**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

**FORM 10-QSB/A**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31,  2005** |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                      |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                   |

 

**CommissionFile Number 0-33295**

 

**MedicalCV, Inc.**

(Exact Name ofSmall Business Issuer as Specified in Its Charter)

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

 

**9725South Robert Trail**

**InverGrove Heights, Minnesota 55077**

**(651)452-3000**

(Address ofPrincipal Executive Offices and Issuer’s

Telephone Number,including Area Code)

 

Check whether theissuer:  (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes  ý No  o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes  o No  ý

 

As of September 13,2005, the issuer had outstanding 11,353,333 shares of common stock and 17,785shares of convertible preferred stock.

 

Transitional SmallBusiness Disclosure Format (check one)   oYes   ý No

 

**PURPOSE OF AMENDMENT**

 

The following Part I item is being amended inthis Form 10-QSB/A:  Item 1.  This amendment is being filed to disclose thenature and effect of a previously disclosed amendment to our financialstatements within footnote 4 to the financial statements contained herein.

 

 

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TABLE OF CONTENTS

 
| PART I       | FINANCIAL INFORMATION |                                                                                                                           |
|-------------------|-----------------------|--------------------------------------------------------------------------------------------------------------------------------|
|              |                  |                                                                                                                           |
|              | ITEM 1                | Financial Statements                                                                                                           |   |
|              |                  | Balance Sheets at July 31, 2005 (unaudited)  and April 30, 2005                                                      |   |
|              |                  | Statements of Operations for the  three-month periods ended July 31, 2005 (unaudited) and July 31,  2004 (unaudited) |   |
|              |                  | Statements of Cash Flows for the  three-month periods ended July 31, 2005 (unaudited) and July 31,  2004 (unaudited) |   |
|              |                  | Notes to Financial Statements                                                                                                  |   |
|              | ITEM 2                | Management’s Discussion and  Analysis or Plan of Operation                                                                |   |
|              | ITEM 3                | Controls and Procedures                                                                                                        |   |
|              |                  |                                                                                                                           |   |
| PART II      | OTHER INFORMATION     |                                                                                                                           |
|              |                  |                                                                                                                           |   |
|              | ITEM 6                | Exhibits                                                                                                                       |   |
|              |                  |                                                                                                                           |   |
| SIGNATURES        |                  |                                                                                                                           |
| INDEX TO EXHIBITS |                  |                                                                                                                           |

 

2

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**PART I**

 

**FINANCIAL INFORMATION**

 

**ITEM 1****                                                        FINANCIALSTATEMENTS**

 

**MEDICALCV, INC.**

**BalanceSheets**

 
| ** **                                                                                                                                                                                            | ** ** | **July 31,** | ** ** | **April 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                            | ** ** | **2005**          | ** ** | **2005**           | ** ** |
| ** **                                                                                                                                                                                            | ** ** | **(unaudited)**   | ** ** | ** **         | ** ** |
| **ASSETS**                                                                                                                                                                                            |       |              |       |               |       |
| Current  assets:                                                                                                                                                                                      |       |              |       |               |       |
| Cash  and cash equivalents                                                                                                                                                                            |       | $                 | 8,883,804  |               | $          | 10,637,796 |   |
| Prepaid  expenses and other assets                                                                                                                                                                    |       | 191,384           |       | 199,978            |       |
| Current  assets of discontinued operations                                                                                                                                                            |       | 432,182           |       | 875,648            |       |
| Total  current assets                                                                                                                                                                                 |       | 9,507,370         |       | 11,713,422         |       |
|                                                                                                                                                                                                  |       |              |       |               |       |
| Property,  plant and equipment, net                                                                                                                                                                   |       | 1,010,317         |       | 827,791            |       |
| Deferred  financing costs, net                                                                                                                                                                        |       | 56,407            |       | 58,226             |       |
| Other  long-term assets                                                                                                                                                                               |       | 30,798            |       | 30,798             |       |
| Non-current  assets of discontinued operations                                                                                                                                                        |       | 367,799           |       | 367,799            |       |
| Total  assets                                                                                                                                                                                         |       | $                 | 10,972,691 |               | $          | 12,998,036 |   |
|                                                                                                                                                                                                  |       |              |       |               |       |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIT**                                                                                                                                                        |       |              |       |               |       |
| Current  liabilities:                                                                                                                                                                                 |       |              |       |               |       |
| Accounts  payable                                                                                                                                                                                     |       | $                 | 108,550    |               | $          | 399,588 |   |
| Current  portion of related party lease obligations                                                                                                                                                   |       | 314,005           |       | 311,155            |       |
| Accrued  expenses                                                                                                                                                                                     |       | 267,908           |       | 179,095            |       |
| Current  liabilities of discontinued operations                                                                                                                                                       |       | 16,300            |       | 202,595            |       |
| Total  current liabilities                                                                                                                                                                            |       | 706,763           |       | 1,092,433          |       |
| Fair  value of puttable warrants                                                                                                                                                                      |       | 21,538,671        |       | 27,992,609         |       |
| Related  party lease obligations, less current portion                                                                                                                                                |       | 2,786,564         |       | 2,824,977          |       |
| Total  liabilities                                                                                                                                                                                    |       | $                 | 25,031,998 |               | $          | 31,910,019 |   |
|                                                                                                                                                                                                  |       |              |       |               |       |
| Commitments  and contingencies                                                                                                                                                                        |       |              |       |               |       |
|                                                                                                                                                                                                  |       |              |       |               |       |
| 5%  series A, convertible preferred stock; $.01 par value; 19,000 shares  authorized; 17,785 and 18,035 shares issued and outstanding as of July 31,  2005 and April 30, 2005, respectively |       | —            |       | —             |       |
|                                                                                                                                                                                                  |       |              |       |               |       |
| Shareholders’  deficit:                                                                                                                                                                          |       |              |       |               |       |
| Common  stock; $.01 par value; 95,000,000 shares authorized; 11,353,333 and  10,849,583 shares issued and outstanding as of July 31, 2005 and April 30,  2005, respectively                 |       | 108,533           |       | 108,496            |       |
| Additional  paid-in capital                                                                                                                                                                           |       | 23,387,565        |       | 23,386,478         |       |
| Accumulated  deficit                                                                                                                                                                                  |       | (37,555,405       | )          | (42,406,957        | )          |
| Total  shareholders’ deficit                                                                                                                                                                     |       | (14,059,307       | )          | (18,911,983        | )          |
| Total  liabilities and shareholders’ deficit                                                                                                                                                     |       | $                 | 10,972,691 |               | $          | 12,998,036 |   |

 

The accompanying notesare an integral part of these financial statements.

 

3

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**MEDICALCV, INC.**

**Statements of Operations**

**(unaudited)**

 
|                                                 | ** ** | **Three months ended July 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
|                                                 | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Operating expenses,  continuing operations:          |       |                                 |       |   |   |
| Sales and marketing                                  |       | $                                    | 105,217    |   | $ | — |   |
| General and  administrative                          |       | 763,329                              |       | 868,785 |   |
| Research and  Development                            |       | 403,225                              |       | — |   |
| Engineering and  regulatory                          |       | —                               |       | 312,210 |   |
| Total operating  expenses                            |       | 1,271,771                            |       | 1,180,995 |   |
| Loss from operations                                 |       | (1,271,771                           | )          | (1,180,995 | ) |
| Other income (expense):                              |       |                                 |       |   |   |
| Decrease in warrant  liability                       |       | 6,453,938                            |       | — |   |
| Interest income                                      |       | 68,962                               |       | 2,840 |   |
| Interest expense                                     |       | (79,036                              | )          | (180,420 | ) |
| Other income (expense)                               |       | 1,060                                |       | 312 |   |
| Total other income  (expense)                        |       | 6,444,924                            |       | (177,268 | ) |
|                                                 |       |                                 |       |   |   |
| Income (loss) from  continuing operations            |       | 5,173,153                            |       | (1,358,263 | ) |
| Income (loss) from  discontinued operations          |       | (102,969                             | )          | 103,607 |   |
| Net Income (loss)                                    |       | $                                    | 5,070,184  |   | $ | (1,254,656 | ) |
|                                                 |       |                                 |       |   |   |
| Basic and dilutive loss  to common shareholders      |       |                                 |       |   |   |
| Net income (loss)                                    |       | $                                    | 5,070,184  |   | $ | (1,254,656 | ) |
| Convertible preferred  stock dividends               |       | (218,633                             | )          | — |   |
| Net income (loss) to  common shareholders            |       | $                                    | 4,851,551  |   | $ | (1,254,656 | ) |
|                                                 |       |                                 |       |   |   |
| Earning (loss) per  share - Continuing operations    |       |                                 |       |   |   |
| Basic                                                |       | $                                    | 0.47       |   | $ | (0.14 | ) |
| Diluted                                              |       | (0.06                                | )          | (0.14 | ) |
|                                                 |       |                                 |       |   |   |
| Earning (loss) per  share - Discontinured operations |       |                                 |       |   |   |
| Basic                                                |       | (0.01                                | )          | 0.01 |   |
| Diluted                                              |       | (0.01                                | )          | 0.01 |   |
|                                                 |       |                                 |       |   |   |
| Earnings (loss) per  share                           |       |                                 |       |   |   |
| Basic                                                |       | 0.44                                 |       | (0.13 | ) |
| Diluted                                              |       | (0.07                                | )          | (0.13 | ) |
|                                                 |       |                                 |       |   |   |
| Weighted average shares  used                        |       |                                 |       |   |   |
| Basic                                                |       | 11,024,420                           |       | 9,489,670 |   |
| Diluted                                              |       | 21,393,743                           |       | 9,489,670 |   |

 

The accompanying notesare an integral part of these financial statements.

 

4

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**MEDICALCV,INC.**

**Statementsof Cash Flows**

**(unaudited)**

 
| ** **                                                                                                  | ** ** | **Three months ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                                                      |       |                                 |       |   |   |
| Net income (loss)                                                                                           |       | $                                    | 5,070,184  |   | $ | (1,254,656 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities:                       |       |                                 |       |   |   |
| Depreciation                                                                                                |       | 56,248                               |       | 80,247 |   |
| Increase (decrease) in  warrant liability                                                                   |       | (6,453,938                           | )          | — |   |
| Provision for inventory  obsolescence                                                                       |       | —                               |       | 10,250 |   |
| Stock-based  compensation                                                                                   |       | —                               |       | 452 |   |
| Interest and other  income (expense) related to issued warrants and amortization of loan  origination costs |       | —                               |       | 14,294 |   |
| Changes in assets and  liabilities:                                                                         |       |                                 |       |   |   |
| Accounts receivable                                                                                         |       | —                               |       | 111,245 |   |
| Inventories                                                                                                 |       | —                               |       | (3,115 | ) |
| Prepaid expenses and  other assets                                                                          |       | 453,788                              |       | 52,535 |   |
| Accounts payable                                                                                            |       | (291,039                             | )          | (191,802 | ) |
| Accrued expenses                                                                                            |       | (97,482                              | )          | 363,692 |   |
| Net cash used in  operating activities                                                                      |       | (1,262,239                           | )          | (816,858 | ) |
|                                                                                                        |       |                                 |       |   |   |
| Cash flows from  investing activities:                                                                      |       |                                 |       |   |   |
| Purchase of property,  plant and equipment                                                                  |       | (238,682                             | )          | (7,129 | ) |
| Proceeds from the sale  of property, plant and equipment                                                    |       | —                               |       | (152,500 | ) |
| Net cash used in  investing activities                                                                      |       | (238,682                             | )          | (159,629 | ) |
|                                                                                                        |       |                                 |       |   |   |
| Cash flows from  financing activities:                                                                      |       |                                 |       |   |   |
| Payments of term debt                                                                                       |       | —                               |       | (500,000 | ) |
| Deferred financing  costs                                                                                   |       | —                               |       | 10,920 |   |
| Proceeds from the  issuance of common stock and warrants, net of offering costs                             |       | —                               |       | 2,002,907 |   |
| Preferred dividend paid                                                                                     |       | (218,633                             | )          | — |   |
| Proceeds from option  exercise                                                                              |       | 1,125                                |       | — |   |
| Principal payments  under related party lease obligations                                                   |       | (35,563                              | )          | (37,928 | ) |
| Net cash provided by  (used in) financing activities                                                        |       | (253,071                             | )          | 1,475,899 |   |
|                                                                                                        |       |                                 |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                                                       |       | (1,753,992                           | )          | 499,412 |   |
| Cash and cash  equivalents at beginning of year                                                             |       | 10,637,796                           |       | 659,856 |   |
| Cash and cash  equivalents at end of period                                                                 |       | $                                    | 8,883,804  |   | $ | 1,159,268 |   |
|                                                                                                        |       |                                 |       |   |   |
| Supplemental disclosure  of cash flow information:                                                          |       |                                 |       |   |   |
|                                                                                                        |       |                                 |       |   |   |
| Cash paid for interest                                                                                      |       | $                                    | 79,035     |   | $ | 112,829 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

5

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**MEDICALCV,INC.**

 

**Notesto Financial Statements**

 

**(1)****                                 Basisof Financial Statement Presentation**

 

The accompanyingunaudited financial statements included herein have been prepared by MedicalCV, Inc.(the “Company”) in accordance with accounting principles generally accepted inthe United States of America for interim financial information and pursuant tothe rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations.  These interim financial statements should beread in conjunction with the financial statements and the notes theretoincluded in the Company’s Annual Report on Form 10-KSB, as amended, forthe fiscal year ended April 30, 2005.

 

The balance sheet as of July 31,2005, the statements of operations for the three months ended July 31, 2005and 2004, and the statements of cash flows for the three months ended July 31,2005 and 2004 include, in the opinion of management, all adjustments,consisting solely of normal recurring adjustments, 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, 2006.

 

**(2)****                                 GoingConcern**

 

The Company’s financialstatements for the quarter ended July 31, 2005, have been prepared on agoing concern basis, which contemplates the realization of assets andsettlement of liabilities and commitments in the normal course ofbusiness.  The Company has sustained losses and negative cash flows fromoperations in recent years and expects these conditions to continue for theforeseeable future.  At July 31, 2005, the Company had an accumulateddeficit of $37,555,405.  Although the Company raised funds through thesale of convertible preferred stock in the last quarter of fiscal year 2005,the level of cash required for operations during fiscal year 2006 is difficultto predict, and management anticipates that development of its new productswill require additional capital by October 2006.  These matters raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  Management intends to seek additional debt or equity financingas it continues development of new products.  However, the Company may notbe able to obtain such financing on acceptable terms or at all.  If theCompany is unable to obtain such additional financing, it will be required tosignificantly revise its business plans and drastically reduce operatingexpenditures such that it may not be able to develop or enhance its products,gain market share in the United States of America or respond to competitivepressures or unanticipated requirements, which could seriously harm itsbusiness, financial position and results of operations.

 

The Company is subject torisks and uncertainties common to medical technology-based companies, includingrapid technological change, new product development and acceptance, actions ofcompetitors and regulators, dependence on key personnel and market penetration.

 

**(3)****                                 Stock-BasedCompensation**

 

The Company accounts forstock-based employee compensation arrangements in accordance with the provisionsof Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations and complies with thedisclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123,“Accounting for Stock-Based Compensation” and SFAS No. 148 “Accounting forStock-Based Compensation-Transition and Disclosure, an amendment of SFASStatement No. 123.”

 

In December 2004,the Financial Accounting Standards Board (FASB) issued a revised FAS No. 123,“Share-Based Payment (revised 2004)” (FAS No. 123R), which supersedes APB No. 25and amends FAS No. 123 to require companies to expense the value ofstock-based compensation plans. Additionally, FAS 123R, once adopted, disallowsthe use of the prospective transition method permitted by FAS No. 148. FAS123R is effective as of the beginning of the first interim or annual reportingperiod that begins after June 15, 2005 (i.e., the beginning of the Company’sfiscal year 2006).

 

6

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For purposes of the proforma disclosures below, the estimated fair value of the options is amortizedto expense over the options’ vesting period.  Had compensation cost forthe Company’s stock options been recognized based on the fair value at the grantdate consistent with the provisions of SFAS No. 123, the Company’s netincome (loss) would have been adjusted to the pro forma amounts indicatedbelow:

 
| ** **                                                    | ** ** | **Three months ended July 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Net income (loss) to  common shareholders                     |       | $                                    | 4,851,551  |   | $ | (1,254,656 | ) |
| Less:  Pro forma  stock based employee compensation cost |       | (382,181                             | )          | (43,501 | ) |
|                                                          |       |                                 |       |   |   |
| Net income (loss) — pro  forma                           |       | $                                    | 4,469,370  |   | $ | (1,298,157 | ) |
|                                                          |       |                                 |       |   |   |
| Basic earnings (loss)  per share                              |       |                                 |       |   |   |
| As  reported                                                  |       | $                                    | .44        |   | $ | (.13 | ) |
| Pro  forma                                                    |       | .41                                  |       | (.13 | ) |
|                                                          |       |                                 |       |   |   |
| Diluted earnings (loss)  per share                            |       |                                 |       |   |   |
| As  reported                                                  |       | (.07                                 | )          | (.14 | ) |
| Pro  forma                                                    |       | (.09                                 | )          | (.14 | ) |

 

**(4)****                                 Earnings(loss) per Share**

 

Earnings (loss) per shareis computed under the provisions of SFAS No. 128, “Earnings Per Share.”  Basic earnings (loss) per common share iscomputed using net income (loss) and the weighted-average number of shares ofcommon stock outstanding.  Dilutedearnings (loss) per share reflects the potential dilution of securities thatcould share in the earnings of an entity. Diluted net loss per common share does not differ from basic net lossper common share in the three-month period ended July 31, 2004 since thepotentially dilutive shares are anti-dilutive to net loss per share. Potentially dilutive shares excluded from the calculation of diluted net lossper share related to outstanding stock options and warrants totaling 5,151,188in 2005 and outstanding stock options and warrants totaling 1,761,714 in 2004**.**

 

| ** **                                                                      | ** ** | **Three months ended July 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Net income (loss) to  common shareholders for basic (loss) earnings per share   |       | $                                    | 4,851,551  |   | $ | (1,254,656 | ) |
|                                                                            |       |                                 |       |   |   |
| Effect of dilutive  securities:                                                 |       |                                 |       |   |   |
|                                                                            |       |                                 |       |   |   |
| Decrease in warrant  liability                                                  |       | (6,453,938                           | )          | — |   |
|                                                                            |       |                                 |       |   |   |
| Net income (loss) to  common shareholders for diluted (loss) earnings per share |       | $                                    | (1,602,387 | ) | $ | (1,254,656 | ) |

 

| ** **                                                     | ** ** | **Three months ended July 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Weighted average shares  for basic (loss) earnings per share   |       | 11,024,420                           |       | 9,489,670 |   |
| Effect of dilutive  securities:                                |       |                                 |       |   |   |
| Shares  issuable under warrant agreements                      |       | 10,369,323                           |       | — |   |
| Weighted average shares  for diluted (loss) earnings per share |       | 21,393,743                           |       | 9,489,670 |   |

 

The Company restateddilutive earnings (loss) per share from continuing operations for the threemonths ended July 31, 2005, to correct a computational error.  The effect of the restatement was to decreasedilutive earnings per share from continuing operations by $0.30.  This change had no impact on net incomeavailable to common shareholders for the three months ended July 31, 2005, ortotal shareholder deficit at July 31, 2005.

 

**(5)****                                 DiscontinuedOperations**

 

On November 18,2004, the Company’s board of directors voted to authorize management to ceaseproduction of heart valves but to continue marketing the valves while exploringthe merits of possible strategic alternatives for the heart valve business,including, but not limited to, a joint venture with another party or the saleof the business.  Following exploration of a number of alternatives,management concluded in April 2005 that an orderly winding up of the valvebusiness was the Company’s best alternative.  On April 6, 2005, theCompany’s board authorized management to discontinue sales of heart valveseffective April 30, 2005, and to seek a buyer for the related productionequipment.

 

As a result of theCompany’s discontinuance of the heart valve business, the Company made adetermination during the fourth quarter of fiscal year 2005 that the remainingassets of the heart valve operations should be considered “held for sale”pursuant to SFAS No. 144, “Accounting for Impairment or Disposal ofLong-Lived Assets.”  (SFAS No. 144)  Pursuant to SFAS No. 144,the Company ceased depreciation of property and equipment held for sale andevaluated whether any of the long-lived assets of the discontinued heart valvebusiness were impaired.  Based upon the estimated selling prices of theseassets, management concluded that the carrying value of these assets was not

 

7

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impaired.  As of July 31,2005 and April 30, 2005, the carrying value of the remaining net assets ofthe heart valve business is reported as assets of discontinued operations onthe Company’s balance sheet.  In connection with this decision todiscontinue the sale of heart valves, the Company reduced the carrying value ofcertain excess inventories, resulting in a provision recorded during fiscalyear 2005 of $2,573,656.  This provision was included in the 2005 lossfrom discontinued operations.

 

Valve business revenueand loss before income taxes included in discontinued operations are asfollows:

 

| ** **                         | ** ** | **For Three Months Ended July 31,** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Revenues                           |       | $                                        | 338,333    |   | $ | 795,503 |   |
|                               |       |                                     |       |   |   |
| Income (loss) before  income taxes |       | $                                        | (102,969   | ) | $ | 103,607 |   |

 

The carrying amounts andmajor classes of the assets and liabilities, which are presented as assets andliabilities of discontinued operations on the accompanying balance sheet as of July 31,2005 and April 30, 2005, are as follows:

 
| ** **                                                                                                                  | ** ** | **July 31, 2005** | ** ** | **April 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                  |       |                   |       |                    |       |
| Accounts receivable,  net of allowance of $13,974 and $196,521 at July 31, 2005 and April 30,  2005, respectively |       | $                      | 364,913    |                    | $          | 557,291 |   |
| Inventories                                                                                                                 |       | —                 |       | 228,665                 |       |
| Prepaid expenses                                                                                                            |       | 67,269                 |       | 89,692                  |       |
| Total  current assets of discontinued operations                                                                            |       | $                      | 432,182    |                    | $          | 875,648 |   |
|                                                                                                                        |       |                   |       |                    |       |
| Property, plant and  equipment, net                                                                                         |       | $                      | 188,145    |                    | $          | 188,145 |   |
| Other long-term assets                                                                                                      |       | 179,654                |       | 179,654                 |       |
| Total  non-current assets of discontinued operations                                                                        |       | $                      | 367,799    |                    | $          | 367,799 |   |
|                                                                                                                        |       |                   |       |                    |       |
| **LIABILITIES**                                                                                                             |       |                   |       |                    |       |
| Accounts payable                                                                                                            |       | $                      | 6,000      |                    | $          | 192,295 |   |
| Accrued expenses                                                                                                            |       | 10,300                 |       | 10,300                  |       |
| Total  current liabilities of discontinued operations                                                                       |       | $                      | 16,300     |                    | $          | 202,595 |   |
|                                                                                                                        |       |                   |       |                    |       |
| Net assets of  discontinued operations                                                                                      |       | $                      | 783,681    |                    | $          | 1,040,852 |   |

 

**(6)****                                 Restructuringand Severance Charges**

 

In the quarter ended July 31,2004 (the first quarter of fiscal year 2005), the Company restructured itsexecutive management team, resulting in the termination of two employees, whichresulted in a charge of approximately $214,000 to general and administrativeexpenses.  This charge represented the amount of future severance paymentsdue to these former employees.  During the quarter ended October 31,2004, the Company terminated an additional five employees in an effort toreduce operating costs.  This restructuring resulted in approximately$46,000 of additional severance costs, which were charged to general andadministrative expense.  In the quarter ended January 31, 2005, theCompany terminated an additional eleven employees resulting in approximately$48,000 of severance costs charged to general and administrative expense. During the quarter ended July 31, 2005 (the first quarter of fiscal year2006) the Company entered into a separation agreement with an employee,resulting in a charge to general and administrative expense for severance payof $40,382. The Company expects to pay all amounts due to these formeremployees by September 30, 2005.  As of July 31, 2005, $27,802remained accrued but not paid.

 

8

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| ** **                                           | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-----------|------------|
|                                                 |       |      |       |
| Restructuring charges  fiscal year 2005              |       | $         | 308,000    |   |
| Cash usage fiscal year  2005                         |       | (283,166  | )          |
| Balance as of April 30,  2005                   |       | $         | 24,834     |   |
| Severance charges first  quarter of fiscal year 2006 |       | 40,382    |       |
| Cash usage first quarter  of fiscal year 2006        |       | (37,414   | )          |
| Balance as of July 31,  2005                    |       | $         | 27,802     |   |

 

**(7)****                                 EquitySale**

 

During the fourth quarterof fiscal year 2004 and the first quarter of fiscal year 2005, the Companycompleted the private sale of 2,730,763 units for $1.47 per unit.  Eachunit consisted of one share of common stock and one five-year warrant topurchase a common share for $1.60 per share.  Proceeds from the offering,net of offering costs of $452,892, were $3,561,330.  In addition to cashcommissions included in the offering costs, the Company issued to the privateplacement agent and finder five-year warrants to purchase an aggregate of 218,461units at $1.8375 per unit.  As a result of anti-dilution adjustmentsthrough July 31, 2005, these warrants are exercisable for 599,137 units at$0.67 per unit.

 

**PreferredStock**

 

On April 1, 2005,under the terms of a Securities Purchase Agreement with accredited investors,the Company issued 18,035 shares of 5% Series A Convertible PreferredStock to such investors, warrants for the purchase of 27,052,500 shares ofcommon stock to such investors exercisable at $0.50 per share, and warrants forthe purchase in the aggregate of 1,635,960 shares of common stock to theplacement agent and finder exercisable at $0.50 per share. These warrants havea term of five years. The preferred stock, which is non-voting, has astated value of $1,000 and accrues cumulative dividends at a rate of 5 percentof this stated value annually.  Dividends are payable quarterly but may,at the option of the Company, be added to the stated value rather than paid incash, if certain conditions are met.  Each share of preferred stock is convertibleinto the number of shares of common stock equal to the $1,000 stated valuedivided by $0.50, subject to anti-dilution adjustments.  As a result, the18,035 preferred shares sold may be converted into 36,070,000 shares of commonstock, subject to anti-dilution adjustments. As of July 31, 2005, there were 17,785 preferred sharesoutstanding.

 

In certain circumstances,the Company may have the option to require the preferred stockholders toconvert their shares into common stock.  In the event of a fundamentaltransaction, as defined, the preferred shareholders have the right to requirethe Company to redeem the preferred shares at their stated value, including anyaccrued but unpaid dividends.  In the event of certain defaults, thepreferred shareholders have the right to require the Company to redeem thepreferred shares at 110 percent their stated value, including any accrued butunpaid dividends.  As a result of these redemption provisions, thecarrying value of these preferred shares is considered to be redeemable and isreported as a “mezzanine” instrument on the Company’s balance sheet beginningon April 30, 2005.  The aggregate liquidation value of theseredeemable preferred shares at July 31, 2005 was $17,959,116. However, the carrying value of this redeemable preferred stock is zero, net ofa discount associated with the warrants issued to the shareholders, theplacement agent and the finder, as described below.

 

The Company is requiredto register the common shares underlying the preferred stock conversion optionand the purchaser warrants.  If the Company does not meet certainregistration deadlines, the preferred stockholders will be entitled toliquidated damages, as defined.  In the event of a fundamentaltransaction, as defined, the warrants issued to the preferred shareholders, theplacement agent and the finder, all provide the warrant holders with the rightto put the warrants to the Company for cash in an amount equal to the fairvalue of the warrants, as determined using the Black Scholes option pricingmodel.  As a result of this put right, the warrants are reported at theirfair value as a liability on the Company’s balance sheet beginning on April 30,2005, and future changes in the fair value of the warrant will result incharges or benefits to the Company’s results of operations. The fair value ofthese warrants upon closing of the preferred stock sale was $22,271,047. Because the fair value of these warrants at April 30, 2005, exceeded theproceeds received in the preferred stock and warrant issuances, the excess ofthe fair value of the warrants over the proceeds received (including the converteddebt) was recognized as an interest charge of 

 

9

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$4,266,047 uponclosing.  During the period between closing and April 30, 2005, thefair value of these warrants increased to $27,992,609.  The Companyreported this $5,721,562 increase in fair value as other expense in the fourthquarter of fiscal year 2005. During the quarter ended July 31, 2005, thefair value of these warrants decreased to $21,538,671.  The Companyreported this $6,453,938 decrease in fair value as a decrease in warrantliability in other income (expense) in the first quarter of fiscal year 2006.

 

The Company obtainedgross cash proceeds of $13,603,000 at the closing (net of $30,000 in legal feeswhich were withheld by the lead investor).  The Company also converted$4,402,000 of indebtedness into the above-referenced securities.  TheCompany incurred cash offering costs of $817,980, including agent commissions,a finder’s fee and out-of-pocket expense reimbursements to certain third parties. The Company also paid legal and administrative expenses of $18,086 incurred by PKMProperties, LLC (“PKM”) in this transaction. PKM is an entity controlled by Paul K. Miller.  Mr. Millerserves on our Board of Directors and is our largest shareholder.

 

**(8)****                                 SegmentInformation**

 

The Company views itsoperations and manages its business as one segment, the manufacturing andmarketing of cardiothoracic surgery devices.  Factors used to identify theCompany’s single operating segment include the organizational structure of theCompany and the financial information available for evaluation by chiefoperating decision maker.

 

The following tablesummarizes net sales by geographic area:

 

| ** **    | ** ** | **Three Months Ended July 31,** | ** ** |
|---------------|------------|--------------------------------------|------------|
| ** **    | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **    | ** ** | **(unaudited)**                      | ** ** |
| Europe        |       | $                                    | 279,435    |   | $ | 353,316 |   |
| Middle East   |       | —                               |       | 257,332 |   |
| Far East      |       | —                               |       | 7,703 |   |
| United States |       | 58,898                               |       | 168,548 |   |
| Other         |       | —                               |       | 8,604 |   |
| **TOTALS**    |       | $                                    | 338,333    |   | $ | 795,503 |   |

 

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

 

*Thefollowing discussion contains various forward-looking statements within themeaning of Section 21E of the Exchange Act.  Although we believethat, in making any such statement, our expectations are based on reasonableassumptions, any such statement may be influenced by factors that could causeactual outcomes and results to be materially different from thoseprojected.  When used in the following discussion, the words “anticipates,”“believes,” “expects,” “intends,” “plans,” “estimates” and similar expressions,as they relate to us or our management, are intended to identify suchforward-looking statements.  These forward-looking statements are subjectto numerous risks and uncertainties that could cause actual results to differmaterially from those anticipated.  Factors that could cause actualresults to differ materially from those anticipated, certain of which arebeyond our control, are set forth in this document and in our Annual Report on Form 10-KSB,as amended, for the fiscal year ended April 30, 2005, under the caption “Management’sDiscussion and Analysis or Plan of Operation — Cautionary Statement.”*

 

*Ouractual results, performance or achievements could differ materially from thoseexpressed in, or implied by, forward-looking statements.  Accordingly, wecannot be certain that any of the events anticipated by forward-lookingstatements will occur or, if any of them do occur, what impact they will haveon us.  We caution you to keep in mind the cautions and risks described inthis document and in our Cautionary Statement and to refrain from attributingundue certainty to any forward-looking statements, which speak only as of thedate of the document in which they appear.*

 

**Overview**

 

Our core technology is the ATRILAZEÔSurgical Ablation System for use in cardiac tissue ablation procedures inopen-heart surgery.  We acquired thistechnology in August 2003 and received FDA 510(k) clearance in November 2004.  The ATRILAZE system is currently beingutilized as a potential means to treat atrial fibrillation in concomitantopen-heart surgical procedures.

 

Atrial fibrillation, or AF, is the most commonlyoccurring cardiac arrhythmia.  It reducescardiac output, is a major precursor to congestive heart failure and isassociated with an increased incidence of stroke.  The incidence of AF increases with age.  Approximately 5.5 million people worldwideare afflicted with AF.  There are 320,000new diagnoses annually worldwide. Approximately 2.5 million Americans are afflicted with AF, with 160,000new diagnoses each year in the U.S.

 

With our presence in the cardiovascular surgerymarket, we intend to move during the next 12 to 18 months to define the marketand develop a stand-alone, minimally invasive (closed-chest, beating heart)surgical procedure for ablating cardiac tissue as a potential means to treatAF.

 

Previously, our primary focus was on heart valvedisease.  We developed and marketedmechanical heart valves known as the Omnicarbon® 3000 and 4000 heartvalves.  In November 2004, after anexhaustive evaluation of the heart valve business, we discontinued all heartvalve related production.  In April 2005,we announced that our efforts to find a buyer for the heart valve business wereunsuccessful and that we would stop selling heart valves and were exiting theheart valve business.  At that time, wealso determined to direct all of our resources to the development andintroduction of products targeting the treatment of AF.

 

Although our ATRILAZEsystem is being used by cardiovascular surgeons at select centers to ablatecardiac tissue in human concomitant open-heart surgical procedures, we have notgenerated any revenue from these procedures.  We have been providing our ATRILAZEsystem to these surgeons at no cost for proof-of-concept in the clinicalsetting, prior to commencing clinical sales of our ATRILAZE system.  Weexpect to continue validating our technology with key cardiovascular surgeonsin concomitant open-heart procedures for the first half of fiscal year 2006. We expect to begin selling hand-held devices for these procedures on a limitedbasis beginning in the second half of fiscal year 2006.  We do not expectsignificant revenue until we introduce a version of our ATRILAZE system forstand-alone, minimally invasive (closed-chest, beating heart) ablation ofcardiac tissue.

 

MedicalCV wasincorporated in Minnesota on March 30, 1992, under the name CV Dynamics, Inc.

 

11

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**QuartersEnded July 31, 2005 and 2004**

 

**CriticalAccounting Policies**

 

For discussion of ourcritical accounting policies and estimates, see our Annual Report on Form 10-KSB,as amended, for the fiscal year ended April 30, 2005.

 

**Resultsof Operations**

 

*Salesand Marketing*.  Sales and marketing expenses in thequarter ended July 31, 2005, were $105,217 compared to $0 in the sameperiod last fiscal year.  Sales and marketing expenses for the quarter endedJuly 31, 2004, related entirely to heart valve sales and were classifiedas part of discontinued operations in fiscal year 2005.

 

*Generaland Administrative*.  General and administrative expensesfor the quarter ended July 31, 2005, were $763,329 compared to $868,785 inthe prior year.  Included in the quarter ended July 31, 2004, was$214,000 for severance payments while the quarter ended July 31, 2005,included $40,382 for severance payments.  Legal, accounting and otherprofessional fees in the quarter ended July 31, 2005, increased $41,000 comparedto those expenses for the period ended July 31, 2004.  Investor relations expenses in the quarterended July 31, 2005, increased $48,000 compared to the period ended July 31,2004, which was mainly attributable to our enhanced communications efforts.  Insurance costs for the period ended July 31,2005, increased $12,000 compared to the period ended July 31, 2004.  Travel and entertainment expenses for theperiod ended July 31, 2005, increased $53,000 compared to the period endedJuly 31, 2004.  Decreases in recruitingexpense of $25,000, and amortization expenses of $78,000 in the quarter ended July 31,2005, compared to the period ended July 31, 2004, account for theremaining decrease in overall general and administrative expenses for thequarter ended July 31, 2005, compared to the period ended July 31,2004.

 

*Researchand Development / Engineering and Regulatory.* Consistent with our decision to exit the heartvalve business and focus on our ATRILAZE product, we have included ourEngineering and Regulatory expenditures in Research and Development for thequarter ended July 31, 2005.  As aresult of this, research and development expenses for the quarter ended July 31,2005, were $403,225 compared to $0 in the prior year.  Engineering and regulatory expenses for thequarter ended July 31, 2005, were $0 compared to $312,210 in the prioryear.

 

*Other(Expense) Income*.  Interest expense totaled $79,036 inthe quarter ended July 31, 2005, compared to $180,420 in the comparableperiod last fiscal year.  The decrease in interest expense in the firstquarter of fiscal year 2006 was due to the decreased amount of borrowingsoutstanding after our recent financing activity.  Due to the decrease in our stock price at July 31,2005, we recorded a reduction to the fair value of our warrant liability of$6,453,938 during the quarter ended July 31, 2005.  The accounting for the warrants issued inconnection with our April 1, 2005, preferred stock sale is discussed more fullyin Liquidity and Capital Resources on the following pages.  We also expensed dividends on our preferredstock totaling $218,633 during the quarter ended July 31, 2005.

 

*IncomeTax Provision*.  In light of our history of operatinglosses, we have historically recorded a valuation allowance to fully offset ourdeferred tax assets.  We have continued to provide a full valuationallowance through the first quarter of fiscal year 2006 due to the inherentuncertainty about our ability to generate the sufficient taxable income torealize these deferred tax assets.  We have recorded no tax provision inthe current period due to net operating losses generated for income taxreporting purposes.

 

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**Liquidityand Capital Resources**

 

Cash and cash equivalentsdecreased to $8,883,804 at July 31, 2005, from $10,637,796 at April 30,2005.  This decrease in cash and cash equivalents of $1,753,992 was due tothe following:

 

| Net  cash used in operating activities    |   | $        | (1,262,239 | ) |
|-------------------------------------------|--------|----------|------------|---|
| Net cash used in  investing activities    |   | (238,682 | )          |
| Net cash used in by  financing activities |   | (253,071 | )          |
| Net decrease                              |   | $        | (1,753,992 | ) |

 

Net cash used inoperating activities increased $445,381 to $1,262,239 in the quarter ended July 31,2005, from $816,858 in the quarter ended July 31, 2004.  The use ofcash in operations in the first quarter of fiscal year 2005 was primarily dueto net losses of $1,602,386, before the non-cash adjustment to the fair valueof the warrant liability.  The use ofcash in operations in the first quarter of fiscal year 2004 was primarily dueto net losses of $1,254,656.

 

Net cash used ininvesting activities was $238,682 in the quarter ended July 31, 2005.  This was attributable to purchases ofequipment to be used in the clinical studies for our atrial fibrillationproduct and the purchase of a new computer and accounting system as well ascomputer upgrades for research and administrative personnel.  Net cash used in investing activities was$159,629 in the quarter ended July 31, 2004.  This was attributable to a purchase ofequipment to be used in the clinical studies for our atrial fibrillationproduct.

 

Net cash used byfinancing activities was $253,071 in the quarter ended July 31, 2005, andconsisted mainly of principal payments on the related party lease obligation of$35,563 and the payment of the preferred dividend of $218,633.  Net cashprovided by financing activities was $1,475,899 in the quarter ended July 31,2004, and consisted of net proceeds from the sale of common stock of $2,002,907,offset by principal payments on related parties leases of $37,928, and paymentson term debt of $500,000.

 

Throughout fiscal year2004 and in the first quarter of fiscal year 2005, we entered into a number offinancing transactions to provide funds necessary to meet our working capitaland capital expenditure needs and to meet other obligations.  Details ofthese activities are contained in our annual report on Forms 10-KSB, asamended, for the year ended April 30, 2005.  With the exception of the related party saleleaseback, all term debt and lines of credit were converted to equity or repaidon April 1, 2005, as part of the close on the $18 million financingdescribed below.

 

On April 4, 2003, wesold our corporate headquarters, manufacturing facility and surrounding land inInver Grove Heights, Minnesota, to PKM Properties, LLC (“PKM”), an entitycontrolled by Paul K. Miller.  Mr. Miller serves on our Board ofDirectors and is our largest shareholder.

 

In connection with thetransaction, we received total consideration of $3.84 million consisting of (1) $1.0million in cash, (ii) PKM’s assumption of our $2.5 million outstandingindebtedness to Associated Bank, and (iii) PKM’s assumption of ourpromissory note with Dakota Electric Association and land special assessmentspayable to Dakota County aggregating $336,105.  Also in connection with thetransaction, we issued to PKM a five-year warrant for the purchase of 350,000shares of our common stock at an exercise price of $0.625 per share.  As aresult of anti-dilution adjustments through July 31, 2005, this warrant isexercisable for 420,673 shares at $0.52 per share.  These warrants had anallocated fair value of $89,602.  We determined the fair value of thewarrants using the Black Scholes option pricing model.

 

Simultaneous with thesale of the facility, we entered into a lease with PKM to lease back thefacility and a portion of the land.  The lease has a ten-year initial termwith options for us to extend the lease up to ten additional years.  Undercertain conditions, we also have an option to purchase the building at the endof the initial ten-year term at the fair value at that time.

 

Due to our continuedinvolvement with the property including the ability to buy back the property ata future date, the transaction is accounted for as a financing of the propertysold and leased back.  Accordingly, the net book value of the facility andland sold to PKM with a net book value of $707,015 (gross value of $1,433,601net of 

 

13

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accumulated depreciationof $726,586) continues to be presented as part of our property, plant andequipment balance. The related party lease obligation represents theminimum amounts due PKM for the initial ten year term discounted at 4.4 percentand additional payments to be paid to PKM for the Dakota Electric Associationand Dakota County obligations assumed by PKM.

 

On April 1, 2005,under the terms of a Securities Purchase Agreement with accredited investors, weissued 18,035 shares of 5% Series A Convertible Preferred Stock to suchinvestors, warrants for the purchase of 27,052,500 shares of common stock tosuch investors, and warrants for the purchase in the aggregate of 1,635,960shares of common stock to the placement agent and finder.  Each share ofpreferred stock is convertible into the number of shares of common stock equalto the $1,000 stated value divided by $0.50, subject to anti-dilutionadjustments.  As a result, the 18,035 preferred shares sold may beconverted into 36,070,000 shares of common stock, subject to anti-dilutionadjustments.  As of July 31, 2005,there were 17,785 preferred shares outstanding.

 

The preferred stock,which is non-voting, has a stated value of $1,000 and accrues cumulativedividends at a rate of 5 percent of this stated value annually.  Dividendsare payable quarterly but may, at our option, be added to the stated valuerather than paid in cash, if certain conditions are met.  The preferredstock, including any accrued dividends, are convertible, at the option of theholders, into shares of common stock at a conversion price of $0.50 pershare.  In certain circumstances, we may have the option to require thepreferred stockholders to convert their shares into common stock.  In theevent of a fundamental transaction, as defined, the preferred shareholders havethe right to require us to redeem the preferred shares at their stated value,including any accrued but unpaid dividends.  In the event of certaindefaults, the preferred shareholders have the right to require us to redeem thepreferred shares at 110 percent their stated value, including any accrued butunpaid dividends.  As a result of these redemption provisions, thecarrying value of these preferred shares is considered to be redeemable and isreported as a “mezzanine” instrument on our balance sheet beginning on April 30,2005.  The aggregate liquidation value of these redeemable preferredshares at July 31, 2005, was $17,959,116.  However, the carryingvalue of this redeemable preferred stock at July 31, 2005, was zero, netof a discount associated with the warrants issued to the shareholders, theplacement agent and the finder, as described below.

 

In connection with thepreferred stock sale, we issued the preferred stock purchasers warrants for thepurchase of 27,052,500 shares of common stock at $0.50 per share, and we also issuedwarrants for the purchase of 1,635,960 common shares at $0.50 per share to thepreferred stock placement agent and finder.  These warrants have a term offive years.  We are required to register the common shares underlying thepreferred stock conversion option and the purchaser warrants.  If we donot meet certain registration deadlines, the preferred stockholders will beentitled to liquidated damages, as defined.  In the event of a fundamentaltransaction, as defined, the warrants issued to the preferred shareholders, theplacement agent and the finder, all provide the warrant holders with the rightto put the warrants to us for cash in an amount equal to the fair value of thewarrants, as determined using the Black Scholes option pricing model.  Asa result of this put right, the warrants are reported at their fair value as aliability on our balance sheet beginning on April 30, 2005, and futurechanges in the fair value of the warrant will result in charges or benefits toour results of operations. The fair value of these warrants upon closing of thepreferred stock sale was $22,271,047.  Because the fair value of thesewarrants at April 30, 2005, exceeded the proceeds received in thepreferred stock and warrant issuances, the excess of the fair value of thewarrants over the proceeds received (including the converted debt) wasrecognized as an interest charge of $4,266,047 upon closing.  During theperiod between closing and April 30, 2005, the fair value of thesewarrants increased to $27,992,609.  We have reported this $5,721,562increase in fair value as other expense in the fourth quarter of fiscal year2005.  During the quarter ended July 31,2005, the fair value of these warrants decreased to $21,538,671.  We have reported this $6,453,938 decrease infair value as decrease in warrant liability in other income (expense) in thefirst quarter of fiscal year 2006.

 

We obtained gross cashproceeds of $13,603,000 at the closing (net of $30,000 in legal fees which werewithheld by the lead investor).  We also converted $4,402,000 ofindebtedness into the above-referenced securities.  We incurred cashoffering costs of $817,980, including agent commissions, a finder’s fee andout-of-pocket expense reimbursements to certain third parties.  We alsopaid legal and administrative expenses of $18,086 incurred by PKM in thistransaction.

 

We expect that ouroperating losses and negative operating cash flow will continue through fiscalyear 2006 and into fiscal year 2007 as we continue adding staff to support thedevelopment and launch of our atrial fibrillation 

 

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technology.  Weanticipate that our sales and marketing, general and administrative andresearch and development expenses will continue to constitute a material use ofour cash resources.  The actual amounts and timing of our capitalexpenditures will vary significantly depending upon progress on our productdevelopment projects and the availability of financing.

 

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

 

•                                          increasedsales levels of our core products and new products are not achieved;

 

•                                          operatinglosses exceed our projections;

 

•                                          ourmanufacturing and development costs or estimates prove to be inaccurate; or

 

•                                          wedetermine to acquire, license or develop additional technologies.

 

We cannot, however,assure you that our efforts to enter the market for treating atrialfibrillation through laser ablation will:

 

•                                          beattainable;

 

•                                          beprofitable;

 

•                                          reduceour reliance upon financing transactions; or

 

•                                          enableus to continue operations.

 

**Commitmentsand Contingent Liabilities**

 

*ProductLiability Contingency.*  In March 2005, we becameaware that a patient who had been implanted with our heart valve haddied.  We have not received any claims related to this matter but believethat any such claim would be covered by our existing liability insurance. Based upon the expectation that insurance will cover the cost of any claimsafter our payment of the deductible, we do not expect the ultimate resolutionof this matter to have a material effect on our financial position, results ofoperations or cash flows.

 

*RelatedParty Lease Obligation. * On April 4, 2003, we soldour corporate headquarters, manufacturing facility and surrounding land inInver Grove Heights, Minnesota, to PKM.  In connection with thetransaction, we received total consideration of $3.84 million consisting of (1) $1.0million in cash, (2) PKM’s assumption of our $2.5 million outstandingindebtedness to Associated Bank which eliminated our indebtedness to AssociatedBank, and (3) PKM’s assumption of our promissory note with Dakota ElectricAssociation and land special assessments payable to Dakota County aggregating$336,105.

 

We simultaneously leasedback our facility pursuant to a ten-year lease, with options to renew and anoption to repurchase the facility.  We continue to utilize the facility aswe did prior to the financing transaction. In July 2005, PKM listed the building for sale.  PKM isseeking a buyer for the property to facilitate our release from the remainingeight years of the lease, thereby permitting us to relocate to a morecost-effective facility.  We have anagreement with PKM that releases us from our lease if the building sells abovea certain price.  However, there can be no assurance the building will besold and that we will be successful in obtaining a release from our lease.

 

*ClinicalStudies. * We entered into agreements with several largeinstitutions to conduct clinical studies regarding certain aspects of ourOmnicarbon heart valve’s clinical performance.  The agreements run throughfiscal year 2006.  In general, recipients of clinical study payments wererequired to utilize our products in order to complete their studies and collectand submit data according to a study protocol.  As of July 31, 2005,we had accrued, but not paid, $10,300 for clinical study payments.  In April 2005,we announced our exit from the mechanical heart valve business.  We haveassigned any financial responsibility for studies outside the United States toour former distributors.

 

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*AccruedSeverance. * As part of the change in our strategic plan,we have changed personnel and eliminated certain positions, we are makingseverance payments to former officers and employees.  As of July 31,2005, our remaining obligations totaled $27,802. We expect to completemaking these severance payments by September 30, 2005**.**

 

| ** **                                    | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-----------|------------|
| Restructuring charges  fiscal year 2005       |       | $         | 308,000    |   |
| Cash usage                                    |       | (283,166  | )          |
| **Balance as of April 30,  2005**        | ** ** | **$**     | **24,834** | ** ** |
| Adjustments to  provision                     |       | 40,382    |       |
| Cash usage first  quarter of fiscal year 2006 |       | (37,414   | )          |
| **Balance as of July 31,  2005**         | ** ** | **$**     | **27,802** | ** ** |

 

*AtrialFibrillation Technology Purchase Agreement. * In August 2003,we entered into a technology purchase agreement with LightWave and itsprincipals relating to the acquisition of LightWave’s interests in technologyconsisting of a catheter/probe containing elements of optical fiber, coolantpassages and other features for the purpose of delivering laser energy to theepicardial surface of the heart for treatment of atrial fibrillation.  Wepaid LightWave an initial standstill payment consisting of 15,000 shares of ourcommon stock, $10,000 upon closing and an additional $30,000 to LightWave ininstallments in 2004 and 2005.  We will be obligated to pay $125,000 toLightWave within 45 days after the first commercial sale of our product in theUnited States or Europe to two or more parties and $385,000 within 45 daysfollowing our achievement of $1,500,000 of cumulative gross sales of disposableproducts.  In addition, during fiscal year 2004, we issued to LightWave awarrant for the purchase of 25,000 shares at closing and, during fiscal year2005, a warrant for the purchase of 25,000 shares upon receiving FDA 510(k)clearance.  In addition, we are obligated to issue a warrant for thepurchase of 25,000 shares upon a receipt of a U.S. utility patent covering theproduct and a warrant for the purchase of 25,000 shares upon the firstcommercial sale of our product.

 

Following the firstcommercial sale, we have agreed to pay LightWave payments equal to 6 percent ofnet sales of the LightWave product in countries in which we obtain patentprotection and 4 percent of net sales of the LightWave product in territoriesin which there is no patent protection. Commencing with the second yearfollowing our first commercial sale, we have agreed to pay minimum annualpayments as follows:

 

| **Year  Following  Commercialization** | ** ** | **Minimum  Annual  Payment** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| 2                                      |       | $                            | 50,000     |   |
| 3                                      |       | $                            | 75,000     |   |
| 4                                      |       | $                            | 100,000    |   |
| 5                                      |       | $                            | 200,000    |   |
| 6                                      |       | $                            | 300,000    |   |
| 7                                      |       | $                            | 350,000    |   |
| 8                                      |       | $                            | 350,000    |   |
| 9                                      |       | $                            | 400,000    |   |
| 10                                     |       | $                            | 500,000    |   |

 

We are obligated to paypayments for a period of ten years following the first commercial sale. Our technology purchase agreement with LightWave contains other customaryconditions, including mutual indemnification obligations.  LightWave andtwo of its principals have agreed to certain noncompetition obligations,nondisclosure obligations, and certain obligations to assign new developmentsor inventions relating to the acquired technology to our company.  We haveagreed to use our reasonable commercial efforts to commercialize the technologywithin three years following the acquisition of the technology fromLightWave.  If we fail in any year to pay minimum annual payments, we maybe obligated to grant LightWave a nonexclusive right to use the technologyacquired from LightWave, or pay LightWave the difference between paymentsactually made and minimum payments due for a given year.

 

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The following tablesummarizes our contractual obligation as of July 31, 2005:

 
| ** **                               | ** ** | **Payments Due By Period** | ** ** |
|------------------------------------------|------------|----------------------------|------------|
| **Summary  of Contractual  Obligations** | ** ** | **TOTAL**                  | ** ** | **Less than One  Year** | ** ** | **Two to Three  Years** | ** ** | **Four or More  Years** | ** ** |
| Related Party Lease  Obligation(1)       |       | $                          | 2,966,400  |   | $ | 370,800 |   | $ | 746,235 |   | $ | 1,849,365 |   |
| Clinical Studies                         |       | 10,300                     |       | 10,300 |   | — |   | — |   |
| Deferred compensation                    |       | 27,802                     |       | 27,802 |   | — |   | — |   |
| TOTAL CONTRACTUAL  OBLIGATIONS           |       | $                          | 3,004,502  |   | $ | 408,902 |   | $ | 746,235 |   | $ | 1,849,365 |   |

 

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(1)                                  Futurepayments include interest due.

 

**Qualitativeand Quantitative Disclosures about Market Risk**

 

We have discontinuedsales of the heart valve and are focusing all of our resources on the developmentand introduction of our ATRILAZE Surgical Ablation System.  Sales in fiscal year 2006 are not expected tobe material, and we expect that any sales will be in the United Statesdenominated in U.S. dollars.  Ourinterest income and expenses are sensitive to changes in the general level ofU.S. interest rates, particularly since our investments are in short-terminstruments.  In June 2005 we placed a majority of our temporarilyidle cash in a fund managed by a very large brokerage firm.  This fund buys, sells and holds interest ratesensitive investments.  If investors inthe fund tried to redeem a significant portion of their shares simultaneously,the fund might be forced to sell investments below cost and we could incur aloss of principal in addition to a reduction or loss of interest.  Based on the current nature and levels of ourinvestments and debt, however, we believe that we currently have no materialmarket risk exposure.

 

Our general investingpolicy is to limit market and credit risk and the risk of principal loss. All liquid investments with original maturities of three months or less areconsidered to be cash equivalents.

 

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**ITEM 3****                                                        CONTROLSAND PROCEDURES**

 

We maintain a system ofdisclosure controls and procedures that is designed to provide reasonableassurance that information, which is required to be disclosed, is accumulatedand communicated to management timely.  As of the end of the periodcovered by this report, we carried out an evaluation under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures are effective.

 

During our most recentfiscal quarter, there has been no change in our internal control over financialreporting (as defined in Rule 13a-15(f) or 15d-15(f) under theExchange Act) that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II**

 

**OTHER INFORMATION**

 

**ITEM 6****                  EXHIBITS**

 

See Index to Exhibits.

 

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**SIGNATURES**

 

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized, on January 5,2006.

 
|   | MedicalCV, Inc. |
|--------|----------------------|
|   |                 |   |
|   | By                   | /s/ Marc P. Flores |   |
|   |                 | Marc P. Flores |
|   |                 | President and Chief  Executive Officer |
|   |                 |   |
|   | By                   | /s/ John H. Jungbauer |   |
|   |                 | John H. Jungbauer |
|   |                 | Vice President, Finance  and   Chief Financial Officer |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                      |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Amended Non-Qualified Stock Option Agreement issued  to John H. Jungbauer, dated November 18, 2004. *                                                                                                                           |
|                |       |                                                                                                                                                                                                                                 |
| 10.2                |       | Lease Termination Agreement entered into by and  between PKM Properties, LLC and the Company, dated June 29, 2005. *                                                                                                            |
|                |       |                                                                                                                                                                                                                                 |
| 10.3                |       | Employment Agreement by and between Marc P. Flores  and the Company, dated August 9, 2005 (incorporated by reference to our  Current Report on Form 8-K/A, filed August 9, 2005 (File No. 000-33295)).           |
|                |       |                                                                                                                                                                                                                                 |
| 10.4                |       | Employment Agreement by and between John H.  Jungbauer and the Company, dated August 9, 2005 (incorporated by  reference to our Current Report on Form 8-K/A, filed August 9, 2005  (File No. 000-33295)).       |
|                |       |                                                                                                                                                                                                                                 |
| 10.5                |       | Form of Non-Qualified Stock Option Agreement  Issued to Executive Officers and Other Key Employees (incorporated by  reference to our Current Report on Form 8-K/A, filed August 9, 2005  (File No. 000-33295)). |
|                |       |                                                                                                                                                                                                                                 |
| 31.1                |       | Chief Executive Officer Certification pursuant to Rule 13a-14.                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                 |
| 31.2                |       | Chief Financial Officer Certification pursuant to Rule 13a-14.                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                 |
| 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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* Previously filed.

 

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