559                                            |       | 1,054 |   | 1,037 |   |
| Amortization of intangibles                                          |       | 203                                              |       | 203                                            |       | 406 |   | 406 |   |
|                                                                 |       | 3,432                                            |       | 3,234                                          |       | 6,784 |   | 6,286 |   |
|                                                                 |       |                                             |       |                                           |       |   |   |   |   |
| **Operating  income (loss)**                                         |       | 97                                               |       | (246                                           | )          | 274 |   | (965 | ) |
|                                                                 |       |                                             |       |                                           |       |   |   |   |   |
| Interest income                                                      |       | 19                                               |       | 8                                              |       | 28 |   | 16 |   |
|                                                                 |       |                                             |       |                                           |       |   |   |   |   |
| **Income  (loss) before taxes**                                      |       | 116                                              |       | (238                                           | )          | 302 |   | (949 | ) |
|                                                                 |       |                                             |       |                                           |       |   |   |   |   |
| Provision for taxes                                                  |       | 85                                               |       | —                                         |       | 185 |   | — |   |
|                                                                 |       |                                             |       |                                           |       |   |   |   |   |
| **Income  (loss) from continuing operations**                        |       | 31                                               |       | (238                                           | )          | 117 |   | (949 | ) |
| **Gain  from discontinued operations, net of $103 for income taxes** |       | 175                                              |       | —                                         |       | 171 |   | — |   |
| **Net  income (loss)**                                               |       | $                                                | 206        |                                           | $          | (238 | ) | $ | 288 |   | $ | (949 | ) |
|                                                                 |       |                                             |       |                                           |       |   |   |   |   |
| **Earnings  (loss) per share - basic**                               |       |                                             |       |                                           |       |   |   |   |   |
| Continuing operations                                                |       | $                                                | 0.01       |                                           | $          | (0.07 | ) | $ | 0.03 |   | $ | (0.26 | ) |
| Discontinued operations                                              |       | 0.05                                             |       | —                                         |       | 0.05 |   | — |   |
| Net income (loss)                                                    |       | $                                                | 0.06       |                                           | $          | (0.07 | ) | $ | 0.08 |   | $ | (0.26 | ) |
|                                                                 |       |                                             |       |                                           |       |   |   |   |   |
| **Earnings  (loss) per share - diluted**                             |       |                                             |       |                                           |       |   |   |   |   |
| Continuing operations                                                |       | $                                                | 0.01       |                                           | $          | (0.07 | ) | $ | 0.03 |   | $ | (0.26 | ) |
| Discontinued operations                                              |       | 0.04                                             |       | —                                         |       | 0.05 |   | — |   |
| Net income (loss)                                                    |       | $                                                | 0.05       |                                           | $          | (0.07 | ) | $ | 0.08 |   | $ | (0.26 | ) |
|                                                                 |       |                                             |       |                                           |       |   |   |   |   |
| **Weighted  average common shares outstanding**                      |       |                                             |       |                                           |       |   |   |   |   |
| **Basic**                                                            |       | 3,619                                            |       | 3,606                                          |       | 3,615 |   | 3,605 |   |
| **Diluted**                                                          |       | 3,760                                            |       | 3,606                                          |       | 3,714 |   | 3,605 |   |

 

Seeaccompanying notes to consolidated financial statements.

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**ANGEION CORPORATION AND SUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

(unaudited,in thousands)
| ** **                                                                                          | ** ** | **Six Months Ended  April 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **Restated  2006**                             | ** ** | **2005** | ** ** |
| **Cash  Flows From Operating Activities:**                                                          |       |                                           |       |   |   |
| Net income (loss)                                                                                   |       | $                                              | 288        |   | $ | (949 | ) |
| Gain from discontinued operations                                                                   |       | (171                                           | )          | — |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                           |       |   |   |
| Depreciation and amortization                                                                       |       | 532                                            |       | 628 |   |
| Stock-based compensation                                                                            |       | 137                                            |       | — |   |
| Tax benefit from stock options exercised                                                            |       | 1                                              |       | — |   |
| Deferred income taxes                                                                               |       | 279                                            |       | — |   |
| Changes in operating assets and liabilities:                                                        |       |                                           |       |   |   |
| Accounts receivable                                                                                 |       | (219                                           | )          | 195 |   |
| Inventories                                                                                         |       | (1,385                                         | )          | (209 | ) |
| Prepaid expenses and other current assets                                                           |       | 70                                             |       | 89 |   |
| Accounts payable                                                                                    |       | 1,185                                          |       | 66 |   |
| Employee compensation                                                                               |       | 66                                             |       | 53 |   |
| Advance payments from customers                                                                     |       | 1,165                                          |       | — |   |
| Deferred income                                                                                     |       | 236                                            |       | 78 |   |
| Warranty reserve                                                                                    |       | 38                                             |       | 10 |   |
| Other current liabilities and accrued expenses                                                      |       | 45                                             |       | (32 | ) |
| Net cash provided by (used in) continuing operations                                                |       | 2,267                                          |       | (71 | ) |
|                                                                                                |       |                                           |       |   |   |
| Cash used in operating activities of discontinued  operations                                       |       | (221                                           | )          | (103 | ) |
| Net cash provided by (used in) operating activities                                                 |       | 2,046                                          |       | (174 | ) |
|                                                                                                |       |                                           |       |   |   |
| **Cash  Flows From Investing Activities:**                                                          |       |                                           |       |   |   |
| Purchase of property and equipment                                                                  |       | (196                                           | )          | (163 | ) |
| Net cash used in investing activities                                                               |       | (196                                           | )          | (163 | ) |
|                                                                                                |       |                                           |       |   |   |
| **Cash  Flows From Financing Activities:**                                                          |       |                                           |       |   |   |
| Proceeds from issuance of common stock                                                              |       | 35                                             |       | 7 |   |
| Net cash provided by financing activities of continuing  operations                                 |       | 35                                             |       | 7 |   |
| Cash provided by (used in) financing activities of discontinued  operations:                        |       |                                           |       |   |   |
| Promissory note payment                                                                             |       | (200                                           | )          | — |   |
| Cash restricted for discontinued operations                                                         |       | 200                                            |       | — |   |
| Net cash provided by financing activities                                                           |       | 35                                             |       | 7 |   |
|                                                                                                |       |                                           |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                                           |       | 1,885                                          |       | (330 | ) |
|                                                                                                |       |                                           |       |   |   |
| **Cash  and cash equivalents at beginning of period**                                               |       | 1,072                                          |       | 2,390 |   |
|                                                                                                |       |                                           |       |   |   |
| **Cash and cash equivalents at  end of period**                                                     | ** ** | **$**                                          | **2,957**  |   | **$** | **2,060** | ** ** |

 

**Supplemental disclosure of non-cash investing activities:**

During the six months ended April 30, 2006, theCompany decreased goodwill $328,000 and intangible assets $77,000 with anoffsetting decrease to the deferred tax valuation allowance of $405,000 for theusage of pre-emergence bankruptcy net operating loss carry forwards.

Seeaccompanying notes to consolidated financial statements.

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

April30, 2006

(Unaudited)

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

The accompanyingconsolidated balance sheet as of April 30, 2006, the consolidated statements ofoperations for the three and six months ended April 30, 2006, and theconsolidated statement of cash flows for the six months ended April 30, 2006have been restated.  The nature of therestatement and the effect on the financial statement line items are discussedin Note 11 to theConsolidated Financial Statements, “Restatementof Quarterly Financial Statements.”

The consolidated balance sheet as of April 30, 2006, the consolidated statements of operations for the three and sixmonths ended April 30, 2006 and2005, and the consolidated statements of cash flows for the six months ended April30, 2006 and 2005, and the relatedinformation presented in these notes have been prepared by management inaccordance with U.S. generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-QSB and Rule 10-01of Regulation S-X, without audit. Accordingly, they do not include all of the information and notesrequired by U.S. generally accepted accounting principles for completefinancial statements.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation ofresults have been included.  Theconsolidated balance sheet at October 31, 2005 was derived from the auditedconsolidated financial statements as of that date.  Operating results for the three and sixmonths ended April 30, 2006 are notnecessarily indicative of the results that may be expected for the year endingOctober 31, 2006.  For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in Angeion Corporation’s Annual Report on Form 10-KSB for the yearended October 31, 2005.

Comprehensive income is a measure of allnon-owner changes in shareholders’ equity and includes items such as net income(loss), certain foreign currency translation items, minimum pension liabilityadjustments and changes in the value of available-for-sale securities.  For the three and six months ended April 30, 2006 and 2005, comprehensive income (loss) for Angeion Corporation wasequivalent to net income (loss) as reported.

Preparation of the consolidated financial statements in conformity withU.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities made in theconsolidated financial statements and accompanying notes.  Actual results could differ from thoseestimates.  Estimates include accountsreceivable, product warranty and inventory reserves, and depreciable lives ofproperty, equipment and intangible assets.

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

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

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customersand international distributors are identical. In instances when a customer order specifies final acceptance of thesystem, revenue is deferred until all customer acceptance criteria have beenmet.  Estimated warranty obligations arerecorded upon shipment.

Service contract revenue isbased on a stated contractual rate and is deferred and recognized ratably overthe service period, which is typically from one to four years.  In accordance with paragraph 4, of theEmerging Issues Task Force abstract 00-21, “*Revenue Arrangements withMultiple Deliverables,*” the Company applies Financial AccountingStandards Board (“FASB”) Technical BulletinNo. 90-1 to service contract revenue.  Revenuefrom installation and training services provided to domestic customers isdeferred until the service has been performed. The total amount of deferred revenue was $1,426,000 and $1,190,000 atApril 30, 2006 and October 31, 2005, respectively.

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

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

The FASB issued SFAS No. 123 (Revised 2004), “*Share-BasedPayment*,” (“SFAS No. 123R”) in December 2004.  SFAS No. 123R is a revision of FASB Statement123, “*Accounting for Stock-Based Compensation*”and supersedes Accounting Principles Board Opinion No. 25, *“Accountingfor Stock Issued to Employees,”* (“APB No. 25”) and its relatedimplementation guidance.  The Statementfocuses primarily on accounting for transactions in which an entity obtainsemployee services through share-based payment transactions.  SFAS No. 123R requires a public entity tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award (withlimited exceptions).  That cost will be recognizedover the period during which an employee is required to provide service inexchange for the award.  The Company willadopt the standard for fiscal 2007 using the modified prospective method.  While the Company cannot precisely determinethe impact on net earnings as a result of the adoption of SFAS No. 123R,estimated compensation expense related to prior periods can be found in “StockBased Compensation” below.  The ultimateamount of increased compensation expense will depend on the number of optionshares granted, their timing and vesting period and the method used tocalculate the fair value of the awards, among other factors.  We have yet to determine the impact of SFASNo. 123R on the Company’sconsolidated financial statements.

In June 2005, the FASB issued SFAS No. 154, “*AccountingChanges and Error Corrections*,” (“SFAS No. 154”) a replacement ofAPB Opinion No. 20 and FASB Statement No. 3. The statement applies to all voluntary changes in accounting principle,and changes the requirements of accounting for and reporting a change inaccounting principle.  SFAS No. 154requires retrospective application to prior periods’ financial statements of a voluntary change inaccounting principle unless it is impractical. SFAS No. 154 is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005.  Earlier application is permitted foraccounting changes and corrections of errors occurring in fiscal yearsbeginning after June 1, 2005.  Thestatement does not change the transition provisions of any existing accountingpronouncements, including those that are in a transition phase as of theeffective date of the statement.  TheCompany has adopted SFAS No. 154.  SeeNote 11 to the Consolidated Financial Statements, “Restatement of Quarterly Financial Statements,” for furtherdetails.

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

The Company applies the intrinsic-value method prescribed under APB No.25 and related interpretations to account for the issuance of stock incentivesto employees and directors.  Accordingly,no compensation expense related to employees’ and directors’ stock incentiveshas been recognized in the consolidated financial statements.  In accordance with the provisions of SFAS No.123, “*Accounting for Stock-Based Compensation*,”the Company is required to present pro forma information reflectingcompensation cost for such issuances. Had the Company determined compensation costs based on the fair value atthe date of grant foroptions granted, the Company’s net income (loss) would have been decreased orincreased to the pro forma amounts indicated in the following table:
|                                                                                                                                               | ** ** | **Three Months Ended  April 30** | ** ** | **Six Months Ended  April 30** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(In thousands, except for per share amounts)**                                                                | ** ** | **Restated  2006**                              | ** ** | **2005**                                      | ** ** | **Restated  2006** | ** ** | **2005** | ** ** |
| Net income  (loss)                                                                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                                               | 206        |                                          | $          | (238 | ) | $ | 288 |   | $ | (949 | ) |
| Add: Stock-based employee compensation expense  included in reported net income (loss), net of related tax effects                            |       | 51                                              |       | —                                        |       | 86 |   | — |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |       | (25                                             | )          | (21                                           | )          | (28 | ) | (42 | ) |
| Pro forma                                                                                                                                     |       | $                                               | 232        |                                          | $          | (259 | ) | $ | 346 |   | $ | (991 | ) |
|                                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net income  (loss) per share – basic                                                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                                               | 0.06       |                                          | $          | (0.07 | ) | $ | 0.08 |   | $ | (0.26 | ) |
| Pro forma                                                                                                                                     |       | $                                               | 0.06       |                                          | $          | (0.07 | ) | $ | 0.10 |   | $ | (0.27 | ) |
|                                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net income  (loss) per share – diluted                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                                               | 0.05       |                                          | $          | (0.07 | ) | $ | 0.08 |   | $ | (0.26 | ) |
| Pro forma                                                                                                                                     |       | $                                               | 0.06       |                                          | $          | (0.07 | ) | $ | 0.09 |   | $ | (0.27 | ) |

 

The above table reflects the acceleration of vesting for 31,200 optionsduring the quarter ended April 30, 2006 due to the achievement ofperformance-based milestones.  As furtherdescribed below, this increased stock-based compensation expense during the threeand six months ended April 30, 2006.  Theabove pro forma net income for the three and six months ended April 30, 2006includes $37,000 of fair value based stock compensation expense that wasaccelerated due to meeting these performance milestones.

***Variable Stock Option Grants***

The Company has granted to its employees 78,000 options with anexercise price of $2.00 that vest at increasing rates as the Company’s commonstock trades for increasing prices for 20 of 30 consecutive days.  Notwithstanding the performance vestingschedule, these options may be exercised in full beginning October 1,2009.  The options will becomeexercisable earlier if the Company’s stock trades at the following prices for20 of 30 consecutive trading days.

9

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

 

Because thevesting for these grants is dependent on achieving these common stock pricemilestones, the Company has accounted for unvested option grants using variableaccounting in accordance with APB No. 25. Accordingly, the Company determines the intrinsic value of unvestedvariable option grants at each balance sheet date and records the changes inintrinsic value as deferred compensation. During the three months ended April 30, 2006, the Company’s stock tradedat or above $4.50 per share for more than 20 of 30 consecutive trading days andtherefore 31,200, or 40% of these options have vested.  Upon vesting, the options are consideredfixed plan awards with no further adjustment to the aggregate intrinsicvalue.  In addition, all previouslyrecorded deferred compensation expense is charged to earnings uponvesting.  Although no options vest untilOctober 1, 2009 or until the Company’s stock trades at the prices listed in theabove table for 20 of 30 consecutive days, these outstanding options arenevertheless deemed to have intrinsic value because the closing price of theCompany’s stock at April 30 and January 31, 2006 was $4.80 and $4.23 per share,respectively.  Stock based compensationexpense associated with these variable options was $81,000 and $137,000 for thethree and six months ended April 30, 2006, respectively.  These amounts include the intrinsic value ofthe unvested options for the three and six months ended at April 30 2006,respectively, pro-rated from their grant date to the time-based vesting date ofOctober 1, 2009 and the intrinsic value of options that vested during thesecond quarter of 2006 based on achieving certain stock price levels describedabove.  The compensation expense for thevested options was based on $4.87 per share, which was the closing price of theCompany’s stock on the day these options vested.  As of April 30, 2006, the Company hasrecorded deferred compensation of $78,000 relating to these unvested variablestock options.

**5.****                                      Inventories**

Inventoriesconsisted of the following at April 30, 2006 and October 31, 2005:
| (In thousands) | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Raw materials       |       | $        | 1,744      |     | $          | 1,304 |   |
| Work-in-progress    |       | 604      |       | 186      |       |
| Finished goods      |       | 2,492    |       | 1,965    |       |
|                |       | $        | 4,840      |     | $          | 3,455 |   |

 

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

Intangible assetsconsisted of the following at April 30, 2006 and October 31, 2005:

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| (In thousands)                 | ** ** | **Restated  2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|--------------------|------------|----------|------------|
| Intangible assets:                  |       |               |       |     |       |
| Developed technology                |       | $                  | 6,900      |     | $          | 6,900 |   |
| Trade name  (unamortized)           |       | 923                |       | 1,000    |       |
|                                |       | 7,823              |       | 7,900    |       |
|                                |       |               |       |     |       |
| Amortization - developed technology |       | (2,808             | )          | (2,402   | )          |
|                                |       | $                  | 5,015      |     | $          | 5,498 |   |

 

Amortizationexpense was $406,000 for each of the six-month periods ended April 30, 2006 and 2005.

Intangible assetsare being amortized using the straight-line method over the estimated usefullives of the assets that range from three to ten years.  If the Company utilizes pre-emergencebankruptcy net operating loss carryforwards (“NOLs”), the Company willsequentially reduce the cost of goodwill, trade name and developed technologyuntil the net carrying cost of these assets is zero.  To the extent that utilization of these NOLsreduces the cost of developed technology, future amortization expense will bereduced.  Estimated amortization expensefor the remainder of fiscal year 2006 and for each of the succeeding yearsbased on the intangible assets as of April 30, 2006, which does not reflect the possible reductiondiscussed above, is as follows:
| (In thousands)                | ** ** | **Amortization** | ** ** |
|------------------------------------|------------|------------------|------------|
| Six months ending October 31, 2006 |       | $                | 406        |   |
| 2007                               |       | 779              |       |
| 2008                               |       | 779              |       |
| 2009                               |       | 778              |       |
| 2010                               |       | 450              |       |
| Thereafter                         |       | 900              |       |
|                               |       | $                | 4,092      |   |

 

Goodwill and Trade name consisted of the following at April 30, 2006and October 31, 2005:
| (In thousands)                                                                 | ** ** | **Goodwill** | ** ** | **Trade Name** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------|------------|---------------------|------------|
| Balance at October 31, 2005                                                         |       | $            | 328        |                | $          | 1,000 |   |
| Reduction in balance due to utilization of pre-emergence bankruptcy NOL  (restated) |       | (328         | )          | (77                 | )          |
| Balance at April  30, 2006 (restated)                                               |       | $            | —     |                | $          | 923 |   |

 

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

Sales of the Company’s equipmentare subject to a warranty obligation. Equipment warranties typically extend for a period of twelve months fromthe date of installation.  Standardwarranty terms are included in customer contracts.  Under the terms of these warranties, theCompany is obligated to repair or replace any components or assemblies that itdeems defective in workmanship or materials. The Company reserves the right to reject warranty claims where itdetermines that failure is due to normal wear, customer modifications, impropermaintenance or misuse.  The Companymaintains a warranty reserve that reflects the estimated expenses that it willincur to honor the warranties on its products. The Company adjusts the warranty reserve based on the number and type ofequipment that is subject to warranty, adjusted for the

11

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remainingmonths of warranty coverage.  Thewarranty reserve adjustment reflects the Company’s historical warrantyexperience based on type of equipment. Warranty activity for the six months ended April 30, 2006 and 2005 was as follows:
| (In thousands)          | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Balance, beginning of period |       | $        | 175        |     | $          | 155 |   |
| Warranty provisions          |       | 198      |       | 141      |       |
| Warranty claims              |       | (160     | )          | (131     | )          |
| Balance, end of  period      |       | $        | 213        |     | $          | 165 |   |

 

**8.****                                     ****Net Income (Loss) per Share**

Basic income (loss) pershare is computed by dividing net income (loss) by the weighted average sharesoutstanding during the reporting period. Diluted income (loss) per share is computed similarly to basic loss pershare except that the weighted average shares outstanding are increased toinclude additional shares from the assumed exercise of stock options andwarrants, if dilutive, using the treasury stock method.  The number of additional shares is calculatedby assuming that outstanding stock options or warrants were exercised and thatthe proceeds from the exercise were used to acquire shares of common stock atthe average market price during the reporting period.

Shares used in theearnings per share computations for the three and six months ended April 30, 2006 and 2005 are asfollows:
|                                                            | ** ** | **Three Months Ended  April 30** | ** ** | **Six Months Ended  April 30** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(In thousands)**                                    | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average common shares outstanding – basic    |       | 3,619                                           |       | 3,606                                         |       | 3,615 |   | 3,605 |   |
| Dilutive effect of  stock options                          |       | 141                                             |       | —                                        |       | 99 |   | — |   |
| Weighted average  common shares outstanding – diluted |       | 3,760                                           |       | 3,606                                         |       | 3,714 |   | 3,605 |   |

 

The dilutive effect ofstock options in the above table excludes all options for which the exerciseprice was higher than the closing market price of $4.80 per share as of April 30, 2006.  The number of option shares excluded from thecalculation was 362,800 for the three and six months ended April 30, 2006.  As a result of the net loss, there were nodilutive common shares outstanding for the three and six months ended April 30, 2005, and accordingly,482,800 were excluded from the calculation.

The Company had warrantsoutstanding at April 30,2006 and 2005 to purchase 179,480, and 179,481 shares, respectively, of itscommon stock that were considered antidilutive and therefore not considered tohave been exercised.

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

On April 12, 2006, Angeion Corporation and Medmarc Casualty InsuranceCompany (“Medmarc”) agreed to a settlement that resolved all matters withrespect to the pending lawsuit between the parties related to the recovery ofinsurance proceeds for a claim associated with the Company’s former ICD business.  Medmarc agreed to make a single payment tothe Company on or prior to June 11, 2006, and each party agreed to dismiss withprejudice all claims against the other in the pending lawsuit.  On June 9, 2006, the Company received thesettlement payment.

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The Company has recorded the total amount duefrom Medmarc as current assets of discontinued operations at April 30,2006.  The Company recorded an increaseto this receivable of $804,000 during the second quarter of 2006.

The current liabilities of discontinuedoperations at April 30, 2006 include the following items:

1)              The legal fees due under the contingency feeagreement with the Company’s counsel;

2)              The remaining $200,000 payment due under theJune 30, 2005 ELA Medical settlement agreement; and

3)              All unpaid miscellaneous expenses due as ofApril 30, 2006.

As a result of the settlement with Medmarc, the Company recordedadditional discontinued operating expenses of $526,000 for the quarter endedApril 30, 2006, primarily reflecting contingent legal fees related to thesettlement.  The adjustments to bothcurrent assets and current liabilities of discontinued operations resulted in anet gain of $175,000 from discontinued operations for the quarter ended April 30,2006.  The Company expects thatthe only expense for discontinued operations in the future will be the purchaseof product liability insurance for as long as the Company believes it necessaryto cover ICDs that remain implanted in patients.  The current policy for product liabilityinsurance covering ICDs expires in July 2006.

See Note 11 to the Consolidated Financial Statements, “Restatement of Quarterly FinancialStatements,” for revisions associated with the presentation of cashflows from discontinued operations.

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

The Company has recorded a provision for taxes fromcontinuing operations of $85,000 and $185,000 for the three and six monthsended April 30, 2006, respectively.  TheCompany has also allocated $103,000 of the provision for taxes to discontinuedoperations for the three and six months ended April 30, 2006.  The provision for taxes has been calculatedand presented in the statement of operations as if the Company’s earnings werefully taxable.  The amount of income taxes payable isdetermined after utilizing the Company’s pre-emergence bankruptcy NOLs.  UnderAmerican Institute of Certified Public Accountants Statement of Position 90-7, *Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code* (“SOP 90-7”), the tax benefit forthe utilization of these loss carry forwards must be recognized as a reductionof intangibles rather than a reduction of the provision for taxes in the statementof operations.  See Note 11 to the Consolidated FinancialStatements, “Restatement of QuarterlyFinancial Statements,” for further details.

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

The Company has recorded a full valuation allowance against its netdeferred tax asset, excluding the effect of deferred tax liability which isunable to be used as a source of income against these deferred

13

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tax assets, based on itsbelief that it is more likely than not that the asset will not be realized inthe future.  This determination was madein a prior fiscal year and is still applicable for the second quarter of2006.  The Company will continue toassess the need for a full valuation allowance in future quarters.  The Company has recognized a deferred taxliability of $211,000 as of April 30, 2006 related to an indefinite lived intangiblethat is being amortized for tax purposes. Under SOP 90-7, a substantial portion of any future reversal of thevaluation allowance will first reduce any intangible assets and then becredited directly to additional paid-in capital.  After the exhaustion of pre- emergence bankruptcy NOLs, approximately $2.3 million of the valuationallowance is related to post-bankruptcy NOLs and would be available to reducethe provision for taxes in the statement of operations.

**11.          Restatement of Quarterly Financial Statements**

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

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

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

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

(1)  The Company has increased the provision fortaxes from continuing operations by $80,000 and $174,000 for the three and sixmonths ended April 30, 2006, respectively, increased tax expense related todiscontinued operations by $97,000 for both periods ended April 30, 2006, anddecreased goodwill by $328,000, decreased intangible assets by $77,000,decreased other current liabilities and accrued expenses by $7,000 anddecreased deferred income tax liabilities by $128,000 as of April 30, 2006 toproperly account for income taxes.

(2)   The Company has reclassified $136,000 and$196,000, for the three and six-month periods ended April 30, 2006,respectively, of bonus expenses previously included in general andadministrative expenses to other statement of operations expense captions toproperly classify bonus expense to the salary of the employee who earned thebonus.

(3)  The Company revised the presentationof operating and financing cash flows attributable to discontinued operationsfor the six months ended April 30, 2006. The revision reflects the restriction of $200,000 of cash and the fiscal2006 payment on the promissory note to ELA Medical as financing activities,rather than operating activities as previously reported.

14

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The Company has restated itsbalance sheet as of April 30, 2006, its statements of operations for the threeand six months ended April 30, 2006 and statement of cash flows for the sixmonths ended April 30, 2006 for the impact of the above items as follows(adjustment number corresponds with the adjustments noted above):
|                                                  | ** ** | **As of April 30, 2006** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                       | ** ** | **As**                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Previously**                               | ** ** | **Adjustments** | ** ** | **As** | ** ** |
| **(In thousands)**                          | ** ** | **Reported**                                 | ** ** | **Amount** | ** ** | **No.** | ** ** | **Restated** | ** ** |
| ***Balance Sheet Data:***                        |       |                                         |       |   |   |   |   |   |   |
| Intangible assets, net                           |       | $                                            | 5,092      |   | $ | (77 | ) | 1 |   | $ | 5,015 |   |
| Goodwill                                         |       | 328                                          |       | (328 | ) | 1 |   | — |   |
| Total Assets                                     |       | 20,551                                       |       | (405 | ) |   |   | 20,146 |   |
|                                             |       |                                         |       |   |   |   |   |   |   |
| Other current liabilities and accrued expenses   |       | 418                                          |       | (7 | ) | 1 |   | 411 |   |
| Total current liabilities                        |       | 7,039                                        |       | (7 | ) |   |   | 7,032 |   |
| Deferred income taxes                            |       | 339                                          |       | (128 | ) | 1 |   | 211 |   |
| Total long-term liabilities                      |       | 848                                          |       | (128 | ) |   |   | 720 |   |
| Total Liabilities                                |       | 7,887                                        |       | (135 | ) |   |   | 7,752 |   |
| Additional paid-in capital                       |       | 17,824                                       |       | 1 |   | 1 |   | 17,825 |   |
| Accumulated deficit                              |       | (5,444                                       | )          | (271 | ) | 1 |   | (5,715 | ) |
| Total shareholders’ equity                  |       | 12,664                                       |       | (270 | ) |   |   | 12,394 |   |
| Total  Liabilities and Shareholders’ Equity |       | $                                            | 20,551     |   | $ | (405 | ) |   |   | $ | 20,146 |   |

 

15

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| ** **                                           | ** ** | **Three Months Ended April 30, 2006** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                           | ** ** | **As  Previously**                                             | ** ** | **Adjustments** | ** ** | **As** | ** ** |
| **(In thousands)**                              | ** ** | **Reported**                                                   | ** ** | **Amount** | ** ** | **No.** | ** ** | **Restated** | ** ** |
| ***Statement of Operations Data:***                  |       |                                                           |       |   |   |   |   |   |   |
| Revenues:                                            |       |                                                           |       |   |   |   |   |   |   |
|  Equipment and supply sales                     |       | $                                                              | 6,564      |   | $ | — |   |   |   | $ | 6,564 |   |
|  Service revenue                                |       | 648                                                            |       | — |   |   |   | 648 |   |
|                                                 |       | 7,212                                                          |       | — |   |   |   | 7,212 |   |
| Cost of goods sold:                                  |       |                                                           |       |   |   |   |   |   |   |
| Cost of equipment and  supply sales                  |       | 3,548                                                          |       | 36 |   | 2 |   | 3,584 |   |
| Cost of service revenue                              |       | 99                                                             |       | — |   |   |   | 99 |   |
|                                                 |       | 3,647                                                          |       | 36 |   |   |   | 3,683 |   |
| Gross margin                                         |       | 3,565                                                          |       | (36 | ) |   |   | 3,529 |   |
| Operating expenses:                                  |       |                                                           |       |   |   |   |   |   |   |
| Selling and marketing                                |       | 1,774                                                          |       | 78 |   | 2 |   | 1,852 |   |
| General and  administrative                          |       | 942                                                            |       | (136 | ) | 2 |   | 806 |   |
| Research and development                             |       | 549                                                            |       | 22 |   | 2 |   | 571 |   |
| Amortization of  intangibles                         |       | 203                                                            |       | — |   |   |   | 203 |   |
|                                                 |       | 3,468                                                          |       | (36 | ) |   |   | 3,432 |   |
| Operating income                                     |       | 97                                                             |       | — |   |   |   | 97 |   |
| Interest income                                      |       | 19                                                             |       | — |   |   |   | 19 |   |
| Income before taxes                                  |       | 116                                                            |       | — |   |   |   | 116 |   |
| Provision for taxes                                  |       | 5                                                              |       | 80 |   | 1 |   | 85 |   |
|                                                 |       |                                                           |       |   |   |   |   |   |   |
| Income from continuing operations                    |       | 111                                                            |       | (80 | ) |   |   | 31 |   |
| Gain from discontinued operations, net of $103 taxes |       | 272                                                            |       | (97 | ) | 1 |   | 175 |   |
| Net income                                           |       | $                                                              | 383        |   | $ | (177 | ) |   |   | $ | 206 |   |
|                                                 |       |                                                           |       |   |   |   |   |   |   |
| Earnings per share – basic                      |       |                                                           |       |   |   |   |   |   |   |
| Continuing operations                                |       | $                                                              | 0.03       |   | $ | (0.02 | ) |   |   | $ | 0.01 |   |
| Discontinued operations                              |       | 0.08                                                           |       | (0.03 | ) |   |   | 0.05 |   |
| Net Income                                           |       | $                                                              | 0.11       |   | $ | (0.05 | ) |   |   | $ | 0.06 |   |
| Earnings per share - diluted                         |       |                                                           |       |   |   |   |   |   |   |
| Continuing operations                                |       | $                                                              | 0.03       |   | $ | (0.02 | ) |   |   | $ | 0.01 |   |
| Discontinued operations                              |       | 0.07                                                           |       | (0.03 | ) |   |   | 0.04 |   |
| Net Income                                           |       | $                                                              | 0.10       |   | $ | (0.05 | ) |   |   | $ | 0.05 |   |

 

16

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| ** **                                            | ** ** | **Six Months Ended April 30, 2006** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                            | ** ** | **As   Previously**                                     | ** ** | **Adjustments** | ** ** | **As** | ** ** |
| **(In thousands)**                               | ** ** | **Reported**                                                 | ** ** | **Amount** | ** ** | **No.** | ** ** | **Restated** | ** ** |
| ***Statement  of Operations Data:***                  |       |                                                         |       |   |   |   |   |   |   |
| Revenues:                                             |       |                                                         |       |   |   |   |   |   |   |
| Equipment and  supply sales                           |       | $                                                            | 12,811     |   | $ | — |   |   |   | $ | 12,811 |   |
| Service revenue                                       |       | 1,334                                                        |       | — |   |   |   | 1,334 |   |
|                                                  |       | 14,145                                                       |       | — |   |   |   | 14,145 |   |
| Cost of goods sold:                                   |       |                                                         |       |   |   |   |   |   |   |
| Cost of  equipment and supply sales                   |       | 6,810                                                        |       | 55 |   | 2 |   | 6,865 |   |
| Cost of service  revenue                              |       | 222                                                          |       | — |   |   |   | 222 |   |
|                                                  |       | 7,032                                                        |       | 55 |   |   |   | 7,087 |   |
| Gross margin                                          |       | 7,113                                                        |       | (55 | ) |   |   | 7,058 |   |
| Operating expenses:                                   |       |                                                         |       |   |   |   |   |   |   |
| Selling and  marketing                                |       | 3,697                                                        |       | 108 |   | 2 |   | 3,805 |   |
| General and  administrative                           |       | 1,715                                                        |       | (196 | ) | 2 |   | 1,519 |   |
| Research and  development                             |       | 1,021                                                        |       | 33 |   | 2 |   | 1,054 |   |
| Amortization of  intangibles                          |       | 406                                                          |       | — |   |   |   | 406 |   |
|                                                  |       | 6,839                                                        |       | (55 | ) |   |   | 6,784 |   |
| Operating income                                      |       | 274                                                          |       | — |   |   |   | 274 |   |
| Interest income                                       |       | 28                                                           |       | — |   |   |   | 28 |   |
| Income before taxes                                   |       | 302                                                          |       | — |   |   |   | 302 |   |
| Provision for taxes                                   |       | 11                                                           |       | 174 |   | 1 |   | 185 |   |
|                                                  |       |                                                         |       |   |   |   |   |   |   |
| Income from continuing  operations                    |       | 291                                                          |       | (174 | ) |   |   | 117 |   |
| Gain from discontinued  operations, net of $103 taxes |       | 268                                                          |       | (97 | ) | 1 |   | 171 |   |
| Net income                                            |       | $                                                            | 559        |   | $ | (271 | ) |   |   | $ | 288 |   |
|                                                  |       |                                                         |       |   |   |   |   |   |   |
| Earnings per share –  basic                      |       |                                                         |       |   |   |   |   |   |   |
| Continuing  operations                                |       | $                                                            | 0.08       |   | $ | (0.05 | ) |   |   | $ | 0.03 |   |
| Discontinued  operations                              |       | 0.07                                                         |       | (0.02 | ) |   |   | 0.05 |   |
| Net Income                                            |       | $                                                            | 0.15       |   | $ | (0.07 | ) |   |   | $ | 0.08 |   |
| Earnings per share -  diluted                         |       |                                                         |       |   |   |   |   |   |   |
| Continuing  operations                                |       | $                                                            | 0.08       |   | $ | (0.05 | ) |   |   | $ | 0.03 |   |
| Discontinued  operations                              |       | 0.07                                                         |       | (0.02 | ) |   |   | 0.05 |   |
| Net Income                                            |       | $                                                            | 0.15       |   | $ | (0.07 | ) |   |   | $ | 0.08 |   |

 

17

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| ** **                                                    | ** ** | **Six Months Ended April 30, 2006** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **As   Previously**                                     | ** ** | **Adjustments** | ** ** | **As** | ** ** |
| **(In thousands)**                                       | ** ** | **Reported**                                                 | ** ** | **Amount** | ** ** | **No.** | ** ** | **Restated** | ** ** |
| ***Statement  of Cash Flows Data:***                          |       |                                                         |       |   |   |   |   |   |   |
| Cash Flows From  Operating Activities:                        |       |                                                         |       |   |   |   |   |   |   |
| Net income                                                    |       | $                                                            | 559        |   | $ | (271 | ) | 1 |   | $ | 288 |   |
| Gain from  discontinued operations                            |       | (268                                                         | )          | 97 |   | 1 |   | (171 | ) |
| Tax benefit from  stock options exercised                     |       | —                                                       |       | 1 |   | 1 |   | 1 |   |
| Deferred income  taxes                                        |       | 2                                                            |       | 277 |   | 1 |   | 279 |   |
|                                                          |       |                                                         |       |   |   |   |   |   |   |
| Other current  liabilities and accrued expenses               |       | 52                                                           |       | (7 | ) | 1 |   | 45 |   |
| Net cash provided by  continuing operations                   |       | 2,170                                                        |       | 97 |   |   |   | 2,267 |   |
| Restricted cash  released for discontinued operations         |       | 200                                                          |       | (200 | ) | 3 |   | — |   |
| Cash used in operating  activities of discontinued operations |       | (324                                                         | )          | (97  200 | ) | 1  3 |   | (221 | ) |
| Net cash provided by  operating activities                    |       | $                                                            | 2,046      |   | $ | — |   |   |   | $ | 2,046 |   |
| Cash Flows From  Financing Activities:                        |       |                                                         |       |   |   |   |   |   |   |
| Proceeds from  issuance of commons stock                      |       | 35                                                           |       | — |   |   |   | 35 |   |
| Promissory note  payment                                      |       | —                                                       |       | (200 | ) | 3 |   | (200 | ) |
| Cash restricted  for discontinued operations                  |       | —                                                       |       | 200 |   | 3 |   | 200 |   |
| Net cash provided by  financing activities                    |       | $                                                            | 35         |   | $ | — |   |   |   | $ | 35 |   |

 

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

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

The discussionabove 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 may differ materially depending on a varietyof factors including:  

·                  Ourability to successfully operate our business including our ability to develop,improve, and update our cardiorespiratory diagnostic products,

·                  Ourability to effectively manufacture and ship products in required quantities tomeet customer demands,

·                  Ourability to successfully defend the Company from product liability claimsrelated to our cardiorespiratory diagnostic products and claims associated withour prior cardiac stimulation products,

·                  Ourability to protect our intellectual property,

·                  Ourability to develop and maintain an effective system of internal controls andprocedures and disclosure controls and procedures, and

·                  Ourdependence on third-party vendors.

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

# **Overview**

The Company is a medicalproducts manufacturer with reported revenues of $23.8 million for the yearended October 31, 2005.  Domestic productsales and service revenues accounted for 83.5% of revenue for the year endedOctober 31, 2005 while international product sales accounted for the remaining16.5%.

The Company,through its Medical Graphics Corporation subsidiary, designs non-invasivediagnostic systems under the MedGraphics trade name that assist health careprofessionals in the prevention, early detection and cost-effective treatmentof heart and lung disease.  It also sellsa version of some of these products under the New Leaf brand to health andfitness clubs and personal trainers to assist them in developing exerciseprograms to help their clients meet their personal goals.  Revenues consist of equipment and supplysales and service revenues.  Equipmentand supply sales reflect sales of Medical Graphics’ non-invasivecardiorespiratory diagnostic equipment, sales of New Leaf health and fitnessproducts, and aftermarket sales of peripherals and supplies.  Service revenues reflect revenues fromextended service contracts, non-warranty service visits and additionaltraining.

Total revenue forthe second quarter of 2006 was $7.2 million, an increase of 19.6% from $6.0million in 2005.  Operating expenses forthe second quarter of 2006 were $3.4 million, an increase of 6.1% from $3.2million in 2005.  Income from continuingoperations for the three months ended April 30, 2006 was $31,000, or $0.01 per diluted share,compared to a loss of $238,000, or $0.07 per share, for the same period in2005.  Net income for the three monthsended April 30, 2006 included a$175,000 gain from discontinued operations and, therefore, was $206,000, or$0.05 per diluted share.

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For the six months ended April 30, 2006, total revenue increased 27.9% to $14.1million from $11.1 million for the same period in 2005.  Operating expenses for the six months ended April30, 2006 increased 7.9% to $6.8 millionfrom $6.3 million for the same period in 2005. Income from continuing operations for the six months ended April 30, 2006 was $117,000, or $0.03 per diluted share, compared to a loss of$949,000, or $0.26 per diluted share, for the same period in 2005.  The net income for the six months ended April30, 2006 included a $171,000 gain fromdiscontinued operations and, therefore, was $288,000, or $0.08 per dilutedshare.

In its pressrelease dated January 9, 2006, the Company included the following as some ofits objectives and goals for 2006:

·                  Adrive toward achieving and sustaining profitability;

·                  Afourth consecutive year of double-digit year-over-year revenue growth;

·                  Theintroduction of new cardiorespiratory diagnostic products;

·                  Continuationof the expansion of our domestic and international sites offering New Leafactive metabolic assessments; and

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

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

·                  TheApril 30, 2006 quarter marked the third consecutive profitable quarter;

·                  TheCompany achieved double-digit year-over-year revenue growth for the eighthquarter in a row.  With year-over-yearrevenue growth for the six months ended April 30, 2006 of 27.9%, the Company’sannual goal is clearly within reach. Second quarter revenue of $7.2 million is a record revenue quarter;

·                  TheCompany is making progress in the development of new cardiorespiratorydiagnostic products;

·                  The Company has added 64 new sitesoffering New Leaf active metabolic assessments since year-end;

·                  TheNew Leaf branded *Energy*SmartTM personalized onlinemeal planning, tracking and calorie management system was launched in February2006.  This system is designed to helpconsumers from weight conscious adults and children to recreational and eliteathletes properly measure and “fuel” their metabolism.

**Restatementof Financial Statements**

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

During the first, second andthird quarters of fiscal 2006 the Company did not correctly apply GenerallyAccepted Accounting Principles (“GAAP”) relating to accounting for theutilization of pre-emergence bankruptcy net operating loss (“NOL”) carryforwards.  The Company has determinedthat during the first three quarters of the fiscal year, it should have appliedAmerican Institute of Certified Public Accountants Statement of Position 90-7, *Financial Reporting by Entities in ReorganizationUnder*

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*the Bankruptcy Code* (“SOP 90-7”) to theutilization of its pre-emergence bankruptcy NOL carry forwards.  Angeion was in Chapter 11 BankruptcyReorganization from June 2002 to October 2002.

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

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

Therefore, the Company has:

·                  Increasedthe provision for taxes by $80,000 and $174,000 for the three and six monthsended April 30, 2006, respectively,

·                  Increasedtax expense related to discontinued operations by $97,000 for both periodsended April 30, 2006, and

·                  Decreased goodwill by $328,000, decreasedintangible assets by $77,000, decreased other current liabilities and accruedexpenses by $7,000 and decreased deferred income tax liabilities by $128,000 asof April 30, 2006.

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

See Note 11 to theConsolidated Financial Statements, “Restatement of Quarterly Financial Statements,” in this Form10-QSB/A for additional discussion of the accounting for income taxes and theuse of pre-emergence bankruptcy NOLs.

**Revenue**

Total revenueincreased by 19.6% to $7.2 million from $6.0 million for the three months endedApril 30, 2006 and 2005, respectively. Domestic product revenue increased by 18.8% to $5.2 million in 2006compared to $4.4 million in 2005. International product revenue increased 38.1% to $1.4 million in 2006compared to $1.0 million in 2005. Service revenue decreased 2.6% to $648,000 in 2006 from $665,000 in2005.

During the second quarter of 2006, one customer accounted for 11.5% ofrevenue.  There were no significantcustomers for the same period in 2005. Due to firm orders already received, revenue from this customer isexpected to exceed 10% of revenues for the third quarter of 2006.

For the six monthsended April 30, total revenue increased by 27.9% to $14.1 million from $11.1million for 2006 and 2005, respectively. Domestic product revenue increased by 29.1% to $10.3 million in 2006compared to $7.9 million in 2005. International product revenue increased 49.5% to $2.6 million in 2006compared to $1.7 million in 2005. Service revenue decreased 5.4% to $1.3 million in 2006 from $1.4 millionin 2005.

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Sales of the newUltima PF and Ultima PFX cardiorespiratory diagnostic systems are contributingsignificantly to both domestic and international revenue growth.  The Company continues to be pleased withcustomer acceptance of these new products that began shipping during April2005.  In addition, revenue from theCompany’s Elite Series systems has remained strong throughout the first sixmonths of 2006 compared to 2005 as customers continue to replace their older1085 Series equipment.

The Company was also successful in the second quarter generating more businessfrom customers engaged in clinical research. Under these agreements, the Company sells its cardiorespiratorydiagnostic systems and servicesto third parties conducting clinical trials at multiple sites inside andoutside the United States.

Revenue from salesof the Company’s New Leaf personal assessment systems has continued to increasethe base from which New Leaf consumable products are made available at healthand fitness clubs.  The increase in thisbase is beginning to drive increased sales of personal metabolic assessmentsthat drive revenue from the Company’s higher margin New Leaf consumableproducts.  For the six months ended April30, 2006, revenue from New Leaf consumable products has more than doubledcompared to the same period in 2005.  TheCompany’s New Leaf health and fitness products are continuing to contribute todomestic growth due to broadening consumer acceptance and expansion of thebase.

Service revenue decreased$17,000 or 2.6% during the second quarter of 2006 compared to the same quarterin 2005 due to the relatively aggressive pace that customers are replacingolder equipment with the Company’s new models, thereby reducing revenue fromextended service contracts and non-warranty service visits on olderequipment.  The second quarter decreaseis somewhat less than the 7.9% decrease experienced during the first quarter of2006.  The Company believes that thisnegative revenue trend will continue to decline and eventually turn positive whennew equipment sold in the past 12 months becomes eligible for new extendedservice contracts.

**Gross Margin**

Gross margin percentagefor the three months ended April 30, 2006 of 48.9% of revenue was comparable to49.5% for the same period in 2005.  Forthe six months ended April 30, 2006, gross margin percentage increased to 49.9%from 48.1% for the same period in 2005. The overall gross margin percentage for the second quarter of 2006decreased due to product mix.  Theproduct mix in the third quarter of 2006 is expected to be similar.

**Selling and Marketing**

Selling andmarketing expenses for the three months ended April 30, 2006 of $1.9 millionwere unchanged compared to the same period in 2005.  For the six months ended April 30, 2006,selling and marketing expenses increased by 6.7% to $3.8 million compared to$3.6 million for the same period in 2005.

Second quarter2006 selling and marketing expenses reflect a $62,000 or 19.3% decrease incommission costs due to lower commissionable revenue and lower costs forrelated incentive programs.  In addition,trade show expenses for the second quarter of 2006 were $29,000 lower comparedto the same period in 2005.  Decreases incommission expenses and trade show costs were offset by a $29,000 increase incosts associated with equipment demonstrations to potential customers.

For the six monthsended April 30, 2006, commission expenses were $75,000 or 13.3% higher comparedto the same period of 2006 primarily due to the 42% increase in domestic salesfor the first

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quarter of 2006.  In addition, increases in expenses fortravel, trade shows and equipment demonstrations contributed to the 3.7%overall increase in selling and marketing expenses for the six months endedApril 30, 2006.

**General and Administrative**

General andadministrative expenses for the three months ended April 30, 2006 increased by$192,000 or 31.3% to $806,000 compared to $614,000 for the same period in2005.  For the six months ended April 30,2006, general and administrative expenses increased by $241,000 or 18.9% to$1.5 million compared to $1.3 million for the same period in 2005.

General andadministrative expenses included $81,000 and $137,000 for the three and sixmonths ended April 30, 2006, respectively, for stock-based compensationassociated with variable options compared to no expense in this area for 2005for either period.  These stock-basedcompensation expenses were non-cash expenses. The Company marks-to-market the intrinsic value of its unvested variableoptions on a quarterly basis.  Inaddition, the Company was required to expense the full amount of intrinsicvalue for an aggregate of 40% of the outstanding options that vested during thesecond quarter.  These vested optionswill now be excluded from future variable option accounting.  See Note 4 to the Consolidated FinancialStatements, “Stock-Based Compensation,” in this Form 10-QSB/A for additionaldiscussion of variable options.

In addition, therewas a $61,000 increase in general and administrative expenses due to a $12,000decrease in the provision for doubtful accounts for the six months ended April30, 2006 compared to a $73,000 decrease in the provision for doubtful accountsfor the same period in 2005.  Legalexpense decreases of $35,000 and $40,000 for the three and six months of 2006compared to the same periods of 2005 somewhat offset these decreases.

General andadministrative expenses also included $19,000 in consulting expenses associatedwith Sarbanes-Oxley compliance costs for the second quarter of 2006 compared to$21,300 for the same period in 2005.  Forthe six months ended April 30, general and administrative expenses included$34,000 for Sarbanes-Oxley compliance costs in 2006 compared to $52,800 for thesame period in 2005.

**Research and Development**

Research and developmentexpenses for the three months ended April 30, 2006 increased $12,000 or by 2.1%to $571,000 from $559,000 for the same period in 2005.  For the six months ended April 30, 2006,research and development expenses increased $17,000 or 1.6% to $1.1 millioncompared to $1.0 million for the same period in 2005.

The Company is currentlyworking on new products intended for use by international markets and asthma,allergy and primary care physicians. These new products are planned for release late in 2006 or early 2007.  In addition, the Company is also implementingnew designs and new components for use in its existing systems that have lowercosts and are more efficient in the manufacturing process.

**Amortization of Intangibles**

Amortization ofdeveloped technology was $203,000 for each of the three month periods endedApril 30, 2006 and 2005 and $406,000 for each of the six-month periods endedApril 30, 2006 and 2005.  As furtherdescribed in Note 6 above, as the Company utilizes pre-emergence bankruptcy netoperating loss carry forwards, the Company will sequentially reduce the cost oftrade names and developed

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technology until the netcarrying cost is zero.  To the extentthat utilization of these NOLs reduces the cost of developed technology, futureamortization expense will be reduced.

**Provision for Taxes**

The Company isrequired to present the provision for taxes for 2006 as if it were fullytaxable in accordance with SOP 90-7.  TheCompany has utilized its pre-emergencebankruptcy NOLs in the calculation of its income taxes payable but is required to pay only U.S. and StateAlternative Minimum Taxes (“AMT”) because it has substantial federal netoperating loss carry forwards.  The tax benefit for using pre-emergencebankruptcy NOLs has been recorded as a reduction of goodwill and intangibleassets in the three and six months ended April 30, 2006.  See Note 11 to the ConsolidatedFinancial Statements, “Restatement ofFinancial Statements,” in this Form 10-QSB/A for additional discussionof the accounting for income taxes and the use of pre-emergence bankruptcy NOLs.

**DiscontinuedOperations**

The net gain fromdiscontinued operations of $171,000 for the six months ended April 30, 2006reflects the net difference after recording the agreed upon insurance recoveryand the associated legal fees that were contingent upon the recovery togetherwith other additionalconsulting fees and miscellaneous litigation expenses.  The Company has allocated $103,000 of theprovision for taxes to discontinued operations for the three and six-monthperiods ended April 30, 2006.  See Note 9to the Consolidated Financial Statements, “Discontinued Operations and RelatedLitigation,” in this Form 10-QSB for additional discussion of the litigationsettlement with Medmarc.

**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, through revenue from license agreements for patented ICD technologyand through the use of cash balances.

The Company had cash andcash equivalents of $3.2 million, including $200,000 of cash restricted fordiscontinued operations, and working capital of $7.0 million as of April 30,2006.  During the six months ended April30, 2006, the Company generated $2.3 million in cash from continuing operationsin part because its net income of $288,000 included non-cash expenses of$532,000 for depreciation and amortization, $137,000 for stock-basedcompensation and $279,000 of deferred income taxes.  Equal increases of $1.2 million for advancepayments from customers and accounts payable together with an increase of$236,000 in deferred income all contributed to the generation of cash.  Advance payments from customers are associatedwith orders for equipment received from a new customer.  Cash was used for increases of $1.4 millionand $219,000 in inventories and accounts receivable, respectively.  The increases in both inventories andaccounts payable are necessary to support the new customer’s order forequipment intended for use in clinical research.

The Company used$221,000 in cash for operating activities of discontinued operations, whichincluded legal fees and consulting expenses and other expenses related to theELA Medical settlement and Medmarc litigation.    On June 9, 2006, the Company received the settlement payment fromMedmarc for the insurance recoveryrelated to expenses associated with previously discontinued ICDproducts.  See Note 9 to the ConsolidatedFinancial Statements, “Discontinued Operations and Related Litigation,” in thisForm 10-QSB/A for additional discussion.

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During the sixmonths ended April 30, 2006, the Company used $196,000 in cash for the purchaseof property and equipment.  The Companyhas no material commitments for capital expenditures for fiscal year 2006.

In connection withthe $1.4 million settlement agreement with ELA Medical, the Company executed a$400,000 promissory note that required a payment of $200,000 that was made onDecember 31, 2005 and another $200,000 payment due on June 30, 2006.  This payment is reflected in the ConsolidatedStatement of Cash Flows for the quarter ended April 30, 2006 as a promissorynote payment within Cash Flows from Financing Activities.  The promissory note is backed up with anirrevocable bank letter of credit.  TheCompany is required to collateralize the irrevocable bank letter of credit with$200,000 of cash that is classified as cash restricted for discontinuedoperations at April 30, 2006.

The Company believes thatits liquidity and capital resource needs for fiscal year 2006 will be metthrough its current cash and cash equivalents and cash flows from operations.

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

*(a) Evaluation of DisclosureControls and Procedures*

Management, with theparticipation of the Company’s chief executive officer, Rodney A. Young, andchief financial officer, Dale H. Johnson, evaluated the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures, as definedin Rules 13a-15(e) under the Securities Exchange Act of 1934, as of April 30,2006.  In this evaluation, the Companyoriginally concluded that its disclosure controls and procedures were effectiveas of April 30, 2006, as disclosed in the Company’s Form 10-QSB filed on June14, 2006.

In connection with therestatement, management, under the direction of its chief executive officer andchief financial officer, reevaluated the disclosure controls and procedures anddue to the identification of a material weakness in internal control overfinancial reporting related to the Company’s accounting for income taxes, asdescribed below, concluded that the Company’s disclosure controls andprocedures were not effective as of April 30, 2006.

The material weakness in internal control overfinancial reporting related to the Company’s accounting for income taxes.  Specifically, the Company did not have, andthrough its engagement of third party outside advisers did not acquire,adequate technical expertise to effectively oversee and review the Company’saccounting for the utilization of pre-emergence bankruptcy NOL carry forwardsin accordance with AICPA Statement of Position 90-7, *Financial Reporting by Entities in Reorganization under the BankruptcyCode*.  As a result, theCompany restated the financial information included in the first three quartersof the year ended October 31, 2006, including the three and six months endedApril 30, 2006, as included herein, to correct a material error in accountingfor income taxes.

Due to this material weakness in internal control overfinancial reporting, the Company performed other procedures related to thepresentation of income taxes and the use of pre-emergence bankruptcy NOL carryforwards in preparing its restated consolidated financial statements as of andfor the three and six months ended April 30, 2006 to ensure that theseconsolidated financial statements were presented fairly, in all materialrespects, in accordance with U.S. generally accepted accounting principles.

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

There was nochange in the Company’s internal control over financial reporting during thequarter ended April 30, 2006 that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

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

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**PART II -OTHER INFORMATION**

**Item 1.  Legal Proceedings.**

The Company is subject to certain claims and lawsuits that have beenfiled in the ordinary course of business. From time to time, the Company brings suit against others to enforcepatent rights or to collect debts in the ordinary course of business.  Except for the litigation discussed below,management believes that the settlement of all litigation would not have amaterial effect on the results of operations or liquidity of the Company.

As disclosed in Item 3 of the Form 10-KSB for the year ended October31, 2005, the Company is involved in a lawsuit brought by Medmarc CasualtyInsurance Company in United States District Court for the District of Minnesotainvolving a claim for indemnification by ELA Medical and the Company’s claimfor insurance coverage from Medmarc in the matter Medmarc Casualty InsuranceCompany v. Angeion Corporation, ELA Medical, Inc. and ELA Medical SA.

The following material developments in that matter have occurred sincethe filing of the Form 10-KSB:

On January 20, 2006, the Company and Medmarc argued summary judgmentmotions in United States District Court on issues of confirming Medmarc’sresponsibility to reimburse the Company for its $1.4 million settlement withELA and its legal fees paid in defending the lawsuit.  As reported by Angeion in its Form 10-QSB forthe quarter ended January 31, 2006, the Court granted, in large part, Angeion’smotion for summary judgment in the pending lawsuit.

Subsequent to the Court’s ruling, on April 12, 2006, Angeion andMedmarc agreed to a confidential settlement that resolves all matters withrespect to the pending lawsuit.  Underthe terms of the settlement, Medmarc agreed to make a single payment to Angeionon or prior to June 11, 2006, and each party agreed to dismiss with prejudiceall claims against the other in the pending lawsuit.

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

# ***Recent Sales of UnregisteredSecurities***

The Company had nounregistered sales of equity securities during the three months ended April 30,2006.

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

The Company didnot purchase any equity securities during the three months ended April 30,2006.

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

None

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

None

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**Item 5.  Other Information.**

None

**Item 6.  Exhibits.**
| (a)    | The following exhibits are included herein: |
|--------|---------------------------------------------|
|   |                                        |
|        | 31                                          | Certifications pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (Rules 13a- 14 and 15d-14 of the Exchange Act). |
|   | 32                                          | Certifications pursuant Section 906 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |

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**SIGNATURES**

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

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

 

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