**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-QSB**

 

| x          | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|------------|----------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                               |
|       | **FOR  THE QUARTERLY PERIOD ENDED JANUARY 31, 2008**                                                     |
| ** ** | ** **                                                                                               |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|            |                                                                                                          |  |

 

**Commission File Number 000-33295**

 

**MedicalCV, Inc.**

(Exact Name of Small Business Issuer as Specified in Its Charter)

 

| **Minnesota**                                                   | ** ** | **41-1717208**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction  of Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**9725 South Robert Trail**

**Inver Grove Heights, Minnesota 55077**

**(651) 452-3000**

(Address of Principal Executive Offices and Issuer’s

Telephone Number, including Area Code)

 

Check whether theissuer:  (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or such shorterperiod that the registrant 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes  o  No  x

 

As of March 7, 2008,the issuer had outstanding 9,984,724 shares of common stock, $0.01 par value.

 

Transitional SmallBusiness Disclosure Format (check one)  o  Yes  x  No

 

 

 

 

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**TABLE OF CONTENTS**

 
| PART I       |   | FINANCIAL INFORMATION |
|-------------------|--------|-----------------------|
|              |   |                  |   |   |
|              |   | ITEM 1                |   | Condensed  Financial Statements |
|              |   | ITEM 2                |   | Management’s  Discussion and Analysis or Plan of Operation |
|              |   | ITEM 3                |   | Controls and  Procedures |
|              |   |                  |   |   |
| PART II      |   | OTHER INFORMATION     |
|              |   |                  |   |   |
|              |   | ITEM 6                |   | Exhibits |
|              |   |                  |   |   |
| SIGNATURES        |
| INDEX TO EXHIBITS |

 

2

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**PART I**

 

**FINANCIAL INFORMATION**

 

**ITEM 1  CONDENSED FINANCIAL STATEMENTS**

 

**MEDICALCV, INC.**

**CONDENSED BALANCE SHEETS**

 
| ** **                                                                                                                        | ** ** | **January 31, 2008** | ** ** | **April 30, 2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                        | ** ** | **(unaudited)**                | ** ** | ** **                   | ** ** |
| **ASSETS**                                                                                                                        |       |                           |       |                         |       |
|                                                                                                                              |       |                           |       |                         |       |
| CURRENT ASSETS                                                                                                                    |       |                           |       |                         |       |
| Cash and cash equivalents                                                                                                         |       | $                              | 4,034,086  |                         | $          | 8,950,983 |   |
| Prepaid expenses and other current assets                                                                                         |       | 176,331                        |       | 280,150                      |       |
| Current asset of discontinued operations                                                                                          |       | 19,986                         |       | 87,323                       |       |
| TOTAL CURRENT ASSETS                                                                                                              |       | 4,230,403                      |       | 9,318,456                    |       |
|                                                                                                                              |       |                           |       |                         |       |
| PROPERTY, PLANT AND  EQUIPMENT, net                                                                                               |       | 749,754                        |       | 788,835                      |       |
| DEFERRED FINANCING COSTS,  net                                                                                                    |       | 344,873                        |       | 349,053                      |       |
| OTHER NONCURRENT ASSET                                                                                                            |       | —                         |       | 15,600                       |       |
| TOTAL ASSETS                                                                                                                      |       | $                              | 5,325,030  |                         | $          | 10,471,944 |   |
|                                                                                                                              |       |                           |       |                         |       |
| **LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY**                                                                           |       |                           |       |                         |       |
| ** **                                                                                                                        | ** ** | ** **                     | ** ** | ** **                   | ** ** |
| CURRENT LIABILITIES                                                                                                               |       |                           |       |                         |       |
| Current amount of related party lease obligation                                                                                  |       | $                              | 358,075    |                         | $          | 334,633 |   |
| Accounts payable                                                                                                                  |       | 833,957                        |       | 685,753                      |       |
| Accrued payroll                                                                                                                   |       | 478,902                        |       | 353,640                      |       |
| TOTAL CURRENT LIABILITIES                                                                                                         |       | 1,670,934                      |       | 1,374,026                    |       |
|                                                                                                                              |       |                           |       |                         |       |
| SECURED PROMISSORY NOTES,  net of discount                                                                                        |       | 7,694,634                      |       | 4,248,173                    |       |
| RELATED PARTY LEASE  OBLIGATION, less current amount                                                                              |       | 1,934,339                      |       | 2,207,600                    |       |
| TOTAL LIABILITIES                                                                                                                 |       | 11,299,907                     |       | 7,829,799                    |       |
|                                                                                                                              |       |                           |       |                         |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                    |       |                           |       |                         |       |
|                                                                                                                              |       |                           |       |                         |       |
| SHAREHOLDERS’ (DEFICIT)  EQUITY                                                                                              |       |                           |       |                         |       |
| Preferred stock; $.01 par value; 1,000,000 and 998,100 shares  authorized; no shares issued and outstanding                  |       | —                         |       | —                       |       |
| Common stock; $.01 par value; 49,000,000 and 24,000,000 shares  authorized; 9,839,724 and 9,837,224 shares issued and outstanding |       | 98,397                         |       | 98,372                       |       |
| Additional paid-in capital                                                                                                        |       | 66,884,177                     |       | 62,603,147                   |       |
| Accumulated deficit                                                                                                               |       | (72,957,451                    | )          | (60,059,374                  | )          |
| TOTAL SHAREHOLDERS’ (DEFICIT) EQUITY                                                                                         |       | (5,974,877                     | )          | 2,642,145                    |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY                                                                    |       | $                              | 5,325,030  |                         | $          | 10,471,944 |   |

 

See notes to condensed financial statements.

 

3

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**MEDICALCV, INC.CONDENSED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                    | ** ** | **Three months ended January 31,** | ** ** | **Nine months ended January 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                               | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                          |       |                                                   |       |                                                  |       |   |   |   |   |
| SALES                                                         |       | $                                                      | 26,100     |                                                  | $          | 11,200 |   | $ | 78,300 |   | $ | 11,200 |   |
| COST  OF GOODS SOLD                                           |       | 1,566                                                  |       | 1,596                                                 |       | 4,698 |   | 1,596 |   |
| GROSS PROFIT                                                  |       | 24,534                                                 |       | 9,604                                                 |       | 73,602 |   | 9,604 |   |
|                                                          |       |                                                   |       |                                                  |       |   |   |   |   |
| OPERATING EXPENSES                                            |       |                                                   |       |                                                  |       |   |   |   |   |
| Sales and marketing                                           |       | 625,416                                                |       | 361,824                                               |       | 1,268,891 |   | 1,158,698 |   |
| General and administrative                                    |       | 1,348,277                                              |       | 899,799                                               |       | 4,285,623 |   | 3,657,007 |   |
| Settlement of legal matter                                    |       | —                                                 |       | —                                                |       | 750,000 |   | — |   |
| Research and development                                      |       | 1,735,263                                              |       | 1,456,710                                             |       | 4,517,948 |   | 5,199,361 |   |
| TOTAL OPERATING EXPENSES                                      |       | 3,708,956                                              |       | 2,718,333                                             |       | 10,822,462 |   | 10,015,066 |   |
| LOSS FROM OPERATIONS                                          |       | (3,684,422                                             | )          | (2,708,729                                            | )          | (10,748,860 | ) | (10,005,462 | ) |
|                                                          |       |                                                   |       |                                                  |       |   |   |   |   |
| OTHER  INCOME (EXPENSE)                                       |       |                                                   |       |                                                  |       |   |   |   |   |
| Interest income                                               |       | 61,619                                                 |       | 65,737                                                |       | 292,556 |   | 247,108 |   |
| Interest expense                                              |       | (866,495                                               | )          | (27,234                                               | )          | (2,374,871 | ) | (94,241 | ) |
| Other income (expense)                                        |       | (621                                                   | )          | 883                                                   |       | 435 |   | 20,608 |   |
| TOTAL OTHER INCOME (EXPENSE)                                  |       | (805,497                                               | )          | 39,386                                                |       | (2,081,880 | ) | 173,475 |   |
|                                                          |       |                                                   |       |                                                  |       |   |   |   |   |
| LOSS  FROM CONTINUING OPERATIONS                              |       | (4,489,919                                             | )          | (2,669,343                                            | )          | (12,830,740 | ) | (9,831,987 | ) |
| LOSS  FROM DISCONTINUED OPERATIONS                            |       | (22,445                                                | )          | (22,445                                               | )          | (67,337 | ) | (35,837 | ) |
| NET  LOSS                                                     |       | $                                                      | (4,512,364 | )                                                     | $          | (2,691,788 | ) | $ | (12,898,077 | ) | $ | (9,867,824 | ) |
|                                                          |       |                                                   |       |                                                  |       |   |   |   |   |
| BASIC  AND DILUTED NET LOSS PER COMMON SHARE                  |       |                                                   |       |                                                  |       |   |   |   |   |
| Continuing operations                                         |       | $                                                      | (0.46      | )                                                     | $          | (0.27 | ) | $ | (1.30 | ) | $ | (1.05 | ) |
| Discontinued operations                                       |       | (0.00                                                  | )          | (0.00                                                 | )          | (0.01 | ) | (0.00 | ) |
| TOTAL NET LOSS PER COMMON SHARE                               |       | $                                                      | (0.46      | )                                                     | $          | (0.27 | ) | $ | (1.31 | ) | $ | (1.05 | ) |
|                                                          |       |                                                   |       |                                                  |       |   |   |   |   |
| BASIC AND DILUTED WEIGHTED AVERAGE COMMON  SHARES OUTSTANDING |       | 9,839,724                                              |       | 9,837,224                                             |       | 9,839,208 |   | 9,410,206 |   |

 

See notes to condensed financial statements.

 

4

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**MEDICALCV, INC.CONDENSED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                              | ** ** | **Nine months ended January 31,** | ** **  |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                                                                              | ** ** | **2008**                                         | ** **  | **2007** | ** ** |
| OPERATING ACTIVITIES                                                                    |       |                                             |        |   |   |
| Net loss                                                                                |       | $                                                | (12,898,077 | ) | $ | (9,867,824 | ) |
| Adjustments to reconcile net loss to net cash used by operating  activities:            |       |                                             |        |   |   |
| Share-based compensation                                                                |       | 1,233,992                                        |        | 1,456,427 |   |
| Depreciation                                                                            |       | 115,074                                          |        | 134,904 |   |
| Gain from the sales of property, plant and equipment                                    |       | —                                           |        | (45,973 | ) |
| Warrant expense related to technology purchase agreement                                |       | —                                           |        | 15,300 |   |
| Amortization of discount related to secured promissory notes                            |       | 944,266                                          |        | — |   |
| Accrued interest related to secured promissory notes                                    |       | 972,195                                          |        | — |   |
| Accrued interest accrual warrant expense related to secured  promissory notes           |       | 281,874                                          |        | — |   |
| Amortization of deferred financing costs                                                |       | 103,217                                          |        | 5,463 |   |
| Changes in operating assets and liabilities:                                            |       |                                             |        |   |   |
| Prepaid expenses and other assets                                                       |       | 186,756                                          |        | 57,116 |   |
| Accounts payable                                                                        |       | 148,204                                          |        | (235,827 | ) |
| Accrued payroll                                                                         |       | 125,262                                          |        | 17,465 |   |
| NET CASH USED BY OPERATING ACTIVITIES                                                   |       | (8,787,237                                       | )           | (8,462,949 | ) |
|                                                                                    |       |                                             |        |   |   |
| INVESTING ACTIVITIES                                                                    |       |                                             |        |   |   |
| Purchases of property, plant and equipment                                              |       | (75,993                                          | )           | (203,117 | ) |
| Proceeds from the sales of property, plant and equipment                                |       | —                                           |        | 50,668 |   |
| NET CASH USED BY INVESTING ACTIVITIES                                                   |       | (75,993                                          | )           | (152,449 | ) |
|                                                                                    |       |                                             |        |   |   |
| FINANCING ACTIVITIES                                                                    |       |                                             |        |   |   |
| Proceeds from issuance of secured promissory notes and warrants, net  of offering costs |       | 4,196,152                                        |        | — |   |
| Principal payments under related party lease obligation                                 |       | (249,819                                         | )           | (240,829 | ) |
| Proceeds from issuance of common stock and warrants, net of offering  costs             |       | —                                           |        | 2,190,000 |   |
| Payments of fractional share interests                                                  |       | —                                           |        | (229 | ) |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                               |       | 3,946,333                                        |        | 1,948,942 |   |
|                                                                                    |       |                                             |        |   |   |
| NET DECREASE IN CASH AND  CASH EQUIVALENTS                                              |       | (4,916,897                                       | )           | (6,666,456 | ) |
| CASH AND CASH EQUIVALENTS                                                               |       |                                             |        |   |   |
| Beginning of year                                                                       |       | 8,950,983                                        |        | 10,351,570 |   |
| End of period                                                                           |       | $                                                | 4,034,086   |   | $ | 3,685,114 |   |
|                                                                                    |       |                                             |        |   |   |
| SUPPLEMENTAL DISCLOSURE OF  CASH FLOW INFORMATION                                       |       |                                             |        |   |   |
| Cash paid for interest                                                                  |       | $                                                | 73,319      |   | $ | 94,241 |   |
| NONCASH INVESTING AND  FINANCING ACTIVITIES                                             |       |                                             |        |   |   |
| Fair value of warrants issued in connection with secured promissory  notes              |       | $                                                | 2,970,000   |   | $ | — |   |

 

See notes to condensed financial statements.

 

5

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**MEDICALCV, INC.Notes to Condensed Financial Statements**

 

**1.****                ****Basis of Financial StatementPresentation**

 

Theaccompanying unaudited condensed financial statements included herein have beenprepared by MedicalCV, Inc. (the “Company”) in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”).  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United States ofAmerica have been condensed or omitted pursuant to such rules andregulations.  These condensed interim financial statements should be readin conjunction with the financial statements and the notes thereto included inthe Company’s Annual Report on Form 10-KSB for the fiscal year ended April 30,2007.

 

Thecondensed balance sheet as of January 31, 2008, the condensed statementsof operations for the three and nine months ended January 31, 2008 and2007, and the condensed statements of cash flows for the nine months ended January 31,2008 and 2007 include, in the opinion of management, all adjustments,consisting of normal recurring adjustments and an adjustment for the settlementof a legal matter, necessary for a fair presentation of the financial resultsfor the respective interim periods and are not necessarily indicative ofresults of operations to be expected for the entire fiscal year ending April 30,2008.

 

**2.****                ********Going Concern**

 

TheCompany’s condensed financial statements as of and for the three and ninemonths ended January 31, 2008 have been prepared on a going concern basis,which contemplates the realization of assets and settlement of liabilities andcommitments in the normal course of business. The Company has sustained lossesand negative cash flows from operations in recent years and expects theseconditions to continue in the foreseeable future. As of January 31, 2008,the Company had an accumulated deficit of $72,957,451. The amount of cashrequired to fund operations during the remaining quarter of the fiscal yearending April 30, 2008 and beyond is difficult to predict.  Nonetheless, management anticipates that itwill be required to raise additional capital in order to continue operationsbeyond April 30, 2008.

 

Thesematters raise substantial doubt about the Company’s ability to continue as agoing concern. Management intends to seek debt and/or equity financing in orderto continue operations. However, the Company may not be able to obtain suchfinancing on acceptable terms or at all. If the Company is unable to obtainsuch financing, the Company will be unable to continue operations. Thecondensed financial statements do not include any adjustments that might resultfrom the outcome of this uncertainty.

 

**3.****                ****Net Loss per CommonShare**

 

Basic netloss per common share was computed by dividing the net loss to commonshareholders by the weighted average number of common shares outstanding.Diluted net loss per common share reflects the potential dilution that couldoccur if holders of warrants, options, and other derivative instruments thatare not anti-dilutive convert their holdings into common stock. Diluted netloss per common share does not differ from basic net loss per common share forthe three and nine months ended January 31, 2008 and 2007 due to the lossfrom continuing operations which would cause the potentially dilutive shares tobe anti-dilutive. Options and warrants outstanding to purchase 4,208,527 and2,218,010 shares of common stock were excluded from the computation for the threemonths ended January 31, 2008 and 2007, respectively, because the lossfrom continuing operations would cause such shares to be anti-dilutive. Optionsand warrants outstanding to purchase 4,043,989 and 2,166,073 shares of commonstock were excluded from the computation for the nine months ended January 31,2008 and 2007, respectively, because the loss from continuing operations wouldcause such shares to be anti-dilutive.

 

6

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**4.****             ****Secured Promissory Notes**

 

On April 20,2007 and June 15, 2007, the Company entered into Secured Note PurchaseAgreements for the issuance and sale of 11% Secured Promissory Notes (“11%Notes”) and warrants for the purchase of the Company’s common stock as follows:

 

| **Holder**                                     | ** ** | **11% Notes  Issued at  Closing** | ** ** | **Shares Issuable  upon Exercise  of Warrants  Issued at  Closing** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| *1**st** Closing  on April 20, 2007* |       |                                        |       |                                                                                    |       |
| Whitebox (1)                                   |       | $                                           | 8,000,000  |                                                                                    | 1,200,000  |   |
|                                           |       |                                        |       |                                                                                    |       |
| *2**nd** Closing  on June 15, 2007*  |       |                                        |       |                                                                                    |       |
| Whitebox (1)                                   |       | 2,000,000                                   |       | 300,000                                                                                 |       |
| Potomac (2)                                    |       | 1,500,000                                   |       | 224,998                                                                                 |       |
| Other accredited investors                     |       | 1,000,000                                   |       | 150,000                                                                                 |       |
|                                           |       | 4,500,000                                   |       | 674,998                                                                                 |       |
| Total Initial Issuance at  Closings            |       | $                                           | 12,500,000 |                                                                                    | 1,874,998  |   |

----

(1)                                  A related party entity that is anaffiliate of Whitebox Advisors, LLC (“Whitebox”), then a beneficial owner ofmore than 10% of the Company’s common stock.

 

(2)                                  Related party entities that areaffiliates of Potomac Capital Management, LLC (“Potomac”), then a beneficialowner of more than 5% of the Company’s common stock.

 

The11% Notes are secured****by a first prioritysecurity interest in the Company’s assets.  The Secured Note PurchaseAgreements contain a restrictive covenant that prohibits the Company fromissuing more than an aggregate of $12,500,000 of 11% Notes. The Company has theright to prepay the 11% Notes, subject to a premium payment of 8% if prepaymentis made within the first year; 6% if prepayment is made within the second year;and 3% if prepayment is made within the third year. The prepayment premium doesnot apply if the prepayment of the 11% Notes is a result of a change ofcontrol.

 

Theprincipal amount of each 11% Note and any accrued but unpaid interest is dueand payable three years following the respective date of issuance of each note.During the first year, interest on the 11% Notes will accrue and be added tothe principal balance of the note. Within 30 days following the end of thefirst year from issuance of each note, the Company is obligated to issue toeach holder an interest accrual warrant for the purchase of the number of sharesof the Company’s common stock that is equal to the quotient obtained bydividing 60% of the accrued interest for the first year by $4.00. During thesecond and third years from issuance of each note, the Company has the optioneach quarter to either (i) pay the accrued interest on each note on orbefore the 15th day following the end of such quarter or (ii) allowthe interest for such quarter to accrue and be added to the principal balanceof the note and issue to each holder, within 30 days following the end of suchquarter, an interest accrual warrant for the purchase of the number of sharesof the Company’s common stock that is equal to the quotient obtained bydividing 60% of the accrued interest for the quarter by $4.00. The form of eachinterest accrual warrant provides for a term of five years and an exerciseprice of $4.00 per share, subject to basic and, for 12 months from the dateissued, full-ratchet anti-dilution adjustments. In addition, the form ofinterest accrual warrant contains a cashless exercise feature and a provisionthat restricts exercise to the extent that, after exercise, the holder wouldotherwise beneficially own in excess of 9.99% of the Company’s common stockoutstanding.

 

7

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Thewarrants issued at the 1st and 2nd closings (“Closing Warrants”) of the 11% Notes for the purchaseof an aggregate of 1,874,998 shares of the Company’s common stock have a termof five years from their respective dates of issuance and have exercise pricesof $4.00 per share, subject to basic and, for 12 months from their respectivedates of issuance, full-ratchet anti-dilution adjustment provisions. TheClosing Warrants contain a provision that restricts exercise to the extentthat, after exercise, the holder would otherwise beneficially own in excess of9.99% of the Company’s common stock outstanding. In addition, the ClosingWarrants had a cashless exercise right as to any shares the SEC would have notpermitted the Company to include in the related resale registration statementand any reductions imposed by the SEC in the number of shares covered by suchresale registration statement would have been made on a pro-rata basis. The Company filed a registration statement on August 6, 2007, which becameeffective on August 13, 2007, to enable the resale of the shares of commonstock underlying the Closing Warrants. The Company is required to keep theregistration statement current, effective and free from any materialmisstatement or omission to state a material fact for a specified period, notto exceed 2 years from the effective date of the registration statement. TheCompany is not required to register for resale the shares of common stockunderlying the interest accrual warrants.

 

TheCompany used the Black-Scholes-Merton formula to estimate the fair value of the1st and 2nd Closing Warrants for the purchaseof an aggregate of 1,200,000 and 674,998 shares, respectively, of the Company’scommon stock using the following assumptions:

 

| ** **              | ** ** | **1****st**** Closing  Warrant  (issued April 20, 2007)** | ** ** | **2****nd**** Closing  Warrants  (issued June 15, 2007)** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| Expected term           |       | 5.0  years                                                                    |       | 5.0  years                                                                    |       |
| Volatility              |       | 106.7                                                                         | %          | 105.9                                                                         | %          |
| Risk free interest rate |       | 4.6                                                                           | %          | 5.1                                                                           | %          |
| Expected dividend rate  |       | 0                                                                             | %          | 0                                                                             | %          |

 

Thefair value of the warrants issued at the 1st and 2nd closings were estimated to be $3,804,000 and$2,970,000, respectively.  The fair value of each Closing Warrant wasrecorded as a discount to the principal balance of each 11% Note and isamortized into interest expense, using the effective interest rate method, overthe 3-year term of each 11% Note. The impact of the discount created from theissuance of the Closing Warrants and 11% interest rate on the principal balanceof each note results in an effective interest rate of 41% and 64% for the 1st and 2nd Closings, respectively.

 

TheCompany used the Black-Scholes-Merton formula to estimate the fair value of thefirst-year interest accrual warrants required to be issued within 30 daysfollowing the end of the first year of the 1st and 2nd Closings of the 11% Notes for the purchase of anaggregate of 132,000 and 74,250 shares of the Company’s common stock,respectively, using the following assumptions:

 

| ** **              | ** ** | **1****st**** Year Interest  Accrual  Warrants** | ** ** |
|-------------------------|------------|------------------------------------------------------------|------------|
| Expected term           |       | 5.0  years                                                 |       |
| Volatility              |       | 108.8                                                      | %          |
| Risk free interest rate |       | 2.8                                                        | %          |
| Expected dividend rate  |       | 0                                                          | %          |

 

Interestexpense related to the secured promissory notes of $807,147, which included$335,873 of amortization of the discount created from the Closing Warrants,$345,629 of accrued interest on the 11% Notes, and $125,645 of expense relatedto the interest accrual warrants to be issued within 30 days following the endof the first year of the respective issuance of each 11% Note, was included inthe condensed statement of operations for the three months ended January 31,2008.

 

8

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Interestexpense related to the secured promissory notes of $2,198,335, which included$944,266 of amortization of the discount created from the Closing Warrants,$972,195 of accrued interest on the 11% Notes, and $281,874 of expense relatedto the interest accrual warrants to be issued within 30 days following the endof the first year of the respective issuance of each 11% Note, was included inthe condensed statement of operations for the nine months ended January 31,2008.

 

TheCompany paid a 6% commission on the gross proceeds of each closing to theplacement agent and certain expenses incurred by the holders and placementagent associated with this transaction. Total financing costs of $892,000 wereincurred by the Company associated with the aggregate of $12,500,000 infinancing. The Company capitalized $407,523 as deferred financing costs andthis amount will be amortized into interest expense over the 3-year term ofeach respective 11% Note. The remaining $484,477 in financing costs reduced theamount recorded in additional paid-in capital associated with the fair value ofthe Closing Warrants.

 

Thesecured promissory notes, net of discount, outstanding at January 31, 2008consisted of the following:

 
| ** **                                         | ** ** | **1****st**** Closing  (Due April 2010)** | ** ** | **2****nd**** Closing  (Due June 2010)** | ** ** | **Total**  | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|
| 11% Secured Promissory  Notes and accrued interest |       | $                                                        | 8,687,650  |                                                    | $          | 4,811,066  |       | $ | 13,498,716 |   |
| Unamortized discount  remaining                    |       | (3,138,848                                               | )          | (2,665,234                                              | )          | (5,804,082 | )          |
| Net balance at  January 31, 2008              |       | $                                                        | 5,548,802  |                                                    | $          | 2,145,832  |       | $ | 7,694,634 |   |

 

**5.****                ****Management Incentive Plan**

 

TheCompany’s Management Incentive Plan (“MIP”) provides an additional performanceincentive to all executive officers and managers identified by the ChiefExecutive Officer and approved by the Compensation Committee of the Company’sBoard of Directors. Subject to applicable award opportunity levels describedbelow, the total dollar value of the annual cash bonus, paid no later than 50days after the performance year, for each participant is calculated as follows:

 

(Corporate achievementlevel  X Base salary  X  70%)  +  (Individual achievement level  X  Basesalary  X 30%).

 

TheBoard of Directors, upon the recommendation of the Compensation Committee, setthe following minimum, target and maximum payouts under the MIP as a percentageof base salary for the fiscal year ending April 30, 2008:

 

| ** **              | ** ** | **Minimum** | ** ** | **Target** | ** ** | **Maximum** | ** ** |
|-------------------------|------------|-------------|------------|------------|------------|-------------|------------|
| Chief Executive Officer |       | 20%         |       | 30%        |       | 45%         |       |
| All other participants  |       | 15%         |       | 25%        |       | 30%         |       |

 

Basedon management’s current estimate of the anticipated achievement of at least theminimum level of performance, the Company has recorded an expense of $42,972and $114,848 in the condensed statement of operations for the three and ninemonths ended January 31, 2008, respectively.

 

9

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**6.****                ****Income Taxes**

 

On May 1,2007, the Company adopted the provisions of Financial Accounting StandardsBoard (“FASB”) Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109*,(“FIN 48”) which clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, *Accounting forIncome Taxes*.  FIN 48 prescribes a financial statementrecognition threshold and measurement attribute of a tax position taken orexpected to be taken in a tax return, and provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. Previously, the Company had accounted for taxcontingences in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 5, *Accounting for Contingencies*.

 

Asrequired by FIN 48, the Company recognizes the financial statement benefit of atax position only after determining whether it is more-likely-than-not that atax position will be sustained by the relevant tax authority upon examination,including resolution of any related appeals or litigation processes, based onthe technical merits of the position.  For tax positions that meet themore-likely-than-not recognition threshold, the amount recognized in thefinancial statements is the largest amount of benefit that has a greater than50% likelihood of being realized upon ultimate settlement with the relevant taxauthority.

 

On May 1,2007, the date of adoption of FIN 48, the Company applied FIN 48 to all taxpositions within the statute of limitations. The adoption of FIN 48 did notresult in a cumulative adjustment to the Company’s accumulated deficit and theCompany determined that it had no unrecognized tax benefits as of May 1,2007. Therefore, the impact of implementing FIN 48 did not impact the effectivetax rate. As of May 1, 2007, the Company did not have any significant taxpositions for which it is reasonably possible that the total amounts ofunrecognized tax benefits will significantly change during the next twelvemonths.

 

TheCompany’s policy is to recognize and classify interest and penalties accrued onany unrecognized tax benefits as a component of income tax expense in thestatement of operations.  As of the date of adoption of FIN 48 on May 1,2007, the Company did not have any accrued interest or penalties associatedwith unrecognized tax benefits, and the Company did not recognize any interestor penalties in the condensed statement of operations for the three and ninemonths ended January 31, 2008.

 

TheCompany is subject to income taxes in the U.S. federal jurisdiction and variousstate jurisdictions.  Tax regulations within each jurisdiction are subjectto the interpretation of the related tax laws and regulations and requiresignificant judgment to apply. As of January 31, 2008, the Company was notunder examination by the Internal Revenue Service (“IRS”) or any state taxingjurisdiction in connection with the Company’s income taxes.  However, allof the Company’s federal and state tax returns within the statue of limitationsremain open and subject to examination by taxing authorities. With fewexceptions, the Company is no longer subject to U.S. federal, state or localincome tax examinations by tax authorities for the years before 2003.

 

Inconnection with the FIN 48 analysis, the Company analyzed its historical equitytransactions with respect to ownership changes within the meaning of InternalRevenue Code Section 382 (“§382”).  As a result of such analysis,management believes that an ownership change pursuant to §382 occurred on April 1,2005 and approximately $20 million of federal and $3 million of statepre-change net operating loss carryforwards will be limited.  The Companyhas historically recorded a full valuation allowance to offset its deferred taxassets.

 

10

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**7.****                ****Employment Agreements and SeveranceCommitments**

 

As of January 31,2008, employment agreements with five officers of the Company contain aprovision for payments of up to twelve months severance if the employment ofthe officer is terminated without cause by the Company or for good reason bythe officer as defined in the agreements. The agreements also contain variousother provisions customary for agreements of such nature.

 

**CurrentVice President, Finance and Chief Financial Officer**

 

On September 7,2007, the Company entered into an Executive Employment Agreement with MichaelA. Brodeur to join the Company as Vice President, Finance and Chief FinancialOfficer.  Effective September 17,2007, Mr. Brodeur assumed these roles following the September 15,2007 departure of Eapen Chacko, then the Company’s Vice President, Finance andChief Financial Officer. Pursuant to the terms of the Executive EmploymentAgreement, Mr. Brodeur receives an annual base salary of $225,000 and iseligible to receive a pro-rated performance-based cash bonus under the Company’sMIP for the fiscal year ending April 30, 2008.  The ExecutiveEmployment Agreement provides that a severance payment will be made if Mr. Brodeur’semployment is terminated by the Company without cause, or by Mr. Brodeurfor good reason.  The severance payment would be six months of basesalary; and, if at the end of such six-month period, Mr. Brodeur is notemployed or engaged as an independent contractor, the Company would pay him upto an additional six months of base salary until he is employed or engaged asan independent contractor.  In addition, Mr. Brodeur agreed tocertain nondisclosure and inventions provisions and certain noncompetition andnonrecruitment provisions during the term of employment and for a period of oneyear after termination of employment.

 

On September 17,2007, the Company granted Mr. Brodeur a ten-year stock option under theCompany’s Amended and Restated 2001 Equity Incentive Plan to purchase 98,397****shares of the Company’s common stock at anexercise price of $2.30 per share with a four-year vesting period of 25% on thefirst anniversary of the date of grant and 6.25% quarterly thereafter.

 

**FormerVice President, Finance and Chief Financial Officer**

 

On June 28,2007, the Company entered into an amendment to the restated ExecutiveEmployment Agreement with Eapen Chacko, then the Company’s Vice President,Finance and Chief Financial Officer, to reflect the mutual decision reachedconcerning Mr. Chacko’s departure from the Company. Pursuant to the amendment,Mr. Chacko’s employment terminated on September 15, 2007 and theCompany paid Mr. Chacko a lump sum severance payment of $100,000. If Mr. Chackois not reemployed or serving as an independent contractor, Mr. Chacko maybe eligible for six monthly installments of base salary of $16,667 beginning March 15,2008 and such payments will cease on the earlier of: 1) the date Mr. Chackois reemployed or serves as an independent contractor; or 2) September 15,2008. In addition to these severance payments, the Company agreed to pay orreimburse Mr. Chacko for medical (COBRA) benefits as set forth in theExecutive Employment Agreement. The Company has recorded an expense of $100,000in the condensed statement of operations for the nine months ended January 31,2008 related to the lump sum severance payment of $100,000 paid to Mr. Chacko.

 

**FormerVice President, Regulatory Affairs and Quality Assurance**

 

On May 31,2007, the Company entered into a letter agreement amending certain provisionsof the Executive Employment Agreement with Dennis E. Steger, then the Company’sVice President, Regulatory Affairs and Quality Assurance, who advised theCompany of his plan to retire.  Pursuant to the agreement, Mr. Steger’semployment terminated on July 1, 2007 and, in lieu of any severancecompensation payable under the Executive Employment Agreement with Mr. Steger,the Company paid Mr. Steger $20,000 and issued to Mr. Steger a fullyvested non-qualified stock option under the Company’s Amended and Restated 2001Equity Incentive Plan for the purchase of 5,734 shares of the Company’s commonstock.  The stock option issued to Mr. Steger on July 1, 2007had an exercise price of $5.50 per share, expired unexercised on January 1,2008, and resulted in a non-cash share-based compensation expense of $8,911 forthe nine months ended January 31, 2008.

 

11

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**8.****                ****Shareholders’ Equity**

 

**AuthorizedCapital**

 

On October 11,2007, the Company’s shareholders approved an amendment to the Company’s RestatedArticles of Incorporation. As a result of the amendment, the total authorizedshares of all classes which the Company has authority to issue is 50,000,000,consisting of: (a) 1,000,000 shares of preferred stock, par value one cent($0.01) per share; and (b) 49,000,000 shares of common stock, par valueone cent ($0.01) per share. Prior to the amendment, the total authorized sharesof all classes which the Company had authority to issue was 25,000,000consisting of: (a) 1,900 shares of 5% Series A Redeemable ConvertiblePreferred Stock; (b) 998,100 shares of preferred stock, par value one cent($0.01) per share; and (c) 24,000,000 shares of common stock, par valueone cent ($0.01) per share.

 

**Share-BasedCompensation Expense**

 

Share-basedcompensation expense included in the condensed statement of operations is asfollows:

 
| ** **                      | ** ** | **Three months ended January 31,** | ** ** | **Nine months ended January 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                               | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Sales and marketing             |       | $                                                      | 19,449     |                                                  | $          | 23,260 |   | $ | 50,800 |   | $ | 68,632 |   |
| General and administrative  (1) |       | 272,602                                                |       | 242,426                                               |       | 821,943 |   | 1,019,494 |   |
| Research and development  (2)   |       | 110,044                                                |       | 126,531                                               |       | 361,249 |   | 368,301 |   |
| Total share-based  compensation |       | $                                                      | 402,095    |                                                  | $          | 392,217 |   | $ | 1,233,992 |   | $ | 1,456,427 |   |

----

(1)          Includes $13,750 of share-basedcompensation expense in the nine months ended January 31, 2008 related toa restricted stock award granted on June 27, 2007 to the chairperson ofthe Company’s Board of Directors for 2,500 shares of the Company’s common stockunder the Company’s Amended and Restated 2001 Equity Incentive Plan.  The 2,500 shares of common stock had a fairvalue of $5.50 per share on the date of grant, vested immediately, and had anaggregate grant date fair value of $13,750.

 

(2)          Includes $1,783 and $17,231 ofshare-based compensation expense for the three months ended January 31,2008 and 2007, respectively, and $20,401 and $48,712 of share-basedcompensation expense for the nine months ended January 31, 2008 and 2007,respectively, related to stock options granted under the Company’s Amended andRestated 2001 Equity Incentive Plan to non-employees serving on the Company’sScientific Advisory Board.

 

As of January 31,2008, there was $2,413,161 of total unrecognized share-based compensation cost.The Company expects that cost to be recognized over a weighted-averageremaining recognition period of 2.1 years.

 

12

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**Share-BasedAwards**

 

TheCompany has the following shareholder-approved stock option and equityincentive plans as of January 31, 2008:

 

| ** **                       | ** ** | **Shares of Common Stock** | ** ** |
|----------------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **Reserved**               | ** ** | **Outstanding (1)** | ** ** | **Available   for Grant** | ** ** |
| 1992 Stock Option Plan           |       | 50,000                     |       | 725 |   | — |   |
| 1993 Director Stock Option  Plan |       | 30,000                     |       | 2,100 |   | — |   |
| 1997 Stock Option Plan           |       | 50,000                     |       | 49,250 |   | — |   |
| 2001 Equity Incentive Plan  (2)  |       | 1,400,000                  |       | 351,350 |   | 1,045,150 |   |
| 2005 Director Stock Option  Plan |       | 300,000                    |       | 128,846 |   | 171,154 |   |
| Total                            |       | 1,830,000                  |       | 532,271 |   | 1,216,304 |   |

----

(1)          In addition, there are optionsoutstanding for the purchase of 492,212 shares of common stock outside ofshareholder-approved plans.

 

(2)          The Amended and Restated 2001 EquityIncentive Plan provides for awards to be granted in the form of stock options,restricted stock, performance awards, restricted stock units, and/or tax offsetpayments.

 

Thefollowing table summarizes information about the Company’s stock options forthe three and nine months ended January 31, 2008:

 
| **Options**                                             | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value(1)** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| Outstanding,  April 30, 2007                       |       | 895,454    |       | $                                      | 8.78       |                                                                         |       |                               |       |   |
| Granted                                                 |       | 80,234     |       | 5.48                                   |       |                                                                         |       |                               |       |
| Forfeited                                               |       | (11,557    | )          | 9.48                                   |       |                                                                         |       |                               |       |
| Expired                                                 |       | (7,822     | )          | 9.33                                   |       |                                                                         |       |                               |       |
| Outstanding, July 31,  2007                        |       | 956,309    |       | 8.49                                   |       |                                                                         |       |                               |       |
| Granted                                                 |       | 186,897    |       | 2.37                                   |       |                                                                         |       |                               |       |
| Forfeited                                               |       | (69,561    | )          | 5.93                                   |       |                                                                         |       |                               |       |
| Expired                                                 |       | (27,960    | )          | 13.74                                  |       |                                                                         |       |                               |       |
| Outstanding,  October 31, 2007                     |       | 1,045,685  |       | 7.43                                   |       |                                                                         |       |                               |       |
| Granted                                                 |       | 10,000     |       | 1.91                                   |       |                                                                         |       |                               |       |
| Forfeited                                               |       | (2,500     | )          | 5.50                                   |       |                                                                         |       |                               |       |
| Expired                                                 |       | (28,702    | )          | 5.90                                   |       |                                                                         |       |                               |       |
| Outstanding,  January 31, 2008                     |       | 1,024,483  |       | 7.42                                   |       | 6.2                                                                          |       | $                                  | 61,264     |   |
| Vested and expected to vest, January 31, 2008 |       | 884,887    |       | 7.57                                   |       | 6.1                                                                          |       | $                                  | 45,810     |   |
| Exercisable,  January 31, 2008                     |       | 539,740    |       | 8.74                                   |       | 5.4                                                                          |       | $                                  | —     |   |
|                                                         |            |            |            |                                        |            |                                                                              |            |                                    |            |  |  |

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(1)             This disclosure excludes those optionsthat have no intrinsic value (i.e. those options that are out-of-the-moneyusing the closing market price of the Company’s common stock on January 31,2008 of $2.65 per share).

 

13

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As of January 31,2008, the exercise prices of stock options outstanding ranged from $1.50 to$23.60 per share and such stock options expire at various dates through January 31, 2018.The exercise price of a stock option is set at the closing market price of theCompany’s common stock on the grant date. Stock options typically vest overfour years and have a maximum contractual term of ten years. Substantially allawards provide for accelerated vesting if there is a change in control (asdefined in the applicable plan or award agreement). There were no stock optionsexercised in the three and nine months ended January 31, 2008 and 2007.

 

TheCompany used the Black-Scholes-Merton formula to estimate the grant date fairvalue of its stock options using the following assumptions:

 
| ** **                              | ** ** | **Three months ended January 31,** | ** ** | **Nine months ended January 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                               | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted average  grant-date fair value |       | $                                                      | 1.61       |                                                  | $          | 2.42 |   | $ | 2.57 |   | $ | 5.49 |   |
| Expected dividend rate (1)              |       | 0                                                      | %          | 0                                                     | %          | 0 | % | 0 | % |
| Risk free interest rate  (2)            |       | 3.2 to 3.7                                             | %          | 4.8                                                   | %          | 3.2 to 5.0 | % | 4.8 to 5.1 | % |
| Expected term (3)                       |       | 6.3 years                                              |       | 5.5 years                                             |       | 0.5 to 6.3 years |   | 5.0 to 6.3 years |   |
| Expected volatility (4)                 |       | 106.4 to 108.8                                         | %          | 104.2                                                 | %          | 99.0 to 108.8 | % | 104.2 to 111.2 | % |
| Weighted-average  volatility            |       | 107.1                                                  | %          | 104.2                                                 | %          | 106.9 | % | 110.0 | % |
|                                         |            |                                                        |            |                                                       |            |  |  |  |  |  |  |  |  |

----

(1)             **Expected dividend rate**—The Company has not historically paid acash dividend to common shareholders and does not expect to pay dividends inthe future.

 

(2)             **Risk free interest rate**—The Company used yield rates on U.S.Treasury securities for a period approximating the expected term of the award.

 

(3)             **Expected term**—Due to the limited number of stockoptions exercised historically and discontinuation of the heart valve business,the Company elected to use the “simplified” method for estimating the expectedterm of options as described in SEC Staff Accounting Bulletin 110. Under thisapproach, the expected term was calculated by taking the average of the vestingterm and the original contract term.

 

(4)             **Expected volatility**—The Company used historical monthlyprice observations for a period approximating the expected term of the award,if available, or at least four years to estimate volatility.

 

14

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**Warrants**

** **

Inconnection with various financings and other activities, the Company haswarrants outstanding for the purchase of the Company’s common stock. Thefollowing table summarizes information about the Company’s warrants for thethree and nine months ended January 31, 2008:

** **

** **
| **Warrants**                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Term  (in years)** | ** ** | **Aggregate  Intrinsic  Value(1)** | ** ** |
|-------------------------------------|------------|------------|------------|----------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| Outstanding,  April 30, 2007   |       | 2,498,075  |       | $                                      | 5.80       |                                                                         |       |                               |       |   |
| Issued                              |       | 674,998    |       | 4.00                                   |       |                                                                         |       |                               |       |
| Impact of anti-dilution features    |       | 2,276      |       | 0.02                                   |       |                                                                         |       |                               |       |
| Outstanding, July 31,  2007    |       | 3,175,349  |       | 5.41                                   |       |                                                                         |       |                               |       |
| Outstanding,  October 31, 2007 |       | 3,175,349  |       | 5.41                                   |       |                                                                         |       |                               |       |
| Outstanding,  January 31, 2008 |       | 3,175,349  |       | 5.41                                   |       | 4.2                                                                          |       | $                                  | —     |   |
|                                     |            |            |            |                                        |            |                                                                              |            |                                    |            |  |  |

----

(1)          This disclosure excludes those warrantsthat have no intrinsic value (i.e. those warrants that are out-of-the-moneyusing the closing market price of the Company’s common stock on January 31,2008 of $2.65 per share).

 

As of January 31,2008, the exercise prices of the warrants outstanding ranged from $3.25 to$29.50 per share and such warrants expire at various dates through March 3,2015. As of January 31, 2008, warrants for the purchase of 1,915,994shares of the Company’s common stock contain a full-ratchet anti-dilutionprovision and warrants for the purchase of 707,405 shares of the Company’scommon stock contain a weighted-average anti-dilution provision with a currentweighted average exercise price of $3.97 per share.

 

**9.****             ****Litigation**

 

On October 19,2007, the Company entered into a settlement agreement with J GiordanoSecurities LLC (d/b/a J Giordano Securities Group) (“JGSG”) pursuant to whichthe Company settled and resolved all disputes, claims and matters incontroversy between the Company and JGSG in exchange for the Company’s paymentto JGSG of $750,000 in cash.  Withoutadmitting any liability or wrongdoing, JGSG and the Company mutually releasedeach other from any and all claims, demands, and causes of action, suits, debtsor liabilities of any kind which were or could have been asserted in thefederal action or arbitration.

 

JGSGhad filed a complaint for breach of an engagement agreement against the Companyin the United States District Court for the District of Connecticut, allegingthat JGSG was entitled to additional compensation pursuant to certain financingactivities by the Company that occurred in December 2005, January 2006,and October 2006, as well as certain compensation relating to registrationof the shares underlying the warrants issued to JGSG as compensation inconnection with the April 2005 private placement of the Company’ssecurities in which JGSG was a placement agent. The Company had moved to dismiss or stay the federal action and tocompel arbitration before the National Association of Securities Dealers,pursuant to which the federal action was stayed. JGSG then filed a statement ofclaim and the Company filed a counterclaim in the arbitration, alleging breachof the engagement agreement and fraud in the inducement. JGSG then filed anamended statement of claim in the arbitration, pursuant to which JGSG claimedit was entitled to alleged damages of $3,346,565 plus reimbursement forreasonable expenses, interest, costs and attorneys’ fees. In order to avoid thecosts, uncertainty, and inconvenience associated with adversary proceedings,the Company entered into the above-referenced settlement agreement with JGSG,effective October 19, 2007.

 

15

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** **

**10.****         ****Concentration of Customers and Products**

 

All ofthe Company’s revenue in the three and nine months ended January 31, 2008 and2007 was derived from the sales of a single product primarily to customersaffiliated with physicians who also serve on the Company’s Scientific AdvisoryBoard or are Company-paid consultants.

 

**11.****      ****Discontinued Operations**

 

On April 6,2005, the Company’s Board of Directors authorized management to discontinuesales and marketing of heart valves effective April 30, 2005, and to seeka buyer for the related production equipment. The carrying amount of asset ofdiscounted operations as of January 31, 2008 consisted of a prepaidinsurance policy which is amortized to the loss from discontinued operationsover the three-year policy period ending April 20, 2008.

 

**12.****         ****Subsequent Events**

 

On February 15,2008, the Company’s Board of Directors, upon the recommendation of theCompensation Committee, granted stock options that vest one-third on the firstanniversary of completion of a financial milestone and vest one-third annuallythereafter for the purchase of the Company’s common stock at $2.35 per share,with an expiration date of February 15, 2018, to the followingindividuals:

 

|                                                                     |   | **Options** |   |
|--------------------------------------------------------------------------|--------|-------------|--------|
| Marc P. Flores,  President and Chief Executive Officer                   |   | 100,000     | (1)    |
| Marc P. Flores,  President and Chief Executive Officer                   |   | 150,000     |   |
| Michael A. Brodeur,  Vice President, Finance and Chief Financial Officer |   | 50,000      | (1)    |
| Adam L. Berman, Vice  President, Research and Development                |   | 50,000      | (1)    |
| Robert W. Clapp, Vice  President, Operations                             |   | 50,000      | (1)    |
| Gary O. Tegan, Vice  President, Marketing                                |   | 50,000      | (1)    |

----

(1)   Granted under the Company’s Amended andRestated 2001 Equity Incentive Plan.

 

On February 15,2008, the Company’s Board of Directors, upon the recommendation of theCompensation Committee, granted restricted stock awards under the Company’sAmended and Restated 2001 Equity Incentive Plan, which vest in their entiretyon the fourth anniversary of the date of grant, assuming continuous employment,to the following individuals:

 

| ** **                                                               | ** ** | **Shares** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|
| Marc P. Flores, President  and Chief Executive Officer                   |       | 85,000     |       |
| Michael A. Brodeur, Vice  President, Finance and Chief Financial Officer |       | 15,000     |       |
| Adam L. Berman, Vice  President, Research and Development                |       | 15,000     |       |
| Robert W. Clapp, Vice  President, Operations                             |       | 15,000     |       |
| Gary O. Tegan, Vice  President, Marketing                                |       | 15,000     |       |

 

Alsoon February 15, 2008, the Company’s Board of Directors, upon therecommendation of the Compensation Committee, amended the Company’s Amended andRestated 2001 Equity Incentive Plan, Amended and Restated 2005 Director StockOption Plan, and Management Incentive Plan to exclude from the definition of a “changein control” an acquisition of the majority of the Company’s outstanding stockby acquisition of stock directly from the Company.  The amended definition of “change in control”also applies to the forms of awards under the plans and to the stand-alonenon-qualified stock option agreements.

 

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**ITEM 2  MANAGEMENT’S DISCUSSION AND ANALYSIS ORPLAN OF OPERATION**

 

*The following discussion contains various forward-lookingstatements within the meaning of Section 21E of the Exchange Act. Although we believe that, in making any such statement, our expectations are basedon reasonable assumptions, any such statement may be influenced by factors thatcould cause actual outcomes and results to be materially different from thoseprojected.  When used in the following discussion, the words “anticipates,”“believes,” “expects,” “intends,” “plans,” “estimates” and similar expressions,as they relate to us or our management, are intended to identify suchforward-looking statements.  These forward-looking statements are subjectto numerous risks and uncertainties that could cause actual results to differmaterially from those anticipated.  Factors that could cause actualresults to differ materially from those anticipated, certain of which arebeyond our control, are set forth in this document and in our Annual Report on Form 10-KSBfor the fiscal year ended April 30, 2007, under the caption “Management’sDiscussion and Analysis or Plan of Operation — Cautionary Statement.”*

 

*Our actual results, performance or achievements could differmaterially from those expressed in, or implied by, forward-lookingstatements.  Accordingly, we cannot be certain that any of the eventsanticipated by forward-looking statements will occur or, if any of them dooccur, what impact they will have on us.  We caution you to keep in mindthe cautions and risks described in this document and in our CautionaryStatement and to refrain from attributing undue certainty to anyforward-looking statements, which speak only as of the date of the document inwhich they appear.  We do not undertake to update any forward-lookingstatement.*

 

**Overview**

 

Wedevelop, manufacture and sell innovative, laser-based surgical ablation systemsdesigned to create precise, clinically relevant lesions, or scars, in softtissue and in cardiac tissue. We believe our laser-based systems, using asub-millimeter fiber optic platform, provides a viable alternative to bothexisting surgical ablation procedures and catheter ablations. Our company wasincorporated in Minnesota on March 30, 1992.  In April 2005, we exited the mechanicalheart valve business and directed all of our resources to the development ofablation systems.

 

Oursystems consist of both capital equipment and associated compatible single-usedevices. The capital equipment consists of a laser generator and, where needed,a controller, both of which can be placed on a small mobile cart. We areplacing capital equipment in hospitals and training physicians on the use ofour laser technology. In May 2007, the first human clinical cases werecompleted using our SOLARTM Surgical Ablation System (“SOLAR System”) and, in September 2007,the first SOLAR System port-based procedure was performed. Through March 7,2008, 41 cases have been performed with our SOLAR System. We expect thatproduct revenue for the remainder of calendar year 2008 will be limited toATRILAZETM Surgical Ablation System (“ATRILAZE System”) and SOLAR Systemsingle-use devices. During calendar year 2008, we plan to build out our salesforce and collect clinical data for expanded indications and publications.

 

We receivedthree separate U.S. Food and Drug Administration (“FDA”) 510(k) clearancesof our ATRILAZE System for the ablation of soft tissue, including cardiactissue, in November 2004, October 2005 and April 2006,respectively. We received FDA 510(k) clearance of our SOLAR System for theablation of soft tissue, not including cardiac tissue, in March 2007.Unless and until we obtain FDA clearance or approval for the use of our SOLARSystem for the ablation of cardiac tissue or, with respect to either system, forthe treatment of atrial fibrillation (“AF”), we and others acting on our behalfmay not promote our systems for such uses, make any claim that our systems aresafe and effective for such uses, or proactively discuss or train physicians onthe use of our systems in connection with such uses. While we cannot lawfullypromote our systems for off-label use, similar ablation products are widelyused by physicians, at their discretion, for the treatment of AF. Physiciansare not restricted by the FDA from using these devices for AF in the practiceof medicine. Human clinical trials and additional product development will berequired to obtain FDA approval for the use of these products in AF, and it isour intent to conduct such clinical trials for the eventual approval of bothproducts for AF.

 

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**CriticalAccounting Policies**

 

Thepreparation of our financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the amounts reportedin the condensed financial statements and accompanying notes. We believe ourestimates and assumptions are reasonable; however, actual results and thetiming of the recognition of such amounts could differ from those estimates. Wehave identified the following critical accounting policies and estimatesutilized by management in the preparation of our financial statements: revenuerecognition, income taxes, and share-based compensation. Actual amounts coulddiffer significantly from management’s estimates. For further discussion of ourcritical accounting policies and estimates, see our Annual Report on Form 10-KSBfor the fiscal year ended April 30, 2007.

 

**Revenue Recognition.**We currently generate revenue from sales of oursingle-use devices. Our revenue recognition policy is based on SEC StaffAccounting Bulletin (“SAB”) 104, *Revenue Recognition*and we consider revenue to be earned when all of the following elements are met:

·                  Persuasive evidence of an arrangement exists — We havea purchase order from the customer and we have generated an invoice identifyingthe terms of the sale;

·                  Delivery has occurred — We have delivered the deviceto the customer and have no remaining performance obligations, installation ortraining;

·                  Price is fixed — Customers do not have a right ofreturn or refund but may receive a replacement if the device is defective; and

·                  Collection of the resulting receivable is reasonablyassured.

 

**Income Taxes.**On May 1, 2007, we adopted the provisions ofFinancial Accounting Standards Board (“FASB”) Interpretation No. 48, *Accounting for Uncertainty in Income Taxes — anInterpretation of FASB Statement No. 109*, (“FIN 48”) whichclarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109,*Accounting for Income Taxes*. FIN48 prescribes a financial statement recognition threshold and measurementattribute of a tax position taken or expected to be taken in a tax return, andprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. Previously, we hadaccounted for tax contingences in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 5, *Accountingfor Contingencies*.

 

Asrequired by FIN 48, we recognize the financial statement benefit of a taxposition only after determining whether it is more likely than not that a taxposition will be sustained by the relevant tax authority upon examination,including resolution of any related appeals or litigation processes, based onthe technical merits of the position. For tax positions that meet themore-likely-than-not recognition threshold, the amount recognized in thefinancial statements is the largest amount of benefit that has a greater than50% likelihood of being realized upon ultimate settlement with the relevant taxauthority.

 

Ourpolicy is to recognize and classify interest and penalties accrued on anyunrecognized tax benefits as a component of income tax expense in the statementof operations.

 

Weestablish a valuation allowance if it is more likely than not that all or aportion of the tax assets will not be utilized. The ultimate realization ofdeferred income tax assets is dependent on the generation of future taxableincome, which must occur prior to the expiration of the net operating losscarryforwards, which comprise the majority of our deferred tax assets. As of April 30,2007 and January 31, 2008, we established a valuation allowance to fullyoffset our deferred tax assets due to the uncertainty about generatingsufficient future taxable income necessary to realize these deferred taxassets, particularly in light of our history of significant operating losses.In addition, future utilization of available net operating loss carryforwardsmay be limited under Internal Revenue Code Section 382 (“§382”) as aresult of changes in ownership.

 

Inconnection with the FIN 48 analysis, we analyzed our historical equitytransactions with respect to ownership changes within the meaning of§382.  As a result of such analysis, we believe that an ownership changepursuant to §382 occurred on April 1, 2005 and approximately $20 millionof federal and $3 million of state pre-change net operating loss carryforwardswill be limited.  We have historically recorded a full valuation allowanceto offset our deferred tax assets.

 

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**Share-Based Compensation.**On May 1, 2006, we adopted SFAS No. 123R(revised 2004), *Share-Based Payment*,and elected the modified prospective application transition method. SFAS No. 123Ris a revision of SFAS No. 123, *Accountingfor Stock-Based Compensation*, and supersedes Accounting PrinciplesBoard (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and its related guidance. As requiredby SFAS No. 123R, we recognize compensation expense during the serviceperiod of share-based awards that are granted, modified, repurchased, orcancelled after May 1, 2006 using the grant-date fair value of the award.In addition, compensation expense is recognized for the remaining serviceperiod of awards granted prior to, but not yet vested as of May 1, 2006,based on the grant-date fair value of the award. In accordance with themodified prospective application transition method of SFAS No. 123R, priorperiod results were not restated. We have also implemented the SECinterpretations in SAB No. 107, *Share-BasedPayments*, in connection with the adoption of SFAS No. 123R.

 

We usethe Black-Scholes-Merton formula to estimate the grant date fair value of stockoption awards, which requires us to develop estimates of, among otherassumptions, the expected volatility and the expected term.

 

Incrementalcompensation cost for a modification of the terms or conditions of an award ismeasured by comparing the fair value of the modified award with the fair valueof the award immediately before the modification. A cancellation of an awardthat is not accompanied by the concurrent grant of, or offer to grant, areplacement award or other valuable consideration is accounted for as arepurchase for no consideration. Accordingly, any unrecognized compensationcost is recognized at the cancellation date.

 

Werecognize compensation expense for share-based awards on a straight-line basisover the requisite service period of the award. The amount of share-basedcompensation recognized is based on the value of the portions of the awardsthat are ultimately expected to vest. SFAS No. 123R requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. Previouslyrecognized compensation expense for the vested portion of share-based awards isnot reversed if an award expires unexercised or if an award is forfeited due toemployee termination. No compensation cost is recognized for unvested awardsthat employees forfeit because the requisite service is not rendered. We usehistorical forfeitures and employee turnover to estimate the number ofshare-based awards that will actually vest. We reevaluate this estimateperiodically and adjust the forfeiture rate on a prospective basis asnecessary.

 

**Reclassifications**

 

Certainreclassifications have been made to the condensed financial statements for thethree and nine months ended January 31, 2007 to conform to theclassifications in the condensed financial statements for the three and ninemonths ended January 31, 2008.  Thereclassifications had no impact on net loss or shareholders’ equity.

 

**Recent Accounting Developments**

 

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*,which defines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. In February 2008, theFASB issued a staff position that delays the effective date of SFAS No. 157for certain non-financial assets and liabilities until fiscal years beginningafter November 15, 2008. We have not determined what, if any, impact theadoption of SFAS No. 157 for these certain non-financial assets andliabilities on May 1, 2009 will have on our financial statements. Theremainder of SFAS No. 157 for financial assets and liabilities is effectivefor financial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. The adoption of SFAS No. 157for financial assets and liabilities on May 1, 2008 is not expected tohave a material impact on our financial statements.

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities—Including an amendment of FASBStatement No. 115*, which permits entities to choose to measuremany financial instruments and certain other items at fair value. SFAS No. 159is effective as of the beginning of an entity’s first fiscal year that beginsafter November 15, 2007. We have not determined what, if any, impact theadoption of SFAS No. 159 on May 1, 2008 will have on our financialstatements.

 

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In June 2007,the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”)regarding the accounting for nonrefundable advance payments for goods orservices received for use in future research and development activities.  As described in EITF Issue No. 07-3,nonrefundable advance payments for goods or services that will be used infuture research and development activities should be deferred and capitalized.  EITF Issue No. 07-3 is effectiveprospectively for financial statements issued for fiscal years beginning after December 15,2007, and interim periods within those fiscal years.  The impact of the adoption of EITF Issue No. 07-3on May 1, 2008 is not expected to have a material impact on our financialstatements.

 

In December 2007,the SEC staff issued SAB 110 which expresses the views of the staff regardingthe use of a “simplified” method, as discussed in SAB 107, in developing anestimate of the expected term of “plain vanilla” share options in accordancewith SFAS No. 123R. As previously determined upon the adoption of SFAS123R on May 1, 2006, we have elected to use the “simplified” method forestimating the expected term of our option grants due to the lack of sufficienthistorical exercise data and the discontinuation of the heart valve business infiscal year 2005.

 

In December 2007,the FASB issued SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements — An amendment of ARB No. 51*,which impacts the accounting and reporting standards for the noncontrollinginterest, previously referred to as the minority interest, in a subsidiary andfor the deconsolidation of a subsidiary. SFAS No. 160 is effectiveprospectively for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008, except for the presentation anddisclosure requirements which are applied retrospectively for all periodpresented. We will apply SFAS No. 160 beginning May 1, 2009 to anynoncontrolling interests.

 

In December 2007,the FASB issued SFAS No. 141R, *Business Combinations*,which replaces SFAS No. 141.  SFAS No. 141Rretains the acquisition method of accounting, previously referred to as thepurchase method in SFAS No. 141, for business combinations, but impactshow an acquirer recognizes and measures the identifiable assets acquired; theliabilities assumed; any noncontrolling interest in the acquiree; and thegoodwill acquired or a gain from a bargain purchase. SFAS No. 141R iseffective prospectively for business combinations for which the acquisitiondate is on or after the beginning of the first annual reporting periodbeginning on or after December 15, 2008. We will apply SFAS 141R prospectively to any business combinationscompleted on or after May 1, 2009.

 

**Results of Operations for the ThreeMonths Ended January 31, 2008 and 2007**

 

*Sales.*Sales of our ATRILAZE System single-use devices of$26,100 and $11,200 were recognized as revenue in the three months ended January 31,2008 and 2007, respectively, primarily to customers affiliated with physicianswho also serve on our Scientific Advisory Board or are company-paidconsultants.

 

*Cost of Goods Sold. *The historical cost of the ATRILAZE Systems waspreviously recorded as research and development expense in the fiscal yearended April 30, 2006 since, at that time, it was believed to have nofuture economic value because our primary focus was on the development of theSOLAR System.  As a result, the cost of goods sold in the three monthsended January 31, 2008 and 2007 consisted primarily of a 6% royaltyexpense to LightWave Ablation Systems, Inc. (“LightWave”).

 

*Sales and Marketing. *Sales and marketing expenses were $625,416 and$361,824 in the three months ended January 31, 2008 and 2007,respectively.  The $263,592 increase insales and marketing expense resulted primarily from an increase in payrollexpenses of $132,053 due to headcount additions and an increase in conventions,travel and entertainment expenses of $103,512 as we expanded our sales efforts.

 

*General and Administrative. *General and administrative expenses were$1,348,277 and $899,799 in the three months ended January 31, 2008 and2007, respectively.  The $448,478increase in general and administrative expenses resulted primarily from anincrease in payroll and contract labor in our finance and accounting departmentof $135,905 and an increase in consulting fees of $98,170 primarily due to ourSarbanes-Oxley compliance efforts.  Inaddition, legal and accounting expenses increased $112,403 in the three monthsended January 31, 2008 related to corporate finance matters.

 

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*Research and Development. *Research and development expenses were$1,735,263 and $1,456,710 in the three months ended January 31, 2008 and2007, respectively.  The $278,553increase in research and development expenses resulted primarily from anincrease in payroll and contract labor of $261,690 as part of our developmentand engineering activities to advance the design of the SOLAR System and buildclinical evaluation units.

 

*Interest Expense. *Interest expense of $866,495 in the three months endedJanuary 31, 2008, which resulted primarily from the 11% Secured PromissoryNotes (“11% Notes”), consisted of $345,629 of accrued interest on the 11%Notes, $335,873 of amortization of the discount related to the warrants issuedat each closing of the 11% Notes, $125,645 of expense related to the interestaccrual warrants to be issued within 30 days following the end of the firstyear of the respective issuance of each 11% Note, $33,960 in amortization ofdeferred financing costs related to the 11% Notes, $23,567 of interest on therelated party lease obligation, and $1,821 in amortization of deferredfinancing costs related to the related party lease obligation. Interest expenseof $27,234 in the three months ended January 31, 2007 resulted from therelated party lease obligation.

 

*Discontinued Operations. *The loss from discontinued operations of$22,445 in the three months ended January 31, 2008 and 2007 consisted ofinsurance expense from the amortization of a three-year prepaid insurancepolicy that expires on April 20, 2008 related to the discontinued heartvalve business.

 

*Income Tax Provision. *We have no income tax provision in the three monthsended January 31, 2008 and 2007 due to the net operating losses generatedfor income tax reporting purposes.  We have established a valuationallowance to fully offset deferred tax assets due to the uncertainty about ourability to generate the future taxable income necessary to realize thesedeferred tax assets, particularly in light of our history of significantoperating losses and changes in ownership.

 

**Results of Operations for the Nine MonthsEnded January 31, 2008 and 2007**

 

*Sales.*Sales of our ATRILAZE System single-use devices of$78,300 and $11,200 were recognized as revenue in the nine months ended January 31,2008 and 2007, respectively, primarily to customers affiliated with physicianswho also serve on our Scientific Advisory Board or are company-paidconsultants. Prior to November 2006, historical sales of our ATRILAZESystem single-use devices were recorded as a reduction of research anddevelopment expenses since the primary purpose of offering the device was toobtain clinical research information to assist in the development of the SOLARSystem.

 

*Cost of Goods Sold. *The historical cost of the ATRILAZE Systems waspreviously recorded as research and development expense in the fiscal yearended April 30, 2006 since, at that time, it was believed to have nofuture economic value because our primary focus was on the development of theSOLAR System.  As a result, the cost of goods sold in the nine monthsended January 31, 2008 and 2007 consisted primarily of a 6% royaltyexpense to LightWave.

 

*Sales and Marketing. *Sales and marketing expenses were $1,268,891 and$1,158,698 in the nine months ended January 31, 2008 and 2007,respectively.  The $110,193 increase insales and marketing expenses resulted primarily from an increase in supplies,advertising, and promotional activities of $52,724 as we expanded our salesefforts and an increase in recruiting fees of $26,510 as we built our salesforce.

 

*General and Administrative. *General and administrative expenses were$4,285,623 and $3,657,007 in the nine months ended January 31, 2008 and2007, respectively.  The $628,616increase in general and administrative expenses resulted primarily from anincrease in payroll and contract labor in our finance and accounting departmentof $272,298 and an increase in consulting fees of $94,943 primarily due to ourSarbanes-Oxley compliance efforts.  Weincurred an increase in legal expenses of $381,704 in the nine months ended January 31,2008 related to corporate finance matters and the settlement of the legalmatter described below. We also experienced a reduction in accounting servicesof $157,370 in the nine months ended January 31, 2008 due primarily to aproposed primary offering of our common stock in the nine months ended January 31,2007 that we decided not to pursue.

 

 

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*Settlement of Legal Matter. *On October 19, 2007, we entered intoa settlement agreement with J Giordano Securities LLC (d/b/a J GiordanoSecurities Group) (“JGSG”) pursuant to which we settled and resolved alldisputes, claims and matters in controversy between our company and JGSG inexchange for our payment to JGSG of  $750,000in cash.  Without admitting any liabilityor wrongdoing, JGSG and our company mutually released each other from any andall claims, demands, and causes of action, suits, debts or liabilities of anykind which were or could have been asserted in the federal action orarbitration.

 

*Research and Development. *Research and development expenses were$4,517,948 and $5,199,361 in the nine months ended January 31, 2008 and2007, respectively.  The $681,413decrease in research and development expenses resulted primarily from areduction of external product development of our capital equipment for oursystems of $1,315,572 offset partially by an increase in payroll costs of$452,741, an increase in recruiting fees of $98,000 and an increase in clinicalstudies of $67,761 as part of our development and engineering activities toadvance the design of the SOLAR System and build clinical evaluation units.

 

*Interest Expense. *Interest expense of $2,374,871 in the nine monthsended January 31, 2008, which resulted primarily from the 11% Notes,consisted of $972,195 of accrued interest on the 11% Notes, $944,266 ofamortization of the discount on the debt related to the warrants issued at eachclosing of the 11% Notes, $281,874 of expense related to the interest accrualwarrants to be issued within 30 days following the end of the first year of therespective issuance of each 11% Note, $97,754 in amortization of deferredfinancing costs related to the 11% Notes, $73,319 of interest on the relatedparty lease obligation, and $5,463 in amortization of deferred financing costs relatedto the related party lease obligation. Interest expense of $94,241 in the ninemonths ended January 31, 2007 resulted from the related party leaseobligation.

 

*Discontinued Operations. *The loss from discontinued operations of$67,337 in the nine months ended January 31, 2008 consisted of insuranceexpense from the amortization of a three-year prepaid insurance policy thatexpires on April 20, 2008 related to the discontinued heart valvebusiness. The loss from discontinued operations of $35,837 in the nine monthsended January 31, 2007 consisted of insurance expense of $67,337 from theprepaid insurance policy offset by a gain of $31,500 from the sale of fixedassets related to the discontinued heart valve business.

 

*Income Tax Provision. *We have no income tax provision in the nine monthsended January 31, 2008 and 2007 due to the net operating losses generatedfor income tax reporting purposes.  We have established a valuationallowance to fully offset deferred tax assets due to the uncertainty about ourability to generate the future taxable income necessary to realize thesedeferred tax assets, particularly in light of our history of significantoperating losses and changes in ownership.

 

**Liquidityand Capital Resources**

 

Cashand cash equivalents decreased from $8,950,983 at April 30, 2007 to$4,034,086 at January 31, 2008 due to the following:

 

| Net cash used by operating  activities     |   | $         | (8,787,237 | )      |
|--------------------------------------------|--------|-----------|------------|--------|
| Net cash used by investing  activities     |   | (75,993   | )          |   |
| Net cash provided by  financing activities |   | 3,946,333 |       |   |
| Net decrease in cash and  cash equivalents |   | $         | (4,916,897 | )      |
|                                            |        |           |            |        |  |  |

 

*Operating Activities.  *The net cash used by operating activitiesof $8,787,237 in the nine months ended January 31, 2008 resulted primarilyfrom the net loss of $12,898,077 partially offset by non-cash interest expenseof $2,301,552 and share-based compensation expense of $1,233,992. The net cashused by operating activities of $8,462,949 in the nine months ended January 31,2007 resulted primarily from the net loss of $9,867,824 partially offset bynon-cash share-based compensation expense of $1,456,427.

 

*Investing Activities.  *The net cash used by investing activitiesof $75,993 in the nine months ended January 31, 2008 resulted frompurchases of property, plant and equipment. The net cash used by investingactivities of $152,449 in the nine months ended January 31, 2007 resultedfrom purchases of property, plant and equipment of $203,117 partially offset bycash proceeds from the sales of property, plant and equipment of $50,668.

 

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*Financing Activities.  *The net cash provided by financingactivities of $3,946,333 in the nine months ended January 31, 2008resulted primarily from the $4,196,152 in net cash proceeds obtained from the 2ndclosing of the 11% Notes in June 2007 (described below) partially offsetby payments under our related party lease obligation.  The net cashprovided by financing activities of $1,948,942 in the nine months ended January 31,2007 resulted primarily from the $2,190,000 in net cash proceeds obtained fromthe October 2006 private placement (described in our Annual Report on Form 10-KSBfor the fiscal year ending April 30, 2007) partially offset by paymentsunder our related party lease obligation.

 

On April 20,2007 and June 15, 2007, we entered into Secured Note Purchase Agreementsfor the issuance and sale of 11% Notes and warrants for the purchase of ourcommon stock as follows:

 

| **Holder**                                     | ** ** | **11% Notes  Issued at  Closing** | ** ** | **Shares Issuable   upon Exercise   of Warrants  Issued at  Closing** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| *1**st** Closing  on April 20, 2007* |       |                                        |       |                                                                                                |       |
| Whitebox (1)                                   |       | $                                           | 8,000,000  |                                                                                                | 1,200,000  |   |
|                                           |       |                                        |       |                                                                                                |       |
| *2**nd** Closing  on June 15, 2007*  |       |                                        |       |                                                                                                |       |
| Whitebox (1)                                   |       | 2,000,000                                   |       | 300,000                                                                                             |       |
| Potomac (2)                                    |       | 1,500,000                                   |       | 224,998                                                                                             |       |
| Other accredited investors                     |       | 1,000,000                                   |       | 150,000                                                                                             |       |
|                                           |       | 4,500,000                                   |       | 674,998                                                                                             |       |
| Total Initial Issuance at  Closings            |       | $                                           | 12,500,000 |                                                                                                | 1,874,998  |   |

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(1)          A related party entity that is anaffiliate of Whitebox Advisors, LLC (“Whitebox”), then a beneficial owner ofmore than 10% of our common stock.

 

(2)          Related party entities that areaffiliates of Potomac Capital Management, LLC (“Potomac”), then a beneficialowner of more than 5% of our common stock.

 

The11% Notes are secured****by a firstpriority security interest in our assets.  The Secured Note PurchaseAgreements contain a restrictive covenant that prohibits us from issuing morethan an aggregate of $12,500,000 of 11% Notes. We have the right to prepay the11% Notes, subject to a premium payment of 8% if prepayment is made within thefirst year; 6% if prepayment is made within the second year; and 3% ifprepayment is made within the third year. The prepayment premium does not applyif the prepayment of the 11% Notes is a result of a change of control.

 

Theprincipal amount of each 11% Note and any accrued but unpaid interest is dueand payable three years following the respective date of issuance of each note.During the first year, interest on the 11% Notes will accrue and be added tothe principal balance of the note. Within 30 days following the end of thefirst year from issuance of each note, we are obligated to issue to each holderan interest accrual warrant for the purchase of the number of shares of ourcommon stock that is equal to the quotient obtained by dividing 60% of theaccrued interest for the first year by $4.00. During the second and third yearsfrom issuance of each note, we have the option each quarter to either (i) paythe accrued interest on each note on or before the 15th day following the end of suchquarter or (ii) allow the interest for such quarter to accrue and be addedto the principal balance of the note and issue to each holder, within 30 daysfollowing the end of such quarter, an interest accrual warrant for the purchaseof the number of shares of our common stock that is equal to the quotientobtained by dividing 60% of the accrued interest for the quarter by $4.00. Theform of each interest accrual warrant provides for a term of five years and anexercise price of $4.00 per share, subject to basic and, for 12 months from thedate issued, full-ratchet anti-dilution adjustments. In addition, the form ofinterest accrual warrant contains a cashless exercise feature and a provisionthat restricts exercise to the extent that, after exercise, the holder wouldotherwise beneficially own in excess of 9.99% of our common stock outstanding.

 

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Thewarrants issued at the 1st and 2nd closings (“Closing Warrants”) of the 11% Notes for the purchaseof an aggregate of 1,874,998 shares of our common stock have a term of fiveyears from their respective dates of issuance and have exercise prices of $4.00per share, subject to basic and, for 12 months from their respective dates ofissuance, full-ratchet anti-dilution adjustment provisions. The ClosingWarrants contain a provision that restricts exercise to the extent that, afterexercise, the holder would otherwise beneficially own in excess of 9.99% of ourcommon stock outstanding. In addition, the Closing Warrants had a cashlessexercise right as to any shares the SEC would have not permitted us to includein the related resale registration statement and any reductions imposed by theSEC in the number of shares covered by such resale registration statement wouldhave been made on a pro-rata basis.  We filed a registration statement on August 6,2007, which became effective on August 13, 2007, to enable the resale ofthe shares of common stock underlying the Closing Warrants. We are required tokeep the registration statement current, effective and free from any materialmisstatement or omission to state a material fact for a specified period, notto exceed two years from the effective date of the registration statement. Weare not required to register for resale the shares of common stock underlyingthe interest accrual warrants.

 

Wepaid a 6% commission on the gross proceeds of each closing to the placementagent and certain expenses incurred by the holders and placement agentassociated with this transaction. Total financing costs of $892,000 wereincurred by us associated with the aggregate of $12,500,000 in financing.

 

*Analysis*

 

Weexpect to continue to incur operating losses and negative operating cash flowas we seek to drive market adoption of our ablation systems. We expect thatsales of our single-use SOLAR and ATRILAZE devices in calendar year 2008 willbe primarily to customers affiliated with physicians who also serve on ourScientific Advisory Board or are company-paid consultants. We anticipate thatour general and administrative, research and development, and sales andmarketing expenses will continue to constitute a material use of our cash resources.The actual amounts and timing of our expenditures will vary significantlydepending upon the progress of our product launch and the availability offinancing. In addition, we expect to incur costs associated with developing thenecessary documentation and performing the required testing of our internalcontrols to meet the requirements of Section 404 of the Sarbanes-OxleyAct.

 

Duringthe remaining quarter of our fiscal year ending April 30, 2008, we expectto incur capital expenditures aggregating approximately $50,000, includingapproximately $25,000 for facility and building improvements and approximately$25,000 for equipment. We anticipate using our available cash to fund suchcapital expenditures. Our cash and cash equivalents balance of $4,034,086 at January 31,2008 is expected to last through the fiscal year ending April 30, 2008.During our third quarter ended January 31, 2008, we implemented a cashmanagement strategy to preserve our available cash, and we will continue tomonitor the need to adjust this strategy based on our capital resources.

 

Given the level of our capital resources, we requirefinancing to continue operations. Because we are not generating positive cashflow from operations, we will be required to raise funds through public orprivate sales of equity securities or incur indebtedness. Our ability to fundour business plan depends on the availability of equity and debt financing,which is affected by prevailing economic conditions in the medical deviceindustry and financial, business and other factors, some of which are beyondour control. We cannot assure you that we will obtain financing on favorableterms or at all. If we elect to raise capital through the issuance and sale ofequity securities, the sales may be at prices below the market price of ourstock, and our shareholders may suffer significant dilution. In particular, aspart of our April and June 2007 debt financing, we issued warrantsfor the purchase of an aggregate of 1,874,998 shares of common stock with anexercise price of $4.00 per share and we agreed to issue certain additionalinterest accrual warrants, all of which contain full-ratchet anti-dilutionprovisions for a period of 12 months from their respective dates of issuance.Such provisions may increase the dilution other shareholders suffer if we wereto raise capital through the issuance and sale of equity securities.

 

Debt financing, if available, may involve significantcash payment obligations, covenants and financial ratios that restrict our abilityto operate and grow our business, and would cause us to incur additionalinterest expense and financing costs. We issued an aggregate of $12,500,000 of11% Notes in April and June 2007. Because we are contractuallyprecluded from issuing additional 11% Notes, and substantially all of ourassets are pledged to our existing lenders, our ability to fund continuedoperations through the issuance of debt is further restricted. Interest on ouroutstanding debt will accrue and be added to the principal balance during thefirst year. Thereafter, we will have the option to pay interest in cash, orhave the interest accrue and be added to the principal balance and issueinterest 

 

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accrual warrants. Making interest payments in cashwould reduce the cash available for other purposes; however, allowing suchpayments to accrue would prompt further dilution to shareholders through theissuance of interest accrual warrants.

 

Our capital requirements may vary depending upon thetiming and the success of the implementation of our business plan, regulatory,technological and competitive developments, or if:

·                  significant sales of our products are notachieved or are delayed;

·                  operating losses exceed our expectations;

·                  our manufacturing and development costsor estimates prove to be inaccurate; or

·                  we acquire, license or develop additionaltechnologies.

 

We cannot assure you that our efforts to implement ourbusiness strategy will:

·                  be attainable;

·                  be profitable;

·                  reduce our reliance upon financingtransactions; or

·                  enable us to continue operations.

 

**Commitmentsand Contingent Liabilities**

 

*Secured Promissory Notes.*On April 20, 2007 and June 15, 2007, weentered into Secured Note Purchase Agreements for the issuance and sale of anaggregate of $12,500,000 in 11% Notes. The 11% Notes, and accrued interest, aredue and payable three years following the respective date of issuance of eachnote.

 

*Related Party Lease Obligation.*Simultaneous with the sale of our landand building in April 2003 to PKM Properties, LLC (“PKM”), an entitycontrolled by Paul K. Miller, we entered into a lease with PKM to lease back thebuilding and a portion of the land. Mr. Miller is one of our directors andone of the largest beneficial owners of our securities. The lease has aten-year initial term with options for us to extend the lease up to tenadditional years. Under certain conditions, we also have an option to purchasethe building at the end of the initial ten-year term at the fair value at thattime. We also are responsible for maintenance and operating costs, utilitiesand real estate taxes under the lease. In addition, the lease makes it ourresponsibility for any construction costs deemed necessary or required by thelandlord in connection with the relocation or removal of the private septicsystem and/or drain field as well as costs associated with responding to any releaseof hazardous materials at the property.

 

*LightWave Technology PurchaseAgreement.*In August 2003,we entered into a technology purchase agreement with LightWave and itsprincipals, one of whom became an employee of our company. The technologypurchase agreement related to our acquisition of LightWave’s interests intechnology consisting of a catheter/probe containing elements of optical fiber,coolant passages and other features for the purpose of delivering laser energyto the epicardial surface of the heart for treatment of AF. We agreed to useour reasonable commercial efforts to commercialize the technology within threeyears following the acquisition of the technology from LightWave. LightWave andtwo of its principals have agreed to certain noncompetition obligations,nondisclosure obligations, and certain obligations to assign new developmentsor inventions relating to the acquired technology to our company.

 

We paid LightWave an initial payment consisting of1,500 shares of our common stock, $10,000 upon closing and an additional$30,000 to LightWave in installments in fiscal year 2004 and 2005. Anadditional $125,000 was paid to LightWave in January 2006. We will beobligated to pay an additional $385,000 within 45 days following ourachievement of $1,500,000 of cumulative gross sales. In addition, at closing,during fiscal year 2004, we issued to LightWave a warrant for the purchase of2,500 shares of our common stock at $14.60 per share and, during fiscal year2005, a warrant for the purchase of 2,500 shares of our common stock at $14.60per share upon receiving an FDA 510(k) clearance. During fiscal year 2007,we issued to LightWave a warrant for the purchase of 2,500 shares of our commonstock at $14.60 per share due to the receipt of a U.S. utility patent coveringthe product and a warrant for the purchase of 2,500 shares of our common stockat $14.60 per share due to the first commercial sale of our ATRILAZE Systemsingle-use device.

 

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We agreed to make payments to LightWave for ten yearsequal to 6% of net sales of such product in countries in which we have patentprotection, including the United States, and 4% of net sales of such product incountries in which there is no patent protection. These payments are due within60 days following each fiscal quarter.

 

Commencing with the second year following the firstcommercial sale on November 29, 2005, we agreed to make minimum annualpayments. We paid LightWave $44,804 during the three months ended January 31,2008 related to the difference between the first minimum annual payment for theannual period ended November 29, 2007 of $50,000 and cumulative paymentsactually made. The remaining minimum annual payments are as follows:

 

| **Annual Period Ending** | ** ** | **Minimum Annual  Payment** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| November 29, 2008             |       | $                                | 75,000     |   |
| November 29, 2009             |       | $                                | 100,000    |   |
| November 29, 2010             |       | $                                | 200,000    |   |
| November 29, 2011             |       | $                                | 300,000    |   |
| November 29, 2012             |       | $                                | 350,000    |   |
| November 29, 2013             |       | $                                | 350,000    |   |
| November 29, 2014             |       | $                                | 400,000    |   |
| November 29, 2015             |       | $                                | 500,000    |   |
| Total minimum payments             |       | $                                | 2,275,000  |   |

 

If we fail in any year to pay the minimum annualpayment, we may be obligated to grant LightWave a nonexclusive right to use thetechnology acquired from LightWave, or pay LightWave the difference between thepayment actually made and the minimum payment due for a given year. If wediscontinue the development or marketing of the product, we would have nofurther obligation to make the minimum annual payments due to LightWave.However, in such event, LightWave may, upon written request, obtain from us alicense to use the intellectual property or, at our option, we may assign ourrights in the intellectual property to LightWave.

 

*Severance Contract.*On June 28, 2007, we entered into an amendment tothe restated Executive Employment Agreement with Eapen Chacko, then our VicePresident, Finance and Chief Financial Officer, to reflect the mutual decisionreached concerning Mr. Chacko’s departure from our company. Pursuant tothe amendment, Mr. Chacko’s employment terminated on September 15,2007 and we paid Mr. Chacko a lump sum severance payment of $100,000. If Mr. Chackois not reemployed or serving as an independent contractor, Mr. Chacko maybe eligible for six monthly installments of base salary of $16,667 beginning March 15,2008 and such payments will cease on the earlier of: 1) the date Mr. Chackois reemployed or serves as an independent contractor; or 2) September 15,2008. In addition to these severance payments, we have agreed to pay orreimburse Mr. Chacko for medical (COBRA) benefits as set forth in theExecutive Employment Agreement.

 

*Product Liability Contingency.*In March 2005, we became aware thata patient who was utilizing one of our heart valves from our discontinued heartvalve business had died. We have not received any claims related to this matterbut believe that any such claim would be covered by our existing liabilityinsurance. Based upon the expectation that insurance would cover the cost ofany claims after our payment of the deductible, we do not expect the ultimateresolution of this matter to have a material effect on our business, financialcondition, operating results or cash flows.

 

*Severance Contingencies.*As of January 31, 2008, employmentagreements with five officers contain a provision for payments of up to twelvemonths of severance if the employment of the officer is terminated withoutcause by us or for good reason by the officer as defined in the agreements.

 

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The following table summarizes our contractualobligations as of January 31, 2008, excluding the product liabilitycontingency and the severance contingencies, as described above:

 
| ** **                                            | ** ** | **Payments Due By Period** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| **Summary of Contractual Obligations** | ** ** | **TOTAL**                                 | ** ** | **Less than  One Year** | ** ** | **Two to  Three  Years** | ** ** | **Four or  More  Years** | ** ** |
| Secured Promissory Notes  (1)(2)                      |       | $                                         | 17,238,030 |   | $ | — |   | $ | 17,238,030 |   | $ | — |   |
| Related Party Lease  Obligation (2)(3)                |       | 2,158,552                                 |       | 442,889 |   | 839,648 |   | 876,015 |   |
| LightWave Minimum Payments  (4)                       |       | 2,275,000                                 |       | 75,000 |   | 300,000 |   | 1,900,000 |   |
| Severance Contract (5)                                |       | 100,000                                   |       | 100,000 |   | — |   | — |   |
| Total Contractual  Obligations                        |       | $                                         | 21,771,582 |   | $ | 617,889 |   | $ | 18,377,678 |   | $ | 2,776,015 |   |

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(1)             Future payment amount assumes we elect toexercise our option to allow interest payable to accrue and be added to theprincipal balance of the 11% Notes.

 

(2)             Future payments include interest.

 

(3)             Excludes executory costs, such as taxes,repairs, and maintenance.

 

(4)             Excludes an additional $385,000 payablewithin 45 days following our achievement of $1,500,000 of cumulative grosssales.

 

(5)             Future payment amount assumes Mr. Chackois not reemployed or serving as an independent contractor prior to September 15,2008.

 

**Off-BalanceSheet Arrangements**

 

Otherthan the LightWave minimum payments and severance contract as set forth abovein “Commitments and Contingent Liabilities,” we do not have any off-balancesheet arrangements that have or are reasonably likely to have a materialcurrent or future effect on our financial condition, changes in financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources.

 

**Qualitative and QuantitativeDisclosures about Market Risk**

 

We arefocusing substantially all of our resources on the development and introductionof our surgical ablation systems. For the foreseeable future, we expect thatsales will be in the U.S. denominated in U.S. dollars. Our interest income andexpenses are sensitive to changes in the general level of U.S. interest rates,particularly since our investments are in short-term instruments. At January 31,2008 and April 30, 2007, we held a majority of our cash in a money marketaccount. Based on the current nature and levels of our investments, we believethat we currently have no material market risk exposure. Our general investingpolicy is to limit market and credit risk and the risk of principal loss. Allliquid investments with maturities of three months or less are considered to becash equivalents.

 

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**ITEM 3   CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

Wemaintain disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) that are designed to ensure that information required to be disclosed byus in the reports we file or submit under the Exchange Act is recorded,processed, summarized, and reported, within the time periods specified in theU.S. Securities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to our management, including ourprincipal executive officer and principal financial officer, to allow timelydecisions regarding required disclosure.

 

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of our company’s disclosurecontrols and procedures as of the end of the period covered in this QuarterlyReport on Form 10-QSB.  Based on this evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures were effective as of the end of the period covered in thisQuarterly Report on Form 10-QSB.

 

**Changesin Internal Control Over Financial Reporting**

 

Therewas no change in our internal control over financial reporting that occurredduring our quarter ended January 31, 2008 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II**

 

**OTHER INFORMATION**

 

**ITEM 6   EXHIBITS**

 

See “Index toExhibits.”

 

 

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**SIGNATURES**

 

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

 
|                            | MedicalCV, Inc. |
|---------------------------------|----------------------|
|                            |                 |   |
| Date: March 14,  2008 | By                   | /s/ Marc P. Flores |
|                            |                 | Marc P. Flores |
|                            |                 | President and Chief  Executive Officer |
|                            |                 |   |
|                            | By                   | /s/ Michael A. Brodeur |
|                            |                 | Michael A. Brodeur |
|                            |                 | Vice President, Finance  and Chief Financial Officer |
|                            |                 |   |

 

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**INDEX TO EXHIBITS**
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Restated Articles of Incorporation of the  Registrant, as Amended (incorporated by reference to our Current Report on  Form 8-K, filed on October 11, 2007 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2                 |       | Bylaws of the Registrant, as Amended and Restated  (incorporated by reference to our Quarterly Report on Form 10-QSB, filed  on December 10, 2007 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1                 |       | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2                 |       | Specimen common stock certificate (incorporated by  reference to Amendment No. 1 to our Registration Statement on  Form SB-2, filed on June 6, 2006 (File No. 333-134315)).                                                                                                                                                                                                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.3                 |       | Secured Note Purchase Agreement between the  Registrant and Whitebox Ready Ltd., dated April 20, 2007, including form  of Secured Promissory Note, forms of Closing Warrant and Interest Warrant,  and form of Security Agreement and UCC Financing Statement (incorporated by  reference to our Current Report on Form 8-K filed on April 20, 2007  (File No. 000-33295)).                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.4                 |       | Amendment to Secured Note Purchase Agreement between  the Registrant and Whitebox Ready Ltd., dated June 15, 2007 (incorporated  by reference to our Current Report on Form 8-K, filed on June 15,  2007 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.5                 |       | Amendment to Warrant Agreement between the  Registrant and Whitebox Ready Ltd., dated June 15, 2007 (incorporated by  reference to our Current Report on Form 8-K filed on June 15, 2007  (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.6                 |       | Secured Note Purchase Agreement between the  Registrant and Whitebox Ready Ltd., Craig-Hallum Partners LP, ASA Opportunity  Fund, L.P., Burguete Investment Partnership LP, Potomac Capital Partners LP,  Potomac Capital International Ltd. and Pleaides Investment Partners-R LP,  dated June 15, 2007, including form of Secured Promissory Note, forms of  Closing Warrant and Interest Warrant, and form of Security Agreement and UCC  Financing Statement (incorporated by reference to our Current Report on  Form 8-K filed on June 15, 2007 (File No. 000-33295)). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1                |       | First Amendment to the Amended and Restated 2001  Equity Incentive Plan (incorporated by reference to our Current Report on  Form 8-K filed on February 22, 2008 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2                |       | First Amendment to the Amended and Restated 2005  Director Stock Option Plan (incorporated by reference to our Current Report  on Form 8-K filed on February 22, 2008 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3                |       | First Amendment to the Management Incentive Plan  (incorporated by reference to our Current Report on Form 8-K filed on  February 22, 2008 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4                |       | Form of Non-Qualified Stock Option Agreement  under the Amended and Restated 2001 Equity Incentive Plan (incorporated by  reference to our Current Report on Form 8-K filed on February 22,  2008 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5                |       | Form of Stand-Alone Non-Qualified Stock Option  Agreement (incorporated by reference to our Current Report on Form 8-K  filed on February 22, 2008 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6                |       | Form of Restricted Stock Award (incorporated by  reference to our Current Report on Form 8-K filed on February 22,  2008 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.7                |       | Form of Amendment to Previous Non-Qualified  Stock Option Grants (incorporated by reference to our Current Report on  Form 8-K filed on February 22, 2008 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.1                |       | Chief Executive Officer Certification pursuant to  Exchange Act Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2                |       | Chief Financial Officer Certification pursuant to  Exchange Act Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1                |       | Chief Executive Officer Certification pursuant to 18  U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.2                |       | Chief Financial Officer Certification pursuant to 18  U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

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