**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, DC 20549**

 

**FORM 10-QSB**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2006** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                         |
| **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 of Small BusinessIssuer as Specified in Its Charter)

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

 

**9725South Robert TrailInver Grove Heights, Minnesota 55077(651) 452-3000**

(Address of Principal ExecutiveOffices and Issuer’s

Telephone Number, includingArea Code)

 

Check whether the issuer:  (1) filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes  ý  No  o

 

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

 

Yes  o  No  ý

 

As of March 10, 2006, the issuer had outstanding 91,029,573 sharesof common stock.

 

Transitional Small Business Disclosure Format (check one)  o Yes   ý No

 

 

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TABLE OF CONTENTS

 
| PART I        |   | FINANCIAL  INFORMATION |
|--------------------|--------|------------------------|
|               |   |                   |   |   |
|               |   | ITEM  1                |   | 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 6                 |   | Exhibits |
|               |   |                   |   |   |
| SIGNATURES         |   |                   |
| INDEX  TO EXHIBITS |   |                   |
|                    |        |                        |  |  |  |  |

 

2

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**PART I**

 

**FINANCIALINFORMATION**

 

**ITEM 1****                                                        FINANCIALSTATEMENTS**

 

**MEDICALCV, INC.**

**BalanceSheets**

 
| ** **                                                                                                                                                | ** ** | **January 31,  2006** | ** ** | **April 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|
|                                                                                                                                                      |       | **(unaudited)**            | ** ** | **(audited)**            |       |
| **ASSETS**                                                                                                                                                |       |                       |       |                     |       |
| Cash and  cash equivalents                                                                                                                                |       | $                          | 12,602,096 |                     | $          | 10,637,796 |   |
| Prepaid  expenses and other assets                                                                                                                        |       | 180,580                    |       | 199,978                  |       |
| Current  assets of discontinued operations                                                                                                                |       | 89,692                     |       | 875,648                  |       |
| Total current  assets                                                                                                                                     |       | 12,872,368                 |       | 11,713,422               |       |
|                                                                                                                                                      |       |                       |       |                     |       |
| Property,  plant and equipment, net                                                                                                                       |       | 962,929                    |       | 827,791                  |       |
| Deferred  financing costs, net                                                                                                                            |       | 52,768                     |       | 58,226                   |       |
| Other  long-term assets                                                                                                                                   |       | 30,798                     |       | 30,798                   |       |
| Non-current  assets of discontinued operations                                                                                                            |       | 112,385                    |       | 367,799                  |       |
| Total assets                                                                                                                                              |       | $                          | 14,031,248 |                     | $          | 12,998,036 |   |
|                                                                                                                                                      |       |                       |       |                     |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY  (DEFICIT)**                                                                                                  |       |                       |       |                     |       |
| Accounts  payable                                                                                                                                         |       | $                          | 521,179    |                     | $          | 399,588 |   |
| Current  portion of related party lease obligations                                                                                                       |       | 310,478                    |       | 311,155                  |       |
| Accrued  expenses                                                                                                                                         |       | 209,639                    |       | 179,095                  |       |
| Current  liabilities of discontinued operations                                                                                                           |       | 10,300                     |       | 202,595                  |       |
| Total  current liabilities                                                                                                                                |       | 1,051,596                  |       | 1,092,433                |       |
| Fair value  of puttable warrants                                                                                                                          |       | —                     |       | 27,992,609               |       |
| Related  party lease obligations, less current portion                                                                                                    |       | 2,630,861                  |       | 2,824,977                |       |
| Total  liabilities                                                                                                                                        |       | 3,682,457                  |       | 31,910,019               |       |
|                                                                                                                                                      |       |                       |       |                     |       |
| Commitments  and contingencies                                                                                                                            |       |                       |       |                     |       |
|                                                                                                                                                      |       |                       |       |                     |       |
| 5% series A  redeemable convertible preferred stock; stated value $1,000 per share; 19,000  shares authorized; 0 and 18,035 shares issued and outstanding |       | —                     |       | —                   |       |
|                                                                                                                                                      |       |                       |       |                     |       |
| Shareholders’  equity (deficit):                                                                                                                     |       |                       |       |                     |       |
| Preferred  stock; $.01 par value; 9,981,000 shares authorized; no shares issued and  outstanding                                                          |       | —                     |       | —                   |       |
| Common  stock; $.01 par value; 240,000,000 shares authorized; 91,029,573 and  10,849,583 shares issued and outstanding                                    |       | 910,296                    |       | 108,496                  |       |
| Additional  paid-in capital                                                                                                                               |       | 53,668,091                 |       | 23,386,478               |       |
| Warrants                                                                                                                                                  |       | 375,518                    |       | —                   |       |
| Stock  options                                                                                                                                            |       | 117,490                    |       | —                   |       |
| Deferred  stock option compensation                                                                                                                       |       | (94,601                    | )          | —                   |       |
| Accumulated  deficit                                                                                                                                      |       | (44,628,003                | )          | (42,406,957              | )          |
| Total  shareholders’ equity (deficit)                                                                                                                |       | 10,348,791                 |       | (18,911,983              | )          |
| Total  liabilities and shareholders’ equity (deficit)                                                                                                |       | $                          | 14,031,248 |                     | $          | 12,998,036 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

3

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**MEDICALCV, INC.**

**Statementsof Operations**

**(unaudited)**

 
| ** **                                                                    | ** ** | **Three months ended January 31,** | ** ** | **Nine months ended January 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                | ** ** | **2005**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating  expenses, continuing operations:                                   |       |                                    |       |                                   |       |   |   |   |   |
| Sales and  marketing                                                          |       | $                                       | 295,742    |                                   | $          | 97,568 |   | $ | 429,576 |   | $ | 97,568 |   |
| General and  administrative                                                   |       | 840,155                                 |       | 712,864                                |       | 2,324,735 |   | 2,429,731 |   |
| Research and  development services                                            |       | 707,630                                 |       | 552,266                                |       | 1,900,305 |   | 1,250,443 |   |
| Total  operating expenses                                                     |       | 1,843,527                               |       | 1,362,698                              |       | 4,654,616 |   | 3,777,742 |   |
| Loss from  operations                                                         |       | (1,843,527                              | )          | (1,362,698                             | )          | (4,654,616 | ) | (3,777,742 | ) |
| Other income  (expense):                                                      |       |                                    |       |                                   |       |   |   |   |   |
| Decrease in  warrant liability                                                |       | 9,273,355                               |       | —                                 |       | 16,549,457 |   | — |   |
| Interest  income                                                              |       | 97,362                                  |       | 56                                     |       | 243,392 |   | 3,711 |   |
| Interest expense                                                              |       | (28,776                                 | )          | (136,941                               | )          | (128,855 | ) | (429,715 | ) |
| Other income  (expense)                                                       |       | (1,404                                  | )          | 1,623                                  |       | (5,008 | ) | 4,595 |   |
| Total other  income (expense)                                                 |       | 9,340,537                               |       | (135,262                               | )          | 16,658,986 |   | (421,409 | ) |
|                                                                          |       |                                    |       |                                   |       |   |   |   |   |
| Income  (loss) from continuing operations                                     |       | 7,497,010                               |       | (1,497,960                             | )          | 12,004,370 |   | (4,199,151 | ) |
| Income  (loss) from discontinued operations                                   |       | 92,755                                  |       | (366,726                               | )          | (56,895 | ) | (1,480,561 | ) |
| Net income  (loss)                                                            |       | $                                       | 7,589,765  |                                   | $          | (1,864,686 | ) | $ | 11,947,475 |   | $ | (5,679,712 | ) |
|                                                                          |       |                                    |       |                                   |       |   |   |   |   |
| Basic and  dilutive loss to common shareholders:                              |       |                                    |       |                                   |       |   |   |   |   |
| Net income  (loss)                                                            |       | $                                       | 7,589,765  |                                   | $          | (1,864,686 | ) | $ | 11,947,475 |   | $ | (5,679,712 | ) |
| Inducement  to acquire redeemable convertible preferred stock                 |       | (13,579,979                             | )          | —                                 |       | (13,579,979 | ) | — |   |
| Redeemable  convertible preferred stock cash dividends                        |       | (146,851                                | )          | —                                 |       | (588,542 | ) | — |   |
| Net loss to  common shareholders                                              |       | $                                       | (6,137,065 | )                                      | $          | (1,864,686 | ) | $ | (2,221,046 | ) | $ | (5,679,712 | ) |
|                                                                          |       |                                    |       |                                   |       |   |   |   |   |
| Net loss per  common share - Continuing operations, after preferred dividends |       |                                    |       |                                   |       |   |   |   |   |
| Basic                                                                         |       | $                                       | (0.15      | )                                      | $          | (0.14 | ) | $ | (0.11 | ) | $ | (0.40 | ) |
| Diluted                                                                       |       | (0.26                                   | )          | (0.14                                  | )          | (0.41 | ) | (0.40 | ) |
|                                                                          |       |                                    |       |                                   |       |   |   |   |   |
| Net income  (loss) per common share - Discontinued operations                 |       |                                    |       |                                   |       |   |   |   |   |
| Basic                                                                         |       | 0.00                                    |       | (0.03                                  | )          | (0.00 | ) | (0.14 | ) |
| Diluted                                                                       |       | 0.00                                    |       | (0.03                                  | )          | (0.00 | ) | (0.14 | ) |
|                                                                          |       |                                    |       |                                   |       |   |   |   |   |
| Net loss per  common share                                                    |       |                                    |       |                                   |       |   |   |   |   |
| Basic                                                                         |       | (0.15                                   | )          | (0.17                                  | )          | (0.11 | ) | (0.54 | ) |
| Diluted                                                                       |       | (0.26                                   | )          | (0.17                                  | )          | (0.41 | ) | (0.54 | ) |
|                                                                          |       |                                    |       |                                   |       |   |   |   |   |
| Weighted  average common shares used                                          |       |                                    |       |                                   |       |   |   |   |   |
| Basic                                                                         |       | 40,445,492                              |       | 10,730,944                             |       | 20,960,574 |   | 10,613,627 |   |
| Diluted                                                                       |       | 58,789,757                              |       | 10,730,944                             |       | 46,200,969 |   | 10,613,627 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

4

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**MEDICALCV,INC.**

**Statementsof Cash Flows**

**(unaudited)**

 
| ** **                                                                                                   | ** ** | **Nine months ended January 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Cash flows  from operating activities:                                                                       |       |                                   |       |   |   |
| Net income  (loss)                                                                                           |       | $                                      | 11,947,475 |   | $ | (5,679,712 | ) |
| Adjustments  to reconcile net income (loss) to net cash used by operating activities:                        |       |                                   |       |   |   |
| Decrease in  warrant liability                                                                               |       | (16,549,457                            | )          | — |   |
| Depreciation                                                                                                 |       | 171,395                                |       | 236,595 |   |
| Provision  for doubtful accounts                                                                             |       | 23,935                                 |       | 220,281 |   |
| Gain from  the sale of property, plant and equipment                                                         |       | (137,647                               | )          | — |   |
| Provision  for inventory obsolescence                                                                        |       | —                                 |       | 1,277,691 |   |
| Stock-based  compensation                                                                                    |       | 22,889                                 |       | 249,048 |   |
| Interest and  other expense related to issued warrants and amortization of loan origination  costs           |       | —                                 |       | 62,339 |   |
| Warrant  expense related to purchase of technology                                                           |       | —                                 |       | 18,373 |   |
| Changes in  operating assets and liabilities:                                                                |       |                                   |       |   |   |
| Accounts  receivable                                                                                         |       | 557,291                                |       | 806,880 |   |
| Inventories                                                                                                  |       | 228,665                                |       | 215,455 |   |
| Prepaid  expenses and other assets                                                                           |       | 68,190                                 |       | 144,795 |   |
| Accounts  payable                                                                                            |       | (70,704                                | )          | (234,275 | ) |
| Accrued  expenses                                                                                            |       | 30,544                                 |       | 177,012 |   |
| Net cash  used by operating activities                                                                       |       | (3,707,424                             | )          | (2,505,518 | ) |
|                                                                                                         |       |                                   |       |   |   |
| Cash flows  from investing activities:                                                                       |       |                                   |       |   |   |
| Purchase of  property, plant and equipment                                                                   |       | (322,498                               | )          | (201,313 | ) |
| Proceeds  from the sale of property, plant and equipment                                                     |       | 341,757                                |       | 23,123 |   |
| Net cash  provided (used) by investing activities                                                            |       | 19,259                                 |       | (178,190 | ) |
|                                                                                                         |       |                                   |       |   |   |
| Cash flows  from financing activities:                                                                       |       |                                   |       |   |   |
| Borrowing on  long-term debt                                                                                 |       | —                                 |       | 925,000 |   |
| Payments of  term debt                                                                                       |       | —                                 |       | (500,000 | ) |
| Proceeds  from exercise of warrants, net of costs                                                            |       | 6,435,140                              |       | — |   |
| Proceeds  from the issuance of common stock and warrants, net of offering costs                              |       | —                                 |       | 2,000,608 |   |
| Proceeds  from exercise of options                                                                           |       | 660                                    |       | 1,375 |   |
| Preferred  dividend paid                                                                                     |       | (588,542                               | )          | — |   |
| Principal  payments under related party lease obligations                                                    |       | (194,793                               | )          | (205,852 | ) |
| Net cash  provided by financing activities                                                                   |       | 5,652,465                              |       | 2,221,131 |   |
|                                                                                                         |       |                                   |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                        |       | 1,964,300                              |       | (462,577 | ) |
| Cash and  cash equivalents at beginning of year                                                              |       | 10,637,796                             |       | 659,856 |   |
| Cash and  cash equivalents at end of period                                                                  |       | $                                      | 12,602,096 |   | $ | 197,279 |   |
|                                                                                                         |       |                                   |       |   |   |
| Supplemental  disclosure of cash flow information:                                                           |       |                                   |       |   |   |
| Cash paid  for interest                                                                                      |       | $                                      | 128,855    |   | $ | 345,387 |   |
|                                                                                                         |       |                                   |       |   |   |
| Non-cash  investing and financing activities                                                                 |       |                                   |       |   |   |
| Inducement  to acquire redeemable convertible preferred stock                                                |       | 13,579,979                             |       | — |   |
| Reduction of  fair value of puttable warrants upon exercise of warrants and removal of put  option           |       | 11,443,152                             |       | — |   |
| Discount on  convertible subordinated bridge notes related to warrants granted in  connection with the notes |       | —                                 |       | 48,047 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

5

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**MEDICALCV,INC.**

**Notesto Financial Statements**

 

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

 

The accompanying unaudited financial statements included herein havebeen prepared by MedicalCV, Inc. (the “Company”) in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and pursuant to the rules and regulations ofthe Securities and Exchange Commission.  Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules andregulations.  These interim financial statements should be read inconjunction with the financial statements and the notes thereto included in theCompany’s Annual Report on Form 10-KSB, as amended, for the fiscal yearended April 30, 2005.

 

The balance sheet as of January 31, 2006, the statements ofoperations for the three and nine months ended January 31, 2006 and 2005,and the statements of cash flows for the nine months ended January 31,2006 and 2005 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 financial statements as of and for the periods ended January 31,2006, have been prepared on a going concern basis, which contemplates therealization of assets and settlement of liabilities and commitments in thenormal course of business.  The Company has sustained losses and negativecash flows from operations in recent years and expects these conditions tocontinue for the foreseeable future.  At January 31, 2006, the Companyhad an accumulated deficit of $44,628,003. Although the Company raised funds through the sale of convertiblepreferred stock in the last quarter of fiscal year 2005 and the exercise ofwarrants to purchase common shares in the third quarter of fiscal year 2006,management anticipates that development of its new products will requireadditional capital by the first quarter of fiscal year 2008.  Thesematters raise substantial doubt about the Company’s ability to continue as agoing concern.  Management intends to seek additional debt or equityfinancing as it continues development of new products.  However, theCompany may not be able to obtain such financing on acceptable terms or atall.  If the Company is unable to obtain such additional financing, itwill be required to significantly revise its business plans and drasticallyreduce operating expenditures such that it may not be able to develop orenhance its products, gain market share or respond to competitive pressures orunanticipated requirements, which could seriously harm its business, financialposition and results of operations.

 

The Company is subject to risks and uncertainties common to medicaltechnology-based companies, including rapid technological change, new productdevelopment and acceptance, actions of competitors and regulators, dependenceon key personnel and market penetration.

 

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

 

The Company accounts for stock-based employee compensation arrangementsin accordance with the provisions of Accounting Principles Board Opinion (APB) No. 25,“Accounting for Stock Issued to Employees,” and related interpretations andcomplies with the disclosure provisions of Statement of Financial AccountingStandards (SFAS) No. 123, “Accounting for Stock-Based Compensation” andSFAS No. 148 “Accounting for Stock-Based Compensation-Transition andDisclosure, an amendment of SFAS Statement No. 123.”

 

In December 2004, the Financial Accounting Standards Board(FASB) issued a revised SFAS No. 123, “Share-Based Payment (revised 2004)”(SFAS No. 123R), which supersedes APB No. 25 and amends SFAS No. 123to require companies to expense the value of stock-based compensation plans.Additionally, SFAS 123R, once adopted, disallows the use of the prospectivetransition method permitted by SFAS No. 148. SFAS 123R is effective as ofthe beginning of the first interim reporting period that begins after theCompany’s fiscal year ending April 30, 2006.

 

For purposes of the pro forma disclosures below, the estimated fairvalue of the options is amortized to expense over the

 

6

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options’ vesting period.  Had compensation cost for the Company’sstock options been recognized based on the fair value at the grant dateconsistent with the provisions of SFAS No. 123R, the Company’s net losswould have been adjusted to the pro forma amounts indicated below:

 
| ** **                                        | ** ** | **For the Periods Ended January 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **Three Months**                           | ** ** | **Nine Months** | ** ** |
| ** **                                        | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss to  common shareholders                  |       | $                                          | (6,137,065 | ) | $ | (1,864,686 | ) | $ | (2,221,046 | ) | $ | (5,679,712 | ) |
|                                              |       |                                       |       |   |   |   |   |   |   |
| Pro-forma  stock-based employee compensation cost |       | (533,209                                   | )          | (211,066 | ) | (1,336,486 | ) | (355,029 | ) |
|                                              |       |                                       |       |   |   |   |   |   |   |
| Net loss –  pro forma                        |       | $                                          | (6,670,274 | ) | $ | (2,075,752 | ) | $ | (3,557,532 | ) | $ | (6,034,741 | ) |
|                                              |       |                                       |       |   |   |   |   |   |   |
| Basic net  loss per common share                  |       |                                       |       |   |   |   |   |   |   |
| As reported                                       |       | $                                          | (.15       | ) | $ | (.17 | ) | $ | (.11 | ) | $ | (.54 | ) |
| Pro forma                                         |       | (.16                                       | )          | (.19 | ) | (.17 | ) | (.57 | ) |
|                                              |       |                                       |       |   |   |   |   |   |   |
| Diluted net  loss per common share                |       |                                       |       |   |   |   |   |   |   |
| As reported                                       |       | (.26                                       | )          | (.17 | ) | (.41 | ) | (.54 | ) |
| Pro forma                                         |       | (.27                                       | )          | (.19 | ) | (.44 | ) | (.57 | ) |

 

**(4)****                                 NetLoss per Common Share**

 

Basic net loss per common share was computed using net loss to commonshareholders and the weighted average number of shares of common stockoutstanding.  Diluted net loss per common share reflects the potentialdilution of securities that could share in the earnings of an entity. Diluted net loss per common share does not differ from basic net loss percommon share in the three and nine month periods ended January 31, 2005since the potentially dilutive shares are anti-dilutive.  Since certain warrants outstanding during thethree and nine month periods ended January 31, 2006 are considered commonstock equivalents as they are potentially dilutive because they can be settledin common stock, the net loss to common shareholders for those periods isincreased by the decrease in warrant liability and the weighted average numberof shares used for the basic net loss per share computation is increased by theshares issuable under the warrants as follows:

 
| ** **                                                           | ** ** | **For the Periods Ended January 31,  2006** | ** **  |
|----------------------------------------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                                                           | ** ** | **Three Months**                                 | ** **  | **Nine Months** | ** ** |
| Net loss to  common shareholders for basic net loss per common share |       | $                                                | (6,137,065  | ) | $ | (2,221,046 | ) |
|                                                                 |       |                                             |        |   |   |
| Effect of  dilutive securities:                                      |       |                                             |        |   |   |
|                                                                 |       |                                             |        |   |   |
| Decrease in  warrant liability                                       |       | (9,273,355                                       | )           | (16,549,457 | ) |
|                                                                 |       |                                             |        |   |   |
| Net loss to  common shareholders for diluted loss per common share   |       | $                                                | (15,410,420 | ) | $ | (18,770,503 | ) |

 
|                                                           |   | **For the Periods Ended January 31, 2006** |       |
|----------------------------------------------------------------|--------|-------------------------------------------------|------------|
|                                                           |   | **Three Months**                                | ** ** | **Nine Months** |   |
| Weighted  average shares for basic net loss per common share   |   | 40,445,492                                      |       | 20 ,960,574 |   |
|                                                           |   |                                            |       |   |   |
| Effect of  dilutive securities:                                |   |                                            |       |   |   |
|                                                           |   |                                            |       |   |   |
| Shares  issuable under warrant agreements                      |   | 18,344,265                                      |       | 25,240,395 |   |
|                                                           |   |                                            |       |   |   |
| Weighted  average shares for diluted net loss per common share |   | 58,789,757                                      |       | 46,200,969 |   |

 

Options and warrants to purchase 18,896,776 and 8,305,256 shares ofcommon stock were excluded from the diluted computation for the quarters ended January 31,2006 and 2005, respectively, because they were anti-dilutive.  Options and warrants to purchase 18,221,211and 8,883,115 shares of common stock were excluded from the diluted computationfor the nine months ended January 31, 2006 and 2005, respectively,because they were anti-dilutive.

 

7

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

 

On November 18, 2004, the Company’s board of directors voted toauthorize management to cease production of heart valves but to continuemarketing the valves while exploring the merits of possible strategic alternativesfor the heart valve business, including, but not limited to, a joint venturewith another party or the sale of the business.  Following exploration ofa number of alternatives, management concluded in April 2005 that anorderly winding up of the valve business was the Company’s bestalternative.  On April 6, 2005, the Company’s board authorizedmanagement to discontinue sales of heart valves effective April 30, 2005,and to seek a buyer for the related production equipment.

 

As a result of the Company’s discontinuance of the heart valvebusiness, the Company made a determination during the fourth quarter of fiscalyear 2005 that the remaining assets of the heart valve operations should beconsidered “held for sale” pursuant to SFAS No. 144, “Accounting forImpairment or Disposal of Long-Lived Assets.”  (SFAS No. 144) Pursuant to SFAS No. 144, the Company ceased depreciation of property andequipment held for sale and evaluated whether any of the long-lived assets ofthe discontinued heart valve business were impaired.  Based upon theestimated selling prices of these assets, management concluded that thecarrying value of these assets was not impaired.  During the nine months ended January 31,2006, the Company disposed of the majority of the assets related to thediscontinued operations.  As of January 31,2006 and April 30, 2005, the carrying value of the remaining assets andliabilities of the heart valve business are reported as assets or liabilitiesof discontinued operations on the Company’s balance sheet.  In connectionwith this decision to discontinue the sale of heart valves, the Company reducedthe carrying value of certain excess inventories, resulting in a provisionrecorded during fiscal year 2005 of $2,573,656.

 

The Company has complied with the SEC staff communications and guidanceregarding discontinued operations presentation in the cash flows statements forthe nine months ended January 31, 2006 and 2005.

 

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

 

In the six months ended October 31, 2004, the Company restructuredits executive management team, resulting in the termination of two employees,and also terminated an additional five employees in an effort to reduceoperating costs.  Severance costs in connectionwith these terminations of approximately $202,000 and $26,000 (restated) werecharged to general and administrative expenses and discontinued operations,respectively.  This charge represented the amount of future severancepayments due to these former employees.  In the quarter ended January 31,2005, the Company terminated an additional eleven employees resulting inapproximately $16,000 of severance costs charged to general and administrativeexpenses and $32,000 (restated) charged to discontinued operations. During the quarter ended April 30, 2005, the Company terminated twoadditional employees resulting in approximately $32,000 of severance costscharged to general and administrative expenses. During the quarter ended July 31, 2005, the Company entered into aseparation agreement with an employee, resulting in a charge to general andadministrative expenses for severance pay of approximately $40,000. The Companypaid all amounts due to these former employees by September 30, 2005.  Approximately $283,000 and $63,000 of theabove severance payments were made in fiscal years 2005 and 2006, respectively.

 

**(7)****                                 EquityTransactions**

 

**Common Stock and Warrants**

 

During the fourth quarter of fiscal year 2004 and the first quarter offiscal year 2005, the Company completed the private sale of 2,730,763 units for$1.47 per unit.  Each unit consisted of one share of common stock and onefive-year warrant to purchase a common share for $1.60 per share. Proceeds from the offering, net of offering costs of $455,190, were $3,559,032. In addition to cash commissions included in the offering costs, the Companyissued to the private placement agent and finder five-year warrants to purchasean aggregate of 218,461 units at $1.8375 per unit.  As a result ofanti-dilution adjustments through January 31, 2006, these warrants areexercisable for 854,089 units at $0.47 per unit.

 

**Preferred Stock and Warrants**

 

On April 1, 2005, under the terms of a Securities PurchaseAgreement with accredited investors, the Company issued 18,035 shares of 5% Series ARedeemable Convertible Preferred Stock to such investors, five-year warrantsfor the purchase of 27,052,500 shares of common stock to such investorsexercisable at $0.50 per share, and five year warrants for the purchase in theaggregate of 1,635,960 shares of common stock to the placement agent and finderexercisable at $0.50 per share.  TheCompany obtained gross cash proceeds of $13,603,000 at the closing (net of$30,000 in legal fees which were withheld by the lead investor).  TheCompany also converted $4,402,000 of indebtedness into the above-referenced

 

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securities.  The Company incurred cash offering costs of $817,980,including agent commissions, a finder’s fee and out-of-pocket expensereimbursements.  The Company also paidlegal and administrative expenses of $18,086 incurred by PKM Properties, LLC (“PKM”)in this transaction.  PKM is an entity controlled by Paul K. Miller. Mr. Miller serves on the Company’s Board of Directors and is the Company’slargest shareholder.

 

On December 21,2005, holders of a majority of the outstanding shares of redeemable convertiblepreferred stock (“preferred stock”) authorized the Company to proceed with apreferred stock acquisition plan.  Pursuant to such plan, on December 21,2005, the Company entered into preferred stock acquisition agreements with theholders of an aggregate of 14,988 shares of preferred stock.  Under theagreements, the Company acquired the preferred stock of each such holder inconsideration of the issuance 3,077 shares of common stock for each share ofpreferred stock being acquired.  On January 6, 2006, under the sameform of preferred stock acquisition agreements, the Company acquired anadditional 2,717 shares of preferred stock, representing all of the remainingthen-outstanding shares of the Company’s preferred stock, for the same pershare consideration.  In the aggregate, the Company issued 54,478,285shares of common stock in consideration of the acquisition of 17,705 shares ofpreferred stock.  The Company originally sold 18,035 shares of preferredstock.  The 330 shares of preferred stock not purchased in December 2005or January 2006 were converted between June 2005 and October 2005into shares of common stock at a conversion ratio of 2,000 shares of commonstock for each share of preferred stock.

 

Alsoon December 21, 2005, the Company and holders of a majority of theoutstanding shares of preferred stock and related common stock purchasewarrants entered into an amendment to the securities purchase agreement as of April 1,2005, to revise certain definitions contained therein.  Following suchamendment, on December 21, 2005, the Company and each of the holders whooriginally agreed to sell preferred stock to the Company entered into amendmentsto such holders’ warrants issued under the securities purchase agreement. Pursuant to these amendments, the Company (1) reduced the exercise priceon outstanding warrants for the purchase of an aggregate of 22,969,500 sharesof common stock held by such persons from $0.50 per share to $0.325 per share,and (2) accelerated the expiration date of such warrants from April 1,2010, to January 6, 2006.  Concurrent with such warrant amendments,investors delivered warrant exercise notices to the Company.  The Companyauthorized one of such warrants, namely the warrant for the purchase of4,452,000 shares held by PKM to be exercised on a net exercise basis (using amarket price of $0.66 per share).

 

On January 6,2006, under the same form of amended warrant agreements, investors exercisedwarrants for the purchase of 4,230,500 shares of common stock.  TheCompany authorized one of such warrants, namely the warrant for the purchase of1,512,000 shares held by Peter L. Hauser, a principal shareholder, to be exercisedon a net exercise basis (using a market price of $0.66 per share).

 

In theaggregate, the Company issued 24,115,681 shares of common stock in connectionwith the exercises by investors of investor warrants issued in our April 2005private placement.  The Company also issued an additional 147,500 sharesof common stock in connection with exercises of warrants originally issued toits agent and finder in its April 2005 private placement.

 

Alsoon January 6, 2006, pursuant to exercise notices dated January 5,2006, the Company issued shares of common stock upon the exercise of certainother warrants.  In particular, holders of warrants for the purchase of anaggregate of 1,078,500 shares of common stock, which were originally issued tothe Company’s placement agent in its April 2005 financing, wereexercised.  Of such number, warrants for the purchase of 15,000 shareswere exercised for cash and warrants for the purchase of 1,063,500 shares wereexercised on a net exercise basis, resulting in the issuance of 759,774 sharesof common stock.  Also effective January 6, 2006, the Company amendedthe outstanding finder warrant for the purchase of 409,960 shares of commonstock to adjust the exercise price to $0.325 per share and eliminate the rightto put the warrant to the Company for cash in an amount equal to the fair valueof the warrants in the event of a fundamental transaction.

 

Thenet effect of the December 2005 and January 2006 transactions,including the changes in the terms of the preferred stock and warrants, was toincrease cash by approximately $6,436,000 (net of expenses of approximately$471,000), decrease the warrant liability associated with the warrantscontaining a put feature by approximately $18,188,000, increase common stockand additional paid-in capital by approximately $31,083,000, increase warrantequity by approximately $376,000, increase non-cash dividends on preferredstock by approximately $13,580,000 because of the change in the number ofcommon shares issued upon acquisition of the preferred stock and increase otherincome by approximately $6,745,000.  Theoutstanding shares of common stock were increased by 79,516,240 shares.

 

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In certain circumstances, the Company had the option to require thepreferred stockholders to convert their shares into common stock.  In theevent of a fundamental transaction, as defined, the preferred shareholders hadthe right to require the Company to redeem the preferred shares at their statedvalue, including any accrued but unpaid dividends.  In the event ofcertain defaults, the preferred shareholders had the right to require theCompany to redeem the preferred shares at 110 percent of their stated value,including any accrued but unpaid dividends.  As a result of theseredemption provisions, the carrying value of these preferred shares wereconsidered to be redeemable and were reported as a “mezzanine” instrument onthe Company’s balance sheet.  Theaggregate liquidation value of these redeemable preferred shares at April 30,2005 was $18,109,116.  However, thecarrying value of this redeemable preferred stock at April 30, 2005, waszero, net of a discount associated with the warrants issued to theshareholders, the placement agent and finder, as described below.  No redeemable convertible preferred stock wasoutstanding at January 31, 2006.

 

The Company was required to register the common shares underlying thepreferred stock conversion option and the purchaser warrants.  If theCompany did not meet certain registration deadlines, the preferred stockholderswere entitled to liquidated damages, as defined.  In the event of afundamental transaction, as defined, the warrants issued to the preferredshareholders, the placement agent and finder, all provided the warrant holderswith the right to put the warrants to the Company for cash in an amount equalto the fair value of the warrants, as determined using the Black Scholes optionpricing model.  As a result of this put right, the warrants were reportedat their fair value as a liability on the Company’s balance sheet and changesin the fair value of the warrants resulted in charges or benefits to theCompany’s results of operations. The fair value of these warrants upon closingof the preferred stock sale was $22,271,047.  Because the fair value ofthese warrants at April 1, 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) was recognizedas other expense of $4,266,047 upon closing.  During the period betweenclosing and April 30, 2005, the fair value of these warrants increased to$27,992,609.  The Company reported this $5,721,562 increase in fair valueas other expense in the fourth quarter of fiscal year 2005. The fair value ofthe warrants, after the changes in terms, was $11,443,152 at the date thewarrants were exercised or the put right was removed.  The Company reported the $16,549,457 and$9,273,355 decrease in fair value during the nine and three months ended January 31,2006, respectively, as a decrease in warrant liability in other income in thestatements of operations for the nine and three months ended January 31,2006, respectively.  As of January 31,2006, all warrants related to the April 1, 2005 transaction were exercisedor the put option was removed.

 

The Company measured the fair value of the warrant liability using theBlack Scholes option pricing model.  TheCompany believed this was the appropriate valuation model because theredemption terms of the warrants provided for the holders to put them to theCompany at their fair value as measured using the Black Scholes model.  The assumptions used to value the warrantswhen they were issued on April 1, 2005 and when they were valued at theend of the Company’s 2005 fiscal year (April 30, 2005) and at date ofexercise was as follows:

 
|                     |   | **April 1, 2005 and April 30, 2005** | ** ** | **Date of Exercise** | ** ** |
|--------------------------|--------|------------------------------------------------|------------|----------------------|------------|
| Term                     |   | 5 years                                        |       | 0 years              |       |
| Expected  volatility     |   | 116%                                           |       | 132%                 |       |
| Risk-free  interest rate |   | 4.24%                                          |       | 4.38%                |       |
| Expected  dividend yield |   | 0                                              |       | 0                    |       |

 

**(8)****                                 EmploymentContracts**

 

During the nine months ended January 31, 2006, the Company enteredinto employment agreements with six officers. The contracts give the officers and the Company the right to terminatethe contract with or without cause with sixty (60) days’ written notice.  The contracts also contain a provision forlump sum payments of up to twelve months severance if the officer is terminatedwithout cause by the Company or for good reason by the officer as defined inthe contracts.  The contracts alsocontain various other provisions.

 

**(9)****                                 SubsequentEvent**

 

On March 9, 2006, J Giordano Securities LLC (d/b/a J GiordanoSecurities Group) (JGSG) filed suit against the Company in U.S. District Court,District of Connecticut.  JGSG claimsthat it is entitled to damages due to an alleged breach of the engagementagreement, as amended, between the Company and JGSG.  In particular, JGSG claims that the exerciseof outstanding warrants for the purchase of common stock by certainJGSG-identified

 

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investors and the Company’s purchase of outstanding shares of 5% Series ARedeemable Convertible Preferred Stock from certain JGSG-identified investorsin December 2005 and January 2006 entitle JGSG to damages no lessthan $1,431,789.  In particular, JGSGseeks (a) $279,191 in cash commissions, (b) warrants for the purchaseof 859,050 shares at $0.325 per share, (c) lost profits of $751,669 on theargument that JGSG would have exercised the foregoing warrant and sold 859,050shares on December 30, 2005, at a price of $1.20 per share, and (d) the$400,909 in cash commissions the Company paid C.E. Unterberg Towbin LLC.  In addition, JGSG seeks reimbursement forreasonable expenses, interest, costs and attorneys’ fees.  The Company believes that this lawsuit iswithout merit and intends to vigorously defend itself.

 

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

 

*The following discussion contains variousforward-looking statements within the meaning of Section 21E of theExchange Act.  Although we believe that, in making any such statement, ourexpectations 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, as amended, for thefiscal year ended April 30, 2005, under the caption “Management’sDiscussion and Analysis or Plan of 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.*

 

**Overview**

 

Our core technology is the ATRILAZETM Surgical Ablation System for usein cardiac tissue ablation procedures in open-heart surgery.  We acquiredthis technology in August 2003 and received FDA 510(k) clearance for thefirst generation product in December 2004 and the second generationproduct in October 2005.  The AtriLaze system and its platform oflaser technology is currently being utilized as a potential means to treatatrial fibrillation in concomitant open-heart surgical procedures.

 

Atrial fibrillation, or AF, is the most commonly occurring cardiacarrhythmia.  It reduces cardiac output, is a major precursor to congestiveheart failure and is associated with an increased incidence of stroke. The incidence of AF increases with age.  Approximately 5.5 million peopleworldwide are afflicted with AF.  There are 320,000 new diagnoses annuallyworldwide.  Approximately 2.5 million Americans are afflicted with AF,with 160,000 new diagnoses each year in the U.S.

 

With our presence in the cardiovascular surgery market, we intend todefine the market and develop a stand-alone, minimally invasive (closed-chest,beating heart) surgical procedure for ablating cardiac tissue as a potentialmeans to treat AF.

 

Previously, our primary focus was on heart valve disease.  Wedeveloped and marketed mechanical heart valves known as the Omnicarbon® 3000and 4000 heart valves.  In November 2004, after an exhaustiveevaluation of the heart valve business, we discontinued all heart valve relatedproduction.  In April 2005, we announced that our efforts to find abuyer for the heart valve business were unsuccessful and that we would stopselling heart valves and were exiting the heart valve business.  At thattime, we also determined to direct all of our resources to the development andintroduction of products targeting the treatment of AF.

 

Although our AtriLaze system is being used by cardiovascular surgeonsat select centers to ablate cardiac tissue in human concomitant open-heartsurgical procedures, we have not generated any revenue from theseprocedures.  We have been providing our AtriLaze system to these surgeonsat no cost for proof-of-concept in the clinical setting, prior to commencingclinical sales of our AtriLaze system.  We expect to continue validatingour technology with key cardiovascular surgeons in concomitant open-heartprocedures into fiscal year 2007.  Weexpect to begin selling hand-held devices for these procedures on a limitedbasis beginning in the fourth quarter of fiscal year 2006.  We do notexpect significant revenue until we introduce a version of our AtriLaze systemfor stand-alone, minimally invasive (closed-chest, beating heart) ablation ofcardiac tissue.

 

MedicalCV was incorporated in Minnesota on March 30, 1992, underthe name CV Dynamics, Inc.

 

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**Periods Ended January 31, 2006 and 2005**

 

**Critical Accounting Policies**

 

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

 

In June 2005, the Financial Accounting Standards Board (FASB)issued DIG Issue B 38.  Thisimplementation issue requires companies to assess whether puts and callembedded in financial contracts require that the host contract and embeddedderivative be bifurcated and valued separately. DIG Issue B 38 specifically addresses debt host contracts.

 

At the time we sold our preferred stock instrument we concluded that itwas an equity host contract.  We alsoconcluded that DIG Issue B 38, which is effective for fiscal periods beginningafter December 15, 2005, did not apply to the put obligation embedded inour preferred stock.

 

**Results of Operations for the Three MonthsEnded January 31, 2006 and 2005**

 

*Sales and Marketing*. Sales and marketing expenses in the quarter ended January 31, 2006 were$295,742 compared to $97,568 in the same period last fiscal year. Salesand marketing expenses for both quarters were comprised of expenses related tothe marketing of our AtriLaze product. The major components of the increase in sales and marketing expense werean increase in royalties of approximately $125,000, an increase in salaries andrelated costs of approximately $30,000 and an increase in travel and relatedcosts of approximately $35,000.

 

*General and Administrative*. General and administrative expenses for the quarter ended January 31,2006, were $840,155 compared to $712,864 in the quarter ended January 31,2005.  The major components in theincrease in general and administrative expense were increases in personnelcosts of approximately $185,000 and professional fees of approximately$115,000. These increases were partially offset by reductions in consultingfees of approximately $100,000 and travel costs of approximately $83,000.

 

*Research and Development Services.* Research and development services includes expenses previously classifiedas research and development expenses and engineering and regulatoryexpenses.  Expenses related to researchand development services were $707,630 for the quarter ended January 31,2006 compared to $552,266 in the same period last fiscal year.  The increase in research and developmentservices expense was attributable to increased personnel costs of approximately$70,000, increased consulting and advisory board fees and expenses ofapproximately $72,000, and increased material costs of $46,000, partiallyoffset by decreased professional fees of approximately $40,000.

 

*Other Income (Expense)*. Duringthe quarter ended January 31, 2006, we amended the terms related to theexercise price and expiration date of the warrants we issued on April 1,2005.  The changes resulted in therecording of other income in the amount of $6,744,930 in the quarter.  In addition, due to the decrease in our stockprice between October 31, 2005 and the date the warrants were exercised,we recorded a reduction to the fair value of our warrant liability of$2,528,425 during the quarter ended January 31, 2006.  The accountingfor the warrants issued in connection with our April 1, 2005 preferredstock sale is discussed more fully in Note 7 to our Financial Statements.  Interest expense totaled $28,776 in thequarter ended January 31, 2006, compared to $136,941 in the comparableperiod last fiscal year.  The decrease in interest expense was due to thedecreased amount of borrowings outstanding.    Interest income forthe quarter ended January 31, 2006 was $97,362 compared to $56 for thequarter ended January 31, 2005.  Theincrease was due to the additional cash available for investment in fiscal year2006.

 

*Discontinued Operations.*  Discontinued operations relate to the heartvalue business.  The income fromdiscontinued operations of $92,755 in the quarter ended January 31, 2006resulted from a gain on disposition of assets of approximately $138,000partially offset by expenses of approximately $46,000.  The loss of $366,726 in the quarter ended January 31,2005 related to costs and expenses of approximately $917,000, partially offsetby sales of approximately $550,000.

 

*Dividends on Preferred Stock. *During the quarterended January 31, 2006, we offered to repurchase certain outstandingshares of preferred stock pursuant to our preferred stock acquisitionplan.  Our acquisition of the preferredstock in consideration of the issuance of 3,077 shares of common stock pershare of preferred stock resulted in a non-cash dividend on the preferred stockof $13,579,979.  In addition, cashdividends of $146,851 were paid during the quarter.

 

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*Income Tax Provision*. In light of our history of operating losses, we have historically recorded avaluation allowance to fully offset our deferred tax assets.  We havecontinued to provide a full valuation allowance through the third quarter offiscal year 2006 due to the inherent uncertainty about our ability to generatethe sufficient taxable income to realize these deferred tax assets.  Wehave recorded no tax provision in the quarter ended January 31, 2006 dueto net operating losses generated for income tax reporting purposes.

 

**Results of Operations for the Nine MonthsEnded January 31, 2006 and 2005**

 

*Sales and Marketing*. Sales and marketing expenses for the nine months ended January 31, 2006were $429,576 compared to $97,568 in the same period last fiscal year.  Sales and marketing expenses for both periodswere comprised of expenses related to the marketing of our AtriLazeproduct.  The major components in theincrease in sales and marketing expense were an increase in royalties ofapproximately $125,000, an increase in salaries and related costs ofapproximately $86,000 and an increase in travel and related costs ofapproximately $70,000.

 

*General and Administrative*. General and administrative expenses for the nine months ended January 31,2006, were $2,324,735 compared to $2,429,731 for the same period in the prioryear.  The major components in thedecrease in general and administrative expense were reductions in severanceexpense of approximately $220,000, in consulting fees of approximately $280,000and in expenses related to warrants issued of approximately $82,000, offset inpart by increases in personnel cost of approximately $120,000 and professionalfees of approximately $325,000.

 

*Research and Development Services.* Research and development services includes expenses previously classifiedas research and development expenses and engineering and regulatoryexpenses.  Expenses related to researchand development services were $1,900,305 for the nine months ended January 31,2006 compared to $1,250,443 in the same period last fiscal year.  The increase in research and developmentservices expense was primarily attributable to increased personnel costs ofapproximately $220,000, increased consulting and advisory board fees andexpenses of approximately $267,000, increased material costs of approximately$65,000, and increased travel expenses of approximately $128,000, partiallyoffset by decreased professional fees of approximately $33,000.

 

*Other Income (Expense)*. During the nine months ended January 31, 2006, we amended the termsrelated to the exercise price and expiration date of the warrants we issued in April 2005.  The changes resulted in the recording ofother income in the amount of $6,744,930 in the nine month period ended January 31,2006.  In addition, due to the decreasein our stock price between April 30, 2005 and the date the warrants wereexercised, we recorded a reduction to the fair value of our warrant liabilityof $9,804,527 during the nine months ended January 31, 2006.  Theaccounting for the warrants issued in connection with our April 1, 2005preferred stock sale is discussed more fully in Note 7 to our FinancialStatements.  Interest expense totaled$128,855 in the nine months ended January 31, 2006, compared to $429,715in the comparable period last fiscal year.  The decrease in interestexpense was due to the decreased amount of borrowings outstanding.  Interest income totaled $243,392 for the ninemonths ended January 31, 2006 compared to $3,711 for the same period inthe previous fiscal year.  The increasewas due to a greater amount of cash available in fiscal year 2006.

 

*Discontinued Operations.*  Discontinued operations relate to the heartvalue business.  The loss fromdiscontinued operations of $56,895 for the nine months ended January 31,2006 resulted from costs and expenses of approximately $533,000 partiallyoffset by sales of approximately $338,000 and a gain on disposition of assetsof approximately $138,000.  The loss of$1,480,561 in the nine months ended January 31, 2005 related to costs andexpenses of approximately $3,287,000, partially offset by sales ofapproximately $1,806,000.

 

*Dividends on Preferred Stock. *During the ninemonths ended January 31, 2006, we offered to repurchase certainoutstanding shares of preferred stock pursuant to our preferred stockacquisition plan.  Our acquisition of thepreferred stock in consideration of the issuance of 3,077 shares of commonstock per share of preferred stock resulted in a non-cash dividend on thepreferred stock of $13,579,979.  Inaddition, cash dividends of $588,542 were paid during the nine month period.

 

*Income Tax Provision*. In light of our history of operating losses, we have historically recorded avaluation allowance to fully offset our deferred tax assets.  We havecontinued to provide a full valuation allowance through the first nine monthsof fiscal year 2006 due to the inherent uncertainty about our ability togenerate the sufficient taxable income to realize these deferred taxassets.  We have recorded no tax provision in the nine month period due tonet operating

 

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losses generated for income tax reporting purposes.

 

**Liquidity and Capital Resources**

 

Cash and cash equivalents increased to $12,602,096 at January 31,2006, from $10,637,796 at April 30, 2005.  This increase in cash andcash equivalents of $1,964,300 was due to the following:

 

 
| Net cash used by operating activities      | ** ** | $         | (3,707,424 | )      |
|--------------------------------------------|------------|-----------|------------|--------|
| Net cash  provided by investing activities |       | 19,259    |       |
| Net cash  provided by financing activities |       | 5,652,465 |       |
| Net increase  in cash and cash equivalents |       | $         | 1,964,300  |   |

 

*Operating Activities. *Net cash used byoperating activities was $3,707,424 and $2,505,518 for the nine months ended January 31,2006 and 2005, respectively.  The netcash used by operating activities for the first nine months of fiscal year 2006resulted primarily from the net income of $11,947,475 for the period beingoffset by non-cash adjustments of $16,468,885 and increased by net changes inoperating assets and liabilities of $813,986.  The non-cash adjustments related primarily tothe decrease in the fair value of the warrant liability, the gain on the saleof property, plant and equipment and depreciation.  The net changes in operating assets andliabilities related primarily to a decrease in receivables, inventories andprepaid expenses and an increase in accrued expenses being offset by a decreasein accounts payable.  The net cash usedby operating activities for the first nine months of fiscal year 2005 resultedprimarily from the net loss of $5,679,712 for the period offset by non-cashadjustments of $2,064,327 and by net changes in operating assets andliabilities of $1,109,867.  The non-cashadjustments related primarily to an increase in the inventory reserve and thebad debt provision, stock-based compensation and depreciation.  The net changes in operating assets andliabilities related primarily to decreases in accounts receivable, inventoriesand prepaid expenses and to an increase in accrued expenses, net of a decreasein accounts payable.

 

*Investing Activities. *Net cash provided byinvesting activities was $19,259 for the nine months ended January 31,2006.  Proceeds from the sale of property, plant and equipment werepartially offset by purchases of equipment to be used in the clinical studiesfor our atrial fibrillation product and the purchase of a new computer andaccounting system, as well as computer upgrades for research and administrativepersonnel.  Net cash used in investing activitiesfor the nine months ended January 31, 2005, totaled $178,190.  Wepurchased $201,313 of equipment to support users of our initial atrialfibrillation product.  The funds used were partially offset by theproceeds from the sale of other equipment.

 

*Financing Activities. *Net cash provided byfinancing activities was $5,652,465 for the nine months ended January 31,2006, and consisted primarily of proceeds from the exercise of warrants of$6,435,140 offset by the payment of preferred dividends of $588,542 andprincipal payments on the related party lease obligations of $194,793.  Net cash provided by financing activities was$2,221,131 for the nine months ended January 31, 2005, and consistedprimarily of net proceeds from the sale of common stock and warrants of$2,000,608, additional borrowings under term debt arrangements of $925,000,offset by payments on term debt of $500,000 and by principal payments onrelated party leases of $205,852.

 

Throughout fiscal year 2004 and in the first quarter of fiscal year2005, we entered into a number of financing transactions to provide fundsnecessary to meet our working capital and capital expenditure needs and to meetother obligations.  Details of these activities are contained in ourAnnual Report on Form 10-KSB, as amended, for the year ended April 30,2005.  With the exception of the related party sale leaseback, all termdebt and lines of credit were converted to equity or repaid on April 1,2005, as part of the close on the $18 million financing described below.

 

On April 1, 2005, under the terms of a Securities PurchaseAgreement with accredited investors, we issued 18,035 shares of 5% Series ARedeemable Convertible Preferred Stock to such investors, warrants for thepurchase of 27,052,500 shares of common stock to such investors, and warrantsfor the purchase in the aggregate of 1,635,960 shares of common stock to theplacement agent and finder.  We obtained gross cash proceeds of$13,603,000 at the closing (net of $30,000 in legal fees which were withheld bythe lead investor).  We also converted $4,402,000 of indebtedness into theabove-referenced securities.  We incurred cash offering costs of $817,980,including agent commissions, a finder’s fee and out-of-pocket expensereimbursements.  We also paid legal andadministrative expenses of $18,086 incurred by PKM Properties, LLC (“PKM”) inthis transaction.  PKM is an entity controlled by Paul K. Miller.  Mr. Millerserves on our Board of Directors and is our largest shareholder.

 

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On December 21,2005, holders of a majority of the outstanding shares of preferred stockauthorized us to proceed with a preferred stock acquisition plan. Pursuant to such plan, on December 21, 2005, we entered into preferredstock acquisition agreements with the holders of an aggregate of 14,988 sharesof preferred stock.  Under the agreements, we acquired the preferred stockof each such holder in consideration of the issuance 3,077 shares of commonstock for each share of preferred stock being acquired.  On January 6,2006, under the same form of preferred stock acquisition agreements, weacquired an additional 2,717 shares of preferred stock, representing all of theremaining then-outstanding shares of our preferred stock, for the same pershare consideration.  In the aggregate, we issued 54,478,285 shares ofcommon stock in consideration of the acquisition of 17,705 shares of preferredstock.  We originally sold 18,035 shares of preferred stock.  The 330shares of preferred stock not purchased in December 2005 or January 2006were converted between June 2005 and October 2005 into shares ofcommon stock at a conversion ratio of 2,000 shares of common stock for eachshare of preferred stock.

 

Alsoon December 21, 2005, we and holders of a majority of the outstanding sharesof preferred stock and related common stock purchase warrants entered into anamendment to the securities purchase agreement as of April 1, 2005, torevise certain definitions contained therein.  Following such amendment,on December 21, 2005, we and each of the holders who originally agreed tosell preferred stock to us entered into amendments to such holders’ warrantsissued under the securities purchase agreement.  Pursuant to theseamendments, we (1) reduced the exercise price on outstanding warrants forthe purchase of an aggregate of 22,969,500 shares of common stock held by suchpersons from $0.50 per share to $0.325 per share, and (2) accelerated theexpiration date of such warrants from April 1, 2010, to January 6,2006.  Concurrent with such warrant amendments, investors deliveredwarrant exercise notices to us.  We authorized one of such warrants,namely the warrant for the purchase of 4,452,000 shares held by PKM to beexercised on a net exercise basis (using a market price of $0.66 per share).

 

On January 6,2006, under the same form of amended warrant agreements, investors exercisedwarrants for the purchase of 4,230,500 shares of common stock.  Weauthorized one of such warrants, namely the warrant for the purchase of1,512,000 shares held by Peter L. Hauser, a principal shareholder, to beexercised on a net exercise basis (using a market price of $0.66 per share).

 

In theaggregate, we issued 24,115,681 shares of common stock in connection with theexercises by investors of investor warrants issued in our April 2005private placement.  We also issued an additional 147,500 shares of commonstock in connection with exercises of warrants originally issued to our agentand finder in our April 2005 private placement.

 

Alsoon January 6, 2006, pursuant to exercise notices dated January 5,2006, we issued shares of common stock upon the exercise of certain otherwarrants.  In particular, holders of warrants for the purchase of anaggregate of 1,078,500 shares of common stock, which were originally issued toour placement agent in its April 2005 financing, were exercised.  Ofsuch number, warrants for the purchase of 15,000 shares were exercised for cashand warrants for the purchase of 1,063,500 shares were exercised on a netexercise basis, resulting in the issuance of 759,774 shares of commonstock.  Also effective January 6, 2006, we amended the outstandingfinder warrant for the purchase of 409,960 shares of common stock to adjust theexercise price to $0.325 per share and eliminate the right to put the warrantto us for cash in an amount equal to the fair value of the warrants in theevent of a fundamental transaction.

 

Thenet effect of the December 2005 and January 2006 transactions,including the changes in the terms of the preferred stock and warrants, was toincrease cash by approximately $6,436,000 (net of expenses of approximately$471,000), decrease the warrant liability associated with the warrantscontaining a put feature by approximately $18,188,000, increase common stockand additional paid-in capital by approximately $31,083,000, increase warrantequity by approximately $376,000, increase non-cash dividends on preferredstock by approximately $13,580,000 because of the change in the number ofcommon shares issued upon conversion of the preferred stock and increase otherincome by approximately $6,745,000.  Theoutstanding shares of common stock were increased by 79,516,240 shares.

 

We have been progressing on our business plan at a more rapid rate thanoriginally contemplated.  We expect thatour operating losses and negative operating cash flow will continue throughfiscal year 2006 and into fiscal year 2007 as we continue adding staff tosupport the development and launch of our atrial fibrillation technology. We anticipate that our sales and marketing, general and administrative andresearch and development services expenses will continue to constitute amaterial use of our cash resources.  The actual amounts and timing of ourcapital expenditures will vary significantly depending upon progress on ourproduct development projects and the availability of financing.  Our cash balance of $12,602,096 at January 31,2006 is expected to last through April 2007.

 

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Our capital requirements may vary depending upon the timing and thesuccess of the implementation of our business plan, regulatory, technologicaland competitive developments, or if:

 

•                                          salesof our 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 fortreating atrial fibrillation through laser ablation will:

 

•                                          beattainable;

 

•                                          beprofitable;

 

•                                          reduceour reliance upon financing transactions; or

 

•                                          enableus to continue operations.

 

**Commitments and Contingent Liabilities**

 

*Product Liability Contingency.* In March 2005, we became aware that a patient who had been implanted withour heart valve had died.  We have not received any claims related to thismatter but believe that any such claim would be covered by our existingliability insurance.  Based upon the expectation that insurance will coverthe cost of any claims after our payment of the deductible, we do not expectthe ultimate resolution of this matter to have a material effect on ourfinancial position, results of operations or cash flows.

 

*Related Party Lease Obligation. *On April 4, 2003, we sold our corporate headquarters, manufacturingfacility and surrounding land in Inver Grove Heights, Minnesota, to PKM. In connection with the transaction, we received total consideration of $3.84million consisting of (1) $1.0 million in cash, (2) PKM’s assumptionof our $2.5 million outstanding indebtedness to Associated Bank whicheliminated our indebtedness to Associated Bank, and (3) PKM’s assumptionof our promissory note with Dakota Electric Association and land specialassessments payable to Dakota County aggregating $336,105.

 

We simultaneously leased back our facility pursuant to a ten-yearlease, with options to renew and an option to repurchase the facility.  Wecontinue to utilize the facility as we did prior to the financing transaction. In July 2005, PKM listed the building for sale.  PKM is seekinga buyer for the property to facilitate our release from the remaining eightyears of the lease, thereby permitting us to relocate to a more cost-effectivefacility.  We have an agreement with PKM that releases us from our leaseif the building sells above a certain price.  However, there can be noassurance the building will be sold and that we will be successful in obtaininga release from our lease.

 

*Clinical Studies. *We entered into agreements with several large institutions to conduct clinicalstudies regarding certain aspects of our Omnicarbon heart valve’s clinicalperformance.  The agreements run through fiscal year 2006.  Ingeneral, recipients of clinical study payments were required to utilize ourproducts in order to complete their studies and collect and submit dataaccording to a study protocol.  As of January 31, 2006, we hadaccrued, but not paid, $10,300 for clinical study payments.  We havecommunicated the termination of all studies and are not responsible for anyliabilities beyond the $10,300.  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.

 

*Severance Contingencies.*  Employment agreements with six officerscontain a provision for lump sum payments of up to twelve months severance ifthe officer is terminated without cause by us or for good reason by the officeras defined in the contracts.

 

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*Atrial Fibrillation Technology PurchaseAgreement. * In August 2003, we entered intoa technology purchase agreement with LightWave Ablation Systems, Inc. andits principals relating to the acquisition of LightWave’s interests intechnology consisting of a catheter/probe containing elements of optical fiber,coolant passages and other features for the purpose of delivering laser energyto the epicardial surface of the heart for treatment of atrial fibrillation. We paid LightWave an initial standstill payment consisting of 15,000 shares ofour common stock, $10,000 upon closing and an additional $30,000 to LightWavein installments in 2004 and 2005.  An additional $125,000 was paid to LightWavein 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 disposableproducts.  In addition, at closing, during fiscal year 2004, we issued toLightWave a warrant for the purchase of 25,000 shares of common stock at $1.46per share and, during fiscal year 2005, a warrant for the purchase of 25,000shares of common stock at $1.46 per share upon receiving FDA 510(k)clearance.  In addition, we are obligated to issue a warrant for thepurchase of 25,000 shares of common stock upon a receipt of a U.S. utilitypatent covering the product and a warrant for the purchase of 25,000 shares ofcommon stock upon the first commercial sale of our product.

 

Following the first commercial sale, we have agreed to pay LightWavepayments equal to 6 percent of net sales of the LightWave product in countriesin which we obtain patent protection and 4 percent of net sales of theLightWave product in territories in which there is no patent protection.  Commencing with the second year following ourfirst commercial sale, we have agreed to pay minimum annual payments asfollows:

 
| **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 make payments for a period of ten years followingthe first commercial sale.  Our technology purchase agreement withLightWave contains other customary conditions, including mutual indemnificationobligations.  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 have agreed to use our reasonable commercial efforts tocommercialize the technology within three years following the acquisition ofthe technology from LightWave.  If we fail in any year to pay minimum annualpayments, we may be obligated to grant LightWave a nonexclusive right to usethe technology acquired from LightWave, or pay LightWave the difference betweenpayments actually made and minimum payments due for a given year.

 

The following table summarizes our contractual obligation as of January 31,2006, excluding product liability contingencies, severance contingencies andpayments that are contingent upon achievement of future development of salesmilestones, as described above:

 
| ** **                              | ** ** | **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)      |       | $                          | 2,781,000  |   | $ | 370,800 |   | $ | 755,505 |   | $ | 1,654,695 |   |
| Clinical  Studies                       |       | 10,300                     |       | 10,300 |   | — |   | — |   |
| Total  Contractual Obligations          |       | $                          | 2,791,300  |   | $ | 381,100 |   | $ | 755,505 |   | $ | 1,654,695 |   |

 

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(1)                                  Futurepayments include interest due.

 

**Qualitative and Quantitative Disclosuresabout Market Risk**

 

We have discontinued sales of the heart valve and are focusing all ofour resources on the development and introduction

 

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of our AtriLaze Surgical Ablation System.  Sales in fiscal year2006 are not expected to be material, and we expect that any sales will be inthe United States denominated in U.S. dollars.  Our interest income andexpenses are sensitive to changes in the general level of U.S. interest rates,particularly since our investments are in short-term instruments.  In June 2005,we placed a majority of our temporarily idle cash in a fund managed by a largebrokerage firm.  This fund buys sells and holds interest rate sensitiveinvestments.  If investors in the fund tried to redeem a significantportion of their shares simultaneously, the fund might be forced to sell investmentsbelow cost and we could incur a loss of principal in addition to a reduction orloss 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 investing policy is to limit market and credit risk and therisk of principal loss.  All liquid investments with original maturitiesof three months or less are considered to be cash equivalents.

 

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

 

**Restatement of Previously Issued FinancialStatements**

 

As described in Note 16 to the financial statements set forth in ourAnnual Report on Form 10-KSB/A for the year ended April 30, 2005, we identifiederrors in the presentation of our previously issued statements of operations.As a result of these errors, we have restated our financial statements for thethe quarter ended October 31, 2004 and the year ended April 30, 2005.

 

**Evaluation of Disclosure Controls and Procedures**

 

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

 

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of our company’s disclosurecontrols and procedures as of the end of the period covered in this QuarterlyReport on Form 10-QSB. Based on this evaluation and because of the materialweakness described below, our Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures were noteffective as of the end of the period covered in this Quarterly Report on Form10-QSB. To address the material weakness described below, we have expanded ourdisclosure controls and procedures to include additional analysis and otherprocedures over the preparation of the financial statements included in thisreport. Accordingly, our management has concluded that the financial statementsincluded in this report fairly present in all material respects our financialposition, results of operations and cash flows for the periods presented inconformity with generally accepted accounting principles.

 

**MaterialWeakness in Internal Control Over Financial Reporting**

 

Amaterial weakness is a control deficiency or a combination of controldeficiencies that result in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected. Our management has concluded that, as of January 31,2006, we did not maintain effective controls over the preparation, review,presentation and disclosure of our statement of operations. Specifically, ourcontrols did not prevent or detect the incorrect presentation of certainexpenses as part of continuing operations rather than as part of discontinuedoperations, in accordance with generally accepted accounting principles. Thiscontrol deficiency resulted in the restatement of our financial statements forthe quarter ended October 31, 2004 and the year ended April 30, 2005.Additionally, this control deficiency could result in a misstatement of thepresentation and disclosure of our statement of operations that would result ina material misstatement in our annual or interim financial statements thatwould not be prevented or detected. Accordingly, management determined thatthis control deficiency constitutes a material weakness in our internal controlover financial reporting as of January 31, 2006.

 

**Changesin Internal Control Over Financial Reporting**

 

Therewas no change in our internal control over financial reporting that occurredduring our quarter ended January 31, 2006 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**Planfor Remediation of Material Weakness**

 

Wehave developed a plan to address this material weakness that includes addingadditional professional accounting personnel. On an interim basis, we engaged asenior financial consultant in February 2006 to provide an immediate expansionin our technical finance and accounting resources. This individual will beretained until additional accounting personnel have been employed. We willcontinue to assess the adequacy and appropriateness of our financial staff andadjust accordingly as changes in our business warrant. Management believes thatour plan to address this material weakness, when fully implemented, willremediate this material weakness. Although we are not certain when the materialweakness will be remediated, we will need a period of time over which todemonstrate that these controls are functioning appropriately to conclude thatwe have adequately remediated the material weakness.

 

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**PART II**

 

**OTHERINFORMATION**

 
| **ITEM 1** | ** ** | **LEGAL PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|       |       | On March 9, 2006, J Giordano  Securities LLC (d/b/a J Giordano Securities Group) (JGSG) filed suit against  our company in U.S. District Court, District of Connecticut. JGSG claims that  it is entitled to damages due to an alleged breach of the engagement  agreement, as amended, between us and JGSG. In particular, JGSG claims that  the exercise of outstanding warrants for the purchase of common stock by  certain JGSG-identified investors and our purchase of outstanding shares of  5% Series A Redeemable Convertible Preferred Stock from certain  JGSG-identified investors in December 2005 and January 2006 entitle  JGSG to damages no less than $1,431,789. In particular, JGSG seeks  (a) $279,191 in cash commissions, (b) warrants for the purchase of  859,050 shares at $0.325 per share, (c) lost profits of $751,669 on the  argument that JGSG would have exercised the foregoing warrant and sold  859,050 shares on December 30, 2005, at a price of $1.20 per share, and  (d) the $400,909 in cash commissions we paid C.E. Unterberg Towbin LLC.  In addition, JGSG seeks reimbursement for reasonable expenses, interest,  costs and attorneys’ fees. We believe that this lawsuit is without merit and  intend to vigorously defend ourself. |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **ITEM 6** | ** ** | **EXHIBITS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|       |       | See Index to Exhibits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on March 20, 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                |       | Letter Agreement by and between MedicalCV, Inc.  and Marc P. Flores, dated November 2, 2005 (incorporated by reference to  our Current Report on Form 8-K filed on November 8, 2005 (File No. 000-33295)).                                      |
|                |       |                                                                                                                                                                                                                                                                     |
| 10.2                |       | Letter Agreement by and between MedicalCV, Inc.  and James E. Jeter, dated November 3, 2005 (incorporated by reference to  our Current Report on Form 8-K filed on November 8, 2005 (File No. 000-33295)).                                      |
|                |       |                                                                                                                                                                                                                                                                     |
| 10.3                |       | Form of Stock Option Amendment, dated December 13,  2005 (incorporated by reference to our Quarterly Report on Form 10-QSB  filed on December 14, 2005 (File No. 000-33295)).                                                                   |
|                |       |                                                                                                                                                                                                                                                                     |
| 10.4                |       | Form of Preferred Stock Acquisition  Agreement, dated December 21, 2005 (including form of Registration  Rights Agreement) (incorporated by reference to our Current Report on Form 8-K  filed on December 22, 2005   (File No. 000-33295)).         |
|                |       |                                                                                                                                                                                                                                                                     |
| 10.5                |       | Form of Amendment No. 1 to  Securities Purchase Agreement (originally dated March 31, 2005), dated December 21,  2005 (incorporated by reference to our Current Report on Form 8-K filed  on December 22, 2005 (File No. 000-33295)). |
|                |       |                                                                                                                                                                                                                                                                     |
| 10.6                |       | Form of Amendment No. 1 to  Warrant Agreement (originally issued April 1, 2005), dated December 21,  2005 (incorporated by reference to our Current Report on Form 8-K filed  on December 22, 2005 (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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