**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 OCTOBER 31, 2007** |
| ** **                                          | ** **                                                                                               |
| **o**                                               | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**CommissionFile Number 000-33295**

 

**MedicalCV, Inc.**

(Exact Name of SmallBusiness Issuer as Specified in Its Charter)

 

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

 

**9725 SouthRobert Trail**

**Inver GroveHeights, Minnesota 55077**

**(651)452-3000**

(Address of PrincipalExecutive Offices and Issuer’s

Telephone Number, includingArea Code)

 

Checkwhether the issuer:  (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (orsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

 

Yes  x  No  o

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

 

Yes  o  No  x

 

Asof November 30, 2007, the issuer had outstanding 9,839,724 shares of commonstock, $0.01 par value.

 

TransitionalSmall Business Disclosure Format (check one)  o  Yes  x  No

 

 

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**TABLE OFCONTENTS**

 
| 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 1                | Legal Proceedings                                               |   |
|               | ITEM 4                | Submission  of Matters to a Vote of Security Holders            |   |
|               | ITEM 5                | Other Information                                               |   |
|               | ITEM 6                | Exhibits                                                        |   |
|               |                  |
| SIGNATURES         |                  |
| INDEX  TO EXHIBITS |                  |

 

2

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**PART I**

 

**FINANCIALINFORMATION**

 

**ITEM 1  CONDENSED FINANCIALSTATEMENTS**

 

**MEDICALCV, INC.**

**CONDENSEDBALANCE SHEETS**

 
| ** **                                                                                                                         | ** ** | **October 31, 2007** | ** ** | **April 30, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                         | ** ** | **(unaudited)**                | ** ** | ** **                   | ** ** |
| **ASSETS**                                                                                                                         |       |                           |       |                         |       |
|                                                                                                                               |       |                           |       |                         |       |
| CURRENT ASSETS                                                                                                                     |       |                           |       |                         |       |
| Cash and cash equivalents                                                                                                          |       | $                              | 6,925,420  |                         | $          | 8,950,983 |   |
| Prepaid expenses and other current assets                                                                                          |       | 167,747                        |       | 280,150                      |       |
| Current asset of discontinued operations                                                                                           |       | 42,431                         |       | 87,323                       |       |
| TOTAL CURRENT ASSETS                                                                                                               |       | 7,135,598                      |       | 9,318,456                    |       |
|                                                                                                                               |       |                           |       |                         |       |
| PROPERTY, PLANT AND EQUIPMENT, net                                                                                                 |       | 766,883                        |       | 788,835                      |       |
| DEFERRED FINANCING COSTS, net                                                                                                      |       | 380,654                        |       | 349,053                      |       |
| OTHER NONCURRENT ASSETS                                                                                                            |       | 15,600                         |       | 15,600                       |       |
| TOTAL ASSETS                                                                                                                       |       | $                              | 8,298,735  |                         | $          | 10,471,944 |   |
|                                                                                                                               |       |                           |       |                         |       |
| **LIABILITIES  AND SHAREHOLDERS’ (DEFICIT) EQUITY**                                                                           |       |                           |       |                         |       |
|                                                                                                                               |       |                           |       |                         |       |
| CURRENT LIABILITIES                                                                                                                |       |                           |       |                         |       |
| Current amount of related party lease  obligation                                                                                  |       | $                              | 350,185    |                         | $          | 334,633 |   |
| Accounts payable                                                                                                                   |       | 557,868                        |       | 685,753                      |       |
| Accrued expenses                                                                                                                   |       | 341,535                        |       | 353,640                      |       |
| TOTAL CURRENT LIABILITIES                                                                                                          |       | 1,249,588                      |       | 1,374,026                    |       |
|                                                                                                                               |       |                           |       |                         |       |
| SECURED PROMISSORY NOTES, net of discount                                                                                          |       | 7,013,132                      |       | 4,248,173                    |       |
| RELATED PARTY LEASE OBLIGATION, less  current amount                                                                               |       | 2,026,268                      |       | 2,207,600                    |       |
| TOTAL LIABILITIES                                                                                                                  |       | 10,288,988                     |       | 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                                                                                                         |       | 66,356,437                     |       | 62,603,147                   |       |
| Accumulated deficit                                                                                                                |       | (68,445,087                    | )          | (60,059,374                  | )          |
| TOTAL SHAREHOLDERS’ (DEFICIT) EQUITY                                                                                          |       | (1,990,253                     | )          | 2,642,145                    |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’  (DEFICIT) EQUITY                                                                    |       | $                              | 8,298,735  |                         | $          | 10,471,944 |   |

 

See notes to condensedfinancial statements.

 

3

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

**(UNAUDITED)**

 
| ** **                                                    | ** ** | **Three months ended October 31,** | ** ** | **Six months ended October 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                               | ** ** | **2006**                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                          |       |                                                   |       |                                                 |       |   |   |   |   |
| SALES                                                         |       | $                                                      | 29,000     |                                                 | $          | — |   | $ | 52,200 |   | $ | — |   |
| COST OF GOODS SOLD                                            |       | 1,740                                                  |       | —                                               |       | 3,132 |   | — |   |
| GROSS PROFIT                                                  |       | 27,260                                                 |       | —                                               |       | 49,068 |   | — |   |
|                                                          |       |                                                   |       |                                                 |       |   |   |   |   |
| OPERATING EXPENSES                                            |       |                                                   |       |                                                 |       |   |   |   |   |
| Sales and marketing                                           |       | 352,642                                                |       | 406,192                                              |       | 643,475 |   | 796,874 |   |
| General and administrative                                    |       | 1,662,850                                              |       | 539,595                                              |       | 2,937,346 |   | 2,757,208 |   |
| Settlement of legal matter                                    |       | 750,000                                                |       | —                                               |       | 750,000 |   | — |   |
| Research and development                                      |       | 1,616,036                                              |       | 2,154,289                                            |       | 2,782,685 |   | 3,742,651 |   |
| TOTAL OPERATING EXPENSES                                      |       | 4,381,528                                              |       | 3,100,076                                            |       | 7,113,506 |   | 7,296,733 |   |
| LOSS FROM OPERATIONS                                          |       | (4,354,268                                             | )          | (3,100,076                                           | )          | (7,064,438 | ) | (7,296,733 | ) |
|                                                          |       |                                                   |       |                                                 |       |   |   |   |   |
| OTHER INCOME (EXPENSE)                                        |       |                                                   |       |                                                 |       |   |   |   |   |
| Interest income                                               |       | 112,187                                                |       | 73,022                                               |       | 230,937 |   | 181,371 |   |
| Interest expense                                              |       | (756,799                                               | )          | (29,772                                              | )          | (1,508,376 | ) | (67,007 | ) |
| Other income                                                  |       | 236                                                    |       | 798                                                  |       | 1,056 |   | 19,725 |   |
| TOTAL OTHER INCOME (EXPENSE)                                  |       | (644,376                                               | )          | 44,048                                               |       | (1,276,383 | ) | 134,089 |   |
|                                                          |       |                                                   |       |                                                 |       |   |   |   |   |
| LOSS FROM CONTINUING  OPERATIONS                              |       | (4,998,644                                             | )          | (3,056,028                                           | )          | (8,340,821 | ) | (7,162,644 | ) |
| LOSS FROM DISCONTINUED  OPERATIONS                            |       | (22,446                                                | )          | (22,446                                              | )          | (44,892 | ) | (13,392 | ) |
| NET LOSS                                                      |       | $                                                      | (5,021,090 | )                                                    | $          | (3,078,474 | ) | $ | (8,385,713 | ) | $ | (7,176,036 | ) |
|                                                          |       |                                                   |       |                                                 |       |   |   |   |   |
| BASIC AND DILUTED NET LOSS PER  COMMON SHARE                  |       |                                                   |       |                                                 |       |   |   |   |   |
| Continuing operations                                         |       | $                                                      | (0.51      | )                                                    | $          | (0.33 | ) | $ | (0.85 | ) | $ | (0.78 | ) |
| Discontinued operations                                       |       | (0.00                                                  | )          | (0.00                                                | )          | (0.00 | ) | (0.00 | ) |
| TOTAL NET LOSS PER COMMON  SHARE                              |       | $                                                      | (0.51      | )                                                    | $          | (0.33 | ) | $ | (0.85 | ) | $ | (0.78 | ) |
|                                                          |       |                                                   |       |                                                 |       |   |   |   |   |
| BASIC AND DILUTED WEIGHTED  AVERAGE COMMON SHARES OUTSTANDING |       | 9,839,724                                              |       | 9,262,690                                            |       | 9,838,950 |   | 9,192,815 |   |

 

See notes to condensedfinancial statements.

 

4

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

**(UNAUDITED)**

 
| ** **                                                                              | ** ** | **Six months ended October 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| OPERATING ACTIVITIES                                                                    |       |                                                 |       |   |   |
| Net loss                                                                                |       | $                                                    | (8,385,713 | ) | $ | (7,176,036 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities:            |       |                                                 |       |   |   |
| Share-based compensation                                                                |       | 831,897                                              |       | 1,064,210 |   |
| Depreciation                                                                            |       | 74,550                                               |       | 84,364 |   |
| Gain from the sales of property, plant and  equipment                                   |       | —                                               |       | (49,649 | ) |
| Amortization of discount related to secured  promissory notes                           |       | 608,393                                              |       | — |   |
| Accrued interest related to secured promissory  notes                                   |       | 626,566                                              |       | — |   |
| Accrued interest accrual warrant expense  related to secured promissory notes           |       | 156,229                                              |       | — |   |
| Amortization of deferred financing costs                                                |       | 67,436                                               |       | 3,642 |   |
| Changes in operating assets and  liabilities:                                           |       |                                                 |       |   |   |
| Prepaid expenses and other assets                                                       |       | 157,295                                              |       | 175,875 |   |
| Accounts payable                                                                        |       | (127,885                                             | )          | 142,514 |   |
| Accrued expenses                                                                        |       | (12,105                                              | )          | 22,895 |   |
| NET CASH USED BY OPERATING ACTIVITIES                                                   |       | (6,003,337                                           | )          | (5,732,185 | ) |
|                                                                                    |       |                                                 |       |   |   |
| INVESTING ACTIVITIES                                                                    |       |                                                 |       |   |   |
| Purchases of property, plant and equipment                                              |       | (52,598                                              | )          | (96,051 | ) |
| Proceeds from the sales of property, plant  and equipment                               |       | —                                               |       | 50,668 |   |
| NET CASH USED BY INVESTING ACTIVITIES                                                   |       | (52,598                                              | )          | (45,383 | ) |
|                                                                                    |       |                                                 |       |   |   |
| 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                                |       | (165,780                                             | )          | (159,817 | ) |
| Proceeds from issuance of common stock and  warrants, net of offering costs             |       | —                                               |       | 2,151,250 |   |
| Payments of fractional share interests                                                  |       | —                                               |       | (229 | ) |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                               |       | 4,030,372                                            |       | 1,991,204 |   |
|                                                                                    |       |                                                 |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                               |       | (2,025,563                                           | )          | (3,786,364 | ) |
| CASH AND CASH EQUIVALENTS                                                               |       |                                                 |       |   |   |
| Beginning of year                                                                       |       | 8,950,983                                            |       | 10,351,570 |   |
| End of period                                                                           |       | $                                                    | 6,925,420  |   | $ | 6,565,206 |   |
|                                                                                    |       |                                                 |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                                       |       |                                                 |       |   |   |
| Cash paid for interest                                                                  |       | $                                                    | 49,752     |   | $ | 67,007 |   |
| NONCASH INVESTING AND FINANCING ACTIVITIES                                              |       |                                                 |       |   |   |
| Fair value of warrants issued in connection  with secured promissory notes              |       | $                                                    | 2,970,000  |   | $ | — |   |

 

See notes to condensedfinancial statements.

 

5

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

 

**1.****                ****Basis of Financial Statement Presentation**

 

The accompanying unaudited condensed financialstatements included herein have been prepared by MedicalCV, Inc. (the “Company”)in accordance with accounting principles generally accepted in the UnitedStates of America for interim financial information and pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to suchrules and regulations.  These condensed interim financial statementsshould be read in conjunction with the financial statements and the notesthereto included in the Company’s Annual Report on Form 10-KSB for thefiscal year ended April 30, 2007.

 

The condensed balance sheet as of October 31,2007, the condensed statements of operations for the three and six months endedOctober 31, 2007 and 2006, and the condensed statements of cash flows for the sixmonths ended October 31, 2007 and 2006 include, in the opinion ofmanagement, all adjustments, consisting of normal recurring adjustments and anadjustment for the settlement of a legal matter, necessary for a fairpresentation of the financial results for the respective interim periods andare not necessarily indicative of results of operations to be expected for theentire fiscal year ending April 30, 2008.

 

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

 

The Company’s condensed financial statements as ofand for the three and six months ended October 31, 2007 have been prepared on agoing concern basis, which contemplates the realization of assets andsettlement of liabilities and commitments in the normal course of business. TheCompany has sustained losses and negative cash flows from operations in recentyears and expects these conditions to continue in the foreseeable future. As ofOctober 31, 2007, the Company had an accumulated deficit of $68,445,087. Thelevel of cash required for operations during the remaining quarters of the fiscalyear ending April 30, 2008 is difficult to predict, and management anticipatesthat continued development and commercialization of its ablation systems willrequire additional capital. These matters raise substantial doubt about theCompany’s ability to continue as a going concern. Management intends to seekadditional debt or equity financing as it continues to develop andcommercialize its ablation systems. However, the Company may not be able toobtain such financing on acceptable terms or at all. If the Company is unableto obtain such additional financing, it will be required to significantlyrevise its business plan and drastically reduce operating expenditures suchthat it may not be able to develop or enhance its products, gain market share,or respond to competitive pressures or unanticipated requirements, which couldseriously harm its business, financial condition and results of operations. Thecondensed financial statements do not include any adjustments that might resultfrom the outcome of this uncertainty.

 

**3.****                ****Net Loss per Common Share**

 

Basic net loss per common share was computed bydividing the net loss to common shareholders by the weighted average number ofcommon shares outstanding. Diluted net loss per common share reflects thepotential dilution that could occur if holders of warrants, options, and otherderivative instruments that are not anti-dilutive convert their holdings intocommon stock. Diluted net loss per common share does not differ from basic netloss per common share for the three and six months ended October 31, 2007 and2006 due to the loss from continuing operations which would cause thepotentially dilutive shares to be anti-dilutive. Options and warrantsoutstanding to purchase 4,160,393 and 2,118,040 shares of common stock wereexcluded from the computation for the three months ended October 31, 2007 and2006, respectively, because the loss from continuing operations would causesuch shares to be anti-dilutive. Options and warrants outstanding to purchase 3,961,719and 2,139,239 shares of common stock were excluded from the computation for thesix months ended October 31, 2007 and 2006, respectively, because the loss fromcontinuing operations would cause such shares to be anti-dilutive.

 

6

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

 

On April 20, 2007 and June 15, 2007, theCompany entered into Secured Note Purchase Agreements for the issuance and saleof 11% Secured Promissory Notes (“11% Notes”) and warrants for the purchase ofthe 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 an affiliate of Whitebox Advisors, LLC  (“Whitebox”), then a beneficial owner of more than 10% of the Company’s  common stock.       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                |
| (2)    |   | Related  party entities that are affiliates of Potomac Capital Management, LLC  (“Potomac”), then a beneficial owner of more than 5% of the Company’s common  stock. |

 

The 11% Notes are secured****by a first priority security interest in the Company’sassets.  The Secured Note Purchase Agreements contain a restrictivecovenant that prohibits the Company from issuing more than an aggregate of$12,500,000 of 11% Notes. The Company has the right to prepay the 11% Notes,subject to a premium payment of 8% if prepayment is made within the first year;6% if prepayment is made within the second year; and 3% if prepayment is madewithin the third year. The prepayment premium does not apply if the prepaymentof the 11% Notes is a result of a change of control.

 

The principal amount of each 11% Note and anyaccrued but unpaid interest is due and payable three years following therespective date of issuance of each note. During the first year, interest onthe 11% Notes will accrue and be added to the principal balance of the note.Within 30 days following the end of the first year from issuance of each note,the Company is obligated to issue to each holder an interest accrual warrantfor the purchase of the number of shares of the Company’s common stock that isequal to the quotient obtained by dividing 60% of the accrued interest for thefirst year by $4.00. During the second and third years from issuance of eachnote, the Company has the option each quarter to either (i) pay theaccrued interest on each note on or before the 15th day following the endof such quarter or (ii) allow the interest for such quarter to accrue andbe added to the principal balance of the note and issue to each holder, within30 days following the end of such quarter, an interest accrual warrant for thepurchase of the number of shares of the Company’s common stock that is equal tothe quotient obtained by dividing 60% of the accrued interest for the quarterby $4.00. The form of each interest accrual warrant provides for a term of fiveyears and an exercise price of $4.00 per share, subject to basic and, for 12months from the date issued, full-ratchet anti-dilution adjustments. Inaddition, the form of interest accrual warrant contains a cashless exercisefeature and a provision that restricts exercise to the extent that, afterexercise, the holder would otherwise beneficially own in excess of 9.99% of theCompany’s common stock outstanding.

 

7

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The warrants issued at the 1st and2nd 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 became effectiveon August 13, 2007, to enable the resale of the shares of common stockunderlying 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.

 

The Company used the Black-Scholes-Merton formula toestimate the fair value of the 1st and 2nd ClosingWarrants for the purchase of an aggregate of 1,200,000 and 674,998 shares,respectively, of the Company’s common stock using the following assumptions:

 
|                    | ** ** | **1st Closing  Warrant  (issued April 20, 2007)** | ** ** | **2nd 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                                                                     | %          |

 

The fair value of the warrants issued at the 1st and2nd closings were estimated to be $3,804,000 and $2,970,000,respectively.  The fair value of each Closing Warrant was recorded as adiscount to the principal balance of each 11% Note and is amortized intointerest expense, using the effective interest rate method, over the 3-yearterm of each 11% Note. The impact of the discount created from the issuance ofthe Closing Warrants and 11% interest rate on the principal balance of eachnote results in an effective interest rate of 41% and 64% for the 1st and2nd Closings, respectively.

 

The Company used the Black-Scholes-Merton formula toestimate the fair value of the first-year interest accrual warrants required tobe issued within 30 days following the end of the first year of the 1st and2nd Closings of the 11% Notes for the purchase of an aggregate of132,000 and 74,250 shares of the Company’s common stock, respectively, usingthe following assumptions:

 
|                    | ** ** | **1st Year Interest  Accrual  Warrants** | ** ** |
|-------------------------|------------|----------------------------------------------------|------------|
| Expected term           |       | 5.0 years                                          |       |
| Volatility              |       | 107.3                                              | %          |
| Risk free interest rate |       | 4.2                                                | %          |
| Expected dividend rate  |       | 0                                                  | %          |

 

Interest expense related to the secured promissorynotes of $696,016, which included $335,871 of amortization of the discountcreated from the Closing Warrants, $345,628 of accrued interest on the 11%Notes, and $14,517 of expense related to the interest accrual warrants to beissued within 30 days following the end of the first year of the respectiveissuance of each 11% Note, was included in the condensed statement ofoperations for the three months ended October 31, 2007.

 

8

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Interest expense related to the secured promissorynotes of $1,391,188, which included $608,393 of amortization of the discountcreated from the Closing Warrants, $626,566 of accrued interest on the 11%Notes, and $156,229 of expense related to the interest accrual warrants to beissued within 30 days following the end of the first year of the respectiveissuance of each 11% Note, was included in the condensed statement ofoperations for the six months ended October 31, 2007.

 

The Company paid a 6% commission on the grossproceeds of each closing to the placement agent and certain expenses incurredby the holders and placement agent associated with this transaction. Totalfinancing costs of $892,000 were incurred by the Company associated with theaggregate of $12,500,000 in financing. The Company capitalized $407,523 asdeferred financing costs and this amount will be amortized into interestexpense over the 3-year term of each respective 11% Note. The remaining$484,477 in financing costs reduced the amount recorded in additional paid-incapital associated with the fair value of the Closing Warrants.

 

The secured promissory notes, net of discount,outstanding at October 31, 2007 consisted of the following:

 
| ** **                                         | ** ** | **1st Closing  (Due April 2010)** | ** ** | **2nd Closing  (Due June 2010)** | ** ** | **Total**  | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| 11% Secured Promissory  Notes and accrued interest |       | $                                                | 8,466,448  |                                            | $          | 4,686,639  |       | $ | 13,153,087 |   |
| Unamortized discount  remaining                    |       | (3,352,813                                       | )          | (2,787,142                                      | )          | (6,139,955 | )          |
| Net balance at October 31,  2007                   |       | $                                                | 5,113,635  |                                            | $          | 1,899,497  |       | $ | 7,013,132 |   |

 

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

 

The Company’s Management Incentive Plan (“MIP”)provides an additional performance incentive to all executive officers andmanagers identified by the Chief Executive Officer and approved by theCompensation Committee of the Company’s Board of Directors. Subject toapplicable award opportunity levels described below, the total dollar value ofthe annual cash bonus, paid no later than 50 days after the performance year,for each participant is calculated as follows:  (corporate achievementlevel times base salary times 70%) plus (individual achievement level timesbase salary times 30%). The Board of Directors, upon the recommendation of theCompensation Committee, set the following minimum, target and maximum payoutsunder the MIP as a percentage of base salary for the fiscal year ending April30, 2008:

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

 

Based on management’s current estimate of theanticipated achievement of at least the minimum level of performance, theCompany has recorded an expense of $37,346 and $71,876 in the condensedstatement of operations for the three and six months ended October 31, 2007,respectively.

 

9

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

 

On May 1, 2007, the Company adopted the provisionsof Financial Accounting Standards Board (“FASB”) Interpretation No. 48, *Accounting for Uncertainty in Income Taxes – anInterpretation of FASB Statement No. 109*, (“FIN 48”) which clarifiesthe accounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes*.  FIN 48prescribes 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, theCompany had accounted for tax contingences in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 5, *Accountingfor Contingencies*.

 

As required by FIN 48, the Company recognizes thefinancial statement benefit of a tax position only after determining whether itis more-likely-than-not that a tax position will be sustained by the relevanttax authority upon examination, including resolution of any related appeals orlitigation processes, based on the technical merits of the position.  Fortax positions that meet the more-likely-than-not recognition threshold, theamount recognized in the financial statements is the largest amount of benefitthat has a greater than 50% likelihood of being realized upon ultimatesettlement with the relevant tax authority.

 

On May 1, 2007, the date of adoption of FIN 48, theCompany applied FIN 48 to all tax positions within the statute of limitations.The adoption of FIN 48 did not result in a cumulative adjustment to the Company’saccumulated deficit and the Company determined that it had no unrecognized taxbenefits as of May 1, 2007. Therefore, the impact of implementing FIN 48 didnot impact the effective tax rate. As of May 1, 2007, the Company did not haveany significant tax positions for which it is reasonably possible that thetotal amounts of unrecognized tax benefits will significantly change during thenext twelve months.

 

The Company’s policy is to recognize and classifyinterest and penalties accrued on any unrecognized tax benefits as a componentof income tax expense in the statement of operations.  As of the date ofadoption of FIN 48 on May 1, 2007, the Company did not have any accrued interestor penalties associated with unrecognized tax benefits, and the Company did notrecognize any interest or penalties in the condensed statement of operationsfor the three and six months ended October 31, 2007.

 

The Company is subject to income taxes in the U.S.federal jurisdiction and various state jurisdictions.  Tax regulationswithin each jurisdiction are subject to the interpretation of the related taxlaws and regulations and require significant judgment to apply. As of October31, 2007, the Company was not under examination by the Internal Revenue Service(“IRS”) or any state taxing jurisdiction in connection with the Company’sincome taxes.  However, all of the Company’s federal and state tax returnswithin the statue of limitations remain open and subject to examination bytaxing authorities. With few exceptions, the Company is no longer subject toU.S. federal, state or local income tax examinations by tax authorities for theyears before 2003.

 

In connection with the FIN 48 analysis, the Company analyzedits historical equity transactions with respect to ownership changes within themeaning of Internal Revenue Code Section 382 (“§382”).  As a resultof such analysis, management believes that an ownership change pursuant to §382occurred on April 1, 2005 and approximately $20 million of federal and $3million of state pre-change net operating loss carryforwards will belimited.  The Company has historically recorded a full valuation allowanceto offset its deferred tax assets.

 

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**7.****     ****Employment Agreements andSeverance Commitments**

 

As of October 31, 2007, employment agreements withfive officers of the Company contain a provision for payments of up to twelvemonths severance if the employment of the officer is terminated without causeby the Company or for good reason by the officer as defined in the agreements.The agreements also contain various other provisions customary for agreementsof such nature.

 

**Current Vice President, Finance and Chief Financial Officer**

 

On September 7, 2007, the Company entered into anExecutive Employment Agreement with Michael A. Brodeur to join the Company asVice President, Finance and Chief Financial Officer. Effective September 17,2007, Mr. Brodeur assumed these roles following the September 15, 2007departure of Eapen Chacko, then the Company’s Vice President, Finance and ChiefFinancial Officer. Pursuant to the terms of the Executive Employment Agreement,Mr. Brodeur receives an annual base salary of $225,000 and is eligible toreceive a pro-rated performance-based cash bonus under the Company’s MIP forthe fiscal year ending April 30, 2008.  The Executive Employment Agreementprovides that a severance payment will be made if the employment of Mr. Brodeuris terminated by the Company without cause, or by Mr. Brodeur for goodreason.  The severance payment would be six months of base salary; and, ifat the end of such six-month period, Mr. Brodeur was not employed or engaged asan independent contractor, the Company would pay him up to an additional sixmonths of base salary until he is employed or engaged as an independentcontractor.  In addition, Mr. Brodeur has agreed to certain nondisclosureand inventions provisions and certain noncompetition and nonrecruitment provisionsduring the term of employment and for a period of one year after termination ofemployment.

 

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

 

**Former Vice President, Finance and Chief Financial Officer**

 

On June 28, 2007, the Company entered into anamendment to the restated Executive Employment Agreement with Eapen Chacko,then the Company’s Vice President, Finance and Chief Financial Officer, toreflect the mutual decision reached concerning Mr. Chacko’s departure fromthe Company. Pursuant to the amendment, Mr. Chacko’s employment terminatedon September 15, 2007 and the Company paid Mr. Chacko a lump sum severancepayment of $100,000. If Mr. Chacko is not reemployed or serving as anindependent contractor, Mr. Chacko may be eligible for six monthly installmentsof base salary of $16,667 beginning March 2008 and such payments will cease onthe earlier of: 1) the date Mr. Chacko is reemployed or serves as anindependent contractor; or 2) September 2008. In addition to these severancepayments, the Company has agreed to pay or reimburse Mr. Chacko formedical (COBRA) benefits as set forth in the Executive Employment Agreement.The Company has recorded an expense of $57,500 and $100,000 in the condensedstatement of operations for the three and six months ended October 31, 2007,respectively, related to the lump sum severance payment of $100,000 paid toMr. Chacko.

 

**Former Vice President, Regulatory Affairs and QualityAssurance**

 

On May 31, 2007, the Company entered into a letteragreement amending certain provisions of the Executive Employment Agreementwith Dennis E. Steger, then the Company’s Vice President, Regulatory Affairsand Quality Assurance, who advised the Company of his plan to retire. Pursuant to the agreement, Mr. Steger’s employment terminated on July 1, 2007and, in lieu of any severance compensation payable under the ExecutiveEmployment Agreement with Mr. Steger, the Company paid Mr. Steger $20,000 andissued to Mr. Steger a fully vested non-qualified stock option under theCompany’s Amended and Restated 2001 Equity Incentive Plan for the purchase of5,734 shares of the Company’s common stock.  The stock option issued toMr. Steger on July 1, 2007 has an exercise price of $5.50 per share, expires onJanuary 1, 2008, and resulted in a non-cash share-based compensation expense of$8,911 for the six months ended October 31, 2007.

 

11

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

 

**Authorized Capital**

 

On October 11, 2007, shareholders approved anamendment to the Company’s Restated Articles of Incorporation. As a result ofthe amendment, the total authorized shares of all classes which the Company hasauthority to issue is 50,000,000, consisting of: (a) 1,000,000 shares ofpreferred stock of the par value of one cent ($0.01) per share; and (b)49,000,000 shares of common stock of the par value of one cent ($0.01) pershare. Prior to the amendment, the total authorized shares of all classes whichthe Company had authority to issue was 25,000,000 consisting of: (a) 1,900shares of 5% Series A Redeemable Convertible Preferred Stock; (b) 998,100shares of preferred stock of the par value of one cent ($0.01) per share; and(c) 24,000,000 shares of common stock of the par value of one cent ($0.01) pershare.

 

**Share-Based Compensation Expense**

 

Share-based compensation expense included in thecondensed statement of operations is as follows:

 
| ** **                      | ** ** | **Three months ended October 31,** | ** ** | **Six months ended October 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                               | ** ** | **2006**                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Sales and marketing             |       | $                                                      | 16,731     |                                                 | $          | 23,318 |   | $ | 31,351 |   | $ | 45,372 |   |
| General and administrative  (1) |       |                                                   | 268,202    |                                                 |       | 246,227 |   |   | 549,341 |   |   | 777,068 |   |
| Research and development  (2)   |       |                                                   | 113,572    |                                                 |       | 121,425 |   |   | 251,205 |   |   | 241,770 |   |
| Total share-based  compensation |       | $                                                      | 398,505    |                                                 | $          | 390,970 |   | $ | 831,897 |   | $ | 1,064,210 |   |

 

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(1)   Includes $13,750 of share-based compensationexpense for the six months ended October 31, 2007 related to a restricted stockaward for 2,500 shares, which vested immediately, and was granted under theCompany’s Amended and Restated 2001 Equity Incentive Plan to a non-employeedirector.

 

(2)   Includes $5,052 and $16,571 of share-based compensation expense for thethree months ended October 31, 2007 and 2006, respectively, and $18,618 and$31,481 of share-based compensation expense for the six months ended October31, 2007 and 2006, respectively, related to stock options granted under theCompany’s Amended and Restated 2001 Equity Incentive Plan to non-employeesserving on the Company’s Scientific Advisory Board.

 

As of October 31, 2007, there was $2,808,188 oftotal unrecognized share-based compensation cost. The Company expects that costto be recognized over a weighted-average remaining recognition period of 2.2years.

 

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**Share-Based Awards**

 

The Company has the following shareholder-approvedstock option and equity incentive plans as of October 31, 2007:

 
|                             | ** ** | **Shares of  Common Stock  Reserved** | ** ** | **Shares of  Common Stock   Remaining  Available for Grant** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| 1992 Stock Option Plan           |       | 50,000                                          |       | —                                                                                |       |
| 1993 Director Stock Option  Plan |       | 30,000                                          |       | —                                                                                |       |
| 1997 Stock Option Plan           |       | 50,000                                          |       | 640                                                                                   |       |
| 2001 Equity Incentive Plan  (1)  |       | 1,400,000                                       |       | 1,024,108                                                                             |       |
| 2005 Director Stock Option  Plan |       | 300,000                                         |       | 171,154                                                                               |       |
| Total                            |       | 1,830,000                                       |       | 1,195,902                                                                             |       |

 

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(1)   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.

 

In addition to the shareholder-approved plans, theCompany had stock options outstanding outside of the Company’s authorized plansfor the purchase of an aggregate of 492,212 shares of the Company’s commonstock as of October 31, 2007.

 

The following table summarizes information about theCompany’s stock options for the three and six months ended October 31, 2007:

 
| **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/Expired                                   |       | (19,379    | )          | 9.42                                   |       |                                                                         |       |                               |       |
| Outstanding, July 31, 2007                          |       | 956,309    |       | 8.49                                   |       |                                                                         |       |                               |       |
| Granted                                             |       | 186,897    |       | 2.37                                   |       |                                                                         |       |                               |       |
| Forfeited/Expired                                   |       | (97,521    | )          | 8.17                                   |       |                                                                         |       |                               |       |
| Outstanding, October 31,  2007                      |       | 1,045,685  |       | 7.43                                   |       | 6.2                                                                          |       | $                                  | 6,114      |   |
| Vested and expected to  vest, October 31, 2007 |       | 897,335    |       | 7.56                                   |       | 6.1                                                                          |       | $                                  | 4,322      |   |
| Exercisable,  October 31, 2007                 |       | 515,681    |       | 8.75                                   |       | 5.2                                                                          |       | $                                  | —     |   |
|                                                     |            |            |            |                                        |            |                                                                              |            |                                    |            |  |  |

 

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(1)   This disclosure excludes those options thathave no intrinsic value (i.e. those options that are out-of-the-money using theclosing market price of the Company’s common stock on October 31, 2007 of $2.36per share).

 

As of October 31, 2007, the exercise prices of stockoptions outstanding ranged from $2.15 to $23.60 per share and the stock optionsexpire at various dates through October 31, 2017. The exercise price of astock option is set at the closing market price of the Company’s common stockon the grant date. Stock options typically vest over four years and have amaximum contractual term of ten years. Substantially all awards provide foraccelerated vesting if there is a change in control. There were no stockoptions exercised in the three and six months ended October 31, 2007 and 2006.

 

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The Company used the Black-Scholes-Merton formula toestimate the grant date fair value of its stock options using the followingassumptions:

 
| ** **                              | ** ** | **Three months ended October 31,** | ** ** | **Six months ended October 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                               | ** ** | **2006**                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average  grant-date fair value |       | $                                                      | 1.97       |                                                 | $          | 3.31 |   | $ | 2.60 |   | $ | 5.81 |   |
| Expected dividend rate (1)              |       | 0                                                      | %          | 0                                                    | %          | 0 | % | 0 | % |
| Risk free interest rate  (2)            |       | 4.2 to  4.4                                            | %          | 4.8                                                  | %          | 4.2 to  5.0 | % | 4.8 to  5.1 | % |
| Expected term (3)                       |       | 5.5 to  6.3 years                                      |       | 5.5 to 6.3  years                                    |       | 0.5 to  6.3 years |   | 5.0 to 6.3  years |   |
| Expected volatility (4)                 |       | 107.3  to 108.7                                        | %          | 107.5                                                | %          | 99.0 to  108.7 | % | 107.5  to 111.2 | % |
| Weighted-average  volatility            |       | 107.9                                                  | %          | 107.5                                                | %          | 106.9 | % | 110.6 | % |
|                                         |            |                                                        |            |                                                      |            |  |  |  |  |  |  |  |  |

** **

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(1)   **Expected dividend rate**—The Company has not historically paid a cashdividend to common shareholders and does not expect to pay dividends in thefuture.

 

(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 stock optionsexercised historically, the Company elected to use the “simplified” method forestimating the expected term of options as allowed under SEC Staff AccountingBulletin 107. Under this approach, the expected term was calculated by takingthe average of the vesting term and the original contract term.

 

(4)   **Expected volatility**—The Company used historical monthly priceobservations for a period approximating the expected term of the award, ifavailable, or at least three years to estimate volatility.

 

On June 27, 2007, the Company granted to thechairperson of the Company’s Board of Directors a restricted stock award for2,500 shares of the Company’s common stock.  The 2,500 shares, which had afair value of $5.50 per share on the date of grant, vested immediately and hadan aggregate grant date fair value of $13,750.

 

**Warrants**

 

In connection with various financings and otheractivities, the Company has warrants outstanding for the purchase of theCompany’s common stock. The following table summarizes information about allwarrants for the three and six months ended October 31, 2007:

 
| **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                                   |       | 4.41                                                                         |       | $                                  | —     |   |
|                                   |            |            |            |                                        |            |                                                                              |            |                                    |            |  |  |

 

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(1)   This disclosure excludes those warrants thathave no intrinsic value (i.e. those warrants that are out-of-the-money usingthe closing market price of the Company’s common stock on October 31, 2007 of$2.36 per share).

 

As of October 31, 2007, the exercise prices of thewarrants ranged from $3.25 to $29.50 per share and the warrants expire atvarious dates through March 3, 2015. As of October 31, 2007, warrants forthe purchase of 1,915,994 shares of the Company’s common stock contain afull-ratchet anti-dilution provision and warrants for the purchase of 707,405shares of the Company’s common stock contain a weighted-average anti-dilutionprovision with a current weighted average exercise price of $3.97 per share.

 

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

 

On October 19, 2007, the Company entered into asettlement agreement with J Giordano Securities LLC (d/b/a J GiordanoSecurities Group) (“JGSG”) pursuant to which the Company settled and resolvedall disputes, claims and matters in controversy between the Company and JGSG inexchange for the Company’s payment to 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.

 

JGSG had filed a complaint for breach of anengagement agreement against the Company in the United States District Courtfor the District of Connecticut, alleging that JGSG was entitled to additionalcompensation pursuant to certain financing activities by the Company thatoccurred in December 2005, January 2006, and October 2006, as well as certaincompensation relating to registration of the shares underlying the warrantsissued to JGSG as compensation in connection with the April 2005 privateplacement of the Company’s securities in which JGSG was a placement agent. TheCompany had moved to dismiss or stay the federal action and to compelarbitration before the National Association of Securities Dealers, pursuant towhich the federal action was stayed. JGSG then filed a statement of claim andthe Company filed a counterclaim in the arbitration, alleging breach of theengagement agreement and fraud in the inducement. JGSG then filed an amendedstatement of claim in the arbitration, pursuant to which JGSG claimed it wasentitled to alleged damages of $3,346,565 plus reimbursement for reasonableexpenses, interest, costs and attorneys’ fees. In order to avoid the costs,uncertainty, and inconvenience associated with adversary proceedings, theCompany entered into the above-referenced settlement agreement with JGSG,effective October 19, 2007.

 

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

 

All of the Company’s revenue in the three and sixmonths ended October 31, 2007 was derived from the sales of a single product totwo customers, of which certain physicians also serve on the Company’sScientific Advisory Board or are Company-paid consultants.

 

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

 

On April 6, 2005, the Company’s Board ofDirectors authorized management to discontinue sales and marketing of heartvalves effective April 30, 2005, and to seek a buyer for the relatedproduction equipment. The carrying amount of asset of discounted operations asof October 31, 2007 consisted of a prepaid insurance policy which is amortizedto the loss from discontinued operations over the policy period.

 

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**ITEM 2  MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

*The following discussion containsvarious forward-looking statements within the meaning of Section 21E ofthe Exchange Act.  Although we believe that, in making any such statement,our expectations are based on reasonable assumptions, any such statement may beinfluenced by factors that could cause actual outcomes and results to bematerially different from those projected.  When used in the followingdiscussion, the words “anticipates,” “believes,” “expects,” “intends,” “plans,”“estimates” and similar expressions, as they relate to us or our management,are intended to identify such forward-looking statements.  Theseforward-looking statements are subject to numerous risks and uncertainties thatcould cause actual results to differ materially from those anticipated. Factors that could cause actual results to differ materially from thoseanticipated, certain of which are beyond our control, are set forth in thisdocument and in our Annual Report on Form 10-KSB for the fiscal year endedApril 30, 2007, under the caption “Management’s Discussion and Analysis or Planof Operation – Cautionary Statement.”*

 

*Our actual results, performance orachievements could differ materially from those expressed in, or implied by,forward-looking statements.  Accordingly, we cannot be certain that any ofthe events anticipated by forward-looking statements will occur or, if any ofthem do occur, what impact they will have on us.  We caution you to keepin mind the 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**

 

We develop, manufacture and sell innovative,laser-based surgical ablation systems designed to create precise, clinicallyrelevant lesions, or scars, in soft tissue and in cardiac tissue. We believeour laser-based systems, using a sub-millimeter fiber optic platform, willprovide a viable alternative to both existing surgical ablation procedures andcatheter ablations. In May 2007, the first human clinical cases were completedusing the SOLARTM Surgical Ablation System (“SOLAR System”) and, in September2007, the first SOLAR System port-based procedure to treat atrial fibrillation(“AF”) was performed. Through November 30, 2007, 80 cases have been performedwith our laser-based systems.

 

Our systems consist of both capital equipment andassociated compatible single-use devices. The capital equipment consists of alaser generator and, where needed, a controller, both of which can be placed ona small mobile cart. We are placing capital equipment in hospitals and trainingphysicians on the use of our laser technology. We have recognized limitedrevenue from ATRILAZETM Surgical Ablation System (“ATRILAZE System”) single-use devicesand expect to recognize limited revenue from SOLAR and ATRILAZE single-use devicesin the first half of calendar year 2008. During the first half of calendar year2008, we plan to build out our sales force while continuing to collect clinicaldata for expanded indications and publications. We anticipate that productrevenue for the fiscal year ending April 30, 2008 will be limited to thesingle-use device components of the ATRILAZE and SOLAR Systems.

 

We received three separate U.S. Food and DrugAdministration (“FDA”) 510(k) clearances of our ATRILAZE System for the ablationof soft tissue, including cardiac tissue, in November 2004, October 2005 andApril 2006, respectively. We received FDA 510(k) clearance of ourSOLAR System for the ablation of soft tissue, not including cardiac tissue, inMarch 2007. Certain products of other companies have been cleared for soft andcardiac tissue ablation; however, as of November 30, 2007, the FDA has notapproved any device for the specific treatment of AF. Unless and until weobtain FDA clearance or approval for the use of our SOLAR System for the ablationof cardiac tissue or, with respect to either system, for the treatment of AF,we and others acting on our behalf may not promote our systems for such uses,make any claim that our systems are safe and effective for such uses, orproactively discuss or train physicians on the use of our systems in connectionwith such uses. While we cannot lawfully promote our systems for off-label use,similar ablation products are widely used by physicians, at their discretion,for the treatment of AF. Physicians are not restricted by the FDA from usingthese devices for AF in the practice of medicine. Human clinical trials andadditional product development will be required to obtain FDA approval for theuse of these products in AF, and it is our intent to conduct such clinicaltrials for the eventual approval of both products for AF.

 

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**Critical Accounting Policies**

 

The preparation of our financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe amounts reported in the condensed financial statements and accompanyingnotes. We believe our estimates and assumptions are reasonable; however, actualresults and the timing of the recognition of such amounts could differ fromthose estimates. We have identified the following critical accounting policiesand estimates utilized by management in the preparation of our financialstatements: revenue recognition, income taxes, and share-based compensation.Actual amounts could differ significantly from management’s estimates. Forfurther discussion of our critical accounting policies and estimates, see ourAnnual Report on Form 10-KSB for the fiscal year ended April 30, 2007.

 

**Revenue Recognition.**Wecurrently generate revenue from the sales of single-use medical devices. Revenueis considered to be earned when there is a written sales invoice specifying theterms and conditions of the transaction; the price is fixed; collection of theresulting receivable is probable; title has transferred; and there are noremaining performance obligations. There is no right of return unless theproduct is defective, damaged, or does not perform according to technical specifications.

 

**Income Taxes.**OnMay 1, 2007, we adopted the provisions of Financial Accounting Standards Board (“FASB”)Interpretation No. 48, *Accounting forUncertainty in Income Taxes – an Interpretation of FASB**Statement No. 109*, (“FIN 48”) which clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, *Accounting for Income Taxes*. FIN 48prescribes a financial statement recognition threshold and measurement attributeof a tax position taken or expected to be taken in a tax return, and providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. Previously, we had accounted fortax contingences in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 5, *Accounting for Contingencies*.

 

As required by FIN 48, we recognize the financialstatement benefit of a tax position only after determining whether it is morelikely than not that a tax position will be sustained by the relevant taxauthority upon examination, including resolution of any related appeals orlitigation processes, based on the technical merits of the position. For taxpositions that meet the more-likely-than-not recognition threshold, the amountrecognized in the financial statements is the largest amount of benefit thathas a greater than 50% likelihood of being realized upon ultimate settlementwith the relevant tax authority.

 

Our policy is to recognize and classify interest andpenalties accrued on any unrecognized tax benefits as a component of income taxexpense in the statement of operations.

 

We establish a valuation allowance if it is morelikely than not that all or a portion of the tax assets will not be utilized.The ultimate realization of deferred income tax assets is dependent on thegeneration of future taxable income, which must occur prior to the expirationof the net operating loss carryforwards, which comprise the majority of thedeferred tax assets. As of April 30, 2007 and October 31, 2007, we establisheda valuation allowance to fully offset our deferred tax assets due to theuncertainty about generating sufficient future taxable income necessary torealize these deferred tax assets, particularly in light of our history ofsignificant operating losses. In addition, future utilization of available netoperating loss carryforwards may be limited under Internal Revenue Code Section382 (“§382”) as a result of changes in ownership.

 

In connection with the FIN 48 analysis, we analyzed ourhistorical equity transactions with respect to ownership changes within themeaning of Internal Revenue Code Section 382 (“§382”).  As a resultof such analysis, we believe that an ownership change pursuant to §382 occurredon April 1, 2005 and approximately $20 million of federal and $3 million ofstate pre-change net operating loss carryforwards will be limited.  Wehave historically recorded a full valuation allowance to offset our deferredtax 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.123R is a revision of SFAS No. 123, *Accountingfor Stock-Based Compensation*, and supersedes Accounting PrinciplesBoard (“APB”) Opinion No. 25, *Accounting forStock Issued to Employees*, and its related guidance. As required bySFAS No. 123R, we recognize compensation expense during the service period ofshare-based awards that are granted, modified, repurchased, or cancelled afterMay 1, 2006 using the grant-date fair value of the award. In addition,compensation expense is recognized for the remaining service period of awardsgranted prior to, but not yet vested as of May 1, 2006, based on the grant datefair value of the award. In accordance with the modified prospectiveapplication transition method of SFAS No. 123R, prior period results were notrestated. We have also implemented the SEC interpretations in Staff AccountingBulletin No. 107, *Share-Based Payments*,in connection with the adoption of SFAS No. 123R.

 

We use the Black-Scholes-Merton formula toestimate the grant date fair value of stock option awards, which requires us todevelop estimates of, among other assumptions, the expected volatility and theexpected term.

 

Incremental compensation cost for a modification ofthe terms or conditions of an award is measured by comparing the fair value ofthe modified award with the fair value of the award immediately before themodification. A cancellation of an award that is not accompanied by theconcurrent grant of, or offer to grant, a replacement award or other valuableconsideration is accounted for as a repurchase for no consideration.Accordingly, any unrecognized compensation cost is recognized at thecancellation date.

 

We recognize compensation expense for share-basedawards on a straight-line basis over the requisite service period of the award.The amount of share-based compensation recognized is based on the value of theportions of the awards that are ultimately expected to vest. SFAS No. 123Rrequires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates. Previously recognized compensation expense for the vested portion ofshare-based awards is not reversed if an award expires unexercised or if anaward is forfeited due to employee termination. No compensation cost isrecognized for unvested awards that employees forfeit because the requisiteservice is not rendered. We use historical forfeitures and employee turnover toestimate the number of options that will actually vest. We reevaluate thisestimate periodically and adjust the forfeiture rate on a prospective basis asnecessary.

 

**Reclassifications.**Certainreclassifications have been made to the condensed financial statements for thethree and six months ended October 31, 2006 to conform to the classification inthe condensed financial statements for the three and six months ended October31, 2007. The reclassifications had no impact on net loss or shareholders’equity.

 

**RecentAccounting Developments**

 

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*, which definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. SFAS No. 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007 and interim periods within thosefiscal years. We have not determined what, if any, impact the adoption of SFASNo. 157 on May 1, 2008 will have on our financial statements.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities—Including an amendment of FASB Statement No. 115*,which permits entities to choose to measure many financial instruments andcertain other items at fair value. SFAS No. 159 is effective as of the beginningof an entity’s first fiscal year that begins after November 15, 2007. We havenot determined what, if any, impact the adoption of SFAS No. 159 on May 1, 2008will have on our financial statements.

 

In December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated Financial Statements — Anamendment of ARB No. 51*, which establishes accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years,and interim periods within those fiscal years, beginning on or after December15, 2008. We have not determined what, if any, impact the adoption of SFAS No.160 on May 1, 2009 will have on our financial statements.

 

In December 2007, the FASB issued SFAS No. 141R, *Business Combinations*, which establishes principles andrequirements for how the acquirer recognizes, measures, and discloses theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree; and the goodwill acquired or a gain from a bargain

 

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purchase.SFAS No. 141R is effective 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 have not determined what, if any,impact the adoption of SFAS No. 141R will have on our financial statements.

 

**Results ofOperations for the Three Months Ended October 31, 2007 and 2006**

 

*Sales.*Sales of our ATRILAZE System single-usedevice of $29,000 were recognized as revenue in the three months ended October31, 2007 and were derived from two customers, of which certain physicians alsoserve on our Scientific Advisory Board or are company-paid consultants,representing 60% and 40% of total sales, respectively. Sales of the SOLARSystem single-use medical devices are not expected until calendar year2008.  We do not expect to generate measurable sales of the SOLAR Systemuntil the fiscal year ending April 30, 2009 at the earliest. Prior to November2006, historical sales of our ATRILAZE System single-use medical devices wererecorded as a reduction of research and development expenses since the primarypurpose of offering the device was to obtain clinical research information toassist in the development of the SOLAR System.  We anticipate that productrevenue for the fiscal year ending April 30, 2008 will be limited to the ATRILAZEand SOLAR System single-use device components.

 

*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 no futureeconomic value.  As a result, the cost of goods sold in the three monthsended October 31, 2007 consisted exclusively of a 6% royalty expense toLightWave Ablation Systems, Inc. (“LightWave”).  The current replacementcost of the ATRILAZE System single-use device inventory, had it been includedin cost of goods sold, would not have had a material impact on gross margins ornet loss for the three months ended October 31, 2007.

 

*Sales and Marketing. *Sales and marketing expenses decreased from$406,192 in the three months ended October 31, 2006 to $352,642 in the threemonths ended October 31, 2007.  The $53,550 decrease in sales andmarketing expenses resulted primarily from a decrease in travel andentertainment expenses due to a reduction in the size of our company-sponsoredScientific Advisory Board meetings.

 

*General and Administrative. *General and administrative expenses increasedfrom $539,595 in the three months ended October 31, 2006 to $1,662,850 in thethree months ended October 31, 2007.  The $1,123,255 increase in generaland administrative expenses resulted primarily from an increase of $390,994 inlegal expenses consisting primarily of legal expenses involved with the breachof contract claim by J Giordano Securities LLC and legal expenses for corporatefinance matters. Consulting fees in the three months ended October 31, 2006included a $272,034 credit due to settlement of an outstanding payable. Weincurred $83,165 in consulting fees in the three months ended October 31, 2007related primarily to the adoption of FIN 48. Additionally, the three monthsended October 31, 2007 included severance expense of $57,500 related to thedeparture of our former Vice President, Finance and Chief Financial Officer andan additional $79,167 in payroll expenses due primarily to changes inaccounting personnel.

 

*Settlement of Legal Matter. *On October 19, 2007, we entered into asettlement 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 $750,000 in cash. Without admitting anyliability or wrongdoing, JGSG and our company mutually released each other fromany and all claims, demands, and causes of action, suits, debts or liabilitiesof any kind which were or could have been asserted in the federal action orarbitration described further in Part II – Other Information, Item 1 – LegalProceedings..

 

*Research and Development. *Research and development expenses decreasedfrom $2,154,289 in the three months ended October 31, 2006 to $1,616,036 in thethree months ended October 31, 2007.  The $538,253 decrease in researchand development expenses resulted primarily from a reduction of $526,399 incosts associated with external development of the controller component of ourablation systems.

 

*Interest Expense. *Interest expense increased from $29,772 inthe three months ended October 31, 2006 to $756,799 in the three months endedOctober 31, 2007.  The $727,027 increase in interest expense resultedprimarily from the 11% Secured Promissory Notes (“11% Notes”) outstandingduring the three months ended October 31,

 

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2007. The interest expense related to the 11% Notes consisted of $345,628 of accruedinterest on the 11% Notes, $335,871 of amortization of the discount on the debtrelated to the warrants issued at each closing, and $14,517 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.  Interestexpense in the three months ended October 31, 2007 also included $34,466 inamortization of deferred financing costs related to the 11% Notes.

 

*Discontinued Operations. *The loss from discontinued operations of$22,446 in the three months ended October 31, 2007 and 2006 consisted ofinsurance expense from a prepaid insurance policy related to the heart valvebusiness.

 

*Income Tax Provision. *We have no income tax provision in the threemonths ended October 31, 2007 and 2006 due to the net operating lossesgenerated for income tax reporting purposes.  We have established avaluation allowance to fully offset deferred tax assets due to the uncertaintyabout our ability to generate the future taxable income necessary to realizethese deferred tax assets, particularly in light of our history of significantoperating losses and changes in ownership.

 

**Results ofOperations for the Six Months Ended October 31, 2007 and 2006**

 

*Sales.*Sales of our ATRILAZE System single-usedevice of $52,200 were recognized as revenue in the six months ended October31, 2007 and were derived from two customers, of which certain physicians alsoserve on our Scientific Advisory Board or are company-paid consultants, eachrepresenting 50% of total sales. Sales of the SOLAR System single-use medicaldevices are not expected until calendar year 2008.  We do not expect togenerate measurable sales of the SOLAR System until the fiscal year endingApril 30, 2009 at the earliest. Prior to November 2006, historical sales of ourATRILAZE System 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.  We anticipate that product revenue for the fiscal year endingApril 30, 2008 will be limited to the ATRILAZE and SOLAR System single-usedevice components.

 

*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 no futureeconomic value.  As a result, the cost of goods sold in the six monthsended October 31, 2007 consisted exclusively of a 6% royalty expense toLightWave.  The current replacement cost of the ATRILAZE System single-usedevice inventory, had it been included in cost of goods sold, would not havehad a material impact on gross margins or net loss for the six months endedOctober 31, 2007.

 

*Sales and Marketing. *Sales and marketing expenses decreased from$796,874 in the six months ended October 31, 2006 to $643,475 in the six monthsended October 31, 2007.  The $153,399 decrease in sales and marketingexpenses resulted primarily from a $90,615 decrease in travel and entertainmentexpenses due to a reduction in the size of our company-sponsored ScientificAdvisory Board meetings; and a $118,702 decrease in payroll expenses as the sixmonths ended October 31, 2006 included relocation expenses of $65,000 for ourVice President, Marketing and payroll expenses of our Vice President, Sales whoresigned from employment effective March 31, 2007.

 

*General and Administrative. *General and administrative expenses increasedfrom $2,757,208 in the six months ended October 31, 2006 to $2,937,346 in thesix months ended October 31, 2007.  The $180,138 increase in general andadministrative expenses resulted primarily from an increase in legal expensesinvolved with the breach of contract claim by JGSG partially offset by areduction in share-based compensation expense.

 

*Settlement of Legal Matter. *On October 19, 2007, we entered into asettlement 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 $750,000 in cash. Without admitting anyliability or wrongdoing, JGSG and our company mutually released each other fromany and all claims, demands, and causes of action, suits, debts or liabilitiesof any kind which were or could have been asserted in the federal action orarbitration described further in Part II – Other Information, Item 1 – LegalProceedings.

 

*Research and Development. *Research and development expenses decreasedfrom $3,742,651 in the six months ended October 31, 2006 to $2,782,685 in thesix months ended October 31, 2007.  The $959,966 decrease in

 

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researchand development expenses resulted primarily from a reduction of $924,377 incosts associated with external development of the controller component of ourablation systems.

 

*Interest Expense. *Interest expense increased from $67,007 inthe six months ended October 31, 2006 to $1,508,376 in the six months endedOctober 31, 2007.  The $1,441,369 increase in interest expense resultedprimarily from the 11% Notes outstanding during the six months ended October31, 2007.  The interest expense related to the 11% Notes consisted of$626,566 of accrued interest on the 11% Notes, $608,393 of amortization of thediscount on the debt related to the warrants issued at each closing, and$156,229 of expense related to the interest accrual warrants to be issuedwithin 30 days following the end of the first year of the respective issuanceof each 11% Note.  Interest expense in the six months ended October 31,2007 also included $63,794 in amortization of deferred financing costs relatedto the 11% Notes.

 

*Discontinued Operations. *The loss from discontinued operations of$44,892 in the six months ended October 31, 2007 consisted of insurance expensefrom a prepaid insurance policy related to the heart valve business. The lossfrom discontinued operations of $13,392 in the six months ended October 31,2006 consisted of insurance expense of $44,892 from a prepaid insurance policyoffset by a gain of $31,500 from the sale of fixed assets related to the heartvalve business.

 

*Income Tax Provision. *We have no income tax provision in the sixmonths ended October 31, 2007 and 2006 due to the net operating lossesgenerated for income tax reporting purposes.  We have established avaluation allowance to fully offset deferred tax assets due to the uncertaintyabout our ability to generate the future taxable income necessary to realizethese deferred tax assets, particularly in light of our history of significantoperating losses and changes in ownership.

 

**Liquidity and Capital Resources**

 

Cash and cash equivalents decreased from $8,950,983at April 30, 2007 to $6,925,420 at October 31, 2007 due to thefollowing:

 
| Net cash used by operating activities     |   | $         | (6,003,337 | ) |
|-------------------------------------------|--------|-----------|------------|---|
| Net cash used by investing activities     |   | (52,598   | )          |
| Net cash provided by financing activities |   | 4,030,372 |       |
| Net decrease in cash and cash equivalents |   | $         | (2,025,563 | ) |

 

*Operating Activities.  *The net cash used by operating activities of$6,003,337 in the six months ended October 31, 2007 resulted primarily from thenet loss of $8,385,713 partially offset by non-cash interest expense of$1,458,624 and share-based compensation expense of $831,897. The net cash usedby operating activities of $5,732,185 in the six months ended October 31, 2006resulted primarily from the net loss of $7,176,036 partially offset by non-cashshare-based compensation expense of $1,064,210.

 

*Investing Activities.  *The net cash used by investing activities of$52,598 in the six months ended October 31, 2007 resulted from purchases ofproperty, plant and equipment. The net cash used by investing activities of$45,383 in the six months ended October 31, 2006 resulted from purchasesof property, plant and equipment of $96,051 partially offset by cash proceedsfrom the sales of property, plant and equipment of $50,668.

 

*Financing Activities.  *The net cash provided by financing activitiesof $4,030,372 in the six months ended October 31, 2007 resulted primarilyfrom the $4,196,152 in net cash proceeds obtained from the 2ndclosing of the 11% Notes in June 2007 (described below) partially offset bypayments under our related party lease obligation.  The net cash providedby financing activities of $1,991,204 in the six months ended October 31,2006 resulted primarily from the $2,151,250 in net cash proceeds obtained fromthe October 2006 private placement (described in our Annual Report on Form10-KSB for the fiscal year ending April 30, 2007) partially offset by paymentsunder our related party lease obligation.

 

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On April 20, 2007 and June 15, 2007, we enteredinto Secured Note Purchase Agreements for the issuance and sale of 11% Notesand warrants for the purchase of our 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  |   |

 

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| (1)    |   | A  related party entity that is an affiliate of Whitebox Advisors, LLC  (“Whitebox”), then a beneficial owner of more than 10% of our common stock.       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                |
| (2)    |   | Related  party entities that are affiliates of Potomac Capital Management, LLC  (“Potomac”), then a beneficial owner of more than 5% of our common stock. |

 

 

The 11% Notes are secured****by a first priority security interest in our assets. The Secured Note Purchase Agreements contain a restrictive covenant thatprohibits us from issuing more than an aggregate of $12,500,000 of 11% Notes.We have the right to prepay the 11% Notes, subject to a premium payment of 8%if prepayment is made within the first year; 6% if prepayment is made withinthe second year; and 3% if prepayment is made within the third year. Theprepayment premium does not apply if the prepayment of the 11% Notes is aresult of a change of control.

 

The principal amount of each 11% Note and any accruedbut unpaid interest is due and payable three years following the respectivedate of issuance of each note. During the first year, interest on the 11% Noteswill accrue and be added to the principal balance of the note. Within 30 daysfollowing the end of the first year from issuance of each note, we areobligated to issue to each holder 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 first year by $4.00.During the second and third years from issuance of each note, we have theoption each quarter to either (i) pay the accrued interest on each note onor before the 15th day following the end of such quarteror (ii) allow the interest for such quarter to accrue and be added to theprincipal 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.

 

The warrants issued at the 1st and2nd 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 the

 

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SECin the number of shares covered by such resale registration statement wouldhave been made on a pro-rata basis.  We filed a registration statement onAugust 6, 2007, which became effective on August 13, 2007, to enable the resaleof the shares of common stock underlying the Closing Warrants. We are requiredto keep the registration statement current, effective and free from anymaterial misstatement or omission to state a material fact for a specifiedperiod, not to exceed two years from the effective date of the registrationstatement. We are not required to register for resale the shares of commonstock underlying the interest accrual warrants.

 

We paid a 6% commission on the gross proceeds ofeach closing to the placement agent and certain expenses incurred by theholders and placement agent associated with this transaction. Total financingcosts of $892,000 were incurred by us associated with the aggregate of$12,500,000 in financing.

 

*Analysis*

 

We expect to continue to incur operating losses andnegative operating cash flow as we seek to drive market adoption of oursurgical ablation systems. We have recognized limited revenue from single-useATRILAZE devices and expect to recognize limited revenue from single-use SOLARand ATRILAZE devices in the first half of calendar year 2008. Our systems arecurrently being used in the clinical setting and we have begun to place capitalequipment in hospitals and train physicians on the use of our laser technology.We do not expect to generate measurable sales of the SOLAR System until thefiscal year ending April 30, 2009, at the earliest. However, we anticipate thatour general and administrative, research and development, and sales andmarketing expenses will continue to constitute a material use of our cashresources. 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-Oxley Act. Theactual amounts and timing of our expenditures will vary significantly dependingupon the progress of our product development and the availability of financing.During the remaining quarters of our fiscal year ending April 30, 2008, weexpect to incur capital expenditures aggregating approximately $150,000,including approximately $100,000 for facility and building improvements and approximately$50,000 for equipment. We anticipate using our available cash to fund suchcapital expenditures. Our cash and cash equivalents balance of $6,925,420 atOctober 31, 2007 is expected to last through the fiscal year ending April 30,2008.

 

Given the level of ourcapital resources, we expect to require additional financing to achieve ourgoal of providing the leading surgical ablation treatment option for AF.Because we are not generating positive cash flow from operations, we will berequired to raise additional funds through public or private sales of equitysecurities or the incurrence of indebtedness. Our ability to fund our businessplan depends on the availability of equity and debt financing, which isaffected by prevailing economic conditions in the medical device industry andfinancial, business and other factors, some of which are beyond our control. Wecannot assure that we will obtain financing on favorable terms or at all. If weelect to raise additional capital through the issuance and sale of equitysecurities, the sales may be at prices below the market price of our stock, andour shareholders may suffer significant dilution. In particular, as part of ourApril and June 2007 debt financing, we issued warrants for the purchase of an aggregateof 1,874,998 shares of common stock with an exercise price of $4.00 per shareand we agreed to issue certain additional interest accrual warrants, all ofwhich contain full-ratchet anti-dilution provisions for a period of 12 monthsfrom their respective dates of issuance. Such provisions may increase thedilution other shareholders suffer if we were to raise additional capitalthrough the issuance and sale of equity securities.

 

Debt financing, ifavailable, may involve significant cash payment obligations, covenants andfinancial ratios that restrict our ability to operate and grow our business,and would cause us to incur additional interest expense and financing costs. Weissued an aggregate of $12,500,000 of 11% Notes in April and June 2007. Becausewe are contractually precluded from issuing additional 11% Notes, andsubstantially all of our assets are pledged to our existing lenders, ourability to fund continued operations through the issuance of debt is furtherrestricted. Interest on our outstanding debt will accrue and be added to theprincipal balance during the first year. Thereafter, we will have the option topay interest in cash, or have the interest accrue and be added to the principalbalance and issue interest 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.

 

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Our capital requirements mayvary depending upon the timing and the success of the implementation of ourbusiness plan, regulatory, technological and competitive developments, or if:

 

•      significant sales of our products are not achieved or are delayed;

•      operating losses exceed our expectations;

•      our manufacturing and development costs or estimates prove to beinaccurate; or

•      we acquire, license or develop additional technologies.

 

We cannot, however, assureyou that our efforts to implement our business strategy will:

 

•      be attainable;

•      be profitable;

•      reduce our reliance upon financing transactions; or

•      enable us to continue operations.

 

**Commitments and 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.

 

*RelatedParty Lease Obligation.*Simultaneouswith the sale of our land and building in April 2003 to PKM, an entitycontrolled by Paul K. Miller, we entered into a lease with PKM to lease backthe building 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 anyrelease of hazardous materials at the property.

 

*LightWaveTechnology Purchase Agreement.*In August 2003, we entered into a technology purchase agreement withLightWave and its principals, one of whom became an employee of our company.The technology purchase agreement related to our acquisition of LightWave’sinterests in technology consisting of a catheter/probe containing elements ofoptical fiber, coolant passages and other features for the purpose ofdelivering laser energy to the epicardial surface of the heart for treatment ofAF. We agreed to use our reasonable commercial efforts to commercialize thetechnology within three years following the acquisition of the technology fromLightWave. LightWave and two of its principals have agreed to certainnoncompetition obligations, nondisclosure obligations, and certain obligationsto assign new developments or inventions relating to the acquired technology toour company.

 

We paid LightWave an initialpayment consisting of 1,500 shares of our common stock, $10,000 upon closingand an additional $30,000 to LightWave in installments in fiscal year 2004 and2005. An additional $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 of disposable products. Inaddition, at closing, during fiscal year 2004, we issued to LightWave a warrantfor the purchase of 2,500 shares of our common stock at $14.60 per share and,during fiscal year 2005, a warrant for the purchase of 2,500 shares of ourcommon stock at $14.60 per share upon receiving an FDA 510(k) clearance. Duringfiscal year 2007, we issued to LightWave a warrant for the purchase of 2,500shares of our common stock at $14.60 per share due to the receipt of a U.S.utility patent covering the product and a warrant for the purchase of 2,500shares of our common stock at $14.60 per share due to the first commercial saleof our ATRILAZE System single-use device.

 

Following November 29, 2005,the date of the first commercial sale of our ATRILAZE System single-use device,we agreed to make payments to LightWave for ten years equal to 6% of net salesof such product in countries in which we have patent protection, including theUnited States, and 4% of net sales of such product in countries in which thereis no patent protection. These payments are due within 60 days following eachfiscal quarter.

 

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Commencing with the secondyear following the first commercial sale on November 29, 2005, we agreed tomake minimum annual payments as follows:

 
| **Annual Period Ending** | ** ** | **Minimum Annual  Payment** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| November 29, 2007             |       | $                                | 50,000     |   |
| 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             |       | $                                | 2,325,000  |   |

 

If we fail in any year topay the minimum annual payment, we may be obligated to grant LightWave anonexclusive right to use the technology acquired from LightWave, or payLightWave the difference between the payment actually made and the minimumpayment due for a given year. If we discontinue the development or marketing ofthe product, we would have no further obligation to make the minimum annualpayments due to LightWave. However, in such event, LightWave may, upon writtenrequest, obtain from us a license to use the intellectual property or, at ouroption, we may assign our rights in the intellectual property to LightWave.

 

*OperatingLease.*We have anoperating lease for a certain piece of office equipment, which expires infiscal year 2011. At the end of the initial lease term, we have the option topurchase the equipment at fair market value, renew the lease, or return theequipment.

 

*ProductLiability Contingency.*InMarch 2005, we became aware that a patient who was utilizing one of our heartvalves had died. We have not received any claims related to this matter butbelieve 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.

 

*SeveranceContingencies.*As ofOctober 31, 2007, employment agreements with five officers contain a provisionfor payments of up to twelve months of severance if the employment of theofficer is terminated without cause by us or for good reason by the officer asdefined in the agreements.

 

*Severance Contract.*On June 28, 2007, we entered into anamendment to the restated Executive Employment Agreement with Eapen Chacko,then our Vice President, Finance and Chief Financial Officer, to reflect themutual decision reached concerning Mr. Chacko’s departure from ourcompany. Pursuant to the amendment, Mr. Chacko’s employment terminated onSeptember 15, 2007. In connection with Mr. Chacko’s departure, we paid Mr.Chacko a lump sum severance payment of $100,000 on the date of termination. IfMr. Chacko is not reemployed or serving as an independent contractor, Mr.Chacko may be eligible for six monthly installments of base salary of $16,667beginning March 2008 and such payments will cease on the earlier of: 1) thedate Mr. Chacko is reemployed or serves as an independent contractor; or 2)September 2008. In addition to these severance payments, we have agreed to payor reimburse Mr. Chacko for medical (COBRA) benefits as set forth in theExecutive Employment Agreement.

 

25

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The following tablesummarizes our contractual obligations as of October 31, 2007, excluding theproduct liability contingency and the severance contingencies, as describedabove:

 
| ** **                                            | ** ** | **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)                 |       | 2,266,158                                 |       | 438,734 |   | 849,754 |   | 977,670 |   |
| LightWave Minimum Payments (4)                        |       | 2,325,000                                 |       | 50,000 |   | 175,000 |   | 2,100,000 |   |
| Operating Lease (3)                                   |       | 14,285                                    |       | 5,530 |   | 8,755 |   | — |   |
| Severance Contract (5)                                |       | 100,000                                   |       | 100,000 |   | — |   | — |   |
| Total Contractual Obligations                         |       | $                                         | 21,943,473 |   | $ | 594,264 |   | $ | 18,271,539 |   | $ | 3,077,670 |   |

 

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(1)    Future payment amount assumes we elect to exercise our option to allowinterest payable to accrue and be added to the principal 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 payable within 45 days following ourachievement of $1,500,000 of cumulative gross sales.

 

(5)    Future payment amount assumes Mr. Chacko is not reemployed or servingas an independent contractor prior to September 15, 2008.

 

**Off-Balance Sheet Arrangements**

 

Other than as set forth above in “Commitments andContingent Liabilities,” we do not have any off-balance sheet arrangements thathave or are reasonably likely to have a material current or future effect onour financial condition, changes in financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resources.

 

**Qualitativeand Quantitative Disclosures about Market Risk**

 

We are focusing substantially all of our resourceson the development and introduction of our surgical ablation systems. For theforeseeable future, we expect that sales will be in the U.S. denominated inU.S. dollars. Our interest income and expenses are sensitive to changes in thegeneral level of U.S. interest rates, particularly since our investments are inshort-term instruments. At October 31, 2007 and April 30, 2007, we held amajority of our cash in a money market account. Based on the current nature andlevels of our investments we believe that we currently have no material marketrisk exposure. Our general investing policy is to limit market and credit riskand the risk of principal loss. All liquid investments with maturities of threemonths or less are considered to be cash equivalents.

 

**ITEM 3   CONTROLS ANDPROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934, as amended (the “Exchange Act”)) that are designed to ensure thatinformation required to be disclosed by us in the reports we file or submitunder the Exchange Act is recorded, processed, summarized, and reported, withinthe time periods specified in the U.S. Securities and Exchange Commission’s

 

26

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rules and forms, and thatsuch information is accumulated and communicated to our management, includingour principal executive officer and principal financial officer, to allowtimely decisions regarding required disclosure.

 

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour Company’s disclosure controls and procedures as of the end of the periodcovered in this Quarterly Report on Form 10-QSB.  Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective as of theend of the period covered in this Quarterly Report on Form 10-QSB.

 

**Changes in Internal Control Over Financial Reporting**

 

There was no change in our internal control overfinancial reporting that occurred during our quarter ended October 31, 2007 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

27

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**PART II**

 

**OTHERINFORMATION**

 

**ITEM 1   LEGALPROCEEDINGS**

 

On October 19, 2007, we entered into a settlementagreement with J Giordano Securities LLC (d/b/a J Giordano Securities Group) (“JGSG”)pursuant to which we settled and resolved all disputes, claims and matters incontroversy between our company and JGSG in exchange for our payment to JGSG of$750,000 in cash. Without admitting any liability or wrongdoing, JGSG and ourcompany mutually released each other from any and all claims, demands, andcauses of action, suits, debts or liabilities of any kind which were or couldhave been asserted in the federal action or arbitration.

 

JGSG had filed a complaint for breach of anengagement agreement against us in the United States District Court for theDistrict of Connecticut, alleging that JGSG was entitled to additionalcompensation pursuant to certain financing activities by us that occurred inDecember 2005, January 2006, and October 2006, as well as certain compensationrelating to registration of the shares underlying the warrants issued to JGSGas compensation in connection with the April 2005 private placement of oursecurities in which JGSG was a placement agent. We had moved to dismiss or staythe federal action and to compel arbitration before the National Association ofSecurities Dealers, pursuant to which the federal action was stayed. JGSG thenfiled a statement of claim and we filed a counterclaim in the arbitration,alleging breach of the engagement agreement and fraud in the inducement. JGSGthen filed an amended statement of claim in the arbitration, pursuant to whichJGSG claimed it was entitled to alleged damages of $3,346,565 plusreimbursement for reasonable expenses, interest, costs and attorneys’ fees. Inorder to avoid the costs, uncertainty, and inconvenience associated withadversary proceedings, we entered into the above-referenced settlementagreement with JGSG, effective October 19, 2007.

 

**ITEM 4   SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

TheCompany’s 2007 Annual Meeting of Shareholders was held on October 11,2007.  Five proposals were submitted to shareholders for approval, each ofwhich passed with voting results as follows:

 

(1)          To electeight directors for the ensuing year and until their successors shall beelected and duly qualified.  Each of the nominees for directors, as listedin the proxy statement, was elected with the number of votes set forth below:

 

| **Name**               | ** ** | **For**   | ** ** | **Withhold** | ** ** |
|------------------------|------------|-----------|------------|--------------|------------|
| Susan L. Critzer       |       | 6,914,476 |       | 73,016       |       |
|                   |       |      |       |         |       |
| Marc P. Flores         |       | 6,913,768 |       | 73,724       |       |
|                   |       |      |       |         |       |
| David A. Chazanovitz   |       | 6,922,442 |       | 65,050       |       |
|                   |       |      |       |         |       |
| Richard J. Faleschini  |       | 6,922,442 |       | 65,050       |       |
|                   |       |      |       |         |       |
| Larry G. Haimovitch    |       | 6,922,442 |       | 65,050       |       |
|                   |       |      |       |         |       |
| David B. Kaysen        |       | 6,922,442 |       | 65,050       |       |
|                   |       |      |       |         |       |
| Paul K. Miller         |       | 6,914,603 |       | 72,889       |       |
|                   |       |      |       |         |       |
| J. Robert Paulson, Jr. |       | 6,914,476 |       | 73,016       |       |

 

28

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(2)           Toapprove the amendment of our Restated Articles of Incorporation. 

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|--------------------------|------------|
| 5,993,052 |       | 931,757     |       | 62,683      |       | 0                        |       |

 

(3)           Toapprove the amendment to our Amended and Restated 2001 Equity Incentive Plan.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|--------------------------|------------|
| 3,881,075 |       | 1,128,660   |       | 12,610      |       | 0                        |       |

 

(4)           Toapprove the amendment to our 2005 Director Stock Option Plan.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|--------------------------|------------|
| 3,789,269 |       | 1,216,366   |       | 16,710      |       | 0                        |       |

 

(5)           Toratify the appointment of Lurie Besikof Lapidus & Company, LLP as ourindependent registered public accounting firm for the fiscal year ending April30, 2008.
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Vote** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|--------------------------|------------|
| 6,923,809 |       | 1,000       |       | 62,683      |       | 0                        |       |

 

**ITEM 5   OTHERINFORMATION**

 

On December 5, 2007, the Board of Directorsof our company approved an amendment and restatement of the company’sBylaws. In particular, the following changes were made:  (1) Section 5.4 was added to allow thecompany to issue uncertificated shares of stock in accordance with SECregulations which allow for securities to be listed on a DirectRegistration System, (2) Section 2.6 was amended to increase the minimum noticegenerally applicable to regular and special meetings of shareholders from fivedays before the meeting to ten days before the meeting, (3) references to thename of the company were updated from “CV Dynamics” to “MedicalCV, Inc.” and(4) a reference to the name of a Board committee was updated from “NominatingCommittee” to “Corporate Governance and Nominating Committee.”

 

**ITEM 6   EXHIBITS**

 

See “Index to Exhibits.”

 

29

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**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                         | MedicalCV,  Inc. |
|------------------------------|------------------|
|                         |             |
|                         |             |   |
| Date: December  7, 2007 | 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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**INDEXTO 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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                |       | Non-Employee  Director Compensation Policy, as amended and restated on August 16, 2007  (incorporated by reference to our Current Report on Form 8-K filed on August  21, 2007 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.2                |       | Management  Incentive Plan, adopted August 16, 2007 (incorporated by reference to our  Current Report on Form 8-K, filed on August 21, 2007 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.3                |       | Executive  Employment Agreement, effective September 17, 2007, by and between the  Registrant and Michael A. Brodeur (incorporated by reference to our Current  Report on Form 8-K, filed on September 11, 2007 (File No. 000-33295)).                                                                                                                                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.4                |       | Amended and  Restated 2001 Equity Incentive Plan (incorporated by reference to our  Definitive Schedule 14A (Proxy Statement), filed on September 11, 2007 (File  No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.5                |       | Amended and  Restated 2005 Director Stock Option Plan (incorporated by reference to our  Definitive Schedule 14A (Proxy Statement), filed on September 11, 2007 (File  No. 000-33295)).                                                                                                                                                                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.6                |       | Settlement  Agreement between the Registrant and J Giordano Securities LLC d/b/a J  Giordano Securities Group, dated October 19, 2007 (incorporated by  reference to our Current Report on Form 8-K, filed on October 22, 2007 (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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