**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-QSB**

 
| **(Mark One)** |
|----------------|
| **x**          | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     |
| ** **     | **For the quarterly period ended  September 30, 2007** |
| ** **     | ** ** |
| **o**          | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | ** ** |
| ** **     | **For the transition period from           to         ** |

** **

**Commission File Number 333-103781**

 

**ProUroCareMedical Inc.**

(Exact name of smallbusiness issuer as specified in its charter)

 

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

 

**5500 Wayzata Blvd., Suite 310Golden Valley, Minnesota 55416**

(Address of principalexecutive offices)

 

**(952) 476-9093**

(Issuer’s telephonenumber)

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  YES x  NO o

 

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). YES o  NO x

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date:  16,050,882shares of common stock outstanding as of November 12, 2007 (par value $0.00001per share).

 

Transitional Small Business Disclosure Format (checkone): YES o NO x

 

 

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**ProUroCareMedical Inc.**

**Form10-QSB for the**

**QuarterEnded September 30, 2007**

 

**Table of Contents**

** **
| PART I.    | FINANCIAL INFORMATION                                           |   |
|------------|-----------------------------------------------------------------|--------|
|       |                                                            |   |
| ITEM 1.    | FINANCIAL STATEMENTS                                            |   |
|       |                                                            |   |
|       | Consolidated Balance Sheets                                     |   |
|       |                                                            |   |
|       | Consolidated Statements of Operations                           |   |
|       |                                                            |   |
|       | Consolidated Statements of Cash Flows                           |   |
|       |                                                            |   |
|       | Notes to  Consolidated Financial Statements                     |   |
|       |                                                            |   |
| ITEM  2.   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION |   |
|       |                                                            |   |
| ITEM 3.    | CONTROLS AND PROCEDURES                                         |   |
|       |                                                            |   |
| PART II.   | OTHER INFORMATION                                               |   |
|       |                                                            |   |
| ITEM 1.    | LEGAL PROCEEDINGS                                               |   |
|       |                                                            |   |
| ITEM  2.   | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF  PROCEEDS    |   |
|       |                                                            |   |
| ITEM 4.    | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS            |   |
|       |                                                            |   |
| ITEM 6.    | EXHIBITS                                                        |   |
|       |                                                            |   |
| SIGNATURES |                                                            |

 

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**PART I. FINANCIALINFORMATION**

** **

***Item 1.  Financial Statements***

*** ***

**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Balance Sheets**

** **
| ** **                                                                                                                                                                     | ** ** | **Sepetmber 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **(Unaudited)**                  | ** ** | **(Audited)**                   | ** ** |
| **Assets**                                                                                                                                                                     | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                                                                |       |                             |       |                            |       |
| Cash                                                                                                                                                                           |       | $                                | 11,727     |                            | $          | 2,407 |   |
| Prepaid expenses                                                                                                                                                               |       | 35,105                           |       | 15,459                          |       |
|                                                                                                                                                                           |       |                             |       |                            |       |
| Total current  assets                                                                                                                                                          |       | 46,832                           |       | 17,866                          |       |
| Equipment and  furniture, net                                                                                                                                                  |       | 1,069                            |       | 3,739                           |       |
| Deferred  offering costs                                                                                                                                                       |       | 111,820                          |       | —                          |       |
| Debt issuance  costs, net                                                                                                                                                      |       | 178,595                          |       | 573,013                         |       |
|                                                                                                                                                                           |       |                             |       |                            |       |
|                                                                                                                                                                           |       | $                                | 338,316    |                            | $          | 594,618 |   |
| **Liabilities and Shareholders’ Deficit**                                                                                                                                 |       |                             |       |                            |       |
| Current  liabilities:                                                                                                                                                          |       |                             |       |                            |       |
| Notes payable,  bank                                                                                                                                                           |       | $                                | 2,200,000  |                            | $          | — |   |
| Notes payable,  net of original issue discount                                                                                                                                 |       | 325,967                          |       | 174,338                         |       |
| Accounts payable                                                                                                                                                               |       | 359,176                          |       | 385,793                         |       |
| Accrued expenses                                                                                                                                                               |       | 880,768                          |       | 662,226                         |       |
| Loans from  officers and directors                                                                                                                                             |       | 80,700                           |       | 15,450                          |       |
| Total current  liabilities                                                                                                                                                     |       | 3,846,611                        |       | 1,237,807                       |       |
|                                                                                                                                                                           |       |                             |       |                            |       |
| Commitments and  contingencies                                                                                                                                                 |       |                             |       |                            |       |
| Long-term bank  debt                                                                                                                                                           |       | —                           |       | 2,200,000                       |       |
| Long-term  convertible debentures, net of original issue discount                                                                                                              |       | 392,812                          |       | 209,983                         |       |
| Total  liabilities                                                                                                                                                             |       | 4,239,423                        |       | 3,647,790                       |       |
| Shareholders’  deficit:                                                                                                                                                   |       |                             |       |                            |       |
| Common stock,  $0.00001 par. Authorized 50,000,000 shares; issued and outstanding 16,050,882  and 14,399,686 shares on September 30, 2007 and December 31, 2006,  respectively |       | 160                              |       | 144                             |       |
| Additional  paid-in capital                                                                                                                                                    |       | 11,570,762                       |       | 10,111,482                      |       |
| Deficit  accumulated during development stage                                                                                                                                  |       | (15,472,029                      | )          | (13,164,798                     | )          |
|                                                                                                                                                                           |       |                             |       |                            |       |
| Total  shareholders’ deficit                                                                                                                                              |       | (3,901,107                       | )          | (3,053,172                      | )          |
|                                                                                                                                                                           |       |                             |       |                            |       |
|                                                                                                                                                                           |       | $                                | 338,316    |                            | $          | 594,618 |   |

 

*See accompanying notes to financial statements.*

 

1

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**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Statementsof Operations**

(Unaudited)

 
| ** **                                      | ** ** | **Three months ended  September 30** | ** ** | **Nine months ended  September 30** | ** ** | **Period from  August 17,1999  (inception) to  September 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007**                                                                           | ** ** | **2006** | ** ** | **2007** | ** ** |
| Operating  expenses:                            |       |                                                |       |                                               |       |                                                                               |       |   |   |   |   |
| Research and  development                       |       | $                                                   | 1,082      |                                               | $          | 30,700                                                                             |       | $ | 108,316 |   | $ | 264,209 |   | $ | 4,822,240 |   |
| General and  administrative                     |       | 199,892                                             |       | 397,093                                            |       | 1,075,325                                                                          |       | 1,200,214 |   | 7,574,547 |   |
| Total operating  expenses                       |       | 200,974                                             |       | 427,793                                            |       | 1,183,641                                                                          |       | 1,464,423 |   | 12,396,787 |   |
|                                            |       |                                                |       |                                               |       |                                                                               |       |   |   |   |   |
| Operating loss                                  |       | (200,974                                            | )          | (427,793                                           | )          | (1,183,641                                                                         | )          | (1,464,423 | ) | (12,396,787 | ) |
| Interest income                                 |       | —                                              |       | —                                             |       | —                                                                             |       | — |   | 16,480 |   |
| Interest expense                                |       | (315,600                                            | )          | (298,599                                           | )          | (890,061                                                                           | )          | (793,737 | ) | (2,858,193 | ) |
| Debt  extinguishment cost                       |       | (75,327                                             | )          | —                                             |       | (233,529                                                                           | )          | — |   | (233,529 | ) |
|                                            |       |                                                |       |                                               |       |                                                                               |       |   |   |   |   |
| Net loss                                        |       | $                                                   | (591,901   | )                                                  | $          | (726,392                                                                           | )          | $ | (2,307,231 | ) | $ | (2,258,160 | ) | $ | (15,472,029 | ) |
|                                            |       |                                                |       |                                               |       |                                                                               |       |   |   |   |   |
| Net loss per  common share:                     |       |                                                |       |                                               |       |                                                                               |       |   |   |   |   |
| Basic and  diluted                              |       | $                                                   | (0.04      | )                                                  | $          | (0.05                                                                              | )          | $ | (0.15 | ) | $ | (0.16 | ) | $ | (1.65 | ) |
|                                            |       |                                                |       |                                               |       |                                                                               |       |   |   |   |   |
| Weighted average  number of shares outstanding: |       |                                                |       |                                               |       |                                                                               |       |   |   |   |   |
| Basic and  diluted                              |       | 15,875,586                                          |       | 14,301,713                                         |       | 15,540,217                                                                         |       | 14,246,881 |   | 9,393,488 |   |

 

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

 

2

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**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Statementsof Cash Flows**

**(Unaudited)**

** **
| ** **                                                                                                              | ** ** | **Nine months ended September 30** | ** ** | **Period from  August 17,1999  (inception) to  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2007**                                               | ** ** | **2006**                                                                           | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                                                                  |       |                                                   |       |                                                                               |       |   |   |
| Net loss                                                                                                                |       | $                                                      | (2,307,231 | )                                                                                  | $          | (2,258,160 | ) | $ | (15,472,029 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                            |       |                                                   |       |                                                                               |       |   |   |
| Depreciation and  amortization                                                                                          |       | 2,670                                                  |       | 2,923                                                                              |       | 19,728 |   |
| Gain on sale of  furniture and equipment                                                                                |       | —                                                 |       | —                                                                             |       | (2,200 | ) |
| Stock-based  compensation                                                                                               |       | 511,239                                                |       | 265,770                                                                            |       | 1,666,957 |   |
| Issuance of  common stock for services rendered                                                                         |       | —                                                 |       | 53,738                                                                             |       | 156,904 |   |
| Warrants issued  for services                                                                                           |       | 72,000                                                 |       | —                                                                             |       | 540,636 |   |
| Warrants issued  for debt guarantees                                                                                    |       | —                                                 |       | —                                                                             |       | 320,974 |   |
| Warrants issued  for debt extinguishment                                                                                |       | 233,529                                                |       | —                                                                             |       | 233,529 |   |
| Amortization of  note payable original issue discount                                                                   |       | 52,582                                                 |       | 70,736                                                                             |       | 181,667 |   |
| Amortization of  convertible debt original issue discount                                                               |       | 182,829                                                |       | 148,370                                                                            |       | 392,812 |   |
| Amortization of  debt issuance and deferred offering costs                                                              |       | 394,418                                                |       | 372,728                                                                            |       | 1,171,948 |   |
| 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 | ) |
| Other  receivables                                                                                                      |       | —                                                 |       | (10,121                                                                            | )          | — |   |
| Prepaid expenses                                                                                                        |       | 22,939                                                 |       | 23,031                                                                             |       | 75,917 |   |
| Accounts payable                                                                                                        |       | (7,238                                                 | )          | (7,891                                                                             | )          | 769,737 |   |
| Accrued expenses                                                                                                        |       | 225,535                                                |       | (233,771                                                                           | )          | 1,006,481 |   |
| Net cash used in  operating activities                                                                                  |       | (616,728                                               | )          | (1,572,647                                                                         | )          | (6,878,197 | ) |
| Cash flows from  investing activities:                                                                                  |       |                                                   |       |                                                                               |       |   |   |
| Purchases of  equipment and furniture                                                                                   |       | —                                                 |       | —                                                                             |       | (20,797 | ) |
| Net cash used in  investing activities                                                                                  |       | —                                                 |       | —                                                                             |       | (20,797 | ) |
| Cash flows from  financing activities:                                                                                  |       |                                                   |       |                                                                               |       |   |   |
| Proceeds of note  payable, bank                                                                                         |       | —                                                 |       | 140,500                                                                            |       | 500,000 |   |
| Payment of note  payable, bank                                                                                          |       | —                                                 |       | (400,000                                                                           | )          | (500,000 | ) |
| Proceeds of  notes payable                                                                                              |       | 150,000                                                |       | —                                                                             |       | 490,500 |   |
| Payment of notes  payable                                                                                               |       | (41,618                                                | )          | (170,865                                                                           | )          | (1,024,472 | ) |
| Proceeds from  loans from officers and directors                                                                        |       | 154,650                                                |       | —                                                                             |       | 170,100 |   |
| Payments of  loans from officers and directors                                                                          |       | (79,100                                                | )          | —                                                                             |       | (79,100 | ) |
| Net advances  (payments) to Clinical Network, Inc.                                                                      |       | —                                                 |       | (8,943                                                                             | )          | — |   |
| Proceeds from  long-term debt                                                                                           |       | —                                                 |       | 2,200,000                                                                          |       | 2,200,000 |   |
| Net proceeds  from issuance of common stock                                                                             |       | 447,611                                                |       | 50,000                                                                             |       | 5,682,537 |   |
| Payments for  debt issuance costs                                                                                       |       | (5,495                                                 | )          | (231,966                                                                           | )          | (237,461 | ) |
| Payments for  deferred offering costs                                                                                   |       | —                                                 |       | —                                                                             |       | (28,827 | ) |
| Cost of reverse  merger                                                                                                 |       | —                                                 |       | —                                                                             |       | (162,556 | ) |
| Payment for  rescission of common stock                                                                                 |       | —                                                 |       | —                                                                             |       | (100,000 | ) |
| Net cash  provided by financing activities                                                                              |       | 626,048                                                |       | 1,578,726                                                                          |       | 6,910,721 |   |
| Net increase in  cash                                                                                                   |       | 9,320                                                  |       | 6,079                                                                              |       | 11,727 |   |
| Cash, beginning  of the period                                                                                          |       | 2,407                                                  |       | 37                                                                                 |       | — |   |
| Cash, end of the  period                                                                                                |       | $                                                      | 11,727     |                                                                               | $          | 6,116 |   | $ | 11,727 |   |

 

3

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** **
| ** **                                                                                                                                                  | ** ** | **Nine months ended September 30** | ** ** | **Period from  August 17,1999  (inception) to  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2007**                                               | ** ** | **2006**                                                                           | ** ** | **2007** | ** ** |
| Supplemental  cash flow information:                                                                                                                        |       |                                                   |       |                                                                               |       |   |   |
| Cash paid for  interest                                                                                                                                     |       | $                                                      | 179,831    |                                                                               | $          | 158,759 |   | $ | 537,812 |   |
| Non-cash  investing and financing activities:                                                                                                               |       |                                                   |       |                                                                               |       |   |   |
| Warrants issued  pursuant to note payable                                                                                                                   |       | $                                                      | 51,920     |                                                                               | $          | 60,030 |   | $ | 263,667 |   |
| Common stock  issued in lieu of cash for accrued expenses                                                                                                   |       | 111,993                                                |       | —                                                                             |       | 229,636 |   |
| Deferred  offering costs included in accrued expenses                                                                                                       |       | 105,000                                                |       | —                                                                             |       | 105,000 |   |
| Common stock  issued in lieu of cash for loans from officers and directors                                                                                  |       | 10,300                                                 |       | —                                                                             |       | 10,300 |   |
| Prepaid expenses  financed by note payable                                                                                                                  |       | 42,585                                                 |       | 37,312                                                                             |       | 111,022 |   |
| Common stock  issued in lieu of cash for accounts payable                                                                                                   |       | 20,704                                                 |       | —                                                                             |       | 122,291 |   |
| Convertible debt  issued as debt issuance costs related to guarantee of long-term debt  (recorded as a beneficial conversion in Additional paid-in capital) |       | —                                                 |       | 733,334                                                                            |       | 733,334 |   |
| Common stock  issued for deferred offering expenses                                                                                                         |       | —                                                 |       | 22,750                                                                             |       | 91,501 |   |
| 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 |   |
| Proceeds from  sale of furinture and equipment applied to accounts payable                                                                                  |       | —                                                 |       | —                                                                             |       | 2,200 |   |
| Deposits applied  to accrued expenses                                                                                                                       |       | —                                                 |       | —                                                                             |       | 1,076 |   |

 

*See accompanying notes to financial statements.*

 

4

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**ProUroCare Medical Inc.**

**A Development Stage Company**

**Notes to Consolidated FinancialStatements**

 

**September30, 2007 and 2006 and the period from**

**August17, 1999 (inception) to September 30, 2007**

 

(Unaudited)

 

**Note 1. Description of Business and Summary of SignificantAccounting Policies.**

 

***(a)******                                 Descriptionof Business, Development Stage Activities, and Basis of Presentation***

 

ProUroCare Medical Inc. (“ProUroCare,”the “Company, “we” or “us”) is a development stage company that is developingdiagnostic and imaging technology for use in the characterization andmonitoring of prostate cancer. The Company’s developmental activities haveincluded the acquisition of several technology licenses, the development of astrategic business plan and a senior management team, product development andfund raising activities.

 

The Company had noactivities from its incorporation in August 1999 until July 2001, when theCompany issued 3,000,000 shares of common stock to Clinical Network, Inc. (“ClinicalNetwork”) and Clinical Network LLC (“CN LLC”), a related party to ClinicalNetwork. Moreover, in July 2001, the Company acquired a license to certainmicrowave technology by issuing 3,000,000 shares of common stock to CS MedicalTechnologies, LLC (“CS Medical”). In January 2002, the Company acquired alicense to certain imaging technology through the issuance of 3,999,999 sharesto Profile LLC (“Profile”).

 

Pursuant to a mergeragreement effective April 5, 2004 among ProUroCare Inc. (“PUC”), GlobalInternet Communications, Inc. (“Global”) and GIC Acquisition Corp., a whollyowned subsidiary of Global (“GIC”), GIC merged with and into PUC, whichremained as the surviving company and a wholly owned operating subsidiary ofGlobal (the “Merger”). On April 26, 2004, Global changed its name to ProUroCareMedical Inc. In connection with the Merger, Global completed a privateplacement of 2,205,000 shares of common stock (the “Private Placement”)pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended(the “Securities Act”).

 

The accompanyingConsolidated Financial Statements include the accounts of the Company and itswholly owned subsidiary, PUC. Significant inter-company accounts andtransactions have been eliminated in consolidation.

 

***(b)******                                 InterimFinancial Information***

*** ***

Theaccompanying unaudited financial statements have been prepared in accordancewith accounting principles generally accepted in the United States and pursuantto the rules and regulations of the Securities and Exchange Commission (the “SEC”)for interim financial information. Accordingly, certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in 

 

5

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theUnited States have been omitted pursuant to such rules and regulations. Operatingresults for the three and nine month periods ended September 30, 2007 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2007 or any other period. The accompanying Consolidated FinancialStatements and related notes should be read in conjunction with the auditedConsolidated Financial Statements of the Company, and notes thereto, containedin our Annual Report on Form 10-KSB for the year ended December 31, 2006.

 

Thefinancial information furnished reflects, in the opinion of management, alladjustments, consisting of normal recurring accruals, necessary for a fairpresentation of the results of the interim periods presented.

 

***(c)******                                  AccountingEstimates***

*** ***

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of expenses during the reporting periods. The Company’s significantestimates include the determination of the fair value of its common stock,contingent liability expense and the valuation of license rights. Actual valuesand results could differ from those estimates.

 

***(d)******                                 NetLoss Per Common Share***

*** ***

Basic and diluted loss percommon share is computed by dividing net loss by the weighted-average number ofcommon shares outstanding for the reporting period. Dilutive common-equivalentshares have not been included in the computation of diluted net loss per sharebecause their inclusion would be antidilutive. Antidilutive common equivalentshares issuable based on future exercise of stock options or warrants couldpotentially dilute basic loss per common share in subsequent years. All optionsand warrants outstanding were antidilutive for the three and nine month periodsended September 30, 2007 and 2006 and the period from August 17, 1999(inception) to September 30, 2007 since the Company reported net losses forthese periods.

 

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

*** ***

Effective August 17, 1999,the Company adopted the fair value recognition provisions of FinancialAccounting Standards Board (“FASB”) Statement of Financial Accounting Standards(“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), torecord option and warrant issuances, including stock-based employeecompensation. The Company’s policy is to grant stock options at fair value atthe date of grant, and to record the expense at fair value as required by SFAS123, using the Black-Scholes pricing model.

 

Effective January 1, 2006, the Company adopted SFAS No. 123(revised 2004), “Share-Based Payment” (“SFAS 123R”), that focuses primarily onaccounting for transactions in which an entity obtains employee services inshare-based payment transactions. This statement replaced SFAS 123, andsupersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting forStock Issued to Employees.”  SFAS 123Rrequires all companies to expense the fair value of employee stock options andsimilar awards, which has been the Company’s policy to date. Stock-basedemployee and non-employee compensation 

 

6

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cost related to stock options was $53,138, $415,239 and$1,558,368 for the three and nine month periods ended September 30, 2007, andthe period from August 17, 1999 (inception) to September 30, 2007, respectively.The Company estimates the amount of future stock-based compensation expenserelated to currently outstanding options to be approximately $442,198, $35,149,and $1,800 for the years ending December 31, 2007, December 31, 2008 and December31, 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, option pricing models require the input of highly subjectiveassumptions. Because the Company’s employee and consultant stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, the existing models may not necessarily provide a reliablesingle measure of the fair value of the Company’s employee stock options.

 

No options were granted in the three month periodsended September 30, 2007 and 2006. In determining the compensation cost of theoptions granted during nine month periods ended September 30, 2007 and 2006, asspecified by SFAS 123R and SFAS 123, the fair value of each option grant hasbeen estimated on the date of grant using the Black-Scholes pricing model and theweighted average assumptions used in these calculations are summarized asfollows:

 
| ** **                        | ** ** | **Three Months Ended  September 30** | ** ** | **Nine months Ended  September 30** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Risk-free  Interest Rate          |       | N/A                                                 |       | N/A                                                |       | 4.90 | % | 4.74 | % |
| Expected Life of  Options Granted |       | N/A                                                 |       | N/A                                                |       | 4.0 years |   | 2.8 years |   |
| Expected  Volatility              |       | N/A                                                 |       | N/A                                                |       | 133.4 | % | 132.7 | % |
| Expected  Dividend Yield          |       | N/A                                                 |       | N/A                                                |       | 0 |   | 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. For performance based options that vestupon the occurrence of an event, the Company uses an estimate of when the eventwill occur as the vesting period used in the Black-Scholes calculation for eachoption grant. Because of the limited trading history of the Company’s stock,the expected volatility is based on a simple average of daily price data sincethe date of the Merger on April 5, 2004. Based on the lack of history tocalculate a forfeiture rate, the Company has not adjusted the calculated valueof the options. The risk-free rates for the expected terms of the stock optionsand awards are based on the U.S. Treasury yield curve in effect at the time ofgrants.

 

7

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***(f)******                                    Warrants***

*** ***

***In accordance with Emerging Issues Task Force (“EITF”) No. 96-18, “Accountingfor Equity Instruments that are Issued to Other than Employees for Acquiring,or in Conjunction with Selling, Goods and Services” and EITF No. 98-5, “Accountingfor Convertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios,” the Company has elected to utilize thefair-value method of accounting for warrants issued to non-employees asconsideration for goods or services received, including warrants issued tolenders and guarantors of Company debt (see Note 6(c)). The weighted-averagefair value of the warrants granted during the three and nine month periodsended September 30, 2007 was $0.39 and $0.39, respectively, and such warrantswere immediately vested and exercisable on the date of grant.***

*** ***

The fair value of stock warrants is the estimatedpresent value at grant date using the Black-Scholes pricing model with thefollowing weighted average assumptions:

 
| ** **                           | ** ** | **Three Months Ended  September 30** | ** ** | **Nine months Ended  September 30** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Risk-free  Interest Rate             |       | 4.73                                                | %          | 4.60                                               | %          | 4.71 | % | 4.63 | % |
| Expected Life of  Warrants Issued(1) |       | 5.0 years                                           |       | 5.0 years                                          |       | 4.9 years |   | 5.0 years |   |
| Expected  Volatility                 |       | 134.3                                               | %          | 136.9                                              | %          | 135.2 | % | 134.6 | % |
| Expected  Dividend Yield             |       | 0                                                   |       | 0                                                  |       | 0 |   | 0 |   |

 

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(1)The contractual term of the warrants.

 

Becauseof the limited trading history of the Company’s stock, the expected volatilityis based on a simple average of daily price data since the date of the Mergeron April 5, 2004. Based on the lack of history to calculate a forfeiture rate,the Company has not adjusted the calculated value of the options. 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)******                                 GoingConcern***

*** ***

We have incurred operating losses, accumulateddeficit and negative cash flows from operations since inception. As ofSeptember 30, 2007, we had an accumulated deficit of approximately $15,470,000.These factors, among others, raise substantial doubt about our ability tocontinue as a going concern. The accompanying unaudited Consolidated FinancialStatements do not include any adjustments related to recoverability andclassification of asset carrying amounts or the amount and classification ofliabilities that might result should we be unable to continue as a goingconcern.

 

***(i)****                                   **Recent Accounting Pronouncements*

** **

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial** **Liabilities - Including anamendment of FASB Statement No. 115” (“SFAS No. 159”). SFASNo. 159 permits entities to elect to measure many financial instrumentsand certain other items at fair value. Upon adoption of SFAS No. 159, anentity may elect the fair value option for eligible items that exist at theadoption date. Subsequent to the initial adoption, the election of the fairvalue option may only be made at initial 

 

8

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recognitionof the asset or liability or upon a re-measurement event that gives rise tonew-basis accounting. The decision about whether to elect the fair value optionis applied on an instrument-by-instrument basis, is irrevocable and is appliedonly to an entire instrument and not only to specified risks, cash flows orportions of that instrument. SFAS No. 159 does not affect any existingaccounting literature that requires certain assets and liabilities to becarried at fair value nor does it eliminate disclosure requirements included inother accounting standards. SFAS No. 159 is effective for fiscal yearsbeginning after November 15, 2007. The Company is currently evaluating theimpact of adopting SFAS No. 159 on their respective financial position andresults of operations.

 

In July 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in its tax return.FIN 48 also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. FIN 48 iseffective in fiscal years beginning after December 15, 2006. The provisions ofFIN 48 are to be applied to all tax positions upon initial adoption, with thecumulative effect adjustment reported as an adjustment to the opening balanceof retained earnings. The Company adopted FIN 48 as of January 1, 2007, and theadoption had no significant impact on the Consolidated Financial Statements.

 

The following are disclosures made pursuant to theinitial adoption of FIN 48:

 

The Company has adopted the policy of classifyinginterest in interest expense and penalties in general and administrativeexpense. The Company had recorded no accrued interest or penalties as of thedate of adoption.

 

The Company had no significant unrecognized taxbenefits as of January 1, 2007 and, likewise, no significant unrecognized taxbenefits that, if recognized, would affect the effective tax rate. The Company has generated net operating losscarryforwards of approximately $3.0 million which, if not used, will begin toexpire in 2021. Federal and state tax laws impose significant restrictions onthe utilization of net operating loss carryforwards in the event of a change inownership of the Company that constitutes an “ownership change,” as defined bySection 382 of the Internal Revenue Code of 1986, as amended (the “Code”).

 

The Company had no positions for which it deemed thatit is reasonably possible that the total amounts of the unrecognized taxbenefit will significantly increase or decrease within the 12 months of thedate of adoption.

 

The tax years that remain subject to examination bymajor tax jurisdictions currently are:

 

Federal 2004 - 2006 State of Minnesota 2004 - 2006

 

**Note 2. Notes Payable – Bank.**

** **

InFebruary 2006, the Company completed two closings of senior debt financing. Pursuantto the two closings, on February 16, 2006, the Company issued a promissory noteto Crown Bank in the amount of $1,200,000 at an interest rate of the prime rateplus one percent (8.75 percent at September 30, 2007). This promissory notematures on January 11, 2008. On February 28, 2006, the Company issued a secondpromissory note to Crown Bank in the amount of $1,000,000, also at an interestrate of the prime rate plus one percent. This promissory note matures onFebruary 29, 2008. The average 

 

9

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interestrate of the notes was 9.19 percent and 9.23 percent for the three and ninemonth periods ended September 30, 2007, respectively.

 

Thepromissory notes are secured by a pledge of all Company assets, including twotechnology licenses that were assigned to Crown Bank, and were guaranteed byfour accredited individual investors. In consideration for their guarantees,the Company issued 10 percent unsecured convertible subordinated debenturestotaling $733,334 to the four guarantors (see Note 4).

 

OnOctober 15, 2007, the Company repaid $600,000 of the Crown Bank Promissorynotes and on October 31, 2007, renewed the remaining notes to mature inFebruary, 2009 (see Note 9).

 

**Note 3. Notes Payable.**

** **

On June 1, 2006, PUCborrowed $75,000 from an investor, and in connection therewith issued to suchinvestor a promissory note maturing on August 30, 2006. On August 24, 2006, thepromissory note was amended to mature on the first to occur of (1) the Company’sclosing on an aggregate of $1 million of net proceeds under its financingefforts or (2) October 29, 2006. On January 22, 2007, the Company repaid$25,000 of the promissory note. On March 20, 2007, the promissory note wasamended for a second time to extend the due date of the remaining balance untilthe Company closes on an aggregate of $750,000 or more of new financing. Thepromissory note and amendments thereto bear interest at the prime rate (7.75percent as of September 30, 2007). Interest expense related to this noterecorded during the three and nine month periods ended September 30, 2007 was$1,033 and $3,285, respectively. In connection with the promissory note, theCompany issued a five-year warrant (immediately exercisable) to the investor toacquire a total of 37,500 shares of the Company’s common stock at $0.50 pershare. In connection with the amendments, following repayment of the promissorynote, the Company will issue a five-year warrant (immediately exercisable) tothe investor to acquire 417 shares of the Company’s common stock at $0.50 pershare for each day the promissory note is outstanding after August 30, 2006. Duringthe three and nine month periods ended September 30, 2007, the Company expensedas debt extinguishment cost $20,716 and $61,474 related to the accrual of 38,364and 113,841 warrants to be issued pursuant to the terms of the promissory note,respectively. As of September 30, 2007, the Company had accrued for issuancewarrants to acquire 165,549 shares of the Company’s common stock pursuant tothis arrangement.

 

On November 30, 2006, theCompany borrowed $100,000 from Adron Holdings, LLC (“Adron”). In connectiontherewith, the Company issued to Adron an unsecured promissory note that boreinterest of $5,000 per month and was set to mature on January 2, 2007. Underthe terms of the promissory note, the Company issued a five-year warrant(immediately exercisable) to Adron’s partners to acquire 50,000 shares ofCompany common stock at $0.50 per share, and additional five-year warrants(immediately exercisable) to acquire 50,000 shares at $0.50 per share when theloan was not repaid on January 2, 2007 (see Note 6(c)). On March 20, 2007, theCompany amended the promissory note to reduce the interest rate to $2,500 permonth and extend its due date until the first to occur of (1) the Companyclosing on an aggregate of $750,000 or more of additional financing followingthe date of the amendment, or (2) April 30, 2007. In connection with theamendment, the Company issued to Adron’s partners five-year warrants(immediately exercisable) dated February 1, 2007 to acquire 50,000 shares ofCompany common stock at $0.50 per share, and following repayment of thepromissory note, the Company will issue additional five-year warrants(immediately exercisable) to Adron’s partners to acquire 1,667 shares of theCompany’s common stock for each day the promissory note is outstanding on andafter March 1, 2007, at $0.50 per share. On August 8, 2007, the Company furtheramended the promissory note to increase the interest rate to $3,500 per monthbeginning May 1, 2007 and further extend its due date to the first of (1) the 

 

10

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Company’s closing on$750,000 of new financing or (2) September 15, 2007. As of September 30, 2007,the Company had accrued for issuance warrants to acquire 356,738 shares of theCompany’s common stock pursuant to this arrangement. During the three monthperiod ended September 30, 2007, the Company expensed as debt extinguishmentcost $54,611 related to the accrual of 151,697 warrants to be issued pursuantto the terms of the promissory note. During the nine month period endedSeptember 30, 2007, the Company expensed as debt extinguishment cost $146,426related to the issuance of the 50,000 warrants on February 1, 2007 and theaccrued 356,738 warrants to be issued pursuant to the terms of the promissorynote.

 

OnMay 25, 2007, the Company borrowed $42,585 from a commercial lender pursuant toan insurance policy financing agreement. The financing agreement called for tenmonthly installment payments of $4,453 beginning July 1, 2007, with an imputedannual interest rate of 9.85 percent. The proceeds were paid directly to aninsurance company as a prepayment on an insurance policy. Interest expenseduring the three and nine month period ended September 30, 2007 was $1,845 and$2,194, respectively.

 

On July 31, 2007, the Company borrowed $100,000 forshort-term working capital needs from an investor. In consideration, PUCexecuted and delivered to the investor a $100,000 unsecured demand promissorynote. The note bears interest at the prime rate, and is payable on the first to occur of (1) the Company’s closingon $500,000 of new financing or (2) September 15, 2007. Under the terms of thepromissory note, the Company will issue to the investor five-year warrants(immediately exercisable) to acquire 1,000 shares of the Company’s common stockfor each day the promissory note is outstanding (to be prorated if a portion ofthe loan is repaid), at $0.50 per share. During the three month period endedSeptember 30, 2007, the Company accrued for issuance warrants to acquire 62,000shares of the Company’s common stock pursuant to this arrangement. Thewarrants, valued at $24,800 using the Black-Sholes pricing model, were expensedas interest expense.

 

On August 29, 2007, theCompany borrowed $50,000 for short-term working capital needs from an investor.In consideration, PUC executed and delivered to the investor a $50,000unsecured demand promissory note. The note bears interest at the prime rate,and is payable on the first tooccur of (1) the Company’s closing on $500,000 of new financing or (2)September 15, 2007. Under the terms of the promissory note, the Company willissue to the investor five-year warrants (immediately exercisable) to acquire500 shares of the Company’s common stock for each day the promissory note isoutstanding (to be prorated if a portion of the loan is repaid), at $0.50 pershare. During the three month period ended September 30, 2007, the Companyaccrued for issuance warrants to acquire 16,500 shares of the Company’s commonstock pursuant to this arrangement. The warrants, valued at $4,620 using theBlack-Sholes pricing model, were expensed as interest expense.

 

On October 31, 2007, theCompany issued a promissory note for $600,000 in favor of the Phillips W. SmithFamily Trust (the “Smith Trust”) effective as of October 15, 2007. The proceedswere used to retire $600,000 of the Crown Bank promissory notes (see Note 9).

 

OnOctober 31, 2007, the Company borrowed $100,000 for short-term working capitalneeds from Mr. James Davis. In consideration, the Company executed anddelivered to Mr. Davis a $100,000 unsecured demand promissory note (see Note9).

 

**Note 4. Long-TermDebt - Convertible Debentures.**

 

Asconsideration to the four guarantors to provide their guarantees for $2,200,000of Crown Bank promissory notes (see Note 2), the Company issued $733,334 ofunsecured convertible 10 percent 

 

11

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debentures.All of the debentures mature in February 2009, three years from the date ofissue (coincident with the closing dates of the Crown Bank promissory notes asnoted above) and are convertible into Company common stock at a price of $0.30per share. The cost of the debentures was recorded as debt issuance cost and isbeing amortized as interest expense over the term of the underlying bank notepayable. The value of the beneficial conversion feature was computed as thedifference between the fair market value of the shares at the transaction datesand $0.30 per share conversion price, multiplied by the number of conversionshares that would be issued at $0.30 per share (2,444,444 shares). The value socomputed was in excess of the face value of the convertible debentures issued,and was therefore limited to the $733,334 face value of the debentures issued. Thebeneficial conversion feature was recorded as an original issue discount asdefined in EITF No. 98-5 against the convertible debt liability and is beingamortized as interest expense over the term of the convertible debentures.

 

On March 21, 2007, theCompany and the four guarantors agreed to amend the debenture agreements.Under the terms of the revised debentures, each debenture holder agreed toaccept as payment for interest due on the debenture the following:

 

•                  cash paid for interest from inceptionthrough May 31, 2006 (previously paid in 2006);

 

•                  Investment Units, consisting of oneshare of stock and a three-year warrant to acquire 0.5 shares of Company commonstock at $0.25 ($0.50 per share), for interest accrued from June 1, 2006through January 31, 2007, with such accrued interest converted into InvestmentUnits at a price of $0.40 per unit; and

 

•                  cash or Company common stock(converted on the basis of $0.50 per share), at the option of the Company, forinterest accrued from February 1, 2007 through settlement of the debenture.

 

Accordingly, on March 21, 2007, the Company issued atotal of 124,780 shares of its common stock and three-year warrants (immediately exercisable) to acquireup to 62,392 shares of its common stock at $0.50 per share to the fourguarantors. The warrants, valued at $26,829 using the Black-Scholes pricingmodel, were expensed as debt extinguishment costs. Other terms of thedebentures were not changed.

 

As of September 30, 2007, there was $49,300 of accruedinterest that will convert to Company common stock at a price of $0.50 pershare pursuant tothe terms of the amended debenture.

 

**Note 5. Loansfrom Officers and Directors.**

 

***On April 17, 2007, PUC borrowed, for short-term working capital needs,$75,000 from Alexander Nazarenko, a director of the Company. In consideration,PUC executed and delivered to Mr. Nazarenko a $75,000 unsecured demandpromissory note. The note bore interest at an annual rate of prime plus onepercent, and was repaid on May 8, 2007.***

*** ***

***On June 12, 2007, PUC borrowed $5,000 for working capital needs fromDavid Koenig, a director of the Company. The loan bears no interest and is tobe repaid as soon as the Company is able to do so.***

*** ***

***Also on June 12, 2007, PUC borrowed $10,000 for working capital needsfrom Mr. Nazarenko. The loan bore no interest and was to be repaid as soon asthe Company was able to do so. On June 25, 2007, PUC borrowed an additional$27,000 from Mr. Nazarenko for working capital needs. In consideration ofthese two loans, PUC executed and delivered to Mr. Nazarenko a $37,000unsecured demand promissory note. The note bears interest at an annual rate ofprime plus one percent.***

*** ***

***12***

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*** ***

***On July 3, 2007, PUC borrowed an additional $10,000 for working capitalneeds from Mr. Nazarenko. The unsecured loan bears no interest and is to berepaid as soon as the Company is able to do so.***

*** ***

***On July 12, 2007, PUC borrowed for working capital purposes $2,650 inaggregate from four of its directors (Mr. Koenig, Mr. Nazarenko, RichardCarlson and Scott Smith). The unsecured loans bear no interest and are to berepaid as soon as the Company is able to do so.***

*** ***

***On September 10, 2007,***theCompany issued a total of 11,000 shares of its common stock to Mr.Carlson and Mr. Smith as repayment for $3,330 of outstanding loans to theCompany.

*** ***

***On September 28, 2007, PUC borrowed for working capital purposes$15,000 from Mr. Smith and $10,000 from Robert Rudelius, both directors of theCompany. The unsecured loans bear no interest and are to be repaid as soon asthe Company is able to do so.***

*** ***

**Note 6. Shareholders’ Equity.**

** **

***(a)******                                 ******Common Stock***

 

During the nine month period ended September 30, 2007, the Company sold1,250,000 of the Company’s Investment Units at a price of $0.40, with totalproceeds of $500,000. The Investment Units were sold in tranches of 312,500Units each to four investors on January 18, January 23, February 28 and May 1. EachInvestment Unit consists of one share of the Company’s common stock and a3-year warrant (immediately exercisable) to acquire 0.5 shares of the Company’scommon stock for $0.25 ($0.50 per share).

 

On February12, 2007, the Company issued 17,073 shares of common stock to Mr. Smith asrepayment of a $7,000 loan. The per share value of the stock of $0.41 was basedon the last selling price prior to this issuance as reported on theOver-the-Counter Bulletin Board.

 

On March 21, 2007, theCompany and the four guarantors of the Company’s Crown Bank promissory notes(see Note 2) agreed to amend the related debenture agreements. Pursuantto the revised debenture agreements, among other things, the Company issued atotal of 124,780 shares of its common stock to the four guarantors in lieu ofaccrued interest.

 

On April 2, 2007, theCompany issued 41,408 shares of its common stock to a vendor, as paymentfor product development work valued at $20,704.

 

***On September 10, 2007, theCompany issued a total of 206,935 shares of its common stock to its Mr. Smith,Mr. Rudelius, Mr. Nazarenko, Mr. Koenig and former directors as payment for$62,082 of accrued directors’ fees and a total of 11,000 shares of its commonstock to***Mr. Carlson and Mr. Smith as repayment for $3,330of outstanding loans to the Company.

*** ***

***(b)***                                  Stock Options

*** ***

OnFebruary 1, 2007, the Company granted to Mr. Richard Carlson, our ChiefExecutive Officer, a seven-year option to acquire up to 200,000 shares of the Company’s common stock at a price of$0.50 per share. The options were valued at $0.34 per share using theBlack-Scholes pricing model and will be expensed over the vesting period asgeneral and administrative expense. The options will vest according to thefollowing schedule if the enumerated conditions are satisfied:

 

(a)                      50,000 shares vest immediately;

 

(b)                     50,000 shares vest upon the Company’s closing on new equity financingarrangements 

 

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                                    aggregating to $3,000,000 or more afterFebruary 1, 2007 and prior to December 31, 2007. Such new equity financingshall include, in the event of a corporate partnership, the value of servicessupplied to the Company by the partner entity to develop the Company’s productsor obtain regulatory approval of them;

 

(c)                      50,000 shares vest if the Company records gross product revenues of$1,000,000 or more in the Company’s 2008 fiscal year; and

 

(d)                     50,000 shares vest on December 31, 2008.

 

OnJune 14, 2007, the Company issued 30,000 nonqualified stock options to Mr.Rudelius, upon his appointment to the Board of Directors. The options werevalued at $0.59 per share, and vest ratably over a 24-month period through June14, 2009. These options are exercisable at $0.29 per share through May 2013.

 

***(c)***                                   Warrants

*** ***

The warrants identifiedbelow as issued or to be issued were valued using the Black-Scholes pricingmodel. However, the recorded value of warrants issued to lenders and guarantorsof Company debt and recorded as original issue discount is limited to thecorresponding amount loaned or guaranteed (see Note 1(f)).

*** ***

•                  Inconnection with amendments to a $75,000 promissory note originally issued to aninvestor on June 1, 2006, following repayment of the promissory note, theCompany will issue a five-year warrant (immediately exercisable) to theinvestor to acquire 417 shares of the Company’s common stock at $0.50 per sharefor each day the promissory note is outstanding after August 30, 2006 (see Note3). As of September 30, 2007, warrants to acquire 165,549 shares of the Company’scommon stock were accrued for issuance pursuant to this promissory note.

 

•                  Inconnection with the promissory note issued to Adron, on January 2, 2007 theCompany issued to Adron’s partners five-year warrants (immediately exercisable)to acquire 50,000 shares of the Company’s common stock at $0.50 per share (seeNote 3).

 

•                  Inconnection with the March 20, 2007 amendment of the promissory note issued toAdron, the Company issued to Adron’s partners five-year warrants (immediatelyexercisable) dated February 1, 2007 to acquire 50,000 shares of Company commonstock at $0.50 per share, and following repayment of the promissory note issuedto Adron, the Company will issue additional five-year warrants (immediatelyexercisable) to Adron’s partners to acquire a total of 1,667 shares of theCompany’s common stock for each day the promissory note issued to Adron isoutstanding on and after March 1, 2007, at $0.50 per share (see Note 3). As ofSeptember 30, 2007, warrants to acquire 356,738 shares of the Company’s commonstock were accrued for issuance pursuant to this promissory note.

 

•                  OnMarch 14, 2007, upon the termination of employment of an employee, and inconsideration for an agreement to defer payment of accrued salaries until theCompany is able to make such payments (on the same basis as the payment ofdeferred salaries of continuing employees), the Company agreed to extend bythree years the expiration date of 300,000 warrants beneficially held by theemployee. The modification of the warrant resulted in the recording ofincremental compensation cost totaling $96,000, computed as the increase in thefair value of the warrant as determined under the provisions of SFAS 123R overthe fair value so determined immediately before the modification.

 

14

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•                  OnMarch 21, 2007, the Company and four guarantors of the Company’s bank notespayable agreed to amend the related debenture agreements (see Note 2). Pursuantto the revised debenture agreements, among other things, the Company issuedthree-year warrants (immediatelyexercisable) to acquire a total of 62,392 shares of its common stock, inthe aggregate, at $0.50 per share to the four guarantors (see Note 4).

 

•                  On April 16, 2007, the Company issuedto Artann Laboratories Inc. (“Artann”) five-yearwarrants (immediately exercisable) toacquire 200,000 shares of its common stock at $0.41 per share pursuant to anagreement with Artann (see Note 7). Thewarrants were valued at $72,000 by the Black-Sholes pricing model and recordedas research and development expense.

 

•                  On July 31, 2007, the Companyborrowed $100,000 for short-term working capital needs from an investor (see Note 3). During the three month periodended September 30, 2007, the Company accrued for issuance warrants to acquire62,000 shares of the Company’s common stock pursuant to this arrangement. Thewarrants, valued at $24,800 using the Black-Sholes pricing model, were expensedas interest expense.

 

•                  OnAugust 29, 2007, the Company borrowed $50,000 for short-term workingcapital needs from an investor (seeNote 3). During the three month period ended September 30, 2007, the Companyaccrued for issuance warrants to acquire 16,500 shares of the Company’s commonstock pursuant to this arrangement. The warrants, valued at $4,620 using theBlack-Sholes pricing model, were expensed as interest expense.

 

**Note 7. DevelopmentAgreements.**

*** ***

OnMarch 21, 2007, the Company executed an amendment to the Memorandum ofUnderstanding between PUC and Urologix, Inc. dated July 27, 2005 (the “MOU”). Underthe terms of the MOU, the parties were to co-develop new products utilizingProUroCare’s Electrical Impedance Tomography (“EIT”) technology. The EITtechnology was expected to be assembled into modules that would be compatible withand incorporated into Urologix’ existing thermal therapy systems. The projectwas designed into multiple phases of research, testing and development. Thefirst three phases were projected to cost approximately $550,000 over a periodof 18 to 24 months. The Company and Urologix had agreed to equally share in thedevelopment costs of these phases. After completing Phase I in September 2006,it was determined that an assessment of two key project factors will berequired before proceeding with the second development phase. As both of theseissues were outside of the MOU’s original Phase I development definition, theCompany plans to conduct research on both issues at its own expense before adecision is made to move to Phase II of the program. Due to fundinglimitations, the Company has put further development of the EIT technology onhold. Under the terms of the MOU amendment, Urologix agreed to postpone anydecision regarding the continuance of the remaining phases contemplated underthe MOU, while the Company agreed that the assessments described above will bedone and funded solely by the Company. In addition, Urologix has the right toabandon the project for any reason with 5 days’ notice to the Company, and theCompany has the right to abandon the project for any reason by providing 5 days’notice to Urologix.

 

On April 16, 2007, the Company entered into an agreement (the“Cooperation Agreement”) with Artann inwhich the parties agreed to terminate their existing research and developmentAgreement and to use their best efforts to finalize a new development agreementwithin a reasonable period of time. The Cooperation Agreement establishes aplatform for joint cooperation in establishing the new development agreement,which will define a process for the joint development of a next generationprostate mechanical imaging system with enhanced functionalities. TheCooperation 

 

15

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Agreement terminates theresearch and development agreement, and releases each party from allundischarged obligations and liabilities under that agreement.

 

Under the terms of theCooperation Agreement, the Company paid $60,000 in fees originally due toArtann under the research and development agreement, related to submission oftwo patents and associated patent attorney fees. Further, the Company issued toArtann five-year warrants (immediatelyexercisable) to acquire 200,000 shares of its common stock at $0.41 pershare, thus fulfilling another obligation under the research and developmentagreement. The warrants were valued at $72,000 by the Black-Sholes pricingmodel and will be recorded as research and development expense. The Companyalso agreed to pay Artann $35,000 on May 4, 2007, as a first payment for workalready completed under the proposed development agreement. Actual payment ofthis amount was postponed by mutual agreement until the Company completes itscurrent fund raising efforts.

 

**Note 8. EmploymentMatters.**

*** ***

***On May 11, 2007, the Company entered into an agreement with Mr. MauriceTaylor, its former Chief Executive Officer, to defer the payment of his accruedsalary. Under the terms of the agreement, Mr. Taylor will be paid his accruedsalary from 2006 and 2007 totaling $141,017 in installments of $5,000 per monthfrom June 1, 2007 through December 1, 2007, with the $106,017 balance beingpaid prior to December 28, 2007. Mr. Taylor shall have the option, with tendays’ notice, to take up to 100,000 shares of the Company’s common stock inpayment for any or all of the payments based on the current market price on thedue date of the payment. As consideration for his agreement to defer payment ofhis accrued salary, the Company extended the original one-year period that Mr.Taylor may exercise his stock options following his termination of employmentuntil April 1, 2012. The resulting $103,500 change in the fair value of theoptions as determined by the Black-Scholes pricing model was recorded ascompensation expense.***

*** ***

***On May 11, 2007, the Company entered into an agreement with Mr. MichaelGrossman, its former President and Chief Operating Officer, to defer thepayment of his accrued salary. Under the terms of the agreement, Mr. Grossmanwill be paid his accrued salary from 2006 and 2007 totaling $103,990 ininstallments of $4,000 on May 15, 2007, $6,000 on June 1, 2007 and $8,000 permonth from June 1, 2007 through December 1, 2007, with the $45,990 balancebeing paid prior to December 28, 2007. Mr. Grossman shall have the option, withten days’ notice, to take up to 100,000 shares of the Company’s common stock inpayment for any or all of the payments based on the current market price on thedue date of the payment. As consideration for his agreement to defer payment ofhis accrued salary, the Company extended the original one-year period that Mr.Grossman may exercise his stock options following his termination of employmentuntil February 1, 2012. The resulting $117,000 change in the fair value of theoptions as determined by the Black-Scholes pricing model was recorded as compensationexpense. Except in the event of a breach of the agreement, the parties alsoagreed to release and waive each other from all damages, actions, lawsuits orclaims the other party may have arising out of the employment of Mr. Grossmanand the conclusion of that employment.***

*** ***

On July 21, 2007, PUCentered into an employment agreement with its Chief Financial Officer, RichardThon. The agreement extends through June 30, 2009. The agreement provides for aminimum annual salary of $140,000, a cash incentive bonus potential of up to 30percent of Mr. Thon’s base pay and eligibility to participate in an annualgrant of options to purchase shares of common stock, as determined by theCompany’s Board of Directors. The agreement provides for severance payments ifthe Company terminates Mr. Thon without cause or if Mr. Thon terminates theagreement for good reason, including four months of base salary plus one monthof base salary for 

 

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each year of service (up toa maximum of nine months of base salary), payment of earned bonuses, continuedpayment of existing health and life insurance benefits for a period of fourmonths and immediate vesting of all unvested stock options then held by Mr.Thon. In addition, within a one-year period following a “change in control” ofthe Company, upon termination without cause, unacceptable demotion or reductionin responsibilities, or a relocation of more than 100 miles, Mr. Thon willreceive as severance, six months of base salary plus one month of base salaryfor each year of service (up to a maximum of 12 months of base salary), andimmediate vesting of all unvested stock options then held by Mr. Thon. Theagreement prohibits Mr. Thon from directly or indirectly participating in theownership, management, operation or control of a competitive business for aperiod of one year after his employment with the Company terminates.

 

***Note 9. Subsequent Events.***

*** ***

OnOctober 31, 2007, the Company borrowed $100,000 for short-term working capitalneeds from Mr. James Davis. In consideration, the Company executed anddelivered to Mr. Davis a $100,000 unsecured demand promissory note. The notebears interest at the prime rate, and is payable on the first to occur of (1)the Company’s closing on $500,000 of new financing, or (2) November 30, 2007. Underthe terms of the promissory note, the Company will issue to Mr. Davis five-yearwarrants (immediately exercisable) to acquire 1,000 shares of the Company’scommon stock for each day the promissory note is outstanding (to be prorated ifa portion of the loan is repaid), at $0.50 per share.

 

OnOctober 31, 2007, the Company issued a promissory note for $600,000 in favor ofthe Phillips W. Smith Family Trust (the “Smith Trust”) made effective as of October15, 2007. The proceeds were used to retire $600,000 of the Crown Bankpromissory notes (see Note 2). The promissory note issued to the Smith Trustmatures on February 28, 2009, bears interest at 1.0 percent over the prime rateand has a subordinated security interest in all of the Company’s assets.

 

OnOctober 31, 2007, the Company renewed the remaining $1.6 million ofits Crown Bank promissory notes to extend their maturity dates toFebruary 28, 2009 and to eliminate the “on demand” payment clause. The notescontinue to bear interest at 1.0 percent over the prime rate, to be secured byall of the Company’s assets and to be fully guaranteed by Messrs. James Davis,Bruce Culver and William Reiling.

 

Inconnection with the renewal of the Crown Bank notes, and as a condition to theeffectiveness of the terms and conditions of the renewal of the notes, theCompany has agreed to deposit into an escrow with Crown Bank four months worthof future interest payments due under the notes. The Company has further agreedto deposit into escrow with Crown Bank all of the interest due on the notesthrough maturity upon the closing, and out of the net proceeds of, an underwritten public offering of equitysecurities of the Company.

 

Asconsideration to the Smith Trust for lending funds to the Company and to threeremaining guarantors of the Crown Bank promissory notes for extending theirguarantees through February 28, 2009, the Company agreed to issue to them (1)an aggregate amount of 1,222,222 shares of its common stock upon the effectivedate of the renewed Crown Bank promissory notes, (2) an aggregate amount of244,445 shares of its common stock if the Crown Bank Notes and the Smith TrustNote remain outstanding on October 31, 2008, and (3) five-year warrants to acquirea maximum aggregate of 611,113 shares of Company common stock at an exerciseprice of $0.20. The total aggregate number of shares subject to the five yearwarrants will be determined by dividing 366,667 by the per share or unit priceof equity securities offered by the Company in an underwritten public offering(not less than $0.20) minus 1,222,222. The warrants will be issued on theearlier of (i) the date of an underwritten public offering and (ii) October 31,2008, and will be exercisable 

 

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beginningon the one year anniversary of that date. The Company is still determining theaccounting treatment for the loan renewal.

 

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***Item 2.  Management’s Discussionand Analysis or Plan of Operation.***

*** ***

*The accompanying Plan of Operation should be readin conjunction with our audited Consolidated Financial Statements, and notesthereto, for the year ended December 31, 2006 filed with our Annual Report onForm 10-KSB on March 31, 2007.*

 

*Certain statements contained inthis Quarterly Report on Form 10-QSB may be deemed to be forward-lookingstatements as defined by the Private Securities Litigation Reform Act of 1995,and the Company intends that such forward-looking statements be subject to thesafe-harbor created thereby. Suchforward-looking statements relate to, among other things: generaleconomic or industry conditions, nationally and in the physician, urology andmedical device communities in which we intend to do business; our ability toraise capital to fund our 2007 and 2008 working capital needs and launch ourproducts into the marketplace in subsequent years; our ability to complete thedevelopment of our existing and proposed products on a timely basis or at all;legislation or regulatory requirements, including our securing all FDA andother regulatory 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 enforcingbreaches of the same; clinical results not anticipated by management of theCompany; the quality or composition of our products and the strength andreliability of our contract vendors and partners;; changes in accountingprinciples, policies or guidelines; financial or political instability; acts ofwar or terrorism; and other economic, competitive, governmental, regulatory andtechnical factors affecting our operations, proposed products and prices.. We caution that these statements arequalified by important factors that could cause actual results to differmaterially from those reflected by the forward-looking statements containedherein.*

 

**Overview;Product Offerings.**

 

ProUroCare Medical Inc. (“ProUroCare,” the “Company,” “we,” “us” or “our,”which terms include reference to our wholly owned subsidiary, ProUroCare Inc. (“PUC”),is a development stage company that is focused on developing advancedmechanical imaging technology for assessing the size, shape and volume of theprostate by creating a visual image of the prostate gland for use inidentifying and characterizing abnormal lesions or tissue and monitoring theeffects of prostate treatments.

 

The Company’s primaryactivities to date have focused on acquiring technology licenses, establishingintellectual property and working with our partner, Artann Laboratories Inc. (“Artann”)to complete development of the ProUroScanTM prostate imaging system. We haveassembled an experienced management team and identified the necessary clinical,regulatory and reimbursement resources to assist us in moving the product tomarket. Finally, we have aggressively worked to obtain the funding to completedevelopment the ProUroScanand to bring it to market.

 

***Market Focus - Prostate Disease***

 

Our products are focused on prostate disease in men over 40 years ofage. There are two segments of the market that are of interest to the Company:

 

•                  early detection,characterization and monitoring prostate cancer, and

 

•                  improving the abilityof physicians to assess the effectiveness of existing treatments for BenignProstatic Hyperplasia (“BPH”), also known as enlarged prostate.

 

It is estimated that nearly 219,000 men will be diagnosed with and over27,000 men will die of cancer of the prostate in 2007. We believe that thepercentage of men with moderate to severe symptoms from prostate disease (BPHor prostate cancer) who seek screening, diagnosis and treatment will increasein the future as a result of increased awareness of prostate related diseasesand the development of quantitative diagnostic systems (such as our ProUroScansystem). In addition, the number of potential

 

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patients will increase as a result of an aging population and theincreased awareness and standard of living in many other countries around theworld.

 

***ProUroScan Prostate Mechanical Imaging System***

 

Our initial product is the ProUroScan system, an advanced mechanical imaging system that enables physicians to identify and characterize the existence of abnormal prostate tissue, and monitor changes in prostate tissue over time. The ProUroScan system consists of arrays of sensors mounted on a probe, a central processing unit containing proprietary image construction algorithms, a computer with color monitor and keyboard, a color printer and single-use disposable sheaths to cover the tip of the probe. The system’s operation is based on measurement of the stress pattern on the rectal wall when the probe is pressed against the prostate. Temporal and spatial changes in the stress pattern provide information on the elastic structure of the gland and allow two-dimensional and three-dimensional reconstruction of prostate anatomy and assessment of prostate mechanical properties. The data acquired allow the calculation of prostate features such as size, shape, consistency/hardness and nodularity. The prostate image is displayed on a screen that allows physicians to identify the specific location of soft-tissue abnormalities and determine the relative size of the prostate upon completion of the imaging procedure. In addition to the visual display, results are stored electronically.

 

***The Role of the ProUroScan System***

 

We believe the ProUroScan system’s primary uses will be threefold. For patients with preliminary positive screening results for prostate cancer who are in the process of confirming their diagnosis, the system will be used to assist in characterizing the suspicious tissue and thereby could help reduce the number of unnecessary biopsies. For prostate cancer patients who have chosen to forgo surgical treatments and are being followed under active surveillance, the system can be used to create a digital map to objectively define and measure the progression of the disease over time, providing a means to help determine when aggressive intervention is warranted. Finally, for patients who have symptoms of benign prostate hyperplasia (“BPH”), the system could be used to monitor changes in prostate size before and during the course of medical treatments, allowing physicians to more quickly assess the effectiveness of alternative therapeutic approaches.

 

We intend to position the ProUroScan system as an “adjunctive” tool to digital rectal examinations (“DRE”), prostate specific blood antigen (“PSA”) testing. We believe that the ProUroScan system will enable a physician to detect abnormalities in the prostate more accurately than with their finger, and assess areas of the prostate that the physician cannot reach with their finger. Unlike PSA, which uses measurements of the level of a certain antigen in the blood to infer the existence of cancer, the ProUroScan system directly measures the physical presence of abnormal tissue. Using the combined results of DRE, PSA and ProUroScan system tests, the urologist will be able to make a better determination of the need for a prostate biopsy. Furthermore, the color images and three-dimensional visualization of the prostate provided by the ProUroScan system will identify specific regions of the prostate that should be the focus of a biopsy procedure, and thereby potentially reducing the need for repeat biopsies.

 

The ProUroScan system is designed to produce a digital image of the prostate showing the size and symmetry of the prostate and the location of soft-tissue abnormalities within the prostate. Its ability to digitally store not only the test results but all of the individual pressure readings taken during the course of the procedure will facilitate a quantitative analysis of the progression of the disease over time. By comparing the data taken in a baseline examination to subsequent examinations during the course of 

 

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active surveillance, the urologist will gain valuable information about changes in the patient’s condition that can influence their decision to pursue additional treatment or continue surveillance.

 

Use of the ProUroScan system in patients diagnosed with BPH will be beneficial in allowing physicians to monitor changes in the size and volume of the prostate following treatment with drugs or other tissue reducing technologies. Timely, accurate assessment of prostate volume changes and the effectiveness of treatment will enable physicians to recommend alternative treatments sooner than current assessment methods, and thus provide more immediate relief to patients. Importantly, the ProUroScan system is also capable of identifying previously undefined abnormal tissue that may require further analysis to determine if prostate cancer may be present.

 

***Prostate Cancer Screening, Diagnosis and Treatment***

 

The two most common screening tools for identifying prostate cancer, the DRE and the PSA, have been used for several years, but have often been criticized for their lack of specificity and selectivity.

 

The DRE has traditionallybeen used by physicians in early detection efforts, despite a lack of evidencefrom controlled studies showing that the procedure reduces disease specificmortality rates. In a DRE exam, a physician wearing a latex glove inserts alubricated finger into the rectum to palpate the prostate gland to detectabnormalities. The clinician must rely on his or her experience and sensitivityof touch to estimate the size of the prostate and detect irregularities inshape or hardness. There is significant subjectivity inherent in the DRE exam whichcan be negatively affected by poor examiner training, experience or an abilityto interpret the results, as well as other patient related limitationsincluding excessive obesity, patient discomfort and unusual anatomicalpositioning of the prostate.

 

Data from community-basedstudies indicate that the positive predictive value of a DRE in detectingcancer is 15% to 30% and varies relatively little with age. In anotherScandinavian study, the positive predictive value of DRE was found to be only22% - 29%. A leading urology textbook summed up the value of DRE testing bystating “DRE is a test with only fair reproducibility in the hands ofexperienced examiners (Smith and Catalona, 1995) that misses a substantialproportion of cancers and detects most cancers at a more advanced pathologicstage, when treatment is less likely to be effective.”(1)

 

A newer approach fordetecting prostate cancer is the measurement of prostate specific antigen (PSA)in serum. The primary value of PSA testing comes from its simplicity,objectivity, reproducibility, its low level of invasiveness and overall cost. AlthoughPSA is specific to prostate tissue, it is not specific only for prostate cancer.Older men that have benign enlargement of the prostate and acute prostatitis oftenhave elevated PSA levels. Serum levels of PSA can also be elevated for a periodof time after transrectal needle biopsy, acute urinary retention and prostatesurgery. Because of the prevalence of these conditions in men over the age of50, the specificity of PSA measurements decreases with age.

 

In clinical practice, anelevated PSA level greater than 4ng/mL is generally considered an abnormalresult. Values in excess of 4ng/mL increases the odds of intracapsular tumorsby as much as threefold and the odds of extra capsular tumors by threefold tofivefold. Recent community-based studies show that an abnormal PSA (< than4ng/mL) has been seen in about 15% of men who are older than 50 years of age. Theprobability that a man who is older than 50 having prostate cancer if his PSAlevel is elevated (positive predictive value) is approximately 20% to 30%. However,the likelihood of cancer depends on the degree of elevation in the PSA levels. Forlevels between 4 and 10ng/mL, the positive 

 

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(1) Campbell’s Urology,Eighth Edition, p3063.

 

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predictive value is about20%. This value increases to between 42% and 64% if the PSA level is greaterthan 10ng/nL. Despite these variances, PSA testing has increased the detectionrate of early-stage cancers, which are more curable than late-stage cancers.

 

Most clinicians haveadopted the strategy of performing both tests in combination, which has beenshown to increase the combined predictive value. In fact, in a large study ofvolunteers, the combination of DRE and PSA detected 26% more cancers than PSAalone. However, because of the significant risk of prostate cancer, prostatebiopsy is recommended for all men who have DRE abnormalities, regardless of PSAlevel, because 25% of men with cancer have PSA levels less than 4mg/nL.

 

A patient with a positive DRE or PSA is typically referred to a urologist for further diagnosis, who will usually perform a prostate biopsy to obtain tissue samples for microscopic analysis. The prostate is biopsied by a needle that is guided by ultrasound into the prostate through the rectal wall. Since the existence and exact location of possible cancerous tissue is not known, the urologist will usually take 10 to 14 samples in a scattered pattern throughout the prostate in an attempt to find the suspect tissue. The tissue samples are then sent to a laboratory for analysis and interpretation, and the results are reported several days later. If the results are negative or indeterminate, the urologist may suggest a second biopsy procedure, or that the patient increase the frequency of future screening examinations. Approximately 1 million patients are biopsied each year in the United States, but only 25 percent of biopsy procedures performed detect the presence of cancer.

 

The treatment path for patients who test positive for prostate cancer depends on many variables, including age, location and pathology of the cancerous tissue and general health of the patient. Generally, a younger, otherwise healthy patient will elect to have the prostate removed to eliminate the possibility that it might spread beyond the prostate. Older, less healthy patients may elect not to undergo surgery, and instead monitor the disease closely by semi-annual PSA and DRE exams, and annual biopsies. This monitoring regimen is commonly referred to as “active surveillance.”  Some patients may elect radiation or drug treatments, in addition to necessary ongoing active surveillance. Approximately 219,000 men in the United States will be diagnosed with prostate cancer in 2007 and there are approximately 2 million men alive who have a history of cancer of the prostate. On this basis, we estimate that the number of men over the last decade that have elected against prostate removal and thus are undergoing ongoing active surveillance exceeds one million.

 

***Detailed ProUroScan System Description and Operation***

 

The ProUroScan system consists of arrays of pressure sensors mounted on a probe, a central processing unit containing proprietary image construction algorithms, a computer with color monitor and keyboard, a color printer and single-use disposable sheaths to cover the tip of the probe. The ProUroScansystem’s probe is specially designed for the rectal anatomy to minimize patient discomfort. It is ergonomic for the clinician and similar to a traditional DRE for the patient. The probe utilizes highly sensitive pressure sensors located on the face of the probe head to palpate the prostate. The probe’s positioning system ensures that the person administering the test examines the entire surface of the prostate, and assists prostate image construction.

 

To perform a test, the clinician must first place a single-use disposable sheath over the probe head and shaft and cover it with a lubricant. The clinician then inserts the tip of the probe into the patient’s rectum and palpates the prostate. As the prostate is palpated, a color image of the prostate is produced and displayed on the computer monitor, along with indicators of the amount of pressure being applied to help guide the clinician. Differences in tissue stiffness and elasticity will be depicted in real time on a color monitor. Total testing time for a healthy prostate is under one minute.

 

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Standardizing the procedure using the ProUroScan system mechanical imaging device should minimize the differences in skill levels between physicians in this otherwise subjective procedure. We expect the system will be more sensitive and have the ability to detect abnormalities that the normal human finger cannot detect, thereby improving the quality of the diagnostic process. It should also enable physicians to literally see the differences in tissue elasticity or stiffness on the color monitor, as opposed to a traditional DRE that and relies exclusively on the clinician’s sense of touch. The system will create a hard copy of the prostate diagnostic procedure which can be placed into the patient’s file, and a digital record of the exam that can be stored and used for comparison to subsequent exams. This is advantageous for physicians and patients in that it gives them the ability to compare and contrast the patient’s results from exam to exam, and to get second opinions on the patient’s status in regards to the diagnosis without an additional exam. Comparisons of multiple tests over time can also be done providing longitudinal assessments of the patient’s disease.

 

We believe the ProUroScan system will be truly unique in the market. The closest comparison in terms of imaging capability is to an examination using a transrectal ultrasound (“TRUS”) device. TRUS is a test that uses a rectal probe and sound wave echoes to create an image of the prostate gland, thus allowing visual inspection for abnormal conditions. Although well established as a highly accurate test, TRUS is used primarily as a guide for prostate biopsies, and is seldom used as a screening test due to its expense and difficulty to interpret. The ProUroScan system uses mechanical imaging rather than sound wave echoes, has a smaller rectal probe and can be performed in less than one minute. We believe the overall cost of the ProUroScan system will be much lower than TRUS, providing expanded access to testing and follow-up monitoring. The results of the ProUroScan system test are displayed in color, making the results of the diagnostic test easier to interpret.

 

***Current ProUroScan System Status and Future Development***

 

The ProUroScan system is currently in the late stages of product development. The design specifications are nearly finalized and performance characteristics are generally known. Further development work in the areas of positioning system refinement, software, validation, user interface and sensor production, among others, must be completed before the system can be submitted to the FDA for 510(k) concurrence or commercialized. It is anticipated that, once sufficient financing is obtained to undertake such work, an additional five to six months will be needed to complete the remaining development tasks leading to the production of clinical study units. As discussed below, the clinical study units will be used to conduct the clinical trials necessary to obtain FDA market clearance.

 

We believe that the existing technology platform is robust and provides a platform on which to develop multiple future generation systems. The first generation system will provide an overall assessment of the prostate resulting in a map or record of the pressures that are generated from an assessment of the posterior surface of the prostate using the current sensor probe. We believe that a second generation system will be capable of identifying the specific 3-dimensional location of lesions found in the prostate. We believe that this system will also be able to create a three-dimensional image of the position of the lesions and allow the physician to rotate the image to assist in identifying the actual position of the lesion in the prostate gland. We believe that this second generation system will provide a more thorough diagnosis of the patient’s condition. Future generations of the ProUroScan system may include the capability of guiding biopsies to suspected cancer sites, at a lower cost than current ultrasound approaches.

 

The ProUroScan system prototype has been validated in laboratory experiments on prostate models and in a pre-clinical study. The system has been used for more than two years and on more than 168 patients at the Robert Wood Johnson Medical Center in New Brunswick, New Jersey.

 

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***System Development History and Development Partners***

 

The ProUroScan system is based on work originally performed in the late 1990’s by Artann and ArMed LLC. In 2001, we licensed the rights to this technology, and have worked with Artann and our other technology-based partners to complete its development. Artann is an innovative technology portfolio holding company with the mission of early stage development and validation of original technologies and devices. The value of Artann’s research has been recognized by the support of the Small Business Innovation Research grants from various federal agencies. Artann is the recipient of over 30 grant and contract awards from the National Aeronautics and Space Administration, the Department of Defense and from the various institutes of the National Institutes of Health (including a recent $3 million grant to commercialize the ProUroScan system described below).

 

Much of the ProUroScan system’s development to date has been accomplished under two development agreements between the Company and Artann. Under the first agreement, the “Development Agreement,” Artann developed two working, pre-clinical ProUroScan systems. These development-level systems were delivered to us in November 2004. Artann was paid $180,000 for this 2004 development work.

 

Under the second agreement, the “Research and Development Agreement,” Artann was named a research and development partner to the Company, supporting the further development of the ProUroScan system and other to-be-determined technologies in the urologic field. Any intellectual property and know-how resulting from the advancement of the ProUroScan system under the Research and Development Agreement was to be assigned to the Company. For its role, Artann was to receive a total of $250,000 (plus incentives as explained below) payable upon certain milestone events. A payment of $50,000 was made to Artann upon the execution of the Research and Development Agreement in July 2004. In December 2004, the Company paid Artann $110,000 following the shipment of the ProUroScan system prototypes in accordance with the Development Agreement (including a $10,000 bonus for delivery of the systems ahead of schedule).

 

In March 2006, we engaged Devicix, LLC of Chaska, Minnesota, a firm that provides electrical, mechanical and biomedical and software engineering services to early-stage medical device companies. We expect this firm will assist us and Artann in transferring technology from research and development to clinical study status, place design documentation under an FDA compliant quality control system, complete the design documentation required to submit an FDA request for product clearance, perform verification and validation testing including certification of safety related testing standards and develop quality control processes for transfer to manufacturing.

 

In September 2006, Artann was awarded a Small Business Innovation Research Phase II Competitive Renewal grant from the National Cancer Institute. The aim of the grant is to help commercialize our ProUroScan system. The three-year grant will provide up to $3 million for development of the ProUroScan system, effective September 29, 2006. It is our intent to work with Artann under this grant, and to expand our working relationship with Artann to include their participation in the development and commercialization of future generations of the ProUroScan system.

 

On April 16, 2007, we entered into the Cooperation Agreement with Artann in which the parties agreed to terminate their existing Research and Development Agreement and to use their best efforts to finalize a new development agreement within a reasonable period of time. The Cooperation Agreement establishes a platform for joint cooperation in establishing the new development agreement, which will define a process for the joint development of a next generation prostate mechanical imaging system with enhanced functionalities. The Cooperation Agreement terminates the Research and Development 

 

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Agreement, and releases each party from all undischarged obligations and liabilities under that agreement.

 

Under the terms of the Cooperation Agreement, the Company paid the $60,000 in fees originally due to Artann under the Research and Development Agreement, related to submission of two patents and associated patent attorney fees. Further, the Company issued to Artann five-year warrants (immediately exercisable) to acquire 200,000 shares of its common stock at $0.41 per share, thus fulfilling another obligation under the Research and Development Agreement. The Company also agreed to pay Artann $35,000 in May 2007, as a first payment for work already completed under the proposed development agreement. Actual payment of this amount was postponed by mutual agreement until the Company completes its current fund raising efforts.

 

***Regulatory Issues***

 

We are currently in the process of developing a series of labeling claims reflecting the current needs of the market and the capabilities of the ProUroScan system. We are attempting to create a regulatory strategy that will enable us to begin marketing a basic system and then expand the labeling claims to incorporate more sophisticated features and functionalities as they are developed and validated in clinical studies. This approach is intended to minimize the time it will take to obtain initial FDA clearance and allow us to begin commercializing an operational system sooner. Having systems in place will also be important in assessing future enhancements while physicians are using the cleared device in actual clinical practice.

 

Although the initial FDA claim has yet to be finalized, the content of the claim will likely be limited to the ProUroScan system’s ability to produce a surface map or a record of tissue elasticity measurements taken from the prostate to aid in documenting the size, shape and volume of the prostate, while also identifying palpable lesions. Based on the scope of the claim and the input received from consultants and clinical study sites, we believe the initial ProUroScan system can be submitted to the FDA for market clearance under a 510(k) application, or be evaluated under the FDA’s de novo process. When system development has been completed, we will begin placing ProUroScan systems in a select number of major medical centers to screen patients and collect data for the FDA submission. It is anticipated that the FDA clinical studies will require approximately three months to complete, and that an additional month will be needed to analyze the data and prepare a formal submission to the FDA. Centers participating in the study will be required to obtain approval from an internal Institutional Review Board (“IRB”) to protect the rights and welfare of all participants and to satisfy FDA requirements for what we believe will be a non-significant risk study. IRB approval has been granted for the first ProUroScan system studies at the Veteran’s Administration Medical Center in Minneapolis, Minnesota and at the Robert Wood Johnson University Hospital in New Brunswick, New Jersey.

 

The actual number of patients that will be studied and the specific clinical protocol that will be followed will be significantly determined at a pre-Investigational Device Exemption meeting that we anticipate having with the FDA in early 2008, prior to conducting clinical trials. At that meeting, we will present information about the product and all relevant laboratory testing data. We will also propose a strategy for validating our labeling claim and will present a clinical protocol that all investigative centers will be expected to follow, with the goal being to obtain enough clinical data to have sufficient confidence that the ProUroScan system will perform as defined in the product labeling.

 

Assuming the path outlined above is acceptable to the FDA, of which no assurance can be given, we expect to make a formal submission to the FDA shortly after completion of the clinical study. Published FDA statistics from 2004 (the most recent available) indicate that the average total time from receipt of a 

 

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510(k) application to final action (not including the time a submission is on hold pending receipt of additional information) is 100 days, with 65 percent completed within 90 days. Based on this data, assuming that the results of the clinical trials pose no unanticipated problems, we expect to receive FDA concurrence within 90 to 180 days after the 510(k) application is filed. Such concurrence will allow us to begin active marketing of the ProUroScan system within the United States. However, times can be longer and the de novo process, if we are required to use it, also adds time to the review process.

 

As new and more enhanced product features are developed, we plan to file additional submissions with the FDA and to obtain expanded labeling claims. Depending on the exact nature of these claims, the approval process may require more extensive clinical studies and possibly a full pre-market approval (“PMA”) application. Such an application will likely take significantly more time and be more comprehensive than the 510(k) approval process.

 

In addition to the FDA submission, we expect to satisfy requirements for a Conformité Européene (“CE”) mark, a mark displayed prominently on products indicating compliance with the regulatory directives of the European Union. The CE mark is required to market medical products within the European Union. We will utilize the services of a notified body such as Technischen Überwachungsvereine or Technical Inspections Organizations (“TÜV”), a German company that specializes in assessing conformity with the regulatory directives of the European Union, an assessment that will be a prerequisite to CE marking of the products. It is believed the CE mark conformity assessment process will be similar in duration to the FDA 510(k) process, or approximately six months.

 

***Continuing Revenue Stream; Third-Party Reimbursement***

 

We anticipate that the majority of our revenue generated by the ProUroScan system will come from the consumption of proprietary disposable sheaths and probe tips consumed in the testing process. Revenues also will be generated from the sales and leases of the ProUroScan systems themselves. The ProUroScan systems likely will be placed in clinics under a variety of programs, including outright sales, operating leases, financing leases or placements paid for by premiums paid on the usage of the system.

 

We expect that providers will not initially be able to bill for the ProUroScan system procedure using a unique, currently existing Current Procedural Terminology (“CPT”) code. Providers will be able to bill for it using a miscellaneous CPT code, however. Claims submitted under a miscellaneous code are processed manually and are to include a special report to be used in determining the medical appropriateness of the procedure.

 

In order to apply for a new, unique code, an application must be submitted to the American Medical Association’s (“AMA”) CPT Editorial Panel. The process of obtaining a new CPT code typically takes 14 months to three years. Once a new CPT code is created, the AMA’s Relative Value Scale Update Committee (“RUC”) recommends relative value units (“RVUs”) for it. The Centers for Medicare and Medicaid Services (“CMS”) then takes these recommendations into account when establishing the Medicare Physician Fee Schedule. The amount of reimbursement the provider receives depends on the RVUs assigned to the procedure multiplied by a conversion factor. Most private payers also base their payment rates based on the RVUs adopted by CMS.

 

Third-party payers, such as insurance companies or the government, decide whether to cover procedures such as the ProUroScansystem procedure. Medicare has limited coverage of prostate cancer screening tests and does not pay for items and services that are not reasonable and necessary for the diagnosis or treatment of illness or injury. If the provider expects that Medicare will not cover the procedure for a 

 

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Medicare beneficiary, he or she may collect from the beneficiary if an Advance Beneficiary Notice (“ABN”) is obtained before furnishing the procedure.

 

Initially, we anticipate using a “patient pay model” for physicians to receive payment for performing the ProUroScan system procedure. Under a patient pay model, in the absence of coverage from their health insurance, patients who perceive sufficient value in a procedure agree to pay for the test out of their own funds. This approach was recommended by our reimbursement consultant based on the perceived value of the test, particularly for patients that have an abnormal DRE or PSA value. Only one in four biopsies performed based on an abnormal PSA reading reveal prostate cancer, and only 50 percent of suspicious lesions found by DRE presented cancer on prostate biopsy. Given these statistics, in cases where patients have abnormal DRE or PSA test results or when a test result may not be clear, there is a high incentive to seek additional diagnostic inputs so that patients can make an informed and reasonable decision for themselves and their family. We believe that a sufficient number of patients will be willing to pay for the ProUroScan system procedure out of their personal funds to support the launch of our product in advance of receiving favorable coverage decisions from third-party insurers. The concept of a patient pay model has been used successfully for a few other procedures (e.g., Computer-aided detection (CAD) for mammography) and we expect this to be our approach for generating revenues during at least the early phases of product rollout. As described above, providers also will be able to bill under a “miscellaneous CPT code” until a unique CPT code is created for the ProUroScan system procedure.

 

***Other Technology***

 

Electrical Impedance Tomography (“EIT”) Technology

 

In addition to our ProUroScan technology, we have pursued and licensed rights for other urologic applications. Specifically, we have licensed rights for Electrical Impedance Tomography (“EIT”) technology from the Rensselaer Polytechnic Institute (“RPI”) for use in an imaging technology that measures conductivity or resistively in the body during thermal or cryotherapy applications. Our first product was to be jointly developed by ProUroCare and Urologix, Inc. (“Urologix”) pursuant to a July 2005 agreement. The parties expected the joint development project to involve several phases of research, testing and development, for which they would share equally in the costs of the work performed. After completing Phase I of the development program in September 2006, it was determined that an assessment of certain key factors affecting the compatibility of our EIT technology with Urologix’ equipment would be required before proceeding with Phase II.

 

On March 20, 2007, we executed an amendment to the Urologix agreement to postpone any decision regarding the continuance of the remaining phases contemplated under the agreement, and gave each party the right to abandon the project for any reason with 5 days’ notice to the other. We plan to conduct research related to the compatibility issues if and when sufficient funding becomes available before a decision is made to move to Phase II of the program.

 

Given the delay in the project, we have temporarily suspended payment of the minimum licensing fees required by the RPI license agreement to maintain exclusive rights to the technology. We do retain non-exclusive rights, and RPI has agreed to reinstate the exclusivity of the license upon our payment of all licensing fees due. Also, under the terms of the license, as amended in July 2005, the license terminates if no licensed product is available for sale by July 13, 2009. We believe that due to the additional project work required it is unlikely this deadline will be achieved. Although we believe that we will be able to successfully negotiate an extension of this deadline with RPI, we cannot give assurance of this. If we are unsuccessful in obtaining sufficient funds to continue development of this technology, resolving the key 

 

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project factors noted above, or negotiating an extension of the RPI license, the development efforts with Urologix may be terminated, and we may abandon the EIT technology.

 

Directed Microwave ThermalTherapy

 

We have also licensedtechnology that may be used in the future to develop a focused-beam microwavearray to enhance current microwave-based thermal therapy treatments forenlarged prostates. Once successfully developed, the technology should enablethe physician to selectively treat an area of the prostate, and spare healthytissue, helping to avoid damaging the rectal wall and adjacent organs. We arenot actively developing this technology due to resource constraints, and ourdecision to pursue development in the future will depend on several factors,including the availability of funding and an evaluation of the market potentialof such a product at that time.

 

***Assets; Property Acquisitions and Dispositions***

 

Our primary assets are licenses, other keyintellectual property rights and cash, which are the foundation for ourproposed product offerings. These assets****are pledged tosecure a senior bank note and also to secure a note issued to an investor inthe amount of $600,000 and, as a result, are not available to secure othersenior debt financing. We anticipatepurchasing approximately $135,000 of computer equipment, development tools andmolds, software and production tooling during the next 12 months. We do notanticipate selling any significant equipment or other assets in the near term.

 

***Current Operations – Employees and Expenses***

 

We currently employ only two employees. We conductour research and development, market research, regulatory and other businessoperations through the use of a variety of consultants and medical devicedevelopment contractors. We believe that using consultants and contractors toperform these functions is more cost effective than hiring full-time employeesand affords us flexibility in directing our resources during our developmentstage. As we prepare for submission to the FDA and market launch of ourProUroScan system, over the next 12 months we expect to hire approximately 10employees in the areas of engineering, regulatory compliance, marketing andquality control. During the next 12 months, we expect to complete thedevelopment of clinical ProUroScan systems, conduct clinical trials and file a510(k) submission with the FDA, begin the CE mark registration process in theEuropean Union, and establish strategic marketing and contract manufacturingrelationships in anticipation of regulatory clearance to enter the market.

 

We incur ongoing expenses that are directly relatedto being a publicly traded company, including professional audit and legalfees, financial printing, press releases and transfer agent fees. We currentlyoccupy temporary offices within the office of a Company director, for which weaccrue rent on a month-to-month basis of approximately $2,200 per month. Thedirector has informally agreed to defer payment of this rent until the Companyreceives significant funding. Upon successful completion of our current fundingefforts, we expect to relocate to permanent offices of approximately 2,000square feet. Other expenses incurred include executive officer compensation,expensing of stock options, travel, insurance, telephone, supplies and othermiscellaneous expenses. In the next 12 months, the Company anticipates that itwill spend approximately $1.4 million in marketing and administrative expenses.Of these, the Company expects that approximately $500,000 will be forcompensation, benefits and payroll taxes, and approximately $180,000 will befor consulting costs.

 

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The Company anticipates that it will spend between$1.9 and $2.0 million on research and product development of the ProUroScansystem over the next 12 months. Of this amount, approximately $1.2 million willbe spent on manufacturing, engineering, validation and documentation efforts ona contracted basis with our development partners, including Artann, ascientific technology company focused on early-stage technology development. Muchof the ProUroScan system’s development to date has been accomplished under twodevelopment agreements between the Company and Artann. We anticipate enteringinto a joint development agreement with Artann in 2007. Although the terms ofthat agreement have not been finalized, based on preliminary discussions withArtann we estimate fees paid to Artann over the next twelve months under thatagreement will range between $750,000 and $900,000. Clinical trials and thefiling of the 510(k) application with the FDA are expected to cost between$250,000 and $300,000. ProUroScan systems created for development and clinicaluse are expected to cost the Company between $200,000 and $250,000. Internalsalaries, benefits and miscellaneous departmental expenses for software andhardware development, regulatory work and project management are estimated tocost between $400,000 and $425,000.

 

***Financing Plan***

 

We do not have sufficient funds to complete thedevelopment of our products and gain approval of them from the FDA. As ofSeptember 30, 2007, we had only approximately $12,000 cash on hand and currentliabilities exceeding $3.8 million. We are taking several measures to addressour funding needs:

 

•             For the pastseveral months, we have been funded by loans from several private investors andmembers of our board of directors. We have conserved cash by reducing executiveheadcount, substantially reducing development work on the ProUroScan system,and delaying vendor payments. Significantly, since June 2006 the Company hasdeferred the majority of our remaining executive team’s compensation, which weexpect to pay out of the proceeds of this offering and the proceeds of a PublicOffering.

 

•             On October 15,2007, we borrowed $600,000 from the Smith Trust pursuant to a long-termpromissory note that matures on February 28, 2009, and used the proceeds toretire $600,000 of the $2.2 million of outstanding balance on our short-termnotes with Crown Bank.

 

•             We have renewed theremaining $1,600,000 Crown Bank short-term notes to extend their maturity untilFebruary 28, 2009 effective upon our funding of an escrow account holding fourmonths of interest payments concurrent with the first closing of this offering.

 

•             We are in negotiations with an investmentbanker to initiate a public equity offering in the range of $4.0 to $6.0million during the fourth quarter of 2007 and first quarter of 2008. However,if these negotiations or the proposed public equity offering are unsuccessfulor fall short of their funding goals, or are significantly delayed for anyreason, or if our product development efforts experience significant unforeseendelays, we may not have sufficient funds to complete these objectives, and willrequire additional financing.

 

•             We are in contactwith medical device companies that may be interested in marketing products inthe prostate cancer detection market. Conversations are in the early stageswith at least two such companies. In addition to financial support, asuccessful collaboration with such a company would allow us to gain access todown stream marketing, manufacturing, and sales support.

 

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Even if successful in reaching our immediate fundinggoals, we expect to pursue additional rounds of funding at the conclusion ofthe FDA review of the ProUroScansystem to provide the workingcapital needed to fund a significant commercial launch into the urology market.If additional funds are raised by the issuance of convertible debt or equitysecurities, such as the issuance of stock, the issuance and exercise ofwarrants, the issuance and conversion of convertible debentures, then existingshareholders will experience dilution in their ownership interest. Ifadditional funds are raised by the issuance of debt or certain equityinstruments, we may become subject to certain operational limitations, and suchsecurities may have rights senior to those of our existing holders of commonstock.

 

If adequate funds are not available through theseinitiatives on a timely basis, or are not available on acceptable terms, we maybe unable to fund expansion, or to develop or enhance our products. If we areforced to slow our development programs, or put them on hold, it would delayregulatory approvals needed, and thus delay market entry for our products. Ultimately,if no additional financing is obtained beyond what has been secured to date, wecould potentially be forced to cease operations. See “Risk Factors” beginningon page 31.

 

***Going Concern***

 

We have incurred operating losses, accumulateddeficit and negative cash flows from operations since inception. As ofSeptember 30, 2007, we had an accumulated deficit of approximately $15,470,000.These factors, among others, raise substantial doubt about our ability tocontinue as a going concern. Our Consolidated Financial Statements included inthis memorandum do not include any adjustments related to recoverability andclassification of asset carrying amounts or the amount and classification ofliabilities that might result should we be unable to continue as a goingconcern.

 

For a further description of our business, see our AnnualReport on Form 10-KSB for the year ended December 31, 2006.

 

***Critical Accounting Estimates***

** **

Our critical accountingpolicies are those (i) having the most impact on the reporting of our financialcondition and results, and (ii) requiring significant judgments andestimates. Due to the nature of our current operations, we do not believe wehave any critical policies or procedures.

 

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**IMPORTANTNOTICES TO INVESTORS; SAFE HARBOR STATEMENT**

 

Statementsin this Quarterly Report on Form 10-QSB that are not purely historical are, andshould be deemed, forward-looking statements. These statements with respect tothe goals, plan objectives, intentions, expectations, financial condition,results of operations, future performance and business of our Company, include,without limitation: (i) our ability to successfully complete all clinicaltrials and commercial development of our products and secure all necessaryfederal and other regulatory approvals to introduce and market our products inthe United States and world-wide; (ii) our ability to fund our working capitalneeds over the next 12 to 24 months and until we generate sufficient ongoing revenuefrom our products; (iii) our ability to successfully introduce, market and sellour products into the medical device markets; and (iv) all statements precededby, followed by or that include the words “may,” “would,” “could,” “should,” “expect,”“project,” “anticipate,” “believe,” “estimate,” “plan,” “intend,” “target” orsimilar expressions.

 

Forward-lookingstatements involve inherent risks and uncertainties, and important factors(many of which are beyond our control) that could cause actual results todiffer materially from those set forth in the forward-looking statements,including the following: 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 2007 and 2008 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 all FDA and other regulatory approvals on a timely basis, or atall, prior to being able to market and sell our products in the United States;competition from larger and more well established medical device companies andother competitors; the development of products that may be superior to theproducts offered by us; securing and protecting our intellectual property andassets and enforcing breaches of the same; clinical results not anticipated bymanagement of the Company; the quality or composition of our products and thestrength and reliability of our contract vendors and partners; changes inaccounting principles, policies or guidelines; financial or politicalinstability; acts of war or terrorism; and other economic, competitive,governmental, regulatory and technical factors affecting our operations,proposed products and prices.

 

Accordingly,investors and shareholders are cautioned to appreciate that results actuallyachieved may differ materially from expected results in these statements. Forward-lookingstatements speak only as of the date they are made. We do not undertake, andspecifically disclaim, any obligation to update any forward-looking statementsto reflect events or circumstances occurring after the date of such statements.

 

**RISK FACTORS**

** **

**As adevelopment stage company, we have no operating history and our business planhas not yet been fully tested. We anticipate incurring future losses until ourproducts are completed, regulatory approval is secured and our products areintroduced into the United States and worldwide markets.**

 

The Company, conducting business through ourwholly-owned subsidiary, ProUroCare Inc., is a development-stage company. Wehave yet to commence active operations or manufacture or sell any productsassociated with the proprietary urology-based imaging and therapeutictechnologies that we intend to market. We have no prior operating history fromwhich to evaluate our success, or our likelihood of success, in operating ourbusiness, generating any revenues or achieving profitability. As of September2007, we have generated no revenue and have recorded losses of approximately$15.5 million. 

 

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We are proposing to enter the highly competitiveurology-based imaging and therapeutic industries. There can be no assurancethat our plans for developing and marketing our urology-based products will besuccessful, or that we will ever attain significant sales or profitability. Weanticipate that we will incur losses in the near future.

 

**We arecurrently in need of financing and will need additional financing during 2007and 2008, and any such financing will likely be dilutive to our existingshareholders.**

 

We do not currently have sufficient funds tocomplete the development of our products and gain approval of them from the FDA.As of September 30, 2007, we had only approximately $12,000 cash on hand and currentliabilities exceeding $3.8 million. We are taking several measures to addressour funding needs:

 

•                  For the pastseveral months, we have been funded by loans from several private investors andmembers of our board of directors. We have conserved cash by reducing executiveheadcount, substantially reducing development work on the ProUroScan system,and delaying vendor payments. Significantly, our remaining executive team hashad most of their compensation deferred until the fund raising process iscomplete.

 

•                  On October 15,2007, we borrowed $600,000 from the Phillips W. Smith Family Trust pursuant toa long-term promissory note that matures on February 28, 2009, and used theproceeds to retire $600,000 of the $2.2 million of outstanding balance on ourshort-term notes with Crown Bank.

 

•                  We have renewed theremaining $1,600,000 Crown Bank short-term notes to extend their maturity untilFebruary 28, 2009 effective upon our funding of an escrow account holding fourmonths escrow of interest payments.

 

•                  We are in negotiations with an investmentbanker to initiate a public equity offering in the range of $4.0 to $6.0million during the fourth quarter of 2007 and first quarter of 2008. However,if these negotiations or the proposed public equity offering are unsuccessfulor fall short of their funding goals, or are significantly delayed for anyreason, or if our product development efforts experience significant unforeseendelays, we may not have sufficient funds to complete these objectives, and willrequire additional financing.

 

Even if successful in reaching our immediate fundinggoals and product development is completed on schedule, we expect to pursue oneor more additional rounds of funding in late 2008 to provide the workingcapital needed to fund a significant commercial launch into the urology market.If additional funds are raised by the issuance of convertible debt or equitysecurities, such as the issuance of stock, the issuance and exercise ofwarrants, the issuance and conversion of convertible debentures, then existingshareholders will experience dilution in their ownership interest. Ifadditional funds are raised by the issuance of debt or certain equityinstruments, we may become subject to certain operational limitations, and suchsecurities may have rights senior to those of existing holders of common stock.

 

If adequate funds are not available through theseinitiatives on a timely basis, or are not available on acceptable terms, we maybe unable to fund expansion, or to develop or enhance our products. If we areforced to slow our development programs, or put them on hold, it would delayregulatory approvals needed, and thus delay market entry for our products. Ultimately,if no additional financing is obtained beyond what has been secured to date, wecould potentially be forced to cease operations.

 

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**Ourassets are pledged to secure a senior bank note and also to secure a noteissued to an investor in the amount of $600,000 and, as a result, are notavailable to secure other senior debt financing. Upon the occurrence of anevent of default, our assets will be assigned to guarantors of the senior banknote and the holder of such $600,000 promissory note.**

 

Our senior debt financing through Crown Bank,Minneapolis, Minnesota, has required us to pledge all of our assets and certainlicenses, as well as to provide certain accredited investors’ personalguarantees. In addition, we have issued a subordinated promissory note in theamount of $600,000 to an investor. Such note has a subordinated interest in allof our assets and certain licenses. As such, the Company will not be in aposition in the future to pledge its assets to secure any debt or lendingfacility, in the event we desire or need to borrow such funds on a securedlending basis.

 

Moreover, under the terms and conditions of theCrown Bank facility, and our agreement with such guarantors, in the event ofany default by the Company with its senior lender that causes the personalguarantees to be called and honored, the Company and its lender have agreed thatall the Company’s assets shall be assigned to such guarantors, pro rata, inconsideration of such breach and obligation to pay under the respectiveguarantees. In addition, the holder of the $600,000 promissory note has asubordinated interest in all of the Company’s assets in the event of a defaultunder the note. Thus, common shareholders of the Company, and any existing andfuture investors in the Company’s common stock, would, if the foregoing breachand circumstances occurred, not have access or recourse to the Company’s assetsand collateral, and thus, would likely face a complete loss of their investmentin the Company.

 

**Ourproducts have not been, and may never be, fully commercially completed anddeveloped.**

 

Only three complete ProUroScan systems have beenbuilt for testing, clinical validations and demonstration purposes. Previously,we had developed and manufactured two working prototype ProUroScan systems toprove the feasibility of the device and to provide a means to test and developfuture systems. Nevertheless, we have not generated any revenues from the saleof the ProUroScan system, nor have we manufactured the ProUroScan system incommercial quantities. The completion of development of our proposed productsremains subject to all the risks associated with the development andmanufacture of new products based on innovative technologies, includingunanticipated technical or other problems, failures to meet FDA requirements orperformance objectives and the possible insufficiency of the funds allocatedfor the completion of such development, which could result in a change in thedesign, delay in the development or abandonment of such applications andproducts. Consequently, there can be no assurance that our products will besuccessfully developed or manufactured. Our failure to complete the developmentof products will have a materially adverse effect on our business.

 

**We arerelying upon Artann Laboratories, Inc. (“Artann”) to complete development ofthe ProUroScan system and will not be able to control the pace of thatdevelopment.****Failure to establish a new development agreement on termsacceptable to the Company would significantly delay the development and marketintroduction of the ProUroScan system and would have a material adverse effecton our business****.**

 

Much of the early development of the ProUroScansystem was accomplished under two development agreements between the Companyand Artann, a scientific technology company focused on early-stage technologydevelopment. On April 16, 2007, we entered into a cooperation agreement (the “CooperationAgreement”) with Artann that establishes a platform for joint cooperation inestablishing a new development agreement, which will define a process for thejoint development of a next generation 

 

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prostate mechanical imaging system with enhancedfunctionalities and the licensing of the intellectual property related thereto.It is our intent to expand our working relationship with Artann to includetheir participation in the development of future generations of the ProUroScansystem, although no assurances can be given in this regard. Failure toestablish a new development agreement on terms acceptable to the Company wouldsignificantly delay the development and market introduction of the ProUroScansystem and would have a material adverse effect on our business.

 

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

 

In connection with the development work which we arediscussing with Artann under the Cooperation Agreement between us, Artann hasprovided us with indications of their willingness to grant us exclusive licenserights in the field of prostate assessment to two U.S. patent applications(filed in May and June of 2005) associated with prostate-imaging systems andrelated non-patented technology. These patent applications cover a method anddevice for real-time imaging of the prostate and a method and dual-arraytransducer probe for real-time mechanical imaging of the prostate. Artann hasindicated their willingness to commence negotiations of definitive agreementsfor these development activities and exclusive licenses. Although it is in the mutual interest of Artann andthe Company to enter into an arrangement for the Company to commercialize **the technology we haveworked on together** so that our respective intellectualproperty portfolios can be combined for maximum benefit for use in prostateassessment products**,no assurances can be given in this regard. Failure to obtain exclusive licensesto these critical intellectual properties would have a material adverse effecton our business.**

 

**Even ifsuccessfully developed, our products may not be commercially viable.**

 

Even if we are able to successfully develop ourproducts, we may not be able to manufacture such products in commercialquantities or at prices that will be commercially viable. Further, there isrisk that our products may not prove to be as effective as currently availablemedical or diagnostic products. The inability to successfully completedevelopment of a product or application or a determination by us, forfinancial, technical or other reasons not to complete development of anyproduct or application, particularly in instances in which we have madesufficient capital expenditures, could have a material adverse effect on ourbusiness.

 

**Even ifsuccessfully developed, our products may not be accepted by the marketplace.**

 

Our products, even if successfully developed, willbe competing against existing treatments and competing products in the medicaldevice marketplace. There can be no assurance that physicians, urologists orthe medical device market, in general, will accept our products.

 

**Rapidtechnological change in our competitive marketplace may render our proposedproducts obsolete or may diminish our ability to compete in the marketplace.**

 

The prostate cancer detection, urology-based imagingand medical device markets are extremely competitive, dominated by large andwell financed competition and are subject to rapid technological advances andchanges. The discovery of new technologies and advances in the application ofsuch technologies to the medical marketplace in general, and the market forurology-based imaging products in particular, may render our products obsoleteor non-competitive. Any such changes and advances could force us to abandon ourcurrently proposed products, which would have a material adverse effect on ourbusiness.

 

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**We willdepend upon others for the manufacturing of our products, which will subjectour business to the risk that we will be unable to fully control the supply ofour products to the market.**

 

Our ability to develop, manufacture and successfullycommercialize our proposed products depends upon our ability to enter into andmaintain contractual and collaborative arrangements with others. We do notintend to establish any of our own manufacturing facilities for any of our proposedproducts. Instead, we intend to retain FDA approved contract manufacturers. Therecan be no assurance that such manufacturers will be able to supply our productsin the required quantities, at appropriate quality levels or at acceptablecosts. We may be adversely affected by any difficulties encountered by suchthird-party manufacturers that result in product defects, production delays orthe inability to fulfill orders on a timely basis. If a manufacturer cannotmeet our quality standards and delivery requirements in a cost-efficientmanner, we could suffer interruptions of delivery while we arrange foralternative manufacturing sources. Any extended disruption in the delivery ofour products could result in our inability to satisfy customer demand for ourproducts. Consequently, our inability to obtain alternative sources on a timelybasis may have a material adverse effect on our business.

 

**Ourreliance on third-party manufacturers and other third parties in other aspectsof our business may reduce any profits we may earn from our products and maynegatively affect future product development.**

 

We currently intend to partner with one or morewell-established companies in the urology-based imaging market to commercializeproducts manufactured by FDA approved contract manufacturers, and in connectiontherewith, we will likely be required to enter into manufacturing, licensingand distribution arrangements with third parties. These arrangements willlikely reduce our product profit margins. In addition, the identification ofnew product candidates for development may require us to enter into licensingor other collaborative agreements with others, including medical device andpharmaceutical companies and research institutions. These collaborativeagreements may require us to pay license fees, make milestone payments or payroyalties or grant rights, including marketing rights, to one or more parties. Anysuch arrangement will reduce our profits. Moreover, these arrangements maycontain covenants restricting our product development or business efforts inthe future.

 

**We maynot be able to enter into manufacturing agreements or other collaborativeagreements on terms acceptable to us, if at all, which could have a materialadverse effect on our business.**

 

We cannot be sure that we will be able to enter intomanufacturing or other collaborative arrangements with third parties on termsacceptable to us, if at all. If we fail to establish such arrangements when,and as necessary, we could be required to undertake these activities at our ownexpense, which would significantly increase our capital requirements and maydelay the development, manufacturing and commercialization of our products. Ifwe are unable to address these capital requirements, we would likely be forcedto sell or abandon our business.

 

**We relymaterially on consultants and contractors, some of whom have been partially orwholly paid through issuances of common stock dilutive to our shareholders.**

 

In each of the past two years, the Company hasincurred consulting and contracted research and development fees that representa material expenditure in relation to our total operating costs. During theyear ended December 31, 2006, we incurred consulting and contracted researchand development fees totaling approximately $178,000. Approximately $52,000 ofthis amount was paid through the issuance of 80,554 shares of common stock.

 

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We expect to continue to materially rely onconsultants and contractors to perform a significant amount of research anddevelopment, pre-manufacturing, clinical, regulatory and marketing activities. Expensesfor these activities are anticipated to be approximately $1.4 million duringthe next 12 months. We may issue securities in partial satisfaction of certaindevelopment and consulting expenses. Any such issuance could be dilutive toshareholders.

 

**Thecommercialization of our products may be significantly delayed by governmentalregulation and any and all such delays, if they occur, may have a materialadverse effect on our business.**

 

The proposed products we intend to develop, assembleand market are subject to regulations by the FDA and by comparable agencies incertain states and various foreign countries. The process of complying with therequirements of the FDA and comparable agencies is costly, time consuming andburdensome, especially for a pre-revenue, development stage company. Althoughwe have secured the assistance of regulatory consultants to help direct ourregulatory compliance and filings, no assurances can be given that such filingswill be acceptable to the FDA or comparable agencies. Further, even ifacceptable, we may encounter significant delays which could have a materialadverse effect our business**.**

 

**Thefunding provided by the government from the $3,000,000 Small BusinessInnovation Research Phase II Competitive Renewal grant awarded to Artann by theNational Institutes of Health (“NIH”) may be reduced or delayed. If suchreduction or delay occurs, this may have a material adverse effect on ourbusiness.**

 

The NIH does not guarantee funding associated withgrant awards. The funding is subject to changes in U.S. government funding ofNIH programs, Artann’s ability to perform the proposed work and Artann’scompliance with the rules and regulations of the NIH and the federal government.If a reduction or delay in funding related to the NIH grant occurs, it couldhave a material adverse effect on our business.

 

**We arehighly dependent on the services provided by certain key personnel.**

 

We are highly dependent upon the services of ourexecutive officers, Richard Carlson and Richard Thon. We have not obtained “key-man”life insurance policies insuring the lives of either of these persons. If theservices of either of these persons become unavailable to us, for any reason,our business could be adversely affected.

 

**Ourofficers and directors possess substantial voting power with respect to ourcommon stock, which could adversely affect the market price of our commonstock.**

 

Our officers and directors collectively possessbeneficial ownership of 3,985,144 shares of our common stock, which representsapproximately 23.9 percent of the total voting power. This represents asignificant portion of the voting power of the Company’s shareholders. As aresult, our directors and officers will have the ability to substantiallycontrol our management and affairs through the election and removal of ourentire board of directors and any other matters requiring shareholder approval,including the future merger, consolidation or sale of all or substantially allof our assets. This concentrated control could discourage others frominitiating any potential merger, takeover or other change-of-controltransaction that may otherwise be beneficial to our shareholders. As a result,the return on an investment in our common stock through the market price of ourcommon stock or ultimate sale of our business could be adversely affected.

 

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**Welicense from third parties, and do not own or control, key intellectualproperty critical to our products.**

 

We have exclusively licensed from third parties intellectual propertycovered by patents and patent applications. No assurance can be given that suchprotections will be properly maintained by the parties controlling suchintellectual property, or that such licenses will be honored and not breached. Theintellectual property licensed from third parties includes technology that iscritical to our proposed products. If the parties controlling such intellectualproperty breach our licenses, or fail to adequately maintain, assert and defendsuch intellectual property, and we are unable to defend the intellectualproperty in case of such failure, we may not be able to maintain thetechnological, and thereby competitive, edge that we believe we now possess. Anysuch loss of intellectual property protections would likely have a materialadverse effect on our business.

 

**If we lose our right to licensefrom third parties certain critical intellectual property, our entire businesswould be in jeopardy.**

 

If we breach or fail to perform the materialconditions of an agreement that licenses critical intellectual property, we maylose all or some of our rights to such critical intellectual property. If weshould lose our right to license and use technology covered by our licensesthat is critical to our business, such loss would have a materially adverseeffect on our business. In such a case, the viability of the Company would bein question. Our only alternatives would be to find existing and non-infringingtechnology to replace that lost, if any exists, or develop new technologyourselves. The pursuit of any such alternative would likely cause significantdelay in the development and introduction of our proposed products.

 

**Theprotections for the intellectual property we license from other parties may besuccessfully challenged by third parties.**

 

We license from third parties various keyintellectual property. No assurance can be given that any intellectual propertyclaims will not be successfully challenged by third parties. Any challenge toour intellectual property, regardless of merit, would likely involve costlylitigation which could have a material adverse effect on our business. If asuccessful challenge were made to intellectual property that is critical to ourproposed products, the pursuit of any such alternative would likely causesignificant delay in the development and introduction of such products.Moreover, a successful challenge could call into question the validity of ourbusiness.

 

**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.**

 

Werely on certain licensed patents to provide us with exclusive rights for ourtechnology.  These licensed patents have expiration dates between 2012 and2021.  As we begin to lose certain patent protections on our licensedprostate-imaging systems and related critical patented technologies in2012, we may face strong competition as a result, which could have amaterial adverse effect our business.

 

**We maynot be able to successfully compete against companies in our industry withgreater resources, or with any competition.**

 

The urology-based imaging business, specifically,and the medical device and life sciences business, generally, are extremelycompetitive. We have experienced, and expect to continue experiencing, 

 

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significant competition in the medical device market.Although we believe that we may have a proprietary niche in theprostate-imaging and prostate-therapeutic marketplaces, many factors beyond ourcontrol, including, but not limited to, government regulation, will likelyencourage new competitors. In particular, several large companies will competewith us in the prostate-imaging and prostate-therapeutic business. Many of thecompanies that will be in direct competition with us have significantly greaterresources, more personnel and longer operating histories than we do. Therefore,no assurance can be given that we will be able to successfully compete withthese, or any other companies in the marketplace, if at all.

 

**Ourfailure to receive third-party reimbursement for our products, when in themarketplace, could result in diminished marketability of our products.**

 

We do not currently receive reimbursement from anyparty for the use of our products because there are no products fully developedand currently available for sale in the marketplace. As a result, we have nottaken any steps to obtain approval for reimbursement for the use of any of ourproposed products. Nevertheless, we are working to formulate the appropriateapproach for obtaining and optimizing government and third-party reimbursementfor the use of our products. The success of our future medical device productswill materially depend on the ability of medical service providers to obtainthird-party reimbursement from private and public insurance sources, such asMedicare, Medicaid and various foreign governments when using our products. Itmay be difficult to predict the timing and outcome of reimbursement decisions. Importantly,there are no assurances that such reimbursement will ever be obtained.

 

**Ourcommon stock is illiquid and may be difficult to sell.**

 

Trading of our common stock is conducted on theOver-the-Counter Bulletin Board. Management believes that this has an adverseeffect on the liquidity of our common stock, not only in terms of the number ofsecurities that can be bought and sold at a given price, but also throughdelays in the timing of transactions and reduction in analyst coverage of ourCompany. This may result in lower prices for our common stock than mightotherwise be obtained if our stock were traded on a larger or more establishedexchange, such as NASDAQ Small Cap Market and could also result in a largerspread between the bid and asked prices for our common stock.

 

**Thereis currently limited trading volume in our common stock, which may make itdifficult to sell shares of our common stock.**

 

During the past two years, there has been onlylimited trading activity in our common stock. The relatively small tradingvolume will likely make it difficult for our shareholders to sell their sharesas, and when, they choose. Furthermore, small trading volumes generally depressmarket prices. As a result, investors may not always be able to resell sharesof our common stock publicly at the time and prices that they feel are fair orappropriate.

 

**Becauseour stock is deemed a “penny stock,” you may have difficulty selling shares ofour common stock.**

 

Our common stock is a “penny stock” and is thereforesubject to the requirements of Rule 15g-9 under the Securities Exchange Act of1934. Under this Rule, broker-dealers who sell penny stocks must providepurchasers of these stocks with a standardized risk-disclosure documentprepared by the Securities and Exchange Commission (“SEC”). The penny stockrules severely limit the liquidity of securities in the secondary market, andmany brokers choose not to participate in penny stock 

 

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transactions. As a result, there is generally lesstrading in penny stocks. If you become a holder of our common stock, you maynot always be able to resell shares of our common stock publicly at the timeand prices that you feel are fair or appropriate. Under applicable regulations,our common stock will generally remain a penny stock until and for such time asits per-share price is $5.00 or more (as determined in accordance with SECregulations), or until we meet certain net asset or revenue thresholds. Thesethresholds include the possession of net tangible assets (i.e., total assetsless intangible assets and liabilities) in excess of $5,000,000, and therecognition of average revenues equal to at least $6,000,000 for each of thelast three years. We do not anticipate meeting any of the thresholds in theforeseeable future.

 

**Ourability to use operating loss carryforwards to offset income in future yearsmay be limited by future changes in equity ownership.**

 

As of December 31, 2006, the Company had generatednet operating loss carryforwards of approximately $3.0 million which, if notused, will begin to expire in 2021. Federal and state tax laws imposesignificant restrictions on the utilization of net operating loss carryforwardsin the event of a change in ownership of the Company that constitutes an “ownershipchange,” as defined by Section 382 of the Internal Revenue Code of 1986, asamended. The Company has analyzed the merger and private placement transactionsthat occurred in April 2004 along with subsequent equity transactions and webelieve that they do not constitute such an ownership change. However,additional shares and warrants likely to be issued pursuant to the Company’scurrent financing efforts may trigger such a change in ownership and couldsubject the Company’s use of its entire net operating loss carryforward to theabove limitations.

 

**Ourbusiness and products subject us to the risk of product liability claims.**

 

The manufacture and sale of medical products and theconduct of clinical trials using new technology involve customary risks ofproduct liability claims. There can be no assurance that our insurance coveragelimits will be adequate to protect us from any liabilities which we might incurin connection with the clinical trials or the commercialization of any of ourproducts. Product liability insurance is expensive and in the future may not beavailable on acceptable terms, if at all. A successful product liability claimor series of claims brought against us in excess of our insurance coverage wouldhave a material adverse effect on our business. In addition, any claims, evenif not ultimately successful, could have a material adverse effect on themarketplace’s acceptance of our products.

 

**We havenever paid dividends and do not expect to pay dividends in the foreseeablefuture.**

 

We have never paid dividends on our capital stockand do not anticipate paying any dividends for the foreseeable future.

 

***Item 3. Controls and Procedures.***

 

We carried out anevaluation, with the participation of our chief executive and chief financialofficers, of the effectiveness, as of September 30, 2007, of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of theExchange Act. Based upon that evaluation, our chief executive officer and chieffinancial officer concluded that as of September 30, 2007 our disclosurecontrols and procedures were effective. There has been no change in theinternal controls over financial 

 

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reporting during the lastfiscal quarter that has materially affected or is likely to materially affectour internal control over financial reporting.

 

Nevertheless, due to ourlimited number of employees engaged in the authorization, recording, processingand reporting of transactions, there is inherently a lack of segregation ofduties. We periodically assess the cost versus benefit of adding the resourcesthat would remedy or mitigate this situation, and currently do not consider thebenefits to outweigh the costs of adding additional staff in light of thelimited number of transactions due to the start-up nature of our currentoperations.

 

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**PARTII. OTHER INFORMATION.**

 

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

 

***The Company, like most other public companies, is involvedin legal proceedings in the conduct of the ordinary course of its business.***

 

***Item2. Unregistered Sales of Equity Securities and Use of Proceeds.***

 

*Stock Transactions:*

 

On September 10, 2007, the Company issued a total of 206,935 shares ofits common stock to its directors as payment for $62,082 of accrued directors’fees. The issuance was made in reliance on exemption from registrationprovided under Section 4(2) of the Securities Act of 1933, as amended (the “SecuritiesAct”), for issuance by an issuer not involving a public offering.

 

***On September 10, 2007,***theCompany issued a total of 11,000 shares of its common stock to twodirectors as repayment for $3,330 of outstanding loans to the Company. Theissuance was made in reliance on exemption from registration provided underSection 4(2) of the Securities Act, for issuance by an issuer not involving apublic offering.

 

***Item 4.*** Submission of Matters to a Vote ofSecurity Holders.

 

***The Company held our Annual Meeting of Shareholders on July 17, 2007,at which the shareholders took the following actions:***

 

Matter 1: Election ofDirectors

 

The director nomineesdescribed in the Company’s Proxy Statement were elected as follows:

 

| ** **           | ** ** | **For**   | ** ** | **Withhold** | ** ** |
|----------------------|------------|-----------|------------|--------------|------------|
| Richard C.  Carlson  |       | 9,333,054 |       | 15,800       |       |
| David F. Koenig      |       | 9,333,054 |       | 15,800       |       |
| Alexander  Nazarenko |       | 9,338,054 |       | 15,800       |       |
| Robert Rudelius      |       | 9,333,054 |       | 15,800       |       |
| Scott E. Smith       |       | 9,333,054 |       | 15,800       |       |

 

Each director hasconsented to hold office until the next annual meeting of shareholders or untilhis successor is elected and shall have qualified.

 

Matter 2: Appointment ofIndependent Registered Accounting Firm

 

The appointment ofVirchow, Krause & Company, LLP as the Company’s independent registeredpublic accounting firm for the 2007 fiscal year was ratified as follows:

 

| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 9,163,054 |       | 110,800     |       | 75,000      |       |

 

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***Item6. Exhibits***

 
| **Exhibit No.**   | ** ** | **Description**                                                                                      |
|-------------------|------------|------------------------------------------------------------------------------------------------------|
|              |       |                                                                                                 |
| 10.1*   |       | Promissory Note issued in favor of James Davis, dated August 29,  2007.                              |
|              |       |                                                                                                 |
| 31.1*   |       | Certification of Chief Executive Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
|              |       |                                                                                                 |
| 31.2*   |       | Certification of Chief Financial Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
|              |       |                                                                                                 |
| 32.1*   |       | Certification of Chief Executive Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |
|              |       |                                                                                                 |
| 32.2*   |       | Certification of Chief Financial Officer pursuant to Section 906 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:  November 14, 2007 | By:                             |   /s/ Richard C. Carlson |
|                     | Name:  Richard C. Carlson       |
|                     | Title:  Chief Executive Officer |
|                     |                            |   |
|                     |                            |   |
| Date:  November 14, 2007 | By:                             |   /s/ Richard Thon |
|                     | Name:  Richard Thon             |
|                     | Title:  Chief Financial Officer |

 

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