**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

| **x**      |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------|--------------------------------------------------------------------------------------------------------|
| ** ** |   | ** **                                                                                             |
| ** ** |   | **For the quarterly period ended March 31,  2008**                                                |

 

**or**

 

| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                    |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |   | ** **                                                                                                                                                 |
| ** ** |   | **For the transition period from              to         ** |

 

**Commission File Number 333-103781**

 

**ProUroCare Medical Inc.**

(Exact name of registrantas specified in its charter)

 

| **Nevada**                         |   | **20-1212923**      |
|------------------------------------|--------|---------------------|
| (State or other  jurisdiction      |   | (IRS Employer       |
| of incorporation or  organization) |   | Identification No.) |

 

**5500 Wayzata Blvd., Suite 310**

**Golden Valley, Minnesota 55416**

(Address of principalexecutive offices, and Zip Code)

 

**(952) 476-9093**

(Registrant’s telephonenumber, including area code)

 

Indicate by checkmarkwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.                                                              YESx  NO o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company x |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

YES o  NO x

 

The registrant has 1,725,350 shares of common stockoutstanding as of May 2, 2008.

 

 

----

 

**ProUroCareMedical Inc.**

**Form 10-Qfor the**

**QuarterEnded March 31, 2008**

 

**Table of Contents**

 
| ** **                           | **Page No.**                                                                           |
|--------------------------------------|---------------------------------------------------------------------------------------------|
| ** **                           | ** **                                                                                  |
| PART I  - FINANCIAL INFORMATION | [1]                                                                                         |
|                                 |                                                                                        |
| ITEM 1.                              | FINANCIAL STATEMENTS                                                                        |   |
|                                 |                                                                                        |   |
|                                 | Consolidated Balance Sheets                                                                 | [1] |
|                                 |                                                                                        |   |
|                                 | Consolidated Statements of Operations                                                       | [2] |
|                                 |                                                                                        |   |
|                                 | Consolidated Statements of Cash Flows                                                       | [3] |
|                                 |                                                                                        |   |
|                                 | Notes to Consolidated Financial Statements                                                  | [5] |
|                                 |                                                                                        |   |
| ITEM 2.                              | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | [19] |
|                                 |                                                                                        |   |
| ITEM 4T.                             | CONTROLS AND PROCEDURES                                                                     | [24] |
|                                 |                                                                                        |   |
| PART II  - OTHER INFORMATION    | [25]                                                                                        |
|                                 |                                                                                        |
| ITEM 1.                              | LEGAL PROCEEDINGS                                                                           | [25] |
|                                 |                                                                                        |   |
| ITEM 1A.                             | RISK FACTORS                                                                                | [25] |
|                                 |                                                                                        |
| ITEM  2.                             | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                | [29] |
|                                 |                                                                                        |   |
| ITEM 5.                              | OTHER  INFORMATION                                                                          | [30] |
|                                 |                                                                                        |   |
| ITEM 6.                              | EXHIBITS                                                                                    | [31] |
|                                 |                                                                                        |   |
| SIGNATURES                           |                                                                                        | [32] |
|                                      |                                                                                             |  |  |  |

 

----

 

**PART I.FINANCIAL INFORMATION**

 

***Item 1. Financial Statements***

 

**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                         | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **(Unaudited)**              | ** ** | **(Audited)**                   | ** ** |
| **Assets**                                                                                                                                                                         | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                                                                    |       |                         |       |                            |       |
| Cash                                                                                                                                                                               |       | $                            | 133,626    |                            | $          | 400,613 |   |
| Restricted cash                                                                                                                                                                    |       | 44,087                       |       | 44,000                          |       |
| Prepaid expenses                                                                                                                                                                   |       | 17,543                       |       | 21,733                          |       |
| Total current  assets                                                                                                                                                              |       | 195,256                      |       | 466,346                         |       |
| Equipment and  furniture, net                                                                                                                                                      |       | 452                          |       | 605                             |       |
| Deferred  offering expenses                                                                                                                                                        |       | 190,421                      |       | 132,638                         |       |
| Debt issuance  costs, net                                                                                                                                                          |       | 449,782                      |       | 439,321                         |       |
|                                                                                                                                                                               |       | $                            | 835,911    |                            | $          | 1,038,910 |   |
| **Liabilities and Shareholders’ Deficit**                                                                                                                                     |       |                         |       |                            |       |
| Current  liabilities:                                                                                                                                                              |       |                         |       |                            |       |
| Notes payable,  bank                                                                                                                                                               |       | $                            | 1,600,000  |                            | $          | — |   |
| Notes payable,  net of original issue discount                                                                                                                                     |       | 643,350                      |       | 263,143                         |       |
| Convertible  debentures, net of original issue discount                                                                                                                            |       | 515,369                      |       | —                          |       |
| Accounts payable                                                                                                                                                                   |       | 610,042                      |       | 484,375                         |       |
| Accrued expenses                                                                                                                                                                   |       | 633,740                      |       | 801,925                         |       |
| Loans from  officers and directors                                                                                                                                                 |       | 2,200                        |       | 10,450                          |       |
| Total current  liabilities                                                                                                                                                         |       | 4,004,701                    |       | 1,559,893                       |       |
|                                                                                                                                                                               |       |                         |       |                            |       |
| Commitments and  contingencies                                                                                                                                                     |       |                         |       |                            |       |
| Long-term bank  debt                                                                                                                                                               |       | —                       |       | 1,600,000                       |       |
| Long-term note  payable                                                                                                                                                            |       | —                       |       | 600,000                         |       |
| Long-term  convertible notes, net of original issue discount                                                                                                                       |       | 851,316                      |       | 970,600                         |       |
| Total  liabilities                                                                                                                                                                 |       | 4,856,017                    |       | 4,730,493                       |       |
| Shareholders’  deficit:                                                                                                                                                       |       |                         |       |                            |       |
| Common stock,  $0.00001 par. Authorized 50,000,000 shares; issued and outstanding 1,727,350  and 1,727,311 shares on March 31, 2008 and December 31, 2007,  respectively |       | 17                           |       | 17                              |       |
|                                                                                                                                                                               |       |                         |       |                            |       |
| Additional  paid-in capital                                                                                                                                                        |       | 12,918,531                   |       | 12,586,496                      |       |
| Deficit accumulated  during development stage                                                                                                                                      |       | (16,938,654                  | )          | (16,278,096                     | )          |
| Total  shareholders’ deficit                                                                                                                                                  |       | (4,020,106                   | )          | (3,691,583                      | )          |
|                                                                                                                                                                               |       | $                            | 835,911    |                            | $          | 1,038,910 |   |

 

*See accompanying notes to financial statements.*

 

1

----

 

**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Statementsof Operations**

(Unaudited)

 
| ** **                                      | ** ** | **Three months  ended  March 31,** | ** ** | **Three months  ended  March 31,** | ** ** | **Period from  August 17,1999  (inception) to  March 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                     | ** ** | **2007**                                     | ** ** | **2008**                                                                       | ** ** |
| Operating  expenses:                            |       |                                         |       |                                         |       |                                                                           |       |
|                                            |       |                                         |       |                                         |       |                                                                           |       |
| Research and  development                       |       | $                                            | —     |                                         | $          | 24,820                                                                         |       | $ | 4,857,552 |   |
| General and  administrative                     |       | 246,162                                      |       | 444,441                                      |       | 8,050,658                                                                      |       |
|                                            |       |                                         |       |                                         |       |                                                                           |       |
| Total operating  expenses                       |       | 246,162                                      |       | 469,261                                      |       | 12,908,210                                                                     |       |
|                                            |       |                                         |       |                                         |       |                                                                           |       |
| Operating loss                                  |       | (246,162                                     | )          | (469,261                                     | )          | (12,908,210                                                                    | )          |
|                                            |       |                                         |       |                                         |       |                                                                           |       |
| Interest income                                 |       | 253                                          |       | —                                       |       | 18,011                                                                         |       |
| Interest expense                                |       | (389,309                                     | )          | (295,195                                     | )          | (3,641,739                                                                     | )          |
| Debt  extinguishment cost                       |       | (25,340                                      | )          | (83,700                                      | )          | (406,716                                                                       | )          |
|                                            |       |                                         |       |                                         |       |                                                                           |       |
| Net loss                                        |       | $                                            | (660,558   | )                                            | $          | (848,156                                                                       | )          | $ | (16,938,654 | ) |
|                                            |       |                                         |       |                                         |       |                                                                           |       |
| Net loss per common  share:                     |       |                                         |       |                                         |       |                                                                           |       |
| Basic and  diluted                              |       | $                                            | (0.38      | )                                            | $          | (0.57                                                                          | )          | $ | (17.25 | ) |
|                                            |       |                                         |       |                                         |       |                                                                           |       |
| Weighted-average  number of shares outstanding: |       |                                         |       |                                         |       |                                                                           |       |
| Basic and  diluted                              |       | 1,727,331                                    |       | 1,500,997                                    |       | 982,226                                                                        |       |

 

***See accompanying notes tofinancial statements.***

 

2

----

 

**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Statementsof Cash Flows**

**(Unaudited)**

 
| ** **                                                                                                              | ** ** | **Three months  ended  March 31,** | ** ** | **Three months  ended  March 31,** | ** ** | **Period from  August 17,1999  (inception) to** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2008**                                     | ** ** | **2007**                                     | ** ** | **March 31, 2008**                                   | ** ** |
| Cash flows from  operating activities:                                                                                  |       |                                         |       |                                         |       |                                                           |       |
| Net loss                                                                                                                |       | $                                            | (660,558   | )                                            | $          | (848,156                                                       | )          | $ | (16,938,654 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                            |       |                                         |       |                                         |       |                                                           |       |
| Depreciation and  amortization                                                                                          |       | 153                                          |       | 974                                          |       | 20,345                                                         |       |
| Gain on sale of  furniture and equipment                                                                                |       | —                                       |       | —                                       |       | (2,200                                                         | )          |
| Stock-based  compensation                                                                                               |       | 30,156                                       |       | 184,224                                      |       | 1,735,258                                                      |       |
| Issuance of  common stock for services rendered                                                                         |       | —                                       |       | —                                       |       | 156,904                                                        |       |
| Issuance of  common stock for debt guarantees                                                                           |       | —                                       |       | —                                       |       | 88,889                                                         |       |
| Warrants issued  for services                                                                                           |       | —                                       |       | —                                       |       | 540,636                                                        |       |
| Warrants issued  for debt guarantees                                                                                    |       | —                                       |       | —                                       |       | 320,974                                                        |       |
| Warrants issued  for debt extinguishment                                                                                |       | 25,340                                       |       | 83,700                                       |       | 335,997                                                        |       |
| Amortization of  note payable original issue discount                                                                   |       | 12,904                                       |       | 23,162                                       |       | 255,091                                                        |       |
| Amortization of  convertible debt original issue discount                                                               |       | 189,720                                      |       | 60,273                                       |       | 644,562                                                        |       |
| Amortization of  debt issuance and deferred offering costs                                                              |       | 91,518                                       |       | 130,028                                      |       | 1,375,687                                                      |       |
| Write-off debt  issuance cost for debt extinguishment                                                                   |       | —                                       |       | —                                       |       | 42,797                                                         |       |
| Write-off of  deferred offering cost                                                                                    |       | —                                       |       | —                                       |       | 59,696                                                         |       |
| License rights  expensed as research and development, paid by issuance of common stock to CS  Medical Technologies, LLC |       | —                                       |       | —                                       |       | 475,000                                                        |       |
| License rights  expensed as research and development, paid by issuance of common stock to  Profile, LLC                 |       | —                                       |       | —                                       |       | 1,713,600                                                      |       |
| Changes in  operating assets and liabilities:                                                                           |       |                                         |       |                                         |       |                                                           |       |
| Deposits                                                                                                                |       | —                                       |       | —                                       |       | (189,554                                                       | )          |
| Prepaid expenses                                                                                                        |       | 4,190                                        |       | (24,407                                      | )          | 93,479                                                         |       |
| Other assets                                                                                                            |       | —                                       |       | 13,773                                       |       | —                                                         |       |
| Accounts payable                                                                                                        |       | 30,142                                       |       | 60,216                                       |       | 760,597                                                        |       |
| Accrued expenses                                                                                                        |       | (155,864                                     | )          | 26,467                                       |       | 854,124                                                        |       |
| Net cash used in  operating activities                                                                                  |       | (432,299                                     | )          | (289,746                                     | )          | (7,656,772                                                     | )          |
| Cash flows from  investing activities:                                                                                  |       |                                         |       |                                         |       |                                                           |       |
| Purchases of  equipment and furniture                                                                                   |       | —                                       |       | —                                       |       | (20,797                                                        | )          |
| Deposit into a  restricted cash account                                                                                 |       | (87                                          | )          | —                                       |       | (44,087                                                        | )          |
| Net cash used in  investing activities                                                                                  |       | (87                                          | )          | —                                       |       | (64,884                                                        | )          |
| Cash flows from  financing activities:                                                                                  |       |                                         |       |                                         |       |                                                           |       |
| Net advances  from (payments to) line of credit, bank                                                                   |       |                                         |       |                                         |       |                                                           |       |
| Proceeds of note  payable, bank                                                                                         |       | —                                       |       | —                                       |       | 500,000                                                        |       |
| Payments of note  payable, bank                                                                                         |       | —                                       |       | —                                       |       | (500,000                                                       | )          |
| Proceeds of  notes payable                                                                                              |       | —                                       |       | —                                       |       | 615,500                                                        |       |
| Payment of notes  payable                                                                                               |       | (219,793                                     | )          | (29,100                                      | )          | (1,257,089                                                     | )          |
| Proceeds from  long-term notes payable and bank debt                                                                    |       | 446,500                                      |       | —                                       |       | 4,196,500                                                      |       |
| Payments on  long-term bank debt                                                                                        |       | —                                       |       | —                                       |       | (600,000                                                       | )          |
| Proceeds from  warrants                                                                                                 |       | 23,500                                       |       | —                                       |       | 73,500                                                         |       |
| Payments for  debt issuance costs                                                                                       |       | (76,558                                      | )          | —                                       |       | (601,784                                                       | )          |
| Payment for  rescission of common stock                                                                                 |       | —                                       |       | —                                       |       | (100,000                                                       | )          |
| Proceeds from  loans from officers and directors                                                                        |       | —                                       |       | —                                       |       | 172,600                                                        |       |
| Payments of  loans from officers and directors                                                                          |       | (8,250                                       | )          |                                         |       | (135,100                                                       | )          |
| Payments for  deferred offering expenses                                                                                |       | —                                       |       | —                                       |       | (28,827                                                        | )          |
| Cost of reverse  merger                                                                                                 |       | —                                       |       | —                                       |       | (162,556                                                       | )          |
| Net proceeds  from issuance of common stock                                                                             |       | —                                       |       | 335,111                                      |       | 5,682,538                                                      |       |
| Net cash  provided by financing activities                                                                              |       | 165,399                                      |       | 306,011                                      |       | 7,855,282                                                      |       |
| Net increase in  cash                                                                                                   |       | (266,987                                     | )          | 16,265                                       |       | 133,626                                                        |       |
| Cash, beginning  of the period                                                                                          |       | 400,613                                      |       | 2,407                                        |       | —                                                         |       |
| Cash, end of the  period                                                                                                |       | $                                            | 133,626    |                                         | $          | 18,672                                                         |       | $ | 133,626 |   |

 

3

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| ** **                                                                                                                                                                               | ** ** | **Three months  ended  March 31,** | ** ** | **Three months  ended  March 31,** | ** ** | **Period from  August 17,1999  (inception) to** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2008**                                     | ** ** | **2007**                                     | ** ** | **March 31, 2008**                                   | ** ** |
| Supplemental  cash flow information:                                                                                                                                                     |       |                                         |       |                                         |       |                                                           |       |
| Cash paid for  interest                                                                                                                                                                  |       | $                                            | 44,236     |                                         | $          | 80,304                                                         |       | $ | 637,572 |   |
| Non-cash  investing and financing activities:                                                                                                                                            |       |                                         |       |                                         |       |                                                           |       |
| Conversion of  notes payable into long-term convertible debentures                                                                                                                       |       | —                                       |       | —                                       |       | 175,000                                                        |       |
| Conversion of  loans from directors into long-term convertible debentures                                                                                                                |       | —                                       |       | —                                       |       | 25,000                                                         |       |
| Deferred  offering costs included in accounts payable                                                                                                                                    |       | 70,104                                       |       | —                                       |       | 180,092                                                        |       |
| Deferred  offering costs included in accrued expenses                                                                                                                                    |       | (12,321                                      | )          | —                                       |       | 10,329                                                         |       |
| Debt issuance  costs included in accounts payable                                                                                                                                        |       | 25,421                                       |       | —                                       |       | 81,238                                                         |       |
| Warrants issued  pursuant to notes payable                                                                                                                                               |       | 12,904                                       |       | 23,162                                       |       | 337,091                                                        |       |
| Prepaid expenses  financed by note payable                                                                                                                                               |       | —                                       |       | —                                       |       | 111,022                                                        |       |
| Common stock  issued in lieu of cash for accrued expenses                                                                                                                                |       | —                                       |       | 49,911                                       |       | 229,636                                                        |       |
| Common stock  issued for debt issuance cost                                                                                                                                              |       | —                                       |       | —                                       |       | 158,167                                                        |       |
| Common stock  issued in lieu of cash for accounts payable                                                                                                                                |       | —                                       |       | —                                       |       | 122,291                                                        |       |
| Common stock  issued in lieu of cash for loans from officers and directors                                                                                                               |       | —                                       |       | 7,000                                        |       | 10,300                                                         |       |
| Proceeds from  sale of furniture and equipment                                                                                                                                           |       | —                                       |       | —                                       |       | 2,200                                                          |       |
| Convertible debt  issued as debt issuance costs related to guarantee of long-term debt  (recorded as a beneficial conversion in additional paid-in capital) applied  to accounts payable |       | —                                       |       | —                                       |       | 733,334                                                        |       |
| Issuance of note  payable for redemption of common stock                                                                                                                                 |       | —                                       |       | —                                       |       | 650,000                                                        |       |
| Warrants issued  for debt issuance costs                                                                                                                                                 |       | —                                       |       | —                                       |       | 242,612                                                        |       |
| Conversion of  accounts payable to note payable                                                                                                                                          |       | —                                       |       | —                                       |       | 241,613                                                        |       |
| Deposits applied  to note payable and accrued interest                                                                                                                                   |       | —                                       |       | —                                       |       | 142,696                                                        |       |
| Deposits applied  to accounts payable                                                                                                                                                    |       | —                                       |       | —                                       |       | 45,782                                                         |       |
| Assumption of  liabilities in the Profile, LLC transaction                                                                                                                               |       | —                                       |       | —                                       |       | 25,000                                                         |       |
| Deposits applied  to accrued expenses                                                                                                                                                    |       | —                                       |       | —                                       |       | 1,076                                                          |       |
|                                                                                                                                                                                          |            |                                              |            |                                              |            |                                                                |            |  |  |  |

 

*See accompanying notes to financial statements.*

 

4

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** **

**ProUroCareMedical Inc.**

**A Development Stage Company**

**Notes to ConsolidatedFinancial Statements**

 

**March 31, 2008 and 2007 and the period from**

**August 17, 1999 (inception) to March 31, 2008**

** **

(Unaudited)

 

**(1) Description of Business and Summary of Significant Accounting Policies**

 

***(a)***       Description ofBusiness, Development Stage Activities and Basis of Presentation

 

ProUroCare Medical Inc. (“ProUroCare,”the “Company,” “we” or “us”) is a development stage company that is developingdiagnostic equipment and treatments for enlarged prostates and other maleurological conditions.  The Company’sdevelopmental activities, conducted by its wholly owned operating subsidiaryProUroCare Inc. (“PUC”), have included the acquisition of several technologylicenses, the development of a strategic business plan and a senior managementteam, product development and fund raising activities.

 

PUC had no activities fromits incorporation in August 1999 until July 2001, when it acquired alicense to certain microwave technology from CS Medical Technologies, LLC (“CSMedical”).  In January 2002, PUCacquired a license to certain prostate imaging technology from Profile, LLC (“Profile”).

 

Pursuant to a mergeragreement effective April 5, 2004 (the “Merger”), PUC became a whollyowned operating subsidiary of Global Internet Communications, Inc. (“Global”),which changed its name to ProUroCare Medical Inc. on April 26, 2004.  In connection with the Merger, the Companycompleted a private placement of 220,500 shares, as adjusted for the ReverseSplit (as defined below), of common stock (the “2004 Private Placement”)pursuant to Rule 506 under the Securities Act of 1933, as amended (the “SecuritiesAct”).

 

On December 27,2007, the Company’s shareholders approved a one-for-ten reverse split of theCompany’s common stock without a corresponding reduction in thenumber of authorized shares of the Company capital stock (the “Reverse Split”).  The reverse stock split became effective on February 14,2008.  The exercise price and the numberof shares of common stock issuable under the Company’s outstanding convertibledebentures, options and warrants were proportionately adjusted to reflect theReverse Split for all periods presented.

 

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly owned subsidiary, PUC. Significant inter-company accounts and transactions have been eliminatedin consolidation.

 

***(b)***       Restatement ofShare Data

 

All share data has beenadjusted to give effect to the Reverse Split.

 

5

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At the effective time of theMerger, all 350,100 shares of common stock of PUC that were outstandingimmediately prior to the Merger and held by PUC shareholders were cancelled,with one share of ProUroCare common stock issued to Global.  Simultaneously, the non-dissentingshareholders of PUC received an aggregate of 960,300 shares of common stock ofGlobal in exchange for their aggregate of 320,100 shares of PUC.  All share data has been adjusted to giveeffect to the Merger under which each PUC share was converted into three sharesof Global.  The share data in thisparagraph has been restated to give effect to the Reverse Split, as notedabove.

 

***(b)***           InterimFinancial Information

 

The accompanying unaudited financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and pursuant to the rules and regulations of the Securities andExchange Commission (the “SEC”) for interim financial information.  Accordingly, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beenomitted pursuant to such rules and regulations.  Operating results for the three months March 31,2008 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2008 or any other period.  The accompanying financial statements andrelated notes should be read in conjunction with the audited financialstatements of the Company, and notes thereto, contained in our Annual Report onForm 10-KSB for the year ended December 31, 2007.

 

Thefinancial information furnished reflects, in the opinion of management, all adjustments,consisting of normal recurring accruals, necessary for a fair presentation ofthe results of the interim periods presented.

 

***(c)***       AccountingEstimates

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of expensesduring the reporting periods. The Company’s significant estimates include thedetermination of the fair value of its common stock and stock-basedcompensation awarded to employees, directors, loan guarantors and consultantsand the accounting for debt with beneficial conversion features. Actual resultscould differ from those estimates.

 

*Valuation of Stock-Based Compensation.* Effective as of August 17,1999 (inception), the Company adopted Statement of Financial AccountingStandard (“SFAS”) No. 123 “**Share-BasedPayment”**and on January 1, 2006 adopted SFAS No. 123(revised 2004),****(“SFAS 123R”), which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors including employee stock options basedon fair values.  The Company’sdetermination of fair value of share-based payment awards is based on the dateof grant using an option-pricing model which incorporates a number of highlycomplex and subjective variables.  Thesevariables include, but are not limited to, the Company’s expected stock pricevolatility and estimates regarding projected employee stock option exercisebehaviors and forfeitures.  The Company recognizesthe expense related to the fair value of the award straight-line over thevesting period.

 

6

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* *

*Debt with Beneficial Conversion Features*.  The beneficial conversion features of thepromissory notes were valued using the Black-Scholes pricing model. The resultingoriginal issue discount is amortized over the life of the promissory notes(generally no more that 24 months) using the straight-line method, whichapproximates the interest method.

 

***(d)***       Net Loss PerCommon Share

 

Basicand diluted loss per common share is computed by dividing net loss by theweighted-average number of common shares outstanding for the reportingperiod.  These calculations reflect theeffects of the Company’s Reverse Split (see Note 1(b)).  Dilutive common-equivalent shares have notbeen included in the computation of diluted net loss per share because theirinclusion would be antidilutive. Antidilutive common equivalent shares issuable based on future exerciseof stock options or warrants could potentially dilute basic loss per commonshare in subsequent years.  All optionsand warrants outstanding were anti-dilutive for the three months ended March 31,2008 and 2007, and the period from August 17, 1999 (inception) to March 31,2008 due to the Company’s net losses. 1,160,748 and 536,433 shares of common stock issuable under stockoptions, warrants, convertible debentures and contingent shares and warrantsissuable under agreements with loan guarantors were excluded from thecomputation of diluted net loss per common share for the periods ended March 31,2008 and 2007, respectively, as were the undetermined number of shares issuablepursuant to the convertible notes and warrants issued in connection with ourprivate placements as described and defined in Note 5.

 

***(e)***       Stock-BasedCompensation

 

Effective as of August 17,1999, the Company adopted the fair value recognition provisions of SFAS No. 123to record option and warrant issuances, including stock-based employeecompensation.  The Company’s policy is togrant stock options at fair value at the date of grant and to record theexpense at fair value as required by SFAS 123, using the Black-Scholes pricingmodel.

 

Effective January 1, 2006, the Company adopted SFAS123R, that focuses primarily on accounting for transactions in which an entityobtains employee services in share-based payment transactions.  This statement replaced SFAS 123 andsupersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees.”  SFAS123R requires all companies to expense the fair value of employee stock optionsand similar awards, which has been the Company’s policy to date.  Stock-based employee and non-employeecompensation cost related to stock options was $15,656, $184,224 and $1,597,734for the three months ended March 31, 2008 and 2007, and the period from August 17,1999 (inception) to March 31, 2008, respectively.  The Company estimates the amount of futurestock-based compensation expense related to currently outstanding options to beapproximately $37,300 and $1,800 for the years ending December 31, 2008and 2009, respectively.

 

The Black-Scholesoption-pricing model was developed for use in estimating the fair value oftraded options that have no vesting restrictions and are fully transferable. Inaddition,

 

7

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option pricing modelsrequire the input of highly subjective assumptions. Because the Company’semployee and consultant stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, the existingmodels may not necessarily provide a reliable single measure of the fair valueof the Company’s employee stock options.

 

No stock options were issuedin the three months ended March 31, 2008. In determining the compensation cost of the options and warrants grantedduring the three months ended March 31, 2007, as specified by SFAS 123R,the fair value of each option grant has been estimated on the date of grantusing the Black-Scholes pricing model and the weighted-average assumptions usedin these calculations are summarized as follows:

 
| ** **                        | ** ** | **For the three months ended  March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| Risk-free  Interest Rate          |       | n/a                                                                |       | 4.86% |   |
| Expected Life of  Options Granted |       | n/a                                                                |       | 4.0 years |   |
| Expected  Volatility              |       | n/a                                                                |       | 133.4% |   |
| Expected  Dividend Yield          |       | n/a                                                                |       | 0 |   |

 

The expected life of the options is determined using asimplified method, computed as the average of the option vesting periods andthe contractual term of the option.  Forperformance based options that vest upon the occurrence of an event, theCompany uses an estimate of when the event will occur as the vesting periodused in the Black-Scholes calculation for each option grant.  Because of the limited trading history of theCompany’s stock, until December 31, 2007 the expected volatility was basedon a simple average of daily price data since the date of the Merger on April 5,2004.  Beginning on January 1, 2008,expected volatility is based on a simple average of weekly price data since thedate of the Merger.  Based on the lack ofhistory to calculate a forfeiture rate, the Company has not adjusted thecalculated value of the options.  Therisk-free rates for the expected terms of the stock options and awards arebased on the U.S. Treasury yield curve in effect at the time of grant.

 

***(f)***        Warrants

 

In accordance with Emerging Issues Task Force (“EITF”) Issue No. 96-18,“Accounting for Equity Instruments that are Issued to Other than Employees forAcquiring, or in Conjunction with Selling, Goods and Services” (“EITF 96-18”)and EITF Issue No. 98-5, “Accounting for Convertible Securities withBeneficial Conversion Features or Contingently Adjustable Conversion Ratios” (“EITF98-5”), the Company has elected to utilize the fair-value method of accountingfor warrants issued to non-employees as consideration for goods or servicesreceived, including warrants issued to lenders and guarantors of Company debt. On January 4, 2008, pursuant to a finalseparation agreement with a former employee, the Company issued to the formeremployee five-year, immediately exercisable warrants to acquire up to 14,500shares of the Company’s common stock at an exercise price of $5.00 pershare.  The fair value of the warrantswas estimated at $1.00 per share using the Black-Scholes pricing modelresulting in expense of $14,500 for the three months ended March 31,2008.  No other warrants were grantedduring the three months ended March 31, 2008.  The weighted-average per share fair value ofwarrants granted during the three months ended March 31, 2007 was $4.20,and such warrants were immediately vested and exercisable on the date of grant.

 

8

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The fair value of stockwarrants is the estimated present value at grant date using the Black-Scholespricing model with the following weighted average assumptions:

 
| ** **                           | ** ** | **For the three months ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
| Risk-free  Interest Rate             |       | 3.74%                                                              |       | 4.73% |   |
| Expected Life of  Warrants Issued(1) |       | 5 years                                                            |       | 5 years |   |
| Expected  Volatility                 |       | 125.8%                                                             |       | 135.1% |   |
| Expected  Dividend Yield             |       | 0                                                                  |       | 0 |   |

 

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(1) The contractual term of the warrants.

 

Because of the limited trading history of the Company’sstock, until December 31, 2007 the expected volatility was based on asimple average of daily price data since the date of the Merger on April 5,2004.  Beginning on January 1, 2008,expected volatility is based on a simple average of weekly price data since thedate of the Merger.  Based on the lack ofhistory to calculate a forfeiture rate, the Company has not adjusted thecalculated value of the warrants.  Therisk-free rates for the expected terms of the stock warrants are based on theU.S. Treasury yield curve in effect at the time of grants.

 

***(g)***       Debt IssuanceCosts

 

Debt issuance costs at December 31,2007 consisted of legal andaccounting fees, printing costs and commissions paid to the placement agents related to the Company’s Crown Bankpromissory notes, a promissory note issued to the Phillips W. Smith FamilyTrust (“the Smith Trust”) and the Company’s December 27, 2007 privateplacements of convertible debentures and warrants (the “2007 Private Placement”).  During the three month period ended March 31,2008, the Company incurred additional debt issuance costs related to a secondclosing on the 2007 Private Placement and on closings on an aggregate of $390,000 of units consistingof unsecured, subordinated, convertible promissory notes and common stockpurchase warrants in another private placement (the “February 2008 Private Placement”).  Debtissuance costs are amortized over the term of the related debt as interestexpense using the straight-line method, which approximates the interest method.

 

9

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*** ***

***Debt issuance costs aresummarized as follows:***

 
| ** **                  | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Debt issuance  costs, gross |       | $                        | 554,092    |                        | $          | 452,113 |   |
| Less  amortization          |       | (104,310                 | )          | (12,792                     | )          |
|                        |       |                     |       |                        |       |
| Debt issuance  costs, net   |       | $                        | 449,782    |                        | $          | 439,321 |   |

 

Amortizationexpense related to debt issuance costs was $91,518, $130,028, and $1,375,687for the three months ended March 31, 2008 and 2007, and the period from August 17,1999 (inception) to March 31, 2008, respectively.

 

***(h)***       DeferredOffering Costs

Thelegal fees related to the Company’s private placement of convertible debenturesthat closed on May 2, 2008 (the “May 2008 Private Placement”)(seeNote 8) and an anticipated public offering the Company expects to complete inmid-2008 were recorded as a deferred offering cost asset as of March 31,2008.  The deferred costs related to theanticipated May 2008 Private Placement and the public offering will berecorded as a cost of the offering upon their closings, or expensed as ageneral and administrative expense if no such closings occur.

 

***(i)***        Restricted Cash

 

Pursuant to the renewal ofthe Crown Bank promissory notes (see Note 2), the Company agreed to depositwith Crown Bank four months worth of future interest payments due under thenotes.  The Company has further agreed todeposit with Crown Bank all of the interest due on the notes through maturityupon the closing, and out of the net proceeds of, a future underwritten public offering of equity securities of theCompany.  The funds on deposit arenot available to the Company for any purpose other than for debt service on theCrown Bank promissory notes.

 

***(j)***        GoingConcern

 

We have incurred operating losses, accumulated deficit and negativecash flows from operations since inception. As of March 31, 2008, we had an accumulated deficit ofapproximately $16,939,000.  Thesefactors, among others, raise substantial doubt about our ability to continue asa going concern.  The accompanyingunaudited consolidated financial statements do not include any adjustmentsrelated to recoverability and classification of asset carrying amounts or theamount and classification of liabilities that might result should we be unableto continue as a going concern.

 

**Note 2.  NotesPayable – Bank.**

InFebruary 2006, the Company completed two closings of senior debt financingtotaling $2,200,000 pursuant to promissory notes issued to Crown Bank at aninterest rate of the prime rate plus one percent (6.25 percent and 8.25 percentat March 31, 2008 and December 31, 2007, respectively).  The average interest rate of the notes was7.24 percent for the three months ended March 31, 2008.  On October 15, 2007, the Company retired$600,000 of the Crown Bank Promissory notes, and on October 31, 2007, theCompany renewed the remaining $1,600,000 of

 

10

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notesto mature in February 2009.  Thepromissory notes are secured by a pledge of all Company assets, including itsintellectual property, and are guaranteed by Bruce Culver, James Davis andWilliam Reiling, each five percent shareholders of the Company.

 

Inconnection with the renewal, and as a condition to the effectiveness of theterms and conditions of the renewal of the notes, the Company agreed to depositinto escrow with Crown Bank four months worth of future interest payments dueunder the notes.  On December 28,2007, the Company deposited $44,000 with Crown Bank as the four months interestrequirement, thereby making effective the terms of the renewed notes.  The Company has further agreed to depositinto escrow with Crown Bank all of the interest due on the notes throughmaturity upon the closing, and out of the net proceeds of, an underwritten public offering of equitysecurities of the Company.

 

**Note 3.  NotesPayable.**

** **

On June 1, 2006, the Company borrowed$75,000 from Mr. Roman Pauly, and in connection therewith issued to Mr. Paulya promissory note to mature on August 30, 2006 (the “Pauly Note”).  On March 20, 2007 the Pauly Note wasamended to extend the due date of the note until the Company closes on anaggregate of $750,000 of incremental debt or equity financing.  On January 22, 2007, January 3,2008 and February 29, 2008, the Company repaid $25,000, $33,000 and $7,650of the principal of the Pauly Note, respectively.  At March 31, 2008, the outstandingbalance of the Pauly Note was $9,350. The Pauly Note, as amended, bears interest at the prime rate (6.25percent and 8.25 percent at March 31, 2008 and December 31, 2007,respectively).  In connection with theamendments, following repayment of the Pauly Note, the Company will issue afive-year warrant to Mr. Pauly to acquire 41.7 shares of the Company’scommon stock at $5.00 per share for each day the promissory note is outstandingafter August 30, 2006.  The guidanceprovided by EITF Issue No. 96-19 “Debtor’s Accounting for a Modificationor exchange of Debt Instruments (“EITF 96-19”) indicates that a substantialmodification of debt terms should be accounted for as an extinguishment ofdebt.  The present value of the cashflows under the August 24, 2006 modification was greater than 10 percentdifferent from the present value of the cash flows under the originalagreement.  Accordingly, the accrual ofwarrants to be issued pursuant to the amended note was recorded as debtextinguishment expense (see Note 6).

 

On November 30, 2006, the Companyborrowed $100,000 from Adron Holdings, LLC (“Adron”).  In connection therewith, the Company issuedto Adron an unsecured promissory note that bore an annual interest rate of 60percent and was set to mature on January 2, 2007 (the “Adron Note”).  On each of March 20, 2007 and August 8,2007, the Company amended the Adron Note, resulting in a change of the annualinterest rate to 42 percent, the extension of its due dates and an agreement toissue to Adron 167 five-year warrants to acquire a total of 5,000 shares at$5.00 per share for each day the principal remained unpaid on and after March 1,2007.  In January 2008, the Companyrepaid all of the outstanding principal amount of the Adron Note and issuedfive-year, immediately exercisable warrants to acquire up to 52,357 shares ofthe Company’s common stock at $5.00 per share (see Note 6). The guidanceprovided by EITF 96-19 indicates that a substantial modification of debt termsshould be accounted for as an extinguishment of debt.  The present value of the cash flows under themodifications was greater than 10 percent different from the present value ofthe cash flows under the existing agreement. Accordingly, the accrual of warrants to be issued pursuant to the AdronNote were recorded as debt extinguishment expense (see Note 6).

 

OnMay 25, 2007, the Company borrowed $42,585 from a commercial lenderpursuant to an insurance policy financing agreement. The financing agreementcalled for ten monthly installment payments of $4,453 beginning July 1,2007, with an imputed annual interest rate of 9.85 percent.

 

11

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Theproceeds were paid directly to an insurance company as a prepayment on aninsurance policy.The remaining principal balance of the financing agreement wasrepaid during the three months ended March 31, 2008.

 

**On July 31,2007, the Company borrowed, for working capital purposes, $100,000 from theSmith Trust (a five percent shareholder) pursuant to a promissory note.  The note bears interest at the prime rate(5.25 percent on March 31, 2008)**.  Following repayment of the promissory note, the Companywill issue a five-year warrant to the Smith Trust to acquire 1 share of theCompany’s common stock per $1,000 principal balance outstanding at $5.00 pershare, for each day the promissory note is outstanding (see Note 6(c)).  On January 3, 2008, the Company repaid$66,000 of this note.  On March 11, 2008, the Company amended the promissorynote with the Smith Trust.  Under theterms of the amendment, unpaid principal and interest will be payable upon theCompany’s closing of an aggregate of $500,000 or more of incremental debt orequity financing following the date of the amendment.  Interest expense recorded during the three monthsended March 31, 2008 and 2007, and the period from August 17, 1999(inception) to March 31, 2008was $575, $0 and $3,903, respectively.

** **

***At varioustimes the Company receives short-term, unsecured loans from certain officersand directors solely for short-term working capital needs.  These loans are made without any interest orother consideration accruing to the officers and directors, and had no definedterms.  As of December 31, 2007, theCompany had borrowed a total of $10,450 from David Koenig, a director.  During the three months ended March 31,2008, the Company repaid $8,250 of the loan.***

*** ***

On October 31, 2007, the Company issueda promissory note for $600,000 in favor of the Smith Trust, effective as of October 15,2007.  The proceeds were used to retire$600,000 of the Crown Bank promissory notes. The promissory note issued to the Smith Trust matures on February 28,2009, bears interest at the prime rate plus one percent (6.25 percent at March 31,2008 and 8.25 percent at December 31, 2007, respectively) and has asubordinated security interest in all of the Company’s assets.  Interest expense recorded during the threemonths ended March 31, 2008 and 2007, and the period from August 17,1999 (inception) to March 31, 2008 was $10,954, $0 and $21,846,respectively.  In consideration for thisloan, on November 7, 2007, the Company agreed to issue 33,333 shares ofits common stock to the Smith Trust, the value of which was recorded as debtissuance cost asset (see Note 1(h)).  Wealso agreed to issue to the Smith Trust: (i) an aggregate amount of 6,667shares of our common stock if the Crown Bank promissory notes remainoutstanding on October 31, 2008 and (ii) five-year warrants toacquire a maximum aggregate of 16,667 shares of our common stock at an exerciseprice of $2.00.  The total aggregatenumber of shares subject to the warrants will be determined by dividing 100,000by the per share price in an underwritten public offering (not less than$2.00), minus 33,333.  The warrants willbe issued on the earlier of (i) the date of an underwritten publicoffering or (ii) October 31, 2008, and will be exercisable beginningon the one-year anniversary of that date. On March 11, 2008, theCompany amended the promissory note with the Smith Trust.  Under the terms of the amendment, interestaccrued pursuant to the promissory note will be payable on the maturity date,rather than payable monthly.

 

**On April 3, 2008, the Company borrowedan aggregate of $112,500 pursuant to three promissory notes, each in the amountof $37,500.  The promissory notes wereissued in favor of James Davis, William Reiling and the Smith Trust, each fivepercent shareholders of the Company. Payment in full of the promissory notes and the interest accrued thereonat an annual rate of 10 percent is due on September 1, 2008.  The promissory notes were issued inconnection with the Company’s purchase of certain intellectual property fromProfile (see Note 8).**

 

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** **

**Note 4.  Convertible Debentures.**

 

Asconsideration to the original guarantors (Bruce Culver, James Davis, WilliamReiling and the Smith Trust) to provide their guarantees for the Crown Bankpromissory notes, the Company issued $733,334 of unsecured convertible 10percent debentures.  Of the $733,334,$400,000 matures on February 16, 2009 and $333,334 matures on February 28,2009.  The debentures are convertibleinto Company common stock at a price of $3.00 per share.  The $733,334 face value of the convertibledebentures (before the impact of the calculation of the beneficial conversionfeature – see below) are recorded as current liabilities, with the offset ofthe cost of the debentures recorded as a debt issuance cost asset.  The debt issuance cost asset is beingamortized as interest expense over the term of the underlying bank notepayable.  The convertible debentures are being treated as debt issuance costbecause they represent the costs directly attributable to the bank promissorynote financing.

 

Theembedded conversion feature of the convertible debentures does not meet all thecharacteristics of a derivative instrument as described in SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“SFAS 133”), and thereforewas not separated from the host contract and accounted for as aderivative.  The embedded conversionfeature does not provide for net settlement, the shares to be issued pursuantto the exercise of the conversion feature will be unregistered and, due to thelarge number of shares involved and the thinly traded market for the Company’sshares, cannot be readily settled net by a means outside the contract.  The value of the beneficial conversionfeature was computed as the difference between the fair market value of theshares at the transaction dates and the lowest possible conversion price duringthe debenture term ($3.00 per share), multiplied by the number of conversionshares that would be issued at that conversion price (244,445 shares).  The value so computed was in excess of theface value of the convertible debentures issued, and was therefore limited tothe face value of the debentures issued ($733,334).  The beneficial conversion feature wasrecorded as an original issue discount as defined in EITF 98-5 against theconvertible debt liability and is alsobeing amortized as interest expense over the term of the convertibledebentures.

 

On March 21, 2007, the Company and thefour convertible debenture holders agreed to amend the debentureagreements.  Pursuant to the reviseddebenture agreements, among other things, the Company issued a total of 12,478shares of its Investment Units to the four guarantors in lieu of $49,911 ofaccrued interest.  Each Investment Unitconsists of one share of the Company’s common stock and a 3-year warrant(immediately exercisable) to acquire 0.5 shares of the Company’s common stockfor $2.50 ($5.00 per share).  Theguidance provided by EITF 96-19 indicates that a substantial modification ofdebt terms should be accounted for as an extinguishment of debt.  The present value of the cash flows under theMarch 20, 2007 modification was greater than 10 percent different from thepresent value of the cash flows under the original agreement.  Accordingly, the warrants issued, valued at$26,829 using the Black-Scholes method, were recorded as debt extinguishmentexpense.  No other gain or loss wasrecorded.

 

**On December 27, 2007, the**four convertible debenture holders agreed toamend the terms of their debentures to provide for automatic conversion of theprincipal amount of the debentures and the unpaid interest accrued thereon intoshares of the Company’s common stock at $3.00 per share upon the closing of anunderwritten public offering by the Company. The $733,334 outstanding principal amount of the debentures will convertinto 244,445 shares of the Company’s common stock.  As of March 31, 2008, $86,851 of unpaidaccrued interest related to the debentures was outstanding.  Interest will continue to accrue on thedebentures until they are converted or

** **

**13**

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** **

**otherwise retired.**Interest expense recorded during the three monthsended March 31, 2008 and 2007, and the period from August 17, 1999(inception) to March 31, 2008 was $18,538, $18,335 and $156,661,respectively.

** **

**Note 5.  Long-term ConvertibleDebentures.**

 

**On December 27, 2007, the Company closed on thesale of $1,050,000 of units consisting of unsecured, subordinated, convertiblepromissory notes (the “2007 Notes”) and common stock purchase warrants (the “2007Warrants”) in a private placement (the “2007 Private Placement”).  Net cash proceeds to the Company were$712,923, after deducting $337,077 of expenses of the offering (including$105,000 of commissions paid to the placement agent) and excluding from thecash proceeds the conversion into units of $25,000 of loans made to the Companyby James Davis and $25,000 of certain loans from the Company’s directors.**

** **

**At the closing, the Company issued $997,500 inprincipal amount of 2007 Notes and 2007 Warrants to purchase 210,000 shares ofcommon stock.  The 2007 Notes bearinterest at 10 percent per year, mature on June 27, 2009 and will convertinto the type of equity securities offered by the Company in any underwrittenpublic offering prior to maturity at 70 percent of the public offeringprice.  In the event a public offering isnot completed before the maturity date, the entire principal and unpaid accruedinterest will convert into the Company’s common stock at $0.05 per share.  The Company may, at its option, prepay the2007 Notes anytime on or after December 27, 2008.  The 2007 Warrants will become exercisableupon the earlier of the closing of a public offering or the maturity date ofthe 2007 Notes, and will remain exercisable until December 31, 2012.  The exercise price will be 50 percent of thepublic offering price, or in the event a public offering is not completedbefore the maturity date, at 50 percent of the closing price of the Company’scommon stock on the maturity date of the 2007 Notes.**

** **

**On December 27, 2007, the Company also converted$150,000 of existing loans from James Davis into a note (the “Davis Note”) andwarrants (the “Davis Warrants”).  Theprincipal amount of the note issued to Mr. Davis was $142,500.  Mr. Davis also received warrants topurchase 30,000 shares of the Company’s common stock.  The terms of the Davis Note and DavisWarrants are the same as those issued in the 2007 Private Placement, exceptthat, the Davis note is convertible into the type of equity securities offeredby the Company in an underwritten public offering at 50 percent of the publicoffering price.  In addition, Mr. Davisagreed that the equity securities issued upon conversion of the Davis Note andthe common stock issued upon exercise of the Davis Warrants will not betransferable for a period of one year beginning on the effective date of thepublic offering triggering conversion of the note.**

** **

On January 4, 2008, the Company closed on the sale of$80,000 of additional units as part of the 2007 Private Placement.  Net cash proceeds to the Company were$69,600, after deducting $10,400 of commissions paid to the placementagent.  At closing, the Company issued$76,000 in principal amount of 2007 Notes and 2007 Warrants to purchase 16,000shares of common stock.  In total, in thetwo closings of the 2007 Private Placement, the Company issued a total of$1,073,500 in principal amount of 2007 Notes and 2007 Warrants to purchase226,000 shares of common stock.

 

On February 13 and February 28,2008, the Company closed on an aggregate $390,000 of units consisting ofunsecured, subordinated, convertible promissory notes and common stock purchasewarrants in the February 2008Private Placement.  Net cash proceeds tothe Company were approximately $298,000, after deducting approximately $92,000of expenses of the offering (including $50,700 of commissions paid to theplacement agent).  Each $10,000 unitconsists of a

 

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note in the principal amount of$9,500 (the “February 2008 Notes”) anda warrant to purchase 2,000 shares of our common stock (the “February 2008Warrants”).  The terms of the February 2008Notes and February 2008 Warrants are identical to the 2007 Notes and 2007Warrants, respectively, except that the Company’s option to prepay the February 2008Notes begins anytime on or after February 13, 2009 and the maturity dateof the February 2008 Notes is August 13, 2009.

 

Theembedded conversion features of the 2007 Notes, Davis Notes and the February 2008Notes do not meet all the characteristics of a derivative instrument asdescribed in SFAS 133, and therefore were not separated from the host contractsand accounted for as derivatives.  Theembedded conversion features are indexed to the Company’s common stock, andwould be classified in shareholders’ equity under the guidance of EITF Issue No. 00-19“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock” (“EITF 00-19”), if they were freestandingderivatives.  The embedded conversionfeature contains an explicit limit on the number of shares to be delivered, theCompany has sufficient authorized and unissued shares available to settle themaximum number of shares and the debenture agreement does not contain a netcash settlement feature.  The beneficialconversion features of the promissory notes, valued at $809,512 using theBlack-Scholes pricing model, along with the $51,065 relative fair value of the2007 Warrants, the Davis Warrants, and the February 2008 Warrants, wererecorded as an original issue discount as defined in EITF 98-5 against theconvertible debt liability, and is being amortized as interest expense over theterm of the convertible debentures.  Duringthe three months ended March 31, 2008, $128,776 of the original issuediscount was amortized as interest expense.

 

On May 2, 2008 the Company closed on an aggregate $155,000 of units consisting of unsecured,subordinated, convertible promissory notes and common stock purchase warrantsin the May 2008 Private Placement(see Note 8).

 

**Note 6. Shareholders’ Equity.**

** **

***(a)******        ******CommonStock***

 

***No common stock was issued duringthe three months ended March 31, 2008.***

*** ***

***(b)***         Stock Options

*** ***

***No stock options were issuedduring the three months ended March 31, 2008.***

*** ***

***(c)***          Warrants

*** ***

***The warrants described below, issued or to be issued, areexempt from registration under Section 4(2) of the Securities Act asthey were or will be issued in non-public offerings to a limited number ofsubscribers.  Each of the followingwarrants was valued using the Black-Scholes pricing model:***

 

·                  On January 4, 2008, pursuant to a final separation agreement with aformer employee of the Company, the Company issued to the former employeefive-year warrants (immediately exercisable) to acquire up to 14,500 shares ofthe Company’s common stock at an exercise price of $5.00 per share, and amendeda previously issued warrant to 

 

15

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acquire up to 30,000 shares of the Company’scommon stock to provide for cashless exercise thereof.  The warrants, valued at $14,500 using theBlack-Scholes pricing model, were recorded as compensation expense during thethree months ended March 31, 2008.

 

·                  Pursuant to theterms of the Adron Note (see Note 3), upon the repayment of the principalthereon on January 16, 2008, the Company issued five-year, immediatelyexercisable warrants to acquire up to 52,357 shares of the Company’s commonstock at $5.00 per share.  During thethree months ended March 31, 2008, the accrual of 1,347 warrants valued at$4,849 using the Black-Scholes pricing model was expensed as debtextinguishment expense.  During the threemonths ended March 31, 2007, the issuance of 5,167 warrants valued at$23,162 using the Black-Scholes pricing model was expensed as interest expenseand the accrual of 10,168 warrants valued at $36,604 was recorded as debtextinguishment expense.

 

·                  In connectionwith amendments to the Pauly Note (see Note 3), following repayment of thePauly Note, the Company will issue a five-year warrant (immediatelyexercisable) to Mr. Pauly to acquire 41.7 shares of the Company’s commonstock at $5.00 per share for each day the Pauly Note is outstanding after August 30,2006.  As of March 31, 2008, theCompany had accrued for issuance warrants to acquire 24,186 shares of theCompany’s common stock pursuant to this arrangement.  During the three months ended March 31,2008 and 2007, the accrual of 3,795 and 3,753 warrants valued using theBlack-Scholes pricing model at $20,492 and $20,267, respectively, were expensedas debt extinguishment expense.

 

·                  On July 31, 2007, theCompany borrowed $100,000 for short-term working capital needs pursuant to apromissory note issued to the Smith Trust (see Note 3).  Following repayment of the promissory note,the Company will issue a five-year warrant (immediately exercisable) to theSmith Trust to acquire 1 share of the Company’s common stock per $1,000principal outstanding at $5.00 per share for each day the promissory note isoutstanding after August 30, 2006. As of March 31, 2008, the Company had accrued for issuance warrantsto acquire 18,626 shares of the Company’s common stock pursuant to thisarrangement.  During the three monthsended March 31, 2008, the accrual of 3,226 warrants valued at $12,904using the Black-Scholes pricing model was expensed as interest expense.

 

·                  On April 3,2008, as consideration to James Davis, William Reiling and the Smith Trust, forproviding certain loans to the Company, the Company issued five-year warrants(immediately exercisable) to purchase a total of 75,000 shares of the Company’scommon stock at $1.50 per share to each lender (see Note 8).  The gross proceeds were allocated between thenote and the warrants based on the relative fair value at the time of issuance.  The warrants, valued at $69,000 using theBlack-Scholes pricing model, were allocated $42,769 which will be recorded asoriginal issue discount on the related promissory notes and will be expensed asinterest expense over the term of the promissory notes.

*** ***

***Note 7.  Income Taxes.***

 

InJuly 2006, the FASB issued Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognitionthreshold and measurement attribute for the

 

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financialstatement recognition and measurement of a tax position taken or expected to betaken in its tax return. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. The Company adopted FIN 48 as of January 1,2007, and the adoption had no significant impact on the consolidated financialstatements.

 

The Company has adopted the policy of classifying interest in interestexpense and penalties in general and administrative expense.  The Company had recorded no accrued interestor penalties as of the date of adoption.

 

The Company had no significant unrecognized tax benefits as of March 31,2008 and December 31, 2007 and, likewise, no significant unrecognized taxbenefits that, if recognized, would affect the effective tax rate.  The Company had no positions for which itdeemed that it is reasonably possible that the total amounts of theunrecognized tax benefit will significantly increase or decrease.

 

The Company has generated net operating loss carryforwards of approximately$4.2 million which, if not used, will begin to expire in 2021.  Federal and state tax laws impose significantrestrictions on the utilization of net operating loss carryforwards in theevent of a change in ownership of the Company that constitutes an “ownershipchange,” as defined by Section 382 of the Internal Revenue Code of 1986,as amended (the “Code”).  The Company hasanalyzed the Merger and private placement transactions that occurred in April 2004,and believes that they do not constitute such an ownership change.  However, additional shares and warrantslikely to be issued pursuant to the Company’s financing efforts, together withcertain transactions occurring in the previous 36-month period, may constitutea change in ownership that could subject the Company’s use of its net operatingloss carryforwards to the above limitations. Based on the Company’s estimates, the limitation would apply tosubstantially all of the $4.2 million net operating loss carryforwards.

 

The net operating loss carryforwards are subject to examination untilthey expire.  The tax years that remainsubject to examination by major tax jurisdictions currently are:

 

Federal 2004 - 2006 State of Minnesota 2004 - 2006

 

**Note8.  Subsequent Events.**

 

**Asset PurchaseAgreement and Promissory Note**

** **

**On April 3, 2008, the Company purchased certainpatents, patent applications and know-how (the “Assets”) from Profile pursuantto an asset purchase agreement (the “Asset Purchase Agreement”).  The purchase price of the Assets was$300,000, of which $150,000 was paid in cash and $150,000 was financed under asecured promissory note issued in favor of Profile (the “Profile Note”).  Pursuant to the terms of the Profile Note,the principal and interest accrued thereon becomes due and payable fivebusiness days following the close of a public offering of the Company’s equitysecurities or August 29, 2008, whichever occurs first (the “Maturity Date”).  Interest will accrue at an annual rate of 10percent prior to the Maturity Date and 18 percent thereafter.  In the event the Profile Note is not fullypaid at the Maturity Date or within 45 days thereafter, Profile may enforce itsright to have the Assets returned, and the Company will not be able to recoupany monies that were previously paid to Profile.  The Profile Note was made in connection with,and subject to the terms and conditions of, a Security Agreement dated April 3,2008 between the Company and Profile under which the Company granted to Profilea security interest in the Assets. As noted by SFAS No. **2, “Accounting for Research and Development Costs,”regarding costs of intangibles that are

** **

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** **

**purchasedfrom others for a particular research and development project and that have noalternative future uses,** the Assets will be immediatelyexpensed as research and development expense

** **

**Prior to purchasing the Assets, the Company hadlicensed certain rights to the Assets from Profile.  Profile is a five percent shareholder of theCompany.  The technology encompassed bythe Assets provides the basis for the ProUroScanTM system, theCompany’s initial product currently in the final stages of development.**

** **

**Issuance ofNotes and Warrants**

** **

**On April 3, 2008, the Company borrowedan aggregate of $112,500 pursuant to three unsecured promissory notes, each inthe amount of $37,500.  The promissorynotes were issued in favor of James Davis, William Reiling and the SmithTrust.  Payment in full of the promissorynotes and the interest accrued thereon at an annual rate of 10 percent is dueon September 1, 2008.  Asconsideration for providing the loans, the Company issued immediatelyexercisable, five-year warrants to purchase 25,000 shares of the Company’scommon stock at $1.50 per share to each lender. The gross proceeds were allocated between the note and the warrantsbased on the relative fair value at the time of issuance.  The warrants, valued at $69,000 using theBlack-Scholes pricing model, with a relative fair value of $42,769, will berecorded as original issue discount on the related promissory notes, and willbe expensed as interest expense over the term of the promissory notes.  The proceeds of the loans were used to payfor the purchase of the Assets from Profile, as described above.**

** **

**PrivatePlacement Closing**

** **

On May 2, 2008 the Company closed on an aggregate $155,000 of units consisting of unsecured,subordinated, convertible promissory notes and common stock purchase warrantsin the May 2008 PrivatePlacement.  Net cash proceeds to the Companywere approximately $120,000, after deducting approximately $35,000 of expensesof the offering (including $20,150 of commissions paid to the placementagent).  Each $10,000 unit consists of anote in the principal amount of $9,500 and a warrant to purchase 2,000 shares of our common stock.  Theterms of the notes and warrants are identical to the 2007 Notes and 2007Warrants, respectively, except that the Company’s option to prepay the May 2008notes begins anytime on or after May 2, 2009 and the maturity date of the May notesis November 2, 2009.

 

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*** ***

***Item2.  Management’s Discussion and Analysisof Financial Condition and Results of***Operation.

 

*The accompanyingManagement’s Discussion and Analysis of Financial Condition and Results ofOperation should be read in conjunction with our unaudited consolidatedfinancial statements, and notes thereto, filed with our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2008**.*

 

**Disclosure Regarding Forward-Looking Statements**

 

Certainstatements contained in this Quarterly Report on Form 10-Q may be deemedto be forward-looking statements as defined by the Private SecuritiesLitigation Reform Act of 1995, and the Company intends that suchforward-looking statements be subject to the safe-harbor created thereby. Such forward-looking statements relate to,among other things: general economic or industry conditions, nationallyand in the physician, urology and medical device communities in which we intendto do business; our ability to raise capital to fund our 2008 and 2009 workingcapital needs and launch our products into the marketplace in subsequent years;our ability to complete the development of our existing and proposed productson a timely basis or at all; legislation or regulatory requirements, includingour securing of all U.S. Food and Drug Administration (“FDA”) and otherregulatory approvals on a timely basis, or at all, prior to being able tomarket and sell our products in the United States; competition from larger andmore well established medical device companies and other competitors; thedevelopment of products that may be superior to the products offered by us;securing and protecting our intellectual property and assets, and enforcing breachesof the same; clinical results not anticipated by management of the Company; thequality or composition of our products and the strength and reliability of ourcontract vendors and partners; changes in accounting principles, policies orguidelines; financial or political instability; acts of war or terrorism; andother economic, competitive, governmental, regulatory and technical factorsaffecting our operations, proposed products and prices. We caution that these statements are qualified by important factorsthat could cause actual results to differ materially from those reflected bythe forward-looking statements contained herein.

 

**Overview;****Product Offerings.**

 

ProUroCare Medical Inc. (“ProUroCare,”the “Company,” “we,” “us” or “our,” which terms include reference to our whollyowned subsidiary, ProUroCare Inc. (“PUC”)) is a development stage company thatis focused on developing advanced mechanical imaging technology for assessingthe size, shape and volume of the prostate by creating a visual image of theprostate gland for use in identifying and characterizing abnormal lesions ortissue and monitoring the effects of prostate treatments.

 

The Company’s primaryactivities to date have focused on acquiring technology, intellectual propertyrights and working with Artann Laboratories Inc. (“Artann”) to completedevelopment of the ProUroScanTM prostate imaging system.  We have assembled an experienced managementteam and identified the necessary clinical, regulatory and reimbursementresources to assist us in moving the product to market.  We have aggressively worked to obtain thefunding to complete development of the ProUroScanTM system and tobring it to market.

 

Ourinitial product is the ProUroScanTM system, a mechanical imagingsystem that enables physicians to identify and characterize the existence ofabnormal prostate tissue and monitor changes in prostate tissue over time.  During the next 12 months, assuming ourfinancing efforts are successful (see “Liquidity and Capital Resources,” below), we expect toprepare the ProUroScanTM system for clinical trials, obtain FDAclearance on a basic mapping and datamaintenance labeling claim and prepare to launch our product into themarket, although there can be no assurance that we will be successful in meetingthese milestones.  We 

 

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arecurrently exploring potential marketing relationships with medical devicecompanies that are interested in marketing products in the prostate cancerdetection market.   We expect such a relationship would provide bothfinancial support and access to down stream marketing, engineering,manufacturing and sales capabilities.

 

TheProUroScanTM system has been developed by us under developmentcontracts with Artann, a scientific technology company focused on early-stagetechnology development.  In September 2006,Artann was awarded a $3 million Small Business Innovation Research Phase IICompetitive Renewal grant from the National Cancer Institute (the “2006 NIHGrant”) to help advance the development and application for clearance of ourProUroScanTM system by the FDA. It is our intent to work with Artann under this grant to finalize ourcurrent system for clinical trials, and to expand our working relationship withArtann to include their participation in the development and licensing offuture generations of the ProUroScanTM system.  Weare currently in active negotiations with Artann to enter into a developmentand licensing agreement that willprovide the foundation for future development of the ProUroScanTM system.

 

**CurrentDevelopments**

 

**On April 3, 2008,we purchased certain patents, patent applications and know-how (the “Assets”)from Profile LLC (“Profile”) for $300,000. The technology encompassed by the Assets provides the basis for theProUroScanTM system, our initial product currently in the finalstages of development.  Prior topurchasing the Assets, we had licensed rights to the Assets from Profile.  By purchasing the Assets, we both secure ourkey intellectual property and eliminate potentially very significant royaltypayments to Profile upon commercialization of the ProUroScanTMsystem.  As discussed in Note 8 to theconsolidated financial statements, we financed the purchase of the Assets byissuing a $150,000 promissory note to Profile (secured by the Assets) and byissuing an aggregate $112,500**of unsecured promissory notes to three individual investors.

 

On May 2, 2008, the Company closed on an aggregate $155,000 of units consisting of unsecured,subordinated, convertible promissory notes and common stock purchase warrantsin a private placement on termsessentially the same as the 2007 Private Placement and the February 2008Private Placement.  As of May 2,2008, the Company has closed on a total of $1,825,000 of units in the threeprivate placements, including the conversion of $175,000 of existing debt intounits.

 

**Resultsof Operations**

 

The following discussionof the financial condition and results of operations should be read inconjunction with the financial statements included herewith. This discussionshould not be construed to imply that the results discussed herein willnecessarily continue into the future, or that any conclusion reached hereinwill necessarily be indicative of actual operating results in the future.

 

*Threemonths ended March 31, 2008 compared to the three months ended March 31,2007:*

 

*OperatingExpenses/Operating Loss**.*  Our operatingexpenses (and our operating loss) for the three months ended March 31,2008 were $246,162, a decrease of $233,099, or 48 percent, compared to $469,261last year.  The decrease is primarily theresult of cost cutting efforts in early 2007 that included the retirement of our former Chief ExecutiveOfficer and the terminations of our former President and Chief OperatingOfficer and another employee.

 

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Compensation and benefitscosts in the three months ended March 31, 2008 decreased approximately$84,000, or 51 percent, compared to last year. Stock-based compensation declined approximately $154,000, or 84 percent,compared to last year, as several employee stock options became fully vestedduring 2007 and were therefore fully expensed prior to 2008, and a one-time,$96,000 expense was recognized during the three months ended March 31,2007 related to an extension of the exercise period of a warrant.  Additionally, work on our ProUroVisionproduct was also terminated in early 2007; approximately $24,000 of researchcosts was recorded in the three months ended March 31, 2007.  These decreases were off set by approximately$20,000 of legal fees associated with one-time costs of our reverse stocksplit, the filing of our Registration Statement on Form S-8 and other SECfilings and an approximately $9,000 increase in audit fees, during the threemonths ended March 31, 2008.

 

*NetInterest Expense**. *Net interest expense for the three monthsended March 31, 2008 was $389,056, an increase of 32 percent, compared to$295,195 last year.  The increasedinterest can be attributed to the issuance of convertible notes to investors inour 2007 Private Placement and our February 2008 Private Placement.  Amortization of the original issue discountattributable to warrants issued in the private placements resulted inapproximately $130,000 of recorded interest expense in the three months ended March 31,2008, while the interest on the convertible notes totaled approximately$35,000.  These increases were partiallyoffset by interest expense reductions resulting from declining interest rates(down approximately 30 percent from last year) and a reduction in the amountsof loans that were outstanding.

 

*Debt Extinguishment Expense*. Our debt extinguishment expense for the three months ended March 31,2008 was $25,340, a decrease of 70 percent, compared to $83,700 last year.  Our debt extinguishment expense arisesprimarily from the cost of warrants accrued for issuance pursuant to theprovisions of short-term loans from certain individual lenders.  The decrease was due to the repayment of asignificant portion of these outstanding short term loans in late 2007 and inearly 2008.

 

**Assets; Property Acquisitions and Dispositions**

 

Our primary assets are patents and patentapplications, which are the foundation for our proposed product offerings.  These assets****are pledged ascollateral on a $150,000 loan, and also secure a $1.6 million senior bank noteand a note issued to an investor in the amount of $600,000 and, as a result,are not available to secure other senior debt financing.  We anticipate purchasingapproximately $135,000 of computer equipment, development tools and molds,software and production tooling during the next 12 months.  We do not anticipate selling any significantequipment or other assets in the near term.

 

**Current Operations – Employees and Expenses**

 

We currently employ only two employees.  We conduct our research and development,market research, regulatory and other business operations through the use of avariety of consultants and medical device development contractors.  We believe that using consultants andcontractors to perform these functions is more cost effective than hiringfull-time employees and affords us flexibility in directing our resourcesduring our development stage.  As weprepare for submission to the FDA and market launch of our ProUroScanTMsystem, over the next 12 months we expect to hire approximately 7 employees inthe areas of engineering, regulatory compliance, marketing and qualitycontrol.  During the next 12 months, weexpect to complete the development of clinical ProUroScanTM systems,conduct clinical trials and file a 510(k) submission with the FDA, beginthe registration process in the European Union and establish strategicmarketing and contract manufacturing relationships in anticipation of regulatoryclearance to enter the market.

 

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We incur ongoing expenses that are directly related to being a publicly tradedcompany, including professional audit and legal fees, financial printing, pressreleases and transfer agent fees.  Wecurrently occupy temporary offices within the office of a former Companydirector, for which we accrue rent on a month-to-month basis of approximately$2,200 per month.  Upon successfulcompletion of our current funding efforts, we expect to relocate to permanentoffices of approximately 2,000 square feet. Other expenses incurred include executive officer compensation,expensing of stock options, travel, insurance, telephone, supplies and othermiscellaneous expenses.  In the next 12months, the Company anticipates that it will spend approximately $1.3 millionin marketing and administrative expenses. Of these, the Company expects that approximately $550,000 will be forcompensation, benefits and payroll taxes and approximately $180,000 will be forconsulting costs.

 

Theremaining work to prepare the ProUroScanTM system for FDA clinical studies consists primarily ofengineering and user interface refinements, safety and bio-testing andcompletion of documentation and validation studies.  Over the next 12 months, we expect this workto be performed by Artann and other independent contractors.  We are actively engaged in negotiations withArtann to complete the remaining phases of the ProUroScanTM project, and anticipatecompleting a development agreement in the second quarter of 2008.  A significant portion of these costs areeligible for coverage under the 2006 NIH Grant. Although the terms of our development agreement have yet to befinalized, we expect that a combination of cash and equity will be provided toArtann, spread out over the next five years. We are also negotiating a license agreement with Artann to provideaccess to know how and future intellectual property associated with prostatemechanical imaging.  We expect thatpayment for these interests will be paid by a combination of fees androyalties.  Over the next 12 months, weexpect that cash and equity payments to all outside contractors for research,development and clinical work, net of amounts reimbursed from the 2006 NIHGrant, may range between $2 and $3 million.

 

Wealso anticipate developing a small internal engineering team with competenciesin electrical and mechanical engineering and software design and development tofill specific project requirements not covered by Artann or other outsidecontractors.  Internal salaries, benefitsand miscellaneous departmental expenses for software and hardware development,regulatory work and project management over the next 12 months are estimated tobe $240,000.

 

**Liquidity and Capital Resources**

 

Net cash used in operating activities wasapproximately $432,000 during the first quarter of 2008 compared toapproximately $290,000 in the first quarter of 2007.  The increase in cash used was primarily theresult of payments of accrued expenses, including accrued compensation, in thefirst quarter of 2008.

 

Net cash provided by financing activities was approximately $165,000during the first quarter of 2008 compared to approximately $306,000 in thefirst quarter of 2007.  Net proceeds ofour private placements during the first quarter of 2008 of approximately$393,000 were offset by payments of notes payable and loans from directors ofapproximately $228,000.  During the firstquarter of 2007, net proceeds from the issuance of common stock ofapproximately $335,000 was offset by payments of notes payable of approximately$29,000.

 

We do not currently have sufficient funds tocomplete the development of our products and gain approval of them from theFDA.  As of March 31, 2008, we hadapproximately $134,000 cash on hand and current liabilities of approximately$4.0 million.  We estimate that we willneed approximately $3.5 million of cash over the next 12 months to complete thedevelopment of a first generation system, submit a premarket notificationapplication to the FDA and obtain FDA 510(k) clearance for basic mappingand

 

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data maintenance labeling claims.  In addition, we have $2.2 million of secureddebt and $733,334 of convertible debt, both of which mature at the end of February 2009,and other short term liabilities exceeding $1,150,000.

 

During the next 12 months, we plan to raiseapproximately $5.1 million through private or public offerings of our debt orequity securities, alternative financing sources that may become available tous or some combination of these.  Weanticipate that the net proceeds from such financings will be sufficient tofund our operations and retire approximately $700,000 of short term liabilities.We intend to address the $2.2 million secured debt that matures in February 2009by seeking an equity investment or licensing fee from a strategic marketingpartner, or by seeking an extension of the maturity dates.  We expect that the convertible debt will beconverted into common stock during the next 12 months.  If we are unsuccessful in obtaining an equityinvestment or licensing fee, or an extension of the maturity date of thesecured debt, or if the convertible debt is not converted into our commonstock, we will need to raise additional funds.

 

Sources of alternativefinancing include possible strategic investments from medical device companiesthat may be interested in marketing products in the prostate cancer detectionmarket.  In addition to financialsupport, a successful collaboration with such a company would allow us to gainaccess to down stream marketing, engineering, manufacturing and sales support.

 

Approximately $2.3 millionof our outstanding convertible debentures will automatically convert intoequity upon our closing of an underwritten public offering.  In addition, to date we have issued a totalof 334,000 warrants in our 2007 and 2008 private placements, and additionalwarrants may be issued pursuant to our financing efforts.

 

Weare attempting to raise enough cash to complete the development of a firstgeneration ProUroScanTM system and to seek or obtain FDA 510(k) clearancefor basic mapping and data maintenance labeling claims.  However, if our financing efforts areunsuccessful or significantly delayed for any reason, or if our productdevelopment efforts experience significant unforeseen delays, we may not havesufficient funds to complete these objectives, and will require additionalfinancing.  If additional funds areraised by the issuance of convertible debt or equity securities, such as theissuance of stock, or the issuance and exercise of warrants or the issuance andconversion of convertible debentures, then existing shareholders willexperience dilution in their ownership interests.  If additional funds are raised by theissuance of debt or certain equity instruments, we may become subject tocertain operational limitations and such securities may have rights senior tothose of existing holders of common stock. If adequate funds are notavailable through these initiatives on a timely basis, or are not available onacceptable terms, we may be unable to fund expansion, or to develop or enhanceour products.  Ultimately, if noadditional financing is obtained beyond what has been secured to date, we couldpotentially be forced to cease operations. See Part II, Item 1A of this Quarterly Report on Form 10-Q andItem 1 of our Annual Report on Form 10-KSB for the year ended December 31,2007 for a complete discussion of our risk factors.

 

**Going Concern**

 

We have incurred operating losses, accumulateddeficit and negative cash flows from operations since inception.  As of March 31, 2008, we had anaccumulated deficit of approximately $16.9 million.  These factors, among others, raisesubstantial doubt about our ability to continue as a going concern.  Our unaudited consolidated financialstatements included in this Quarterly Report on Form 10Q do not includeany adjustments related to recoverability and classification of asset carryingamounts or the amount and classification of liabilities that might resultshould we be unable to continue as a going concern.

 

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**CriticalAccounting Policies**

 

Ourfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America, or GAAP. The application ofGAAP requires that we make estimates that affect our reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenue and expensesduring the reporting period. We base our estimates on historical experience andon various other assumptions that we believe to be reasonable under thecircumstances. We evaluate our estimates and assumptions on an ongoing basis.Our actual results may differ significantly from these estimates.

 

Adescription of the Company’s critical accounting policies that represent themore significant judgments and estimates used in the preparation of the Company’sfinancial statements was provided in the Management’s Discussion and Analysisof Financial Condition and Results of Operations section of the Company’sAnnual Report on Form 10-KSB for the year ended December 31, 2007.

 

***Item 4T. Controls and Procedures.***

** **

**Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the rules and forms of the Securities andExchange Commission (the “SEC”). As of March 31, 2008, the end of theperiod covered by this Quarterly Report on Form 10-Q, we carried out anevaluation, under the supervision and with the participation of management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures pursuant to Exchange Act Rule 13a-15. Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures are effective.

 

**Changes in Internal Control Over Financial Reporting**

 

Duringthe quarter ended March 31, 2008, there has been no change in the Company’sinternal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PART II. OTHER INFORMATION.**

 

***Item 1. Legal Proceedings.***

 

***The Company, like most other publiccompanies, is involved in legal proceedings in the conduct of the ordinarycourse of its business.***

 

***Item1A. Risk Factors***

** **

**Investing in our common stockinvolves a high degree of risk. You should carefully consider the risks anduncertainties set forth under Item 1 of our Annual Report on Form 10-KSBfor the year ended December 31, 2007, as well as the material changes tothose risk factors set forth below before purchasing our common stock.  These risks and uncertainties are not theonly ones facing our Company; additional risks and uncertainties may alsoimpair our business operations. If any of the following risks actually occur,our business, financial condition, results of operations or cash flows wouldlikely suffer. In that case, the trading price of our common stock could fall,and you may lose all or part of your investment.  We undertake no obligation to update orrevise any forward-looking statement except as required by the SEC.**

 

The following risk factorsdisclosed in our Annual Report on Form 10-KSB have been deleted as aresult of our April 3, 2008 acquisition of key patents, patentapplications and know-how from Profile that we had previously licensed:

 

·                  We license from third parties, and do not ownor control, key intellectual property critical to our products.

 

·                  If we lose our right to license and use fromthird parties certain critical intellectual property for any reason, our entirebusiness would be in jeopardy.

 

·                  The protections for the intellectual propertywe license from other parties may be successfully challenged by third parties.

 

·                  We will begin tolose patent protection on our licensed prostate-imaging systems and relatedpatent technologies beginning in 2012.  As we lose patent protection onour critical licensed technologies, it may have a material adverse effect onour business

 

The following risk factorsreplace the deleted risk factors noted above as a result of our April 3,2008 acquisition of key patents, patent applications and know-how from Profilethat we had previously licensed:

 

**The intellectual property we own is subject to a secured$150,000 loan which, if not settled upon maturity, could lead to the loss ofour patent rights and put****our entire business in jeopardy.**

 

**We have purchased certain patents, patent applications and know-howfrom Profile**that iscritical to our proposed products.  A portion of the purchase price of thepatents, patent applications and know-how was financed under a secured,$150,000 promissory note issued in favor of Profile.  Pursuant to the terms of the note, theprincipal and interest accrued thereon becomes due and payable five businessdays following the close of a public offering of our equity securities or August 29,2008, whichever occurs first.  In theevent the note is not fully paid upon maturity or within 45 days thereafter,Profile may enforce its right, which is secured by an agreement under which wegranted to Profile a security interest, to have the patents, patentapplications and know-how returned, and we will not be able to recoup anymonies that were previously paid to Profile.  If theforegoing breach and circumstances occurred, the viability of the Company wouldbe in question. Our only alternatives would be to find existing andnon-infringing

 

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**technologyto replace the lost technology, if any exists, or develop new technologyourselves.  The pursuit of any suchalternative would likely cause significant delay in the development andintroduction of our proposed products and could have a material adverse effecton our business.**

 

**Theprotections for our key intellectual property may be successfully challenged bythird parties.**

 

We own various key intellectual properties.  No assurance can be given that anyintellectual property claims will not be successfully challenged by thirdparties.  Any challenge to ourintellectual property, regardless of merit, would likely involve costlylitigation which could have a material adverse effect on our business.  If a successful challenge were made tointellectual property that is critical to our proposed products, the pursuit ofany such alternative would likely cause significant delay in the developmentand introduction of such products. Moreover, a successful challenge could callinto question the validity of our business.

 

**We will begin to lose patent protection on our prostate-imaging systemsand related patent technologies beginning in 2012.  As we lose patentprotection on our critical technologies, it may have a material adverse effecton our business.**

 

Werely on certain patents to provide us with exclusive rights for ourtechnology.  One of these patents willexpire in 2012, another in 2013, while the remainder will expire between 2016and 2021.  As we begin to lose certainpatent protections on our prostate-imaging systems and related criticalpatented technologies in 2012, we may face strong competition as a result,which could have a material adverse effect our business.

 

**The risks and uncertaintieslisted below are fully described in our Annual Report on Form 10-KSB, towhich no material changes have been made:**

** **

**·**                  As a development stage company, we have no operatinghistory and our business plan has not yet been fully tested.  We anticipate incurring future losses untilour products are completed, regulatory approval is secured and our products areintroduced into the United States and worldwide markets.

 

·                  We have a history of operating losses andhave received a “going-concern” qualification from our independent registeredpublic accounting firm.

 

·                  We are currently in need of financing andwill need additional financing during 2008, and any such financing will likelybe dilutive to our existing shareholders.

 

·                  Even if we raise enough cash in our financingefforts to complete development of a first generation ProUroScanTM system and to obtain FDA clearance of a 510(k) ona basic mapping and data maintenance claim, we will still require additionalfinancing to launch our product into the market.

 

·                  Ifwe are unable to secure a distribution partner for the commercial launch of ourfirst generation ProUroScanTM system, we may require additionalfinancing to launch our product into the market.

 

·                  If FDA clearance is delayed, including because weare not able to raise enough funds to get us through the regulatory process, wecould potentially be forced to cease operations.

 

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·                  Our assets are pledged to secure a $1.2million senior bank note and a $600,000 note issued to an investor and, as aresult, are not available to secure other senior debt financing.  Upon the occurrence of an event of default,our assets will be assigned to guarantors of the senior bank note and theholder of such $600,000 promissory note.

 

·                  Our products have not been, and may never be,fully commercially completed and developed.

 

·                  We are relying upon Artann Laboratories, Inc.(“Artann”) to complete development of the ProUroScanTM system and will not be ableto control the pace of that development. Failure to establish a newdevelopment and licensing agreement on terms acceptable to the Company wouldsignificantly delay the development and market introduction of the ProUroScanTMsystem and would have a material adverse effect on our business.

 

·                  Failure to obtain a license for intellectualproperties owned by Artann would have a material adverse effect on ourbusiness.

 

·                  The commercialization of our products may besignificantly delayed by governmental regulation and any and all such delays,if they occur, may have a material adverse effect on our business.

 

·                  Even if successfully developed, our productsmay not be commercially viable.

 

·                  Even if successfully developed, our productsmay not be accepted by the marketplace.

 

·                  Afailure to successfully implement a “patient pay” sales model prior toestablishing third party reimbursement would have a material adverse effect onproduct sales and our financial results.

 

·                  Our failure to receive third-party coverageand reimbursement for our products, when in the marketplace, could result indiminished marketability of our products.

 

·                  Once wecommercialize the ProUroScanTM system, we may be subject, directly or indirectly, tofederal and state healthcare fraud and abuse laws and regulations and couldface substantial penalties if we are unable to fully comply with such laws.

 

·                  Any failure in our efforts or our contractor’sefforts to train physicians or other medical staff could result in lower thanexpected product sales.

 

·                  There is no guarantee that the FDA will grant 510(k) clearanceor PMA approval of our future products and failure to obtain necessaryclearances or approvals for our future products would adversely affect ourability to grow our business.

 

·                  Clinical trials necessary to support ourfuture submissions will be expensive and may require the enrollment of largenumbers of patients, and suitable patients may be difficult to identify andrecruit. Delays or failures in our clinical trials will prevent us fromcommercializing any modified or new products and will adversely affect ourbusiness, operating results and prospects.

 

·                  If the third parties on which we rely toconduct our clinical trials and to assist us with pre-clinical development donot perform as contractually required or expected, we may not be able to obtainregulatory approval for or commercialize our products.

 

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·                  Even if our products are cleared or approved by regulatory authorities,if we or our contract manufacturers or suppliers fail to comply with ongoingFDA or other foreign regulatory authority requirements, or if we experienceunanticipated problems with our products, these products could be subject torestrictions or withdrawal from the market.

 

·                  Our products may in the future be subject to productrecalls that could harm our reputation, business and financial results.

 

·                  If our products cause or contribute to a death or aserious injury, or malfunction in certain ways, we will be subject to medicaldevice reporting regulations, which can result in voluntary corrective actionsor agency enforcement actions.

 

·                  We have limited experience in assembling and testing our products andmay encounter problems or delays in the assembly of our products or fail tomeet certain regulatory requirements which could result in an adverse effect onour business and financial results.

 

·                  Federal regulatory reforms may adversely affect ourability to sell our products profitably.

 

·                  Rapid technological change in our competitivemarketplace may render our proposed products obsolete or may diminish ourability to compete in the marketplace.

 

·                  We will depend upon others for themanufacturing of our products, which will subject our business to the risk thatwe will be unable to fully control the supply of our products to the market.

 

·                  Our reliance on third-party manufacturers andother third parties in other aspects of our business may reduce any profits wemay earn from our products and may negatively affect future productdevelopment.

 

·                  We may not be able to enter intomanufacturing agreements or other collaborative agreements on terms acceptableto us, if at all, which could have a material adverse effect on our business.

 

·                  We expect to rely materially on Artann andother consultants and contractors, some of whom may be partially or wholly paidthrough issuances of common stock dilutive to our shareholders.

 

·                  The funding provided by the government fromthe $3,000,000 Small Business Innovation Research Phase II Competitive Renewalgrant awarded to Artann by the National Institutes of Health (“NIH”) may bereduced or delayed.  If such reduction ordelay occurs, this may have a material adverse effect on our business.

 

·                  We are highly dependent on the servicesprovided by certain key personnel.

 

·                  We may not be able to successfully competeagainst companies in our industry with greater resources, or with anycompetition.

 

·                  Our common stock is illiquid and may bedifficult to sell.

 

·                  There is currently limited trading volume inour common stock, which may make it difficult to sell shares of our commonstock.

 

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·                  Because our stock is deemed a “penny stock,”you may have difficulty selling shares of our common stock.

 

·                  The shares andwarrants that may be issued in future financings may trigger an “ownershipchange” as defined by the Internal Revenue Code of 1986, as amended (the “Code”)and our ability to use operatingloss carryforwards to offset income in future years may be limited.

 

·                  Our business and products subject us to therisk of product liability claims.

 

·                  We have never paid dividends and do notexpect to pay dividends in the foreseeable future.

 

***For a more detailed discussion of therisk factors listed above that have not been materially changed, see Item 1 ofour Annual Report on Form 10-KSB for the year ended December 31, 2007under the heading “Risk Factors Associated with our Business, Operations andSecurities.” We undertake no obligation to update or revise any forward lookingstatements, except as required by the SEC.***

 

***Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds.***

 

***Convertible PromissoryNote Issuances***

 

**On January 4, 2008, in the second and final closing of a privateplacement (the “2007 Private Placement”), we closed on the sale of $80,000 ofunits consisting of unsecured, subordinated, convertible promissory notes (the “2007Notes”) and common stock purchase warrants (the “2007 Warrants”). At theclosing, the Company issued $76,000 in principal amount of 2007 Notes and 2007Warrants to purchase 16,000 shares of common stock.  Net cash proceeds to the Company were$69,600, after deducting $10,400 of commissions paid to the placementagent.  The 2007 Notes bear interest at10 percent per year, mature on June 27, 2009 and will convert into thetype of equity securities offered by the Company in any underwritten publicoffering prior to maturity at 70 percent of the public offering price.  In the event a public offering is notcompleted before the maturity date, the entire principal and unpaid accruedinterest will convert into the Company’s common stock at $0.05 per share.  The Company may, at its option, prepay theNotes anytime on or after December 27, 2008.  The 2007 Warrants will become exercisableupon the earlier of the closing of a public offering or the maturity date ofthe 2007 Notes and will remain exercisable until December 31, 2012.  The exercise price will be 50 percent of thepublic offering price, or in the event that a public offering is not completedbefore the maturity date, at 50 percent of the closing price of the Company’scommon stock on the maturity date.**

 

**On February 13 and February 28, 2008, the Company closed onthe sale of a total of $390,000 of units consisting of unsecured, subordinated,convertible promissory notes (the “February 2008 Notes”) and common stockpurchase warrants (the “February 2008 Warrants”) in a private placement(the “February 2008 Private Placement”). Net cash proceeds to the Company were approximately $298,000, afterdeducting approximately $92,000 of expenses of the offering (including $50,700of commissions paid to the placement agent).**

** **

**At the closing, the Company issued $370,500 in principal amount of February 2008Notes and February 2008 Warrants to purchase 78,000 shares of common stock.  The February 2008 Notes bear interest at10 percent per year, mature on August 13, 2009 and will convert into thetype of equity securities offered by the Company in any underwritten publicoffering prior to maturity at 70 percent of the public offering price.  In the event a public offering is notcompleted before the maturity date, the entire principal and unpaid accruedinterest will convert into the Company’s common stock at $0.05 per share.  The Company may, at its option, prepay the February 2008Notes anytime on or after February 13, 2009.  The February 2008 Warrants will becomeexercisable upon the earlier of the closing of a public offering or thematurity**

 

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**date of the February 2008 Notes and will remain exercisable until December 31,2012.  The exercise price will be 50percent of the public offering price, or in the event that a public offering isnot completed before the maturity date, at 50 percent of the closing price ofthe Company’s common stock on the maturity date.**

 

**Sales of the securities described above were made in compliance withthe requirements of Rule 506 of Regulation D under the Securities Act of1933, as amended (the “Securities Act”) and the exemption from registrationprovide thereby under Section 4(2) of the Securities Act.  In qualifying for such exemption the Companyrelied upon representations from the investors regarding their status as “accreditedinvestors” under Regulation D and the limited manner of the offering as conductedby the placement agent and the**

**Company.**

 

**Warrants**

 

On January 4, 2008, pursuant to a finalseparation agreement with a former employee of the Company, the Company issuedto the former employee five-year warrants (immediately exercisable) to acquireup to 14,500 shares of the Company’s common stock at an exercise price of $5.00per share and amended a previously issued warrant to acquire up to 30,000shares of the Company’s common stock to provide for cashless exercise thereof.

 

Pursuant to the terms of a promissory notewith Adron Holdings, LLC (“Adron”), upon the repayment of the principal thereonon January 16, 2008, the Company issued five-year warrants (immediatelyexercisable) to acquire up to 52,357 shares of the Company’s common stock at$5.00 per share to Adron’s partners.

 

The above warrant issuances were made, and the prospective issuanceswill be made, in reliance on exemption from registration provided under Section 4(2) ofthe Securities Act, for issuance by an issuer not involving a public offering.

 

***Item 5.  Other Information.***

 

**Private Placements of Notes and Warrants**

 

**On May 2, 2008, the Company closed on the sale of $155,000 ofunits consisting of unsecured, subordinated, convertible promissory notes (the “Notes”)and common stock purchase warrants (the “Warrants”) in a privateplacement.  Net cash proceeds to theCompany were approximately $120,000, after deducting approximately $35,000 ofexpenses of the offering (including $20,150 of commissions and fees paid to theplacement agent).  The net proceeds willbe used to pay certain existing obligations and for general corporate purposes.**

** **

**At the closing, the Company issued $147,250 in principal amount ofNotes, and Warrants to purchase 31,000 shares of common stock.  The Notes bear interest at 10% per year,mature on November 2, 2009, and will convert into the type of equitysecurities offered by the Company in any underwritten public offering prior tomaturity at 70% of the public offering price. In the event a public offering is not completed before the maturitydate, the entire principal and unpaid accrued interest will convert into theCompany’s common stock at $0.05 per share. The Company may, at its option, prepay the Notes anytime on or after May 2,2009.  The Warrants will becomeexercisable upon the earlier of the closing of a public offering or thematurity date of the Notes, and will remain exercisable until December 31,2012.  The exercise price will be 50% ofthe public offering price, or in the event a public offering is not completedbefore the maturity date, at 50% of the closing price of the Company’s commonstock on the maturity date.**

 

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**In combination with its earlier private placement closings in late 2007and early 2008, the Company has sold a total of $1,675,000 of investment unitsto date, and has converted an additional $150,000 of debt into investmentunits.**

** **

**Sales of the securities described above were made in compliance withthe requirements of Rule 506 of Regulation D under the Securities Act of1933 and the exemption from registration provide thereby under Section 4(2) ofthe Securities Act of 1933.  Inqualifying for such exemption the Company relied upon representations from theinvestors regarding their status as “accredited investors” under Regulation D,and the limited manner of the offering as conducted by the placement agent andthe Company.**

 

***Item6.  Exhibits***

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                        |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                             |
| 4.1  *               |       | Form of warrants issued to William Reiling, James Davis and the  Phillips W. Smith Family Trust dated April 3, 2008.                                                                         |
|                 |       |                                                                                                                                                                                                   |
| 10.1  *              |       | Asset Purchase Agreement by and between ProUroCare Medical Inc. and  Profile, LLC dated April 3, 2008.                                                                                            |
|                 |       |                                                                                                                                                                                                   |
| 10.2  *              |       | Security Agreement by and between ProUroCare Medical Inc. and  Profile, LLC dated April 3, 2008.                                                                                                  |
|                 |       |                                                                                                                                                                                                   |
| 10.3  *              |       | Promissory Note by and between ProUroCare Medical Inc. and Profile,  LLC dated April 3, 2008.                                                                                                     |
|                 |       |                                                                                                                                                                                                   |
| 10.4  *              |       | Form of Promissory Notes by and between ProUroCare Medical Inc.  and each of William Reiling, James Davis and the Phillips W. Smith Family  Trust dated April 3, 2008.                       |
|                 |       |                                                                                                                                                                                                   |
| 31.1  *              |       | Certification of Principal Executive Officer pursuant to  Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002.                                                                        |
|                 |       |                                                                                                                                                                                                   |
| 31.2  *              |       | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of  the Sarbanes-Oxley Act of 2002.                                                                            |
|                 |       |                                                                                                                                                                                                   |
| 32.1  *              |       | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |

 

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*Filed herewith.

 

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**SIGNATURES**

 

Pursuant to the SecuritiesExchange Act of 1934, as amended, the Company has duly caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 

** **
|                    | **ProUroCare  Medical Inc.**          |
|-------------------------|---------------------------------------|
|                    |                                  |
|                    |                                  |
| Date:  May 7, 2008 | By:                                   |   /s/  Richard C. Carlson |
|                    | Name:   Richard C. Carlson       |
|                    | Title:   Chief Executive Officer |
|                    |                                  |
|                    |                                  |
| Date:  May 7, 2008 | By:                                   |   /s/  Richard Thon |
|                    | Name:   Richard Thon             |
|                    | Title:   Chief Financial Officer |

 

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**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                        |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                   |
| 4.1 *                |       | Form of warrants issued to William Reiling, James Davis and the  Phillips W. Smith Family Trust dated April 3, 2008                                                                          |
|                 |       |                                                                                                                                                                                                   |
| 10.1 *               |       | Asset Purchase Agreement by and between ProUroCare Medical Inc. and  Profile, LLC dated April 3, 2008.                                                                                            |
|                 |       |                                                                                                                                                                                                   |
| 10.2 *               |       | Security Agreement by and between ProUroCare Medical Inc. and  Profile, LLC dated April 3, 2008.                                                                                                  |
|                 |       |                                                                                                                                                                                                   |
| 10.3 *               |       | Promissory Note by and between ProUroCare Medical Inc. and Profile,  LLC dated April 3, 2008.                                                                                                     |
|                 |       |                                                                                                                                                                                                   |
| 10.4 *               |       | Form of Promissory Notes by and between ProUroCare Medical Inc.  and each of William Reiling, James Davis and the Phillips W. Smith Family  Trust dated April 3, 2008.                       |
|                 |       |                                                                                                                                                                                                   |
| 31.1 *               |       | Certification of Principal Executive Officer pursuant to  Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002.                                                                        |
|                 |       |                                                                                                                                                                                                   |
| 31.2 *               |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002.                                                                            |
|                 |       |                                                                                                                                                                                                   |
| 32.1 *               |       | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |

 

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*Filed herewith.

 

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