** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM10-QSB**
| **x**      | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                               |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                           |
| ** ** | **For the quarterly period ended September 30,  2006**                                                                                                                                               |
| ** ** | ** **                                                                                                                                                                                           |
| **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**

**ProUroCare Medical Inc.**

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

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

 

**One Carlson Parkway, Suite 124**

**Plymouth, Minnesota 55447**

(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 (asdefined in Rule 12b-2 of the Exchange Act). YES o  NO x

State the numberof shares outstanding of each of the issuer’s classes of common equity, as ofthe latest practicable date:  14,399,686shares of common stock outstanding as of November 15, 2006 (par value $0.00001per share).

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

 

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**ProUroCare Medical Inc.**

**Form 10-QSB for the**

**QuarterEnded September 30, 2006**

**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  FINANCIAL INFORMATION**

***Item 1.  Financial Statements***

**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Balance Sheets**
| ** **                                                                                                                                                                     | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **(Unaudited)**                  | ** ** | **(Audited)**                   | ** ** |
| **Assets**                                                                                                                                                                     | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                                                                |       |                             |       |                            |       |
| Cash                                                                                                                                                                           |       | $                                | 6,116      |                            | $          | 37 |   |
| Other  receivables                                                                                                                                                             |       | 10,121                           |       | —                          |       |
| Deposit                                                                                                                                                                        |       | 547                              |       | 547                             |       |
| Prepaid expenses                                                                                                                                                               |       | 26,764                           |       | 12,483                          |       |
|                                                                                                                                                                           |       |                             |       |                            |       |
| Total current  assets                                                                                                                                                          |       | 43,548                           |       | 13,067                          |       |
| Equipment and  furniture, net                                                                                                                                                  |       | 4,713                            |       | 7,636                           |       |
| Deferred offering  expenses                                                                                                                                                    |       | —                           |       | 37,881                          |       |
| Debt issuance costs,  net                                                                                                                                                      |       | 705,930                          |       | 52,727                          |       |
|                                                                                                                                                                           |       | $                                | 754,191    |                            | $          | 111,311 |   |
|                                                                                                                                                                           |       |                             |       |                            |       |
| **Liabilities  and Shareholders’ Deficit**                                                                                                                                | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Current liabilities:                                                                                                                                                           |       |                             |       |                            |       |
| Notes payable,  bank                                                                                                                                                           |       | $                                | —     |                            | $          | 400,000 |   |
| Notes payable,  net of original issue discount of $1,478 and $12,184                                                                                                           |       | 105,469                          |       | 87,816                          |       |
| Accounts payable                                                                                                                                                               |       | 379,394                          |       | 387,302                         |       |
| Accrued expenses                                                                                                                                                               |       | 394,118                          |       | 627,872                         |       |
| Due to Clinical  Network, Inc.                                                                                                                                                 |       | —                           |       | 8,943                           |       |
| Total current  liabilities                                                                                                                                                     |       | 878,981                          |       | 1,511,933                       |       |
|                                                                                                                                                                           |       |                             |       |                            |       |
| Long-term notes payable                                                                                                                                                        |       | 2,200,000                        |       | —                          |       |
| Convertible debentures,  net of original issue discount of $584,964 and $0                                                                                                     |       | 148,370                          |       | —                          |       |
| Total  liabilities                                                                                                                                                             |       | 3,227,351                        |       | 1,511,933                       |       |
| Commitments and  contingencies                                                                                                                                                 |       |                             |       |                            |       |
| Shareholders’ deficit:                                                                                                                                                    |       |                             |       |                            |       |
| Common stock,  $0.00001 par. Authorized 50,000,000 shares; issued and outstanding 14,399,686  and 14,174,260 shares on September 30, 2006 and December 31, 2005,  respectively |       | 144                              |       | 142                             |       |
| Additional  paid-in capital                                                                                                                                                    |       | 9,989,801                        |       | 8,804,181                       |       |
| Deficit  accumulated during the development stage                                                                                                                              |       | (12,463,105                      | )          | (10,204,945                     | )          |
| Total  shareholders’ deficit                                                                                                                                              |       | (2,473,160                       | )          | (1,400,622                      | )          |
|                                                                                                                                                                           |       | $                                | 754,191    |                            | $          | 111,311 |   |

 

*See accompanying notes to financial statements.*

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**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Statements of Operations**

(Unaudited)
| ** **                                      | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** **             | ** ** | ** ** | ** ** | **Period from**    | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------------------|------------|------------|------------|-------------------------|------------|
| ** **                                      | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** **             | ** ** | ** ** | ** ** | **August 17,1999** | ** ** |
| ** **                                      | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** **             | ** ** | ** ** | ** ** | **(inception) to** | ** ** |
| ** **                                      | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                      | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006**               | ** ** | **2005**   | ** ** | **2006**                | ** ** |
| Operating  expenses:                            |       |                                                     |       |                                                    |       |                   |       |       |       |                    |       |
| Research and development                        |       | $                                                        | 30,700     |                                                    | $          | 63,987                 |       | $          | 264,209    |                    | $          | 191,696 |   | $ | 4,732,014 |   |
| General and administrative                      |       | 397,093                                                  |       | 457,395                                                 |       | 1,200,214              |       | 1,279,087  |       | 6,103,386               |       |
| Total operating expenses                        |       | 427,793                                                  |       | 521,382                                                 |       | 1,464,423              |       | 1,470,783  |       | 10,835,400              |       |
| Operating loss                                  |       | (427,793                                                 | )          | (521,382                                                | )          | (1,464,423             | )          | (1,470,783 | )          | (10,835,400             | )          |
| Interest income                                 |       | —                                                   |       | —                                                  |       | —                 |       | 445        |       | 16,480                  |       |
| Interest expense                                |       | (298,599                                                 | )          | (6,963                                                  | )          | (793,737               | )          | (13,298    | )          | (1,644,185              | )          |
| Net loss                                        |       | $                                                        | (726,392   | )                                                       | $          | (528,345               | )          | $          | (2,258,160 | )                       | $          | (1,483,636 | ) | $ | (12,463,105 | ) |
|                                            |       |                                                     |       |                                                    |       |                   |       |       |       |                    |       |
| Net loss per  common share:                     |       |                                                     |       |                                                    |       |                   |       |       |       |                    |       |
| Basic and diluted                               |       | $                                                        | (0.05      | )                                                       | $          | (0.04                  | )          | $          | (0.16      | )                       | $          | (0.11 | ) | $ | (1.45 | ) |
|                                            |       |                                                     |       |                                                    |       |                   |       |       |       |                    |       |
| Weighted average  number of shares outstanding: |       |                                                     |       |                                                    |       |                   |       |       |       |                    |       |
| Basic and  diluted                              |       | 14,280,196                                               |       | 14,107,923                                              |       | 14,246,881             |       | 14,040,857 |       | 8,581,044               |       |

 

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

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**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Statements of Cash Flows**

**(Unaudited)**
| ** **                                                                                                                                                  | ** ** | ** **                                              | ** ** | ** **              | ** ** | **Period from**             | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                  | ** ** | ** **                                              | ** ** | ** **              | ** ** | **August 17,1999**          | ** ** |
| ** **                                                                                                                                                  | ** ** | **Nine months ended September 30,** | ** ** | **(inception) to** | ** ** |
| ** **                                                                                                                                                  | ** ** | **2006**                                                | ** ** | **2005**                | ** ** | **September 30, 2006** | ** ** |
| Cash flows from  operating activities:                                                                                                                      |       |                                                    |       |                    |       |                             |       |
| Net loss                                                                                                                                                    |       | $                                                       | (2,258,160 | )                       | $          | (1,483,636                       | )          | $ | (12,463,105 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                                                                                |       |                                                    |       |                    |       |                             |       |
| Depreciation and amortization                                                                                                                               |       | 2,923                                                   |       | 3,978                   |       | 16,084                           |       |
| Stock-based compensation                                                                                                                                    |       | 265,770                                                 |       | 220,601                 |       | 1,077,254                        |       |
| Issuance of common stock for services rendered                                                                                                              |       | 53,738                                                  |       | —                  |       | 156,904                          |       |
| Warrants issued for services                                                                                                                                |       | —                                                  |       | 59,696                  |       | 468,636                          |       |
| Warrants issued for debt guarantees                                                                                                                         |       | —                                                  |       | —                  |       | 320,974                          |       |
| Amortization of note payable original issue discount                                                                                                        |       | 70,736                                                  |       | —                  |       | 85,052                           |       |
| Amortization of convertible debt original issue  discount                                                                                                   |       | 148,370                                                 |       | 659                     |       | 148,370                          |       |
| Amortization of debt issuance and deferred offering  costs                                                                                                  |       | 372,728                                                 |       | 1,392                   |       | 644,613                          |       |
| 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                                                                                                                                                    |       | —                                                  |       | 9,899                   |       | (190,101                         | )          |
| Other receivables                                                                                                                                           |       | (10,121                                                 | )          | —                  |       | (10,121                          | )          |
| Prepaid expenses                                                                                                                                            |       | 23,031                                                  |       | 23,288                  |       | 41,673                           |       |
| Accounts payable                                                                                                                                            |       | (7,891                                                  | )          | 235,999                 |       | 768,393                          |       |
| Accrued expenses                                                                                                                                            |       | (233,771                                                | )          | 396,815                 |       | 512,821                          |       |
| Net cash used in operating activities                                                                                                                       |       | (1,572,647                                              | )          | (531,309                | )          | (6,174,257                       | )          |
| 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                                                                                                                              |       | —                                                  |       | 200,000                 |       | 500,000                          |       |
| Payment of note payable, bank                                                                                                                               |       | (400,000                                                | )          | —                  |       | (500,000                         | )          |
| Proceeds of notes payable                                                                                                                                   |       | 140,500                                                 |       | 100,000                 |       | 240,500                          |       |
| Payment of notes payable                                                                                                                                    |       | (170,865                                                | )          | (82,716                 | )          | (950,907                         | )          |
| Payment for rescission of common stock                                                                                                                      |       | —                                                  |       | —                  |       | (100,000                         | )          |
| Net payments to Clinical Network, Inc.                                                                                                                      |       | (8,943                                                  | )          | —                  |       | —                           |       |
| Payments for debt issuance costs                                                                                                                            |       | (231,966                                                | )          | (11,196                 | )          | (260,793                         | )          |
| Cost of reverse merger                                                                                                                                      |       | —                                                  |       | —                  |       | (162,556                         | )          |
| Proceeds from long-term debt                                                                                                                                |       | 2,200,000                                               |       | —                  |       | 2,200,000                        |       |
| Net proceeds from issuance of common stock                                                                                                                  |       | 50,000                                                  |       | 50,000                  |       | 5,234,926                        |       |
| Net cash provided by financing activities                                                                                                                   |       | 1,578,726                                               |       | 256,088                 |       | 6,201,170                        |       |
| Net increase (decrease) in cash                                                                                                                             |       | 6,079                                                   |       | (275,221                | )          | 6,116                            |       |
| Cash, beginning  of the period                                                                                                                              |       | 37                                                      |       | 301,522                 |       | —                           |       |
| Cash, end of the  period                                                                                                                                    |       | $                                                       | 6,116      |                    | $          | 26,301                           |       | $ | 6,116 |   |
|                                                                                                                                                        |       |                                                    |       |                    |       |                             |       |
| Supplemental  cash flow information:                                                                                                                        |       |                                                    |       |                    |       |                             |       |
| Cash paid for interest                                                                                                                                      |       | $                                                       | 158,759    |                    | $          | 10,153                           |       | $ | 302,231 |   |
| Non-cash investing and financing activities:                                                                                                                |       |                                                    |       |                    |       |                             |       |
| Assumption of liabilities in the Profile, LLC  transaction                                                                                                  |       | $                                                       | —     |                    | $          | —                           |       | $ | 25,000 |   |
| Warrants issued for debt issuance costs                                                                                                                     |       | —                                                  |       | 15,750                  |       | 242,612                          |       |
| Warrants issued pursuant to note payable                                                                                                                    |       | 60,030                                                  |       | 13,250                  |       | 168,530                          |       |
| Issuance of note payable for redemption of common  stock                                                                                                    |       | —                                                  |       | —                  |       | 650,000                          |       |
| Prepaid expenses financed by note payable                                                                                                                   |       | 37,312                                                  |       | 31,125                  |       | 68,437                           |       |
| Common stock issued in lieu of cash for accounts  payable                                                                                                   |       | —                                                  |       | —                  |       | 101,587                          |       |
| Common stock issued in lieu of cash for accrued  expenses                                                                                                   |       | —                                                  |       | —                  |       | 117,643                          |       |
| Conversion of accounts payable to note payable                                                                                                              |       | —                                                  |       | —                  |       | 241,613                          |       |
| Common stock issued for deferred offering expenses                                                                                                          |       | 22,750                                                  |       | 68,750                  |       | 91,501                           |       |
| 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                          |       |
| Deposits applied to note payable and accrued  interest                                                                                                      |       | —                                                  |       | 142,646                 |       | 142,696                          |       |
| Deposits applied to accounts payable                                                                                                                        |       | —                                                  |       | 45,782                  |       | 45,782                           |       |
| Deposits applied  to accrued expenses                                                                                                                       |       | —                                                  |       | 1,076                   |       | 1,076                            |       |

 

*See accompanying notes to financial statements.*

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**ProUroCare Medical Inc.**

**A Development Stage Company**

**Notes to ConsolidatedFinancial Statements**

**September30, 2006 and 2005 and the period from**

**August17, 1999 (inception) to September 30, 2006**

(Unaudited)

**Note 1. Description of Business and Summary of Significant Accounting Policies.**

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

ProUroCare Medical Inc. (“ProUroCare” or the “Company”) is adevelopment stage company that is developing screening, diagnostic, andmonitoring equipment for prostate disease. The Company’s developmental activities have included the acquisition ofseveral technology licenses, the development of a strategic business plan and asenior management team, product development, and fund raising activities.

The Company had no activities from its incorporation in August 1999until July 2001, when the Company issued 3,000,000 shares of common stock toClinical Network, Inc. (“CNI”) and Clinical Network LLC, a related party toCNI.  Moreover, in July 2001, the Companyacquired a license to certain microwave technology by issuing 3,000,000 sharesof common stock to CS Medical Technologies, LLC.  In January 2002, the Company acquired alicense to certain imaging technology through the issuance of 3,999,999 sharesto Profile LLC.

Pursuant to a merger agreement effective April 5, 2004  among ProUroCare Inc., Global InternetCommunications, Inc. (“Global”), and GIC Acquisition Corp., a wholly ownedsubsidiary of Global, GIC Acquisition Corp. merged with and into ProUroCareInc., which remained as the surviving company and a wholly owned operatingsubsidiary of Global (the “Merger”).  OnApril 26, 2004, Global changed its name to ProUroCare Medical Inc. Inconnection with the Merger, Global completed a private placement of 2,205,000shares of common stock pursuant to Rule 506 promulgated under the SecuritiesAct of 1933, as amended (the “Securities Act”).

The accompanying consolidated financial statements include the accountsof the Company and its wholly owned subsidiary, ProUroCare Inc.  Significant inter-company accounts andtransactions have been eliminated in consolidation.

***(b)   Interim FinancialInformation.***

The accompanying unaudited financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America and pursuant to the rules and regulations of theUnited States Securities and Exchange Commission (the “SEC”) for interimfinancial information.  Accordingly,certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been omitted pursuant to such rules andregulations.  Operating results for thethree and nine month periods ended September 30, 2006 are not necessarilyindicative of the results that may be expected for the year ending December 31,2006 or any other period.  Theaccompanying financial

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statementsand related notes should be read in conjunction with the audited financialstatements of the Company, and notes thereto, contained in its Annual Report onForm 10-KSB for the year ended December 31, 2005.

The financial information furnished reflects, in the opinion ofmanagement, all adjustments, consisting of normal recurring accruals, necessaryfor a fair presentation of the results of the interim periods presented.

***(c) Accounting Estimates***

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of expensesduring the reporting periods. The Company’s significant estimates include thedetermination of the fair value of its common stock, contingent liabilityexpense, and the valuation of license rights. Actual results could differ fromthose estimates.

***(d)           Net Loss Per Common Share***

Basic and diluted loss per common share is computed by dividing netloss by the weighted-average number of common shares outstanding for thereporting period.  Dilutivecommon-equivalent shares have not been included in the computation of dilutednet loss per share because their inclusion would be antidilutive.  Antidilutive common equivalent sharesissuable based on future exercise of stock options or warrants couldpotentially dilute basic loss per common share in subsequent years.  All options and warrants outstanding wereantidilutive for the three and nine month periods ended September 30, 2006 and2005 and the period from August 17, 1999 (inception) to September 30, 2006since the Company reported a net loss for these periods.

***(e) Stock-Based Compensation***

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

EffectiveJanuary 1, 2006, the Company adopted the revision to SFAS 123 (“SFAS 123R”), “Share-BasedPayment,” that focuses primarily on accounting for transactions in which anentity obtains employee services in share-based payment transactions.  This statement replaces SFAS 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.”  SFAS123R requires all companies to expense the fair value of employee stock optionsand similar awards, which has been the Company’s policy to date.  The Company estimates the amount of futurestock-based compensation expense related to currently outstanding options to beapproximately $349,000 and $204,000 for the years ending December 31, 2006 andDecember 31, 2007, respectively.

No optionswere granted during the three months ended September 30, 2006.  In determining the compensation cost of theoptions granted during the three and nine month periods ended September 30,2005 and the nine month period ended September 30, 2006, as specified by SFAS123R, the fair value of

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each option grant has beenestimated 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** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Risk-free  Interest Rate          |       | N/A                                                 |       | 3.92                                               |       | 4.74 | % | 3.84 | % |
| Expected Life of  Options Granted |       | N/A                                                 |       | 5.8 years                                          |       | 2.8 years |   | 5.8 years |   |
| Expected  Volatility              |       | N/A                                                 |       | 127.0                                              |       | 132.7 | % | 104.0 | % |
| Expected Dividend Yield           |       | N/A                                                 |       | 0                                                  |       | 0 |   | 0 |   |

 

***The expectedlife of the options is determined using a simplified method, computed as theaverage of the option vesting periods and the contractual term of the option.  For performance based options that vest uponthe occurrence of an event, the Company uses an estimate of when the event willoccur as the vesting period used in the Black-Scholes calculation for eachoption grant.  Because of the limitedtrading history of the Company’s stock, the expected volatility is based on asimple average of daily price data since the date of the Merger on April 5,2004.***

Based on the lack of history to calculate a forfeiture rate, theCompany has not adjusted the calculated value of the options for the three andnine month periods ended September 30, 2006.

***(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,” (“EITF 98-5”the Company has elected to utilizethe fair-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 Notes 2, 3 and 4).  However, the recorded value of warrantsissued to lenders and guarantors of Company debt is limited to thecorresponding amount loaned or guaranteed. In the three and nine month periods ended September 30, 2006, we issuedto lenders and guarantors of Company debt warrants to purchase a total of22,094 and 109,594 shares of our common stock, respectively.  The corresponding aggregate fair market valueof these warrants estimated at their grant dates using the Black Sholes pricingmodel (each limited by the amount of the underlying loan) was $11,531 and$60,031, respectively.

***(g)           Otherreceivables***

Other receivables represent amounts due within 30 days from a jointdevelopment partner for their portion of the cost of the joint developmentproject.  At September 30, 2006 andDecember 31, 2005, no reserves were recorded.

***(h)           Going Concern***

We have incurred operatinglosses, accumulated deficit and negative cash flows from operations sinceinception.  As of September 30, 2006, wehad an accumulated deficit of approximately $12,463,000.  These factors, among others, raise substantialdoubt about our ability to continue as a going concern.  The accompanying consolidated unauditedfinancial statements do not include any

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adjustmentsrelated to recoverability and classification of asset carrying amounts or theamount and classification of liabilities that might result should we be unableto continue as a going concern.

**Note 2.  Shareholders’ Equity.**

*Common Stock*

EffectiveSeptember 1, 2005, the Company engaged Venture Law Resources, PLLC (“VLR”) torepresent the Company as its General Counsel and to assist with theintroduction of strategic investors to the Company from time to time, includingsuccess based compensation arising from any services as a finder to theCompany. Under this agreement, the Company issued 25,000 shares of common stockto VLR as a retainer in connection with VLR’s engagement.  The shares issued to VLR were valued at$17,750 using the fair market value of the Company’s stock price on the date ofgrant and along with a $2,500 retainer paid, was capitalized as deferredoffering expense during 2005.  OnFebruary 22, 2006, an additional 25,000 common shares, valued at $22,750 usingthe fair market value of the Company’s stock price on the date of grant, wereissued to VLR pursuant to their engagement. The $42,750 aggregate value of the shares and initial retainer is beingamortized over the term of the debt guaranteed by strategic investorsintroduced to the Company by VLR.

***OnApril 21, 2006, the Company issued 70,000 shares of its common stock to itsformer Vice-President of Engineering upon his resignation, pursuant to hisemployment agreement.  The shares werevalued at $44,800 based on the average closing share price during the five daysbefore and after the issuance date, and were expensed in April 2006.***

On September7, 2006, we sold 58,140 shares of our common stock to Mr. Scott Smith, aDirector of the Company, and 58,140 shares of our common stock to aninvestor.  The per share selling price of$0.43 was based on the last selling price prior to this sale as reported on theOver-the-Counter Bulletin Board.  Netproceeds received from these investments were $50,000. No underwriter was used,and no commissions were paid on the transaction. The shares were sold intransactions exempt from registration under Section 4(2) of the Securities Actas such transactions were non-public offerings to a limited number ofsubscribers.

On September11, 2006, we issued 14,146 shares of our common stock to a vendor as paymentfor product development work valued at $8,938.

***Stock Options***

***OnMarch 1, 2006, the Company issued to five of its employees stock options toacquire a total of up to 200,000 shares of common stock at $0.75 pershare.  The five-year options, which vestupon the Company securing FDA approval of its ProUroScan***TM system, were valued at $0.56 per share usingthe Black-Scholes pricing model (see Note 1(e)), and are being expensed overthe vesting period (estimated by the Company as twenty-four months) as generaland administrative expense.

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***Warrants***

***The warrants below issued or to be issuedare exempt from registration under Section 4(2) of the Securities Act as theywere or will be issued in non-public offerings to a limited number ofsubscribers.  Each warrant was valuedusing the Black-Scholes pricing model; however, the recorded value of warrantsissued to lenders and guarantors of Company debt is limited to thecorresponding amount loaned or guaranteed (see Note 1(f)).***

On September 14, 2005, ProUroCare Inc. borrowed $100,000 from afinancial institution collateralized by a commercial guaranty from anindividual investor (see Note 3).  Theloan was repaid on February 16, 2006.  Inconnection with the commercial guaranty, the Company issued two five-yearwarrants (immediately exercisable) to the investor to acquire a total of 50,000shares of the Company’s common stock at $0.50 per share.  The warrants, valued at $29,000 using theBlack-Scholes pricing model, were recorded as debt issuance costs and expensedover the term of the loan as interest expense. The Company recorded $0 and $12,977 of expense related to the value ofthe warrants during the three and nine month periods ended September 30, 2006,respectively.

***On September 21, 2005, ProUroCare Inc., borrowed $100,000 from anunrelated individual lender, and in connection therewith issued to such lendera promissory note that was repaid on February 16, 2006 (see Note 4).  In connection with the promissory note, theCompany issued two five-year warrants (immediately exercisable) to the lenderto acquire a total of 50,000 shares of the Company’s common stock at $0.50 pershare (see Note 2).  The gross proceedsof $100,000 were allocated between the promissory note and the common stockwarrants based on the relative fair values of the securities at the time ofissuance.***The warrants,valued at $26,500 using the Black-Scholes pricing model, were recorded asoriginal issue discount as defined in EITF 98-5 and expensed on a straight-linebasis over the term of the promissory note as interest expense.  The Company recorded $0 and $12,184 ofexpense related to the value of the warrants during the three and nine monthperiods ended September 30, 2006, respectively.

***On October 20, 2005, ProUroCareInc. borrowed $300,000 from a financial institution,***collateralized by commercial guaranties from twoindividual investors (see Note 3). The loan was repaid on February 16, 2006.  In connection with the commercial guaranties,on October 19, 2005, the Company issued five-year warrants (immediately exercisable) to eachof the two guarantors to acquire up to 75,000 shares (150,000 shares in total)of the Company’s common stock at $0.50 per share.  The warrants,valued at $79,500 using the Black-Scholes pricing model, were recorded as debtissuance costs and expensed over the term of the loan as interest expense.  The Company recorded $0 and $39,750 ofexpense related to the value of the warrants during the three and nine monthperiods ended September 30, 2006, respectively.

***OnJanuary 25, 2006, ProUroCare Inc. borrowed $23,000 from a lender (see Note4).  Under the terms of the loanagreement, the Company issued a five-year warrant to the lender to acquire50,000 shares of Company common stock at $0.50 per share.  The loan was repaid on February 16,2006. ***Thegross proceeds of $23,000 were allocated between the promissory note and thecommon stock warrant based on the relative fair values of the securities at thetime of issuance.  The fair value of the warrant estimated atgrant date using the Black-Scholes pricing model exceeded the amount of theloan.  Accordingly, the warrant wasvalued at $23,000 and recorded as original issue discount as defined in EITF98-5, and subsequently expensed as interest expense over the term of the loan.  The Company recorded $0 and $23,000 ofexpense related to the value of the warrant during the three and nine monthperiods ended September 30, 2006, respectively.

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***On June 1, 2006, ProUroCare Inc.borrowed $75,000 from an individual investor. Under the terms of the loan agreement, the Company issued a five-yearwarrant to the investor to acquire 37,500 shares of Company common stock at$0.50 per share.  The fair value of thewarrant at the grant date was estimated using the Black-Scholes pricing modelto be $25,500 and was recorded as original issue discount and subsequentlyexpensed as interest expense over the 90-day term of the loan.  On August 24, 2006, the Company amended the$75,000 promissory note to extend the due date of the loan from August 30, 2006to October 29, 2006.  In connection withthe amendment, following repayment of the promissory note, the Company willissue a five-year warrant to the investor to acquire 417 shares of the Company’scommon stock at $0.50 per share for each day the promissory note is outstandingbetween August 30 and October 29, 2006. The fair value of the warrant on the amendment date was estimated usingthe Black-Scholes pricing model to be $0.54 per share, and is expensed asinterest expense as they are earned.  Thetotal interest expense so recorded for the original warrant and the amendmentrelated warrant was $24,206 and $32,706 in the three and nine month periodsended September 30, 2006, respectively.***

***On July21, 2006, the Company borrowed $7,500 from an investor, and in connectiontherewith issued to such lender a promissory note to mature on October 19, 2006(see Note 4).  Under the terms of theloan agreement, the Company issued a five-year warrant to the investor toacquire 3,750 shares of Company common stock at $0.50 per share.  The gross proceeds of $7,500 were allocatedbetween the promissory note and the common stock warrant based on the relativefair values of the securities at the time of issuance.  The warrant, valued at $2,025 using theBlack-Scholes pricing model, was recorded as original issue discount and isbeing expensed as interest expense over the term of the promissory note.  Interest expense so recorded was $1,620 and$1,620 in the three and nine month periods ended September 30, 2006,respectively.***

***On August 30, 2006, the Company borrowed$10,000 from an individual, and in connection therewith issued to such lender apromissory note to mature on November 28, 2006 (see Note 4).  Under the terms of the loan agreement, theCompany issued a five-year warrant to the investor to acquire 5,000 shares ofCompany common stock at $0.50 per share. The gross proceeds of $10,000 wereallocated between the promissory note and the common stock warrant based on therelative fair values of the securities at the time of issuance.  The warrant, valued at $2,300 using theBlack-Scholes pricing model, was recorded as original issue discount and isbeing expensed as interest expense over the term of the promissory note.  Interest expense so recorded was $1,227 and$1,227 in the three and nine month periods ended September 30, 2006,respectively.***

**Note 3.  Notes Payable – Bank.**

On September 14, 2005, ProUroCare Inc. borrowed $100,000 from afinancial institution and issued a secured promissory note to suchinstitution.  The promissory note wascollateralized by the assets of the business under an existing commercialsecurity agreement with the financial institution and a commercial guarantyfrom an individual investor.  Thepromissory note bore interest at an annual rate of 8.0% and was to mature onMarch 14, 2006.  Interest expenserecorded during the three and nine month periods ended September 30, 2006related to this note was $0 and $1,079, respectively.  In connection with the commercial guaranty,the Company issued two five-year warrants to the investor to acquire a total of50,000 shares of the Company’s common stock at $0.50 per share (see Note 2).

On October 20,2005, ProUroCare Inc. borrowed $300,000 from a financial institution.  The loan was evidenced by a promissory noteand collateralized by two$150,000 commercial guaranties provided by two accredited investors and**by the assets of the businessunder an existing commercial security agreement.  The promissory note bore interest at anannual rate of 8.75% and was to mature on March 14, 2006. 

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Interestexpense recorded during the three and nine month periods ended September 30,2006 related to this note was $0 and $3,540, respectively.  In connection with the commercialguaranties, on October 19, 2005, the Company issued five-year warrants to thetwo guarantors to acquire up to 150,000 shares of the Company’s common stock at$0.50 per share (see Note 2).

***Both of these notes (plus accrued interest thereon) were repaid onFebruary 16, 2006 from the net proceeds of the first closing under the Company’songoing senior debt financing (see Note 5).***

**Note 4.  Notes Payable.**

***On September 21, 2005, ProUroCare Inc., borrowed $100,000 from anunrelated individual lender, and in connection therewith issued to such lendera promissory note to mature on March 20, 2006. The promissory note bore an annual interest rate of prime less one-halfpercent*** and was repaid onFebruary 16, 2006.  Interest expense recorded during the three and ninemonth periods ended September 30, 2006 related to this note was $0 and $893,respectively.  In connectionwith the promissory note, the Company issued two five-year warrants(immediately exercisable) to the lender to acquire a total of 50,000 shares ofthe Company’s common stock at $0.50 per share (see Note 2).

***On January 25, 2006, ProUroCare Inc. borrowed, solely for short-termworking capital needs, a total of $48,000 in three separate transactions:***

***1.***                     $12,500from Alexander Nazarenko, a Director of the Company; in consideration, theCompany executed and issued to Mr. Nazarenko a $12,500 unsecured demandpromissory note, which bore interest at an annual rate of prime plus onepercent;

***2.***                     $12,500from David F. Koenig, a Director of the Company; in consideration, the Companyexecuted and issued to Mr. Koenig a $12,500 unsecured demand promissory note,which bore interest at an annual rate of prime plus one percent; and

***3.***                     $23,000from Adron Holdings, LLC (“Adron”), a Minnesota limited liability company,pursuant to a loan agreement between the Company, Adron, Maurice Taylor II andDavid Koenig, a Director of the Company (the “Loan Agreement”).  In consideration for such $23,000 loan, theCompany issued to Adron a $23,000 unsecured promissory note (the “Adron Note”).  Mr. Taylor and Mr. Koenig each personallyguaranteed one-half of the Company’s obligations under the Adron Note andreceived no compensation for the guarantee. The Adron Note was due on March 14, 2006, on which date the Company wasobligated to pay an administrative fee of $4,000; such fee was reduced on a prorata basis due to early repayment (see below). Under the terms of this loanagreement, the Company issued a five-year warrant to Adron to acquire 50,000shares of Company common stock at $0.50 per share (see Note 2).

***All of the above notes (plus accrued interest thereon) were repaid onFebruary 16, 2006 from the net proceeds of the first two closings under theCompany’s ongoing senior debt financing (see Note 5).***

***On June 1, 2006, ProUroCare Inc. borrowed $75,000 from an investor, andin connection therewith issued to such investor a promissory note to mature onAugust 30, 2006. ***On August 24, 2006 the promissory note was amendedto mature on October 29, 2006 or within 15 days of the next closing of anaggregate of $1 million of net proceeds under the Company’s ongoing senior debtfinancing (see Note 5).  The promissory note and amendmentthereto bears an interest at the prime rate. Interest expense recorded duringthe three and nine month periods ended September 30, 2006 related to this notewas $1,582 and $2,097, respectively. In connection with the promissory note, the Company issued a five-yearwarrant (immediately exercisable) to the investor to acquire a total of 37,500shares of the Company’s

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***common stock at $0.50 per share. ***In connection with theamendment, following repayment of the promissory note, the Company will issue afive-year warrant to the investor to acquire 417 shares of the Company’s commonstock for each day the promissory note is outstanding between August 30, 2006and October 29, 2006 at $0.50 per share (see Note 2).

***On July 21, 2006, the Companyborrowed $7,500 from an investor and in connection therewith issued to suchlender a promissory note to mature on October 19, 2006.  The promissory note bears an interest at 9.0%per annum.  Interest expense recordedduring the three and nine month periods ended September 30, 2006 related tothis note was $360 and $360, respectively. In connection with the promissory note, the Company issued a five-yearwarrant (immediately exercisable) to the investor to acquire a total of 3,750shares of the Company’s common stock at $0.50 per share (see Note 2).***

***On August 30, 2006, the Company borrowed$10,000 from an individual, and in connection therewith issued to such lender apromissory note to mature on November 28, 2006. The promissory note bears an interest at 9.0% per annum.  Interest expense recorded during the threeand nine month periods ended September 30, 2006 related to this note was $380and $380, respectively.  In connectionwith the promissory note, the Company issued a five-year warrant (immediatelyexercisable) to the individual to acquire a total of 5,000 shares of theCompany’s common stock at $0.50 per share (see Note 2).***

**Note 5. Ongoing Senior Debt Financing; Convertible Debentures.**

***The Company has undertaken a $4.0to $6.0 million senior debt financing effort in the form of long-term bankloans (the “Loans”) secured by a pledge of all Company assets, including twotechnology licenses that were assigned to the bank, and guaranteed by a limitednumber of accredited individual investors, who receive unsecured convertibledebentures in consideration for their guarantees.  Effective February 16, 2006 and February 28,2006, the Company completed its first two closings under this senior debtfinancing.  These first two closingsaggregated $2.2 million, all of which had been drawn down by the Company as ofSeptember 30, 2006.  M***anagementcan give no assurance that additional closings will occur, nor that theremaining $1.8 to $3.8 million will be secured on a timely basis in 2006, or atall.

As consideration to the guarantors to provide theirguarantees for this $4 to $6 million senior debt financing, the Company intends to issue up to $2million of unsecured convertible 10% debentures that are due in 36 months.  The debentures are convertible at the holders’option into an aggregate of up to 4,000,000 shares of common stock (up to6,666,667 shares if the underlying senior credit facility is not retired withinapproximately 20 months of the debenture issuance date).

***Pursuant to the first of the twoclosings, on February 16, 2006, the Company issued a promissory note to itslender in the amount of $1,200,000 at an interest rate of the Prime Rate plus1.0% (9.25% at September 30, 2006).  Thispromissory note matures on January 11, 2008. In connection with this note, two accredited individuals each guaranteed$600,000 of the loan, and were each issued a 10% unsecured convertiblesubordinated debenture in the amount of $200,000. Furthermore, under the secondclosing held on February 28, 2006, the Company issued a second promissory noteto its lender in the amount of $1,000,000, at an interest rate of the primerate plus one percent (9.25% at September 30, 2006).  This promissory note matures on February 29,2008.  Two additional accreditedindividuals guaranteed the $1,000,000 face amount of this promissory note, andin consideration, were issued 10% unsecured convertible subordinated debenturestotaling $333,334.***

***All of the 10% unsecuredconvertible subordinated debentures issued to the guarantors in connection withthe Company’s ongoing senior debt facility mature three years from the date ofissue and are convertible into Company common stock at a price of $0.50 pershare.  If the guarantees of theunderlying bank indebtedness are not released by August 31, 2007 (orsubsequently October 31, 2007) the conversion price becomes $0.40 per share(and subsequently $0.30 per share), respectively.  The cost***

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***of the debentures was recorded asdebt issuance cost, and is being amortized as interest expense over the term ofthe underlying bank note payable.  Thevalue of beneficial conversion feature was computed as the difference betweenthe fair market value of the shares at the transaction dates and the lowestpossible conversion price during the debenture term ($0.30 per share),multiplied by the number of conversion shares that would be issued at thatconversion price (2,444,444 shares).  Thevalue so computed was in excess of the face value of the convertible debenturesissued, and was therefore limited to the face value of the debentures issued($733,334).  The beneficial conversionfeature was recorded as an original issue discount against the convertible debtliability and is being amortized as interest expense over the term of theconvertible debentures.***

**Note 6.  Legal Proceeding.**

The Company, like most public companies, is involved in routine legalproceedings in the conduct of the ordinary course of its business.

***On April 2, 2004, a formerofficer and employee of ProUroCare Inc. filed a lawsuit against ProUroCare Inc.and the Company relating to his separation of employment with ProUroCare Inc.prior to the Merger.  On March 3, 2006,the Company and ProUroCare Inc. settled this lawsuit.  Under the settlement agreement, the Companypaid $177,000 plus $1,924 of payroll taxes in complete settlement of all claimsand a dismissal of the former employee’s claim. The entire amount paid in the settlement was recorded as a reserve as ofDecember 31, 2005.***

***Note 7.  SubsequentEvents.***

On October 31, 2006 a member of the Company’s Board ofDirectors loaned $7,000 to the Company. There was no written loan agreement associated with this loan.  The Company expects to repay the loan uponreceiving sufficient proceeds from its on-going financing efforts.

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

*The accompanying Plan of Operation should be readin conjunction with ProUroCare’s audited financial statements, and notesthereto, for the year ended December 31, 2005 filed in our annual report onForm 10-KSB on March 31, 2006.*

*Certainstatements contained in this report 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: our continued accessto critical working capital to fund our needs until we generate sufficientongoing revenue; estimates regarding the size of our target markets; successfulproduct completion and development and clinical and commercial trials for ourproducts; the timing and success of such product development and U.S. clinicaltrials and securing approval from the Food and Drug Administration (“FDA”);acceptance of our products in the marketplace; new product introductions;competitive factors; physician and urology acceptance of our products in themarketplace; reimbursement for our products; enforcement of our intellectualproperty rights; and the success and strategy outlined in our business model.We caution that these statements are qualified by important factors that couldcause actual results to differ materially from those reflected by theforward-looking statements contained herein.*

*Overview;**Product Offerings.*

ProUroCare Medical Inc. (“ProUroCare,” the “Company,” “we,” “us” or “our,”which terms include reference to ProUroCare Inc., ProUroCare Medical Inc.’swholly owned subsidiary) is a development stage company that is developing screening,diagnostic, and monitoring equipment for prostate disease.  Our developmental activities have includedthe acquisition of several technology licenses, the development of a strategicbusiness plan and a senior management team, product development and fundraising activities.

**ProUroScan****TM**** Prostate Mechanical Imaging System**

Our initial product is theProUroScanTM system, developed and designed as a uniquediagnostic-imaging system that enables physicians to accurately display andchart a prostate examination, and identify tissue abnormalities.  The ProUroScanTM imaging system is being designed to show thesize and symmetry of the prostate and detect certain soft-tissue abnormalitieswithin the prostate that may be precursors to a more clearly defined hardenedarea or nodule.

Screening for tissueabnormalities is currently accomplished by means of a digital rectalexamination (“DRE”).  A DRE is aqualitative and subjective test in which a physician wearing a latex gloveinserts a lubricated finger into the rectum to feel or palpate the prostategland for abnormalities.  The clinicianmust rely on his or her experience and the sensitivity of their finger toestimate the size of the prostate and detect hardness or abnormalities withinthe prostate that may indicate the presence of potentially life-threateningdisease.  We believe that the ProUroScanTM will enable a physician todetect abnormalities in the prostate more accurately than with their finger,assess areas of the prostate that the physician cannot reach with their finger,and produce quantifiable and chartable results. Moreover, the ProUroScanTM offersthe advantage of being able to create an electronic record that can be storedwithin the system, printed and used for comparisons with new images created ata later date.  No such electronic recordsor color images are possible when performing a traditional DRE.

The ProUroScanTM system consists of a probe, acentral processing unit containing proprietary image construction algorithms, acomputer with color monitor and keyboard, a color printer, and single-usedisposable sheaths to cover the tip of the probe.  The ProUroScanTM probe is specially designed for the rectalanatomy to minimize discomfort.  It isergonomic for the clinician and similar to a traditional

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DREfor the patient.  The probe utilizespressure sensors located on the face of the probe head to palpate theprostate.  The probe attaches to thecentral processing unit which converts the information from the probe sensorswith proprietary algorithms and then translates the data into a multicolorimage on the monitor. This real-time imaging capability allows the personadministering the test to examine the entire surface of the prostate, which inturn assists prostate image construction.

We anticipate that themajority of the revenue from this system will be generated by usage fees basedon consumption of proprietary disposable sheaths and/or probe tips.  The systems themselves likely will be placedin clinics under a variety of programs, including operating leases, financingleases, outright sale, or placements paid for by an upcharge or usage premiumpaid on a per use basis.

We intend to position thisproduct as an adjunctive test to DRE and Prostate Specific Antigen (“PSA”)blood tests, which have low sensitivity and specificity and cannot bedocumented with color images.  TheProUroScanTM willbe marketed towards primary care physicians and urologists.  We believe the ProUroScanTM will help ensure that primary care physiciansscreen more effectively and quickly refer appropriate patients to urologistsfor more definitive testing.

The ProUroScanTM iscurrently in product development.  Thedesign specifications are being finalized and performance characteristics aregenerally known.  Further developmentwork in the areas of positioning system refinement, software, user interface,and sensor production, among others, must be completed before the system can becommercialized.

The current pre-clinical version of the ProUroScanTM was developed under two researchand development agreements with Artann Laboratories (“Artann”).  Two pre-clinical ProUroScanTM systems were delivered by Artannin late November 2004, and have undergone bench and laboratory testing toconfirm the function of the system components and the overall operatingsystem.  In September 2006, Artann wasawarded a Small Business Innovation Research Phase II Competitive Renewal grantfrom the National Cancer Institute. The aim of the grant is to help advance thedevelopment and application for the FDA clearance of our ProUroScanTM system.  The three-year grantwill provide up to $3 million for ProUroScanTM development, effective September 29,2006.  It is our intent to work withArtann under this grant, and to expand our working relationship with Artann toinclude their participation in the development and commercialization of futuregenerations of the ProUroScanTM.

In March 2006, we engaged Devicix, LLC of Chaska,Minnesota (“Devicix”), a firm that provides electrical, mechanical, biomedical,and software engineering services to established and early-stage medical devicecompanies.  We expect that Devicix willassist us in transferring technology from Artann’s system, place designdocumentation under an FDA compliant quality control system, complete thedesign documentation required to submit an FDA request for product clearance,perform verification and validation testing including certification of systemsafety to medical device standards and prepare a documentation packageincluding the definition of assembly instructions and quality control processesfor transfer to manufacturing.

We are currently in the process of establishing a series of labelingclaims reflecting the current needs of the market and the capabilities of thesystem.  Given that the system will becapable of providing physicians with a number of different outputs, we areattempting to create a regulatory strategy that will enable us to beginmarketing a basic system and then expand the labeling claims to incorporate moresophisticated features as they are developed and validated in clinicalstudies.  The advantage of this approachis that it allows us to minimize the time it will take to obtain FDA approvaland to begin commercializing an operational system sooner.  Having systems in place will also beimportant in assessing future enhancements while physicians are using it inactual clinical practice.

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Although the initial claim has yet to be finalized, the content of theclaim will likely be limited to the system’s ability to**producea surface map or record of the prostate as an aid to document palpable lesionsidentified during a clinical prostate examination.  Based on the scope of this claim andthe input received from consultants and clinical study sites, we believe theinitial 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.  Following completion of theremaining engineering and development efforts on the current system, a smallpre-clinical study will be conducted to ensure that all design criteria andoperating requirements of the system have been achieved.  Systems will then be placed in a selectnumber of major medical centers that will screen patients and collect data forthe FDA submission.  It is anticipatedthat the FDA clinical studies will require approximately three months tocomplete, and that an additional month will be needed to analyze the data andprepare a formal submission to the agency. Centers participating in the study will be required to obtain approvalfrom their Institutional Review Board (“IRB”) to protect the rights and welfareof all participants.  IRB approval hasbeen granted for the first ProUroScanTM studies at the Minneapolis/St. Paul Veteran’sAdministration Medical Center and at the Robert Wood Johnson UniversityHospital in New Brunswick, New Jersey.

The actual number of patients that will be studied and the specificclinical protocol that will be followed will be significantly impacted by ameeting that we anticipate having with the FDA prior to conducting clinicaltrials.  At that meeting we will presentinformation about the product and all relevant and laboratory testingdata.  We will also propose a strategyfor validating our labeling claim and a clinical protocol that allinvestigative centers will be expected to follow, with the goal being to obtainenough clinical data to have sufficient confidence that the system will performas defined in the product labeling.

Assuming the path outlined above is acceptable to the FDA, of which noassurance can be given, we expect to make a formal submission to the agencyshortly after completion of the clinical study. Recently published FDA statistics indicate that the average time fromreceipt of a 510(k) application to final action is 65 days, with 90% completedin less than 180 days.  Based on thisdata, assuming that the results of the clinical trials pose no unanticipatedproblems, we expect to receive FDA concurrence within 90 – 180 days after the510(k) application is filed.  Suchconcurrence will allow us to begin active marketing of the ProUroScanTM system within the United States.

As new and more enhancedproduct features are developed, the Company plans to file additionalsubmissions with the FDA and to obtain expanded labeling claims.  Depending on the exact nature of theseclaims, the approval process may require more extensive clinical studies andpossibly a full pre-market approval (“PMA”) application.  Such an application will likely takesignificantly more time and be more comprehensive than the 510(k) approvalprocess.

**ProUroVision****TM**** Thermal Therapy Vision System**

Oursecond product, the ProUroVisionTM, is a proprietary vision technology for thermaltherapy systems designed to aid in the treatment of benign prostatichyperplasia (“BPH”) and other prostate diseases.  Thermal therapy is a minimally invasivecatheter-based therapy that uses microwave technology to precisely andpreferentially heat diseased areas of the prostate to a temperature sufficientto cause cell death and is one of the urology community’s accepted alternativesto surgical intervention. The ProUroVisionTM’s unique and proprietary Electrical ImpedanceTomography (“EIT”) technology will allow the urologist to observe the heatmigrate in real time through the prostate during the thermal treatment.  This product will give vision to what iscurrently a blind procedure and in so doing, protect the urethral tissue andadjacent organs, enhancing safety and efficacy.

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**Joint Development Agreement with Urologix Inc.**

On August 2, 2005, we entered into a co-developmentagreement with Urologix®, Inc. and Rensselaer Polytechnic Instituteto develop a real-time temperature imaging system, ProUroVisionTM, to beutilized with Urologix’ Cooled ThermoTherapyTM system in the treatment of BPH aswell as potential new indications. Urologix entered into this agreement with the belief that they canachieve substantially increased utilization of their system by giving thephysician the ability to see the progress of their thermal therapy treatment,thus increasing their confidence in being able to deliver positive clinicaloutcomes for their patients. Combined with the ProUroVisionTM technology, Urologix’ CooledThermoTherapyTM procedure could become the treatment of choice when drugsare no longer effective.

We have successfully completed the first phase ofresearch, testing and development, proving the feasibility of measuringtemperature changes using EIT techniques in a simulated environment.  The parties are currently evaluating certaintechnical findings from this first phase before proceeding with subsequentphases in the development process. ProUroCare and Urologix have agreed to equally share in the developmentcosts of these phases.  Upon successfulcompletion of the development of the modules, the parties contemplate enteringinto definitive agreements pursuant to which Urologix would market the newproducts subject to a license agreement.

Theparties expect the final EIT system to be assembled into modules that will becompatible with Urologix’ existing thermal therapy systems.  They plan to retrofit the system on theirinstalled base of approximately 500 thermal therapy systems, and to integrate thesystem into their devices for new placements. We intend to contract manufacture and sell to them a single use,disposable rectal sheath and electrode kit needed to perform the therapyprocedure. Upon conversion of Urologix’ installed systems, we expect ourdisposable kits will be used in the approximately 20,000 procedures currentlyperformed each year.

*Assets; Property Acquisitions andDispositions*.

Our primary assets are cash, licenses and other keyintellectual property rights, which are the foundation for our proposed productofferings.  These assets have beenpledged as security against promissory notes with Crown Bank.  We anticipate purchasing only a very limitedamount of equipment and other assets during the next 12 months.  We do not anticipate selling any significantequipment or other assets in the near term.

*CurrentOperations – Employees and Expenses*.

We currently employ three executive officers and oneother employee.  We conduct our researchand development, market research, regulatory, and other business operationsthrough the use of a variety of consultants and medical device developmentcontractors.  We believe that usingconsultants and contractors to perform these functions is more cost effectivethan hiring full-time employees and affords us flexibility in directing ourresources toward specific and changing goals during our development stage.  As we prepare for FDA submission and marketlaunch of our ProUroScanTM product, we expect to add four to sixemployees in the areas of engineering and regulatory compliance within the next12 months.  During the next 12 months, weexpect to complete the development of clinical ProUroScanTM systems, conduct clinical trials inpreparation for filing a 510(k) submission with the FDA, and fund developmentwork on our therapeutic products.

We incur ongoing expenses that are directly related tobeing a publicly traded company, including professional audit and legal fees,financial printing, press releases and transfer agent fees.  Our facilities consist of a month-to-monthrental of approximately 2,200 square feet in an office that we share

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with another company.Other expenses incurred include travel, insurance, telephone, supplies andother miscellaneous expenses. Over the next 12 months, we anticipate spendingapproximately $1.3 million in marketing and administrative expenses.  Of these, we expect that approximately$840,000 will be for compensation, benefits, and payroll taxes.

We anticipate that we will spend between $1.9 and $2.1million on research and product development of the ProUroScanTM system over the next 12 months.  Of this amount, approximately $1.1 to $1.2million will be spent on manufacturing, engineering, validation anddocumentation efforts with a contracted medical-products developmentcompany.  Clinical trials and the 510(k)filing with the FDA are expected to cost in the range of $275,000 to$300,000.  ProUroScanTM systems created for development and clinicaluse are expected to cost between $150,000 and $200,000.  Internal salaries, benefits, andmiscellaneous departmental expenses for software and hardware development,regulatory work, and project management are estimated to be $475,000 to$500,000.

For our thermal therapy products, we expect thatresearch and development efforts will be funded primarily through a jointdevelopment and marketing arrangement with Urologix.  We expect to spend between $125,000 and$150,000 over the next 12 months in this joint development effort.

*Liquidity and Capital Resources.*

We had a working capitaldeficit of approximately $(835,000) and $(1,499,000) at September 30, 2006 andDecember 31, 2005, respectively.  Cashused in operations was approximately $1,573,000 and $531,000 for the nine monthperiods ended September 30, 2006 and 2005, and $6,174,000 for the period fromAugust 17, 1999 (date of inception) to September 30, 2006.

The primary use of cash inthe nine months ended September 30, 2006 was to fund our operating losses,retire $500,000 of outstanding notes payable and pay approximately $808,000 ofoutstanding accounts payable and accrued expenses.  The primary use of cash in the period fromAugust 17, 1999 (inception) through September 30, 2006, was to fund the$6,174,000 cash used in operating activities. Cash was also used to pay$750,000 to Profile, LLC to redeem common stock arising from their exercise ofdissenter’s rights at the time of the Merger, including $650,000 (plus accruedinterest) in relation to a note payable, to fund the approximate $163,000 costof the Merger and to acquire approximately $21,000 of office furniture andcomputer equipment.

In September 2006, ourdevelopment partner, Artann, was awarded a Small Business Innovation ResearchPhase II Competitive Renewal grant from the National Cancer Institute.  The three-year grant will provide up to $3million for ProUroScanTM development and application for the FDAclearance of thesystem. Although all grant funding must go towards work on the ProUroScanTM system, Artann as the grantrecipient controls the specific allocation of the funding.  We expect to work closely with Artann todefine the specific activities to be funded by this grant, and who will performthem. The funding is available only on a reimbursement basis; the parties mustperform the work first, and then apply for reimbursement from the grant.  While funds from this grant are not readilyavailable to us to meet general operating costs, they will be used to covercertain future ProUroScanTM development and FDA clearance activitiesthereby reducing the amount of funding required for these activities from othersources.

As of the date of this report, we had only a minimalamount of cash available, which is not sufficient to cover our normal operatingexpenses.  In addition, we have currentliabilities exceeding $900,000. To satisfy our financing requirements, fund ourlosses, further the development of our products and fund us until we secureinitial FDA market clearance on our ProUroScanTM product, we are seeking funding from a varietyof sources:

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·                  We continue to seekguarantors for our senior debt credit financing effort that we initiated latein 2005. This credit facility is secured by all the Company’s assets, includingits rights and licenses to our essential technology, and personally guaranteedby certain individual guarantors. As of the date of this report, we have closedon $2.2 million of this credit facility that was expected to raise $4 to $6million. If we succeed in closing on the $6 million maximum amount of thisfinancing, as consideration to the guarantors to provide their guarantees wewill issue $2 million of unsecured convertible 10% debentures that are due in36 months.  The debentures areconvertible at the holders’ option into an aggregate of 4,000,000 shares ofcommon stock (up to 6,666,667 shares if the underlying senior credit facilityis not retired within approximately 20 months of each debenture’s issuancedate). It has taken more time to close on additional amounts under the seniordebt financing effort than was anticipated, and there is no guarantee that wewill be able to close on any additional amounts.

·                  We havecommenced an effort to sell up to $3 million of 8% convertible subordinateddebentures to accredited individuals. These debentures are due three years after their issued dates andconvertible into our common stock at a conversion price of between $0.50 to$1.50 per share depending on the conversion date.

·                  We arenegotiating with certain interested parties who have expressed an interest inmaking direct equity investments in our Company and are endeavoring to identifyadditional such parties.  These potentialequity investments will most likely be in the form of investment unitsconsisting of shares of our common stock with warrants attached.  The exact terms of these potential equityinvestments have not been determined and are subject to further negotiation.

·                  We have takenmeasures to conserve cash, includingsubstantially reducing development work on the ProUroScanTM system, reducing expenses, and deferringvendor payments and staff salaries.

If additional funds are raised by the issuance of debtor equity securities, such as through the issuance of stock, the issuance andexercise of warrants, or the issuance and conversion of convertible debentures,then existing shareholders will experience dilution of their ownershipinterest.  If additional funds are raisedby the issuance of debt or other equity instruments, we may become subject tocertain operational limitations, and such securities may have rights senior tothose of existing holders of common stock.

Management can give no assurance that the financing werequire to continue operations and complete the development of our products canbe secured on a timely basis in 2006, or at all.  Continued inability to fund the developmentof our products willdelay our anticipated entry into the market accordingly.  Ultimately, if no additional financing isobtained on a timely basis, or at all, we could default on our senior debtfacility and lose our essential technology rights and licenses, and be forcedto cease operations.  See “RISK FACTORS ASSOCIATED WITH OURBUSINESS, OPERATIONS AND SECURITIES,” on page 20 of this quarterly report onForm 10-QSB.

**Going Concern**

We have incurred operatinglosses, accumulated deficit and negative cash flows from operations sinceinception.  As of September 30, 2006, wehad an accumulated deficit of approximately $12,463,000.  These factors, among others, raisesubstantial doubt about our ability to continue as a going concern.  The accompanying consolidated unauditedfinancial statements do not include any

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adjustmentsrelated to recoverability and classification of asset carrying amounts or theamount and classification of liabilities that might result should we be unableto continue as a going concern.

**Critical AccountingEstimates**

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 ourcurrent operations, we do not believe we have any critical policies orprocedures.

**IMPORTANTNOTICES TO INVESTORS; SAFE HARBOR STATEMENT**

Statements in this Form 10-QSB which are not purely historical are, andshould be deemed, forward-looking statements. These statements with respect to the goals, plan objectives, intentions,expectations, financial condition, results of operations, future performanceand business of our Company, include, without limitation, (i) our ability tosuccessfully complete all clinical trials and commercial development of ourproducts and secure all necessary federal and other regulatory approvals tointroduce and market our products in the United States and around the world;(ii) our ability to fund our working capital needs over the next 12 to 24months and until we generate sufficient ongoing revenue from our products;(iii) our ability to successfully introduce, market and sell our products intothe medical device markets; and (iv) all statements preceded by, followed by orthat include the words “may,” “would,” “could,” “should,” “expects,” “projects,”“anticipates,” “believes,” “estimates,” “plans,” “intends,” “targets” orsimilar expressions.

Forward-looking statements involve inherent risks and uncertainties,and important factors (many of which are beyond our control) that could causeactual results to differ materially from those set forth in the forward-lookingstatements, including the following, in addition to those contained in ourCompany’s reports on file with the Securities and Exchange Commission: generaleconomic or industry conditions, nationally and in the physician, urology andmedical device communities in which we intend to do business; our ability tofund our working capital needs over the next 12 to 24 months; our ability tocomplete the development of our existing and proposed products on a timelybasis or at all; legislation or regulatory requirements, including our securingall FDA and other regulatory approvals on a timely basis, or at all, prior tobeing able to market and sell our products in the United States; competitionfrom larger and more well established medical device companies and othercompetitors; the development of products that may be superior to the productsoffered by us; securing and protecting our intellectual property and assets andenforcing breaches of the same; clinical results not anticipated by managementof the Company; the quality or composition of our products and the strength andreliability of our contract vendors and partners; ability to raise capital tofund our 2006 and 2007 working capital needs and launch our products into themarketplace in subsequent years; changes in accounting principles, policies orguidelines; financial or political instability; acts of war or terrorism; andother economic, competitive, governmental, regulatory and technical factorsaffecting our operations, proposed products and prices.

Accordingly, investors and shareholders are cautioned to appreciatethat results actually achieved may differ materially from expected results inthese statements.  Forward-lookingstatements speak only as of the date they are made.  We do not undertake, and specificallydisclaim, any obligation to update any forward-looking statements to reflectevents or circumstances occurring after the date of such statements.

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**RISK FACTORS ASSOCIATED WITH OUR BUSINESS**, OPERATIONS AND SECURITIES

**As a development-stagecompany, we have no operating history and our business plan has not yet beenfully tested.  We will incur materialfuture losses until our products are completed, FDA regulatory approval issecured, and our products are successfully introduced into the United Statesand worldwide medical device markets.**

The Company, conductingbusiness through our wholly-owned subsidiary, ProUroCare Inc., is adevelopment-stage company.  We have yetto commence active operations or manufacture or sell any products associatedwith the proprietary urology-based imaging and therapeutic technologies that weintend to market.  We have no prioroperating history from which to evaluate our success, or our likelihood ofsuccess in operating our business, generating any revenues or achievingprofitability.  To date, we havegenerated no revenue and are proposing to enter the highly competitiveurology-imaging and therapeutic markets. There can be no assurance that our plans for developing and marketingour urology-based products will be successful, or that we will ever attainsignificant sales or profitability.  Weanticipate that we will incur losses in the near future.

**We will need additionalfinancing during 2006 and 2007 and beyond, and any such financing will likelybe dilutive to our existing shareholders.**

As of the date of this report, we had only a minimalamount of cash available, which is not sufficient to cover our normal operatingexpenses.  In addition, we have currentliabilities exceeding $900,000. To satisfy our financing requirements, fund ourlosses, further the development of our products and fund us until we secureinitial FDA market clearance on our ProUroScanTM product, we are seeking funding from a varietyof sources, which may or may not provide us with the additional funds werequire to continue as a going concern.

If additional funds are raised by the issuance of debtor equity securities, such as through the issuance of stock, the issuance andexercise of warrants, or the issuance and conversion of convertible debentures,then existing shareholders will experience dilution of their ownershipinterest.  If additional funds are raisedby the issuance of debt or other equity instruments, we may become subject tocertain operational limitations, and such securities may have rights senior tothose of existing holders of common stock.

###### Management can give no assurance that the financing we require tocontinue operations and complete the development of our products can be securedon a timely basis in 2006, or at all. Continued inability to fund the development of our products will delayour anticipated entry into the market accordingly.  Ultimately, if no additional financing isobtained on a timely basis, or at all, we could default on our senior debtfacility and lose our essential technology rights and licenses, and be forcedto cease operations.

###### **Our assetsare pledged to secure our senior debt financing and are not available to secureother senior debt financing.  As aresult, in the event of default, all assets will be assigned to loanguarantors.**

As discussed above,**and in ourfinancial statements, our ongoing senior debt financing through Crown Bank,Minneapolis, Minnesota, has required us to pledge all our assets and certainlicenses, as well as provide certain accredited investors’ personal guarantees.As such, the Company will not be in a position in the future to pledge itsassets to secure any debt or lending facility, in the event we desire or needto borrow such funds on a secured lending basis. Moreover, under the terms andconditions of the foregoing facility, and our agreement with such guarantors,in the event of any default by the Company with its senior lender, and personalguarantees are 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

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suchbreach and obligation to pay under the respective guarantees. Thus, commonshareholders of the Company, and any existing and future investors in theCompany’s common stock, would, if the foregoing breach and circumstancesoccurred, not have access or recourse to the Company’s assets and collateral,and thus, would likely face a complete loss of their investment in the Company.

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

Working with our developmentpartners, we have developed and manufactured two working ProUroScanTM systems for testing, clinicalvalidations and demonstration purposes. Previously we had developed and manufactured two working prototypeProUroScanTM systems to prove the feasibility of the deviceand to provide a means to test and develop future systems.  Nevertheless, we have not generated anyrevenues from the sale of the ProUroScanTM nor have we manufactured ProUroScanTM systems in commercialquantities.  The completion of thedevelopment of proposed products remains subject to all the risks associatedwith the development and manufacture of new products based on innovativetechnologies, including unanticipated technical, clinical, or other problems,failures to meet FDA requirements or performance objectives and the possible insufficiencyof the funds allocated for the completion of such development, which couldresult in a change in the design, delay in the development or abandonment ofsuch applications and products. Consequently, there can be no assurance that our products will besuccessfully developed or manufactured. Our failure to complete the development of products will have amaterially adverse effect on our business.

**Even if successfullydeveloped, our products may not be commercially viable.**

Even if we are able to successfullydevelop our products, we may not be able to manufacture such products incommercial quantities and at prices that will be commercially viable.  Further, there is risk that our products maynot prove to be as effective as currently available medical or diagnosticproducts.  The inability to successfullycomplete development of a product or application or a determination by us, forfinancial, technical or other reasons not to complete development of any productor application, particularly in instances in which we have made sufficientcapital expenditures will likely have a material adverse effect on ourbusiness.

**Even if successfullydeveloped, our products may not be accepted by the marketplace.**

Our products, even ifsuccessfully developed, will be competing against existing treatments andcompeting products in the medical device marketplace.  There can be no assurance that physicians,urologists, or the medical device market in general will accept our products.

**We will depend upon othersfor the manufacturing of our products, which will subject our business to therisk that we will be unable to fully control the supply of our products to themarket.**

Our ability to develop,manufacture and successfully commercialize our proposed products depends uponour ability to enter into and maintain contractual and collaborativearrangements with others. We do not intend to initially manufacture any of ourproposed products.  In this regard, weintend to retain contract manufacturers. There can be no assurance that such manufacturers will be able to supplyour products in the required quantities, at appropriate quality levels or atacceptable costs.  We may be adverselyaffected by any difficulties encountered by such third-party manufacturers thatresult in product defects, production delays or the inability to fulfill orderson a timely basis.  If a manufacturercannot meet our quality standards and delivery requirements in a cost-efficientmanner, we would likely suffer interruptions of delivery while we arrange foralternative manufacturing sources.  Anyextended disruption in the delivery of products could result in our inabilityto satisfy customer demand for our products. Consequently, our inability to obtain alternative sources on a timelybasis may have a material adverse effect on our business and results ofoperations.

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**Our reliance on third-partymanufacturers and other third parties in other aspects of our business willreduce any profits we may earn from our products and may negatively affectfuture product development.**

As noted above, we intend toinitially market and commercialize products manufactured by others, and inconnection therewith we will likely be required to enter into manufacturing,licensing and distribution arrangements with third parties.  These arrangements will likely reduce ourproduct profit margins.  In addition, theidentification of new product candidates for development may require us toenter into licensing or other collaborative agreements with others, includingmedical-device and pharmaceutical companies, and research institutions.  These collaborative agreements may require usto pay license fees, make milestone payments, pay royalties and/or grantrights, including marketing rights, to one or more parties.  Any such arrangement will reduce ourprofits.  Moreover, these arrangementsmay contain covenants restricting our product development or business effortsin the future.

**We may not be able to enterinto manufacturing agreements or other collaborative agreements on terms acceptableto us, if at all, which failure would materially and adversely affect ourbusiness.**

We cannot be sure that wewill be able to enter into manufacturing or other collaborative arrangementswith third parties on terms acceptable to us, if at all.  If we fail to establish such arrangementswhen and as necessary, we could be required to undertake these activities atour own expense, which would significantly increase our capital requirementsand may delay the development, manufacture and commercialization of ourproducts.  If we could not find ways ofaddressing these capital requirements, we would likely be forced to sell orabandon our business.

**We materially rely onconsultants and contractors, some of whom have been partially or wholly paidthrough issuances of common stock dilutive to our shareholders.**

We expect to materially relyon consultants and contractors to perform a significant amount of research anddevelopment, pre-manufacturing, clinical, regulatory and marketingactivities.  Expenses for theseactivities are anticipated to be approximately $1.3 to $1.4 million during thenext 12 months.  We plan to issuesecurities in partial satisfaction of certain development and consultingexpenses, including the Artann Laboratories warrants discussed below.  Any such issuance will be dilutive toshareholders.

Under the terms of aresearch and development agreement with Artann, we are committed to issuewarrants for up to an additional 200,000 shares of common stock at $2.00 pershare or current market price, whichever is lower.

**The resale of our commonstock under Rule 144, under our prior SB-2 Registration Statement, and inconjunction with our on-going senior debt financing has depressed and adverselyaffected the market price of our common stock in the public market, and thus,could cause additional dilution if and when the Company needs to raiseadditional working capital.**

The sale, or availabilityfor sale, of our restricted common stock in the public market pursuant to Rule144, in the ordinary course, and previously under our prior RegistrationStatement on Form SB-2that became effective on January 24, 2005 has adverselyaffected the prevailing market price of our common stock, and will likely do soin the future. Furthermore, due to the 11,027,836 shares of restricted commonstock that have been held over one (1) year, and thus, are eligible for resaleunder Rule 144, selling stockholders may continue to depress the price of ourcommon stock. Accordingly, the adverse market and pricing pressures resultingfrom the resale of our common stock may continue for an extended period of timeand continue to depress the price of our common stock in the open market.

Pursuant to our ongoingsenior debt financing described above, we may issue debentures convertible atthe holders’ option into an aggregate of up to 4,000,000 shares of common stock(up to 6,666,667 shares if the underlying senior credit facility is not retiredwithin approximately 20 months of

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thedebenture’s issuance date).  Pursuant toour $3 million 8% convertible subordinated debenture offering, we plan to issuedebentures convertible at the holders’ option into an aggregate of up to6,000,000 shares of common stock.  Theholders of these debentures have been granted registration rights, wherebyholders of 60% or more of the amount of the debentures can demand that theshares issued upon conversion be registered with the SEC for publicresale.  We may also issue additionalshares and securities convertible into shares in connection with our businessand may grant additional stock options to our employees, officers, directorsand consultants or warrants to third parties. The sale, or availability for sale, of these additional shares of commonstock in the public market will likely increase the adverse market and pricingpressure.

If these adverse marketconditions persist, and the Company needs to secure additional capital during2006 and 2007 and beyond, such pricing pressure and market conditions couldhinder our ability to raise capital on terms and conditions acceptable to theCompany. In addition, shareholders may experience dilution if and when theCompany raises additional capital by the sale of its equity securities undersuch adverse market conditions.

**The commercialization of ourproducts could be significantly delayed by governmental regulation and any andall such delays, if they occur, will likely materially and adversely affect theCompany and our operations.**

The proposed products weintend to develop, assemble and market are subject to regulations by the FDAand by comparable agencies in certain states and various foreigncountries.  The process of complying withthe requirements of the FDA, related agencies and other state and foreignagencies is costly, time consuming and burdensome, especially for apre-revenue, development stage company. Although we have secured the assistance of regulatory consultants tohelp direct our regulatory compliance and filings, no assurances can be giventhat such filings will be acceptable to the FDA or other regulatorybodies.  Further, even if acceptable, wemay encounter significant delays which will materially and adversely affect ourbusiness plan.

**We are highly dependent onthe services provided by certain key personnel.**

We are highly and materiallydependent upon the services of our executive officers and other key personnel,including Maurice R. Taylor II, Michael P. Grossman, Richard Thon and RichardCarlson.  We have not obtained “key-man”life insurance insuring the lives of any of these persons.  If the services of any of these personsbecome unavailable to us, for any reason, our business could be adverselyaffected.

**Our officers and directorspossess substantial voting power with respect to our common stock, which couldadversely affect the market price of our common stock.**

Our officers and directorscollectively possess beneficial ownership of 5,362,352 shares of our commonstock, which represents approximately 34.3% of the voting power of our commonstock.  This represents a significant portionof the voting power of the Company’s shareholders.  As a result, our directors and officers willhave the ability to substantially (but not wholly) control our management andaffairs through the election and removal of our entire board of directors, andall other matters requiring shareholder approval, including the future merger,consolidation or sale of all or substantially all of our assets.  This concentrated control could discourageothers from initiating 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 inour common stock through the market price of our common stock or ultimate saleof our business could be adversely affected.

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**We license from thirdparties, and do not own or control, key intellectual property critical to ourproducts.**

We haveexclusively licensed from third parties intellectual property covered bypatents and patent applications. Although we have been advised by patent counsel that such licensedtechnologies have received protection in proposed major market areas, noassurance can be given that such protections will be properly maintained by theparties controlling such intellectual properties, or that such licenses will behonored and not breached.  Theintellectual property licensed from third parties includes technology that iscritical to our proposed products.  Ifthe parties controlling such intellectual property breach our licenses, or failto adequately maintain, assert and defend such intellectual property, we maynot be able to maintain the technological (and thereby competitive) edge webelieve we possess.  As discussed above,**and in our financial statements, our ongoing senior debtfinancing through Crown Bank, Minneapolis, Minnesota, has required us to pledgeall of our assets and certain licenses, as well as to provide certainaccredited investors’ personal guarantees. Moreover, under the terms andconditions of the foregoing facility, and our agreement with such guarantors,in the event of any default by the Company with its senior lender, and personalguarantees are called and honored, the Company and its lender have agreed thatall of the Company’s assets shall be assigned to such guarantors, pro rata, inconsideration of such breach and obligation to pay under the respectiveguarantees. 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’sintellectual property. Any such loss of intellectual property protections wouldlikely have a materially adverse effect on the Company and its business.

**If we lose our right tolicense from third parties certain critical intellectual property, our entirebusiness would be in jeopardy.**

The agreements pursuant towhich we license critical intellectual property are not irrevocable.  If we should lose our right to license anduse any technology covered by our licenses, such loss would have a materiallyadverse effect on the Company and our business. In such a case, the viability of the Company’s business would be inquestion. Our only alternatives would be to find existing and non-infringingtechnology to replace that lost (if any exists), or to develop new technologyourselves.  The pursuit of any suchalternative would likely cause significant delay in the development andintroduction of our proposed products.

**The protections for theintellectual property we own and license from other parties may be successfullychallenged by third parties.**

We own and, as noted above,license from third parties various key intellectual property.  No assurance can be given that anyintellectual property claims will not be successfully challenged by thirdparties.  Any challenge to ourintellectual property, regardless of merit, would likely involve costlylitigation which would materially and adversely affect the Company.  Moreover, if a challenge were successful, itis possible that the viability of the Company’s business would be inquestion.  If a successful challenge weremade to intellectual property that is critical to our proposed products, thepursuit of any such alternative would likely cause significant delay in thedevelopment and introduction of such products.

**Rapid technological changein our competitive marketplace may render our proposed products obsolete ordiminish our ability to compete in the marketplace.**

The urologic products andmedical device markets are extremely competitive, dominated by large and wellfinanced competition, and subject to rapid technological advances andchanges.  The discovery of newtechnologies and advances in the application of such technologies to the medicalmarketplace in general, and the market for urologic products in particular, mayrender our products obsolete or non-competitive.  

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Anysuch changes and advances could force us to abandon our currently proposedproducts, which would have a material and adverse effect on the Company and itsbusiness.

**We may not be able tocompete against companies with greater resources than us, or with anycompetition.**

The urology imaging andtherapeutic businesses and the medical device and life sciences business ingeneral, are extremely competitive.  Wehave experienced, and expect to continue experiencing significant competitionin the medical device market.  Althoughwe believe we may have a proprietary niche in the prostate-imaging andprostate-therapeutic marketplaces, many factors beyond our control will likelyencourage new competitors.  Inparticular, several large companies will compete with us in theprostate-imaging and prostate-therapeutic business.  Many of the companies that will be in directcompetition with us have significantly greater resources, more personnel andlonger operating histories than we do. Therefore, no assurance can be given that we will be able tosuccessfully compete with these, or any other companies in the marketplace, ifat all.

**Our failure to receivethird-party reimbursement for our products, when in the marketplace, wouldresult in diminished marketability of our products.**

We do not currently receivereimbursement from any party for the use of our products because no productsare currently fully developed and available for sale in the marketplace and wehave taken no steps to obtain approval for reimbursement for the use of any ofour proposed products.  Nevertheless, weare working to formulate the appropriate approach to obtaining and optimizinggovernment and third-party reimbursement for the use of our products.  We expect that the use of our ProUroScanTM product will be eligible forreimbursement utilizing existing Current Procedural Terminology (“CPT”) codes(discussed below).  In addition, and asexplained below, we believe that our therapeutic products will be used inprocedures eligible for reimbursement as well, without negatively affectingreimbursement for such procedures.  Thesuccess of our future medical device products will materially depend on theability of medical service providers to obtain third-party reimbursement fromprivate insurance sources, Medicare, Medicaid, and various foreign governmentswhen using our products.  It may bedifficult to predict the timing and outcome of reimbursement decisions.  Importantly, there are no assurances thatsuch reimbursement will ever be obtained.

Each procedure performed bya physician is assigned a specific CPT code. When a procedure is performed, the physician must use the CPT code whenbilling third-party payers such as insurance companies or the government.  The amount of reimbursement the physicianreceives depends on the relative value assigned to the procedure by thethird-party payer via the CPT coding. When a new product or procedure is introduced, it must be submitted tothe American Medical Association’s (“AMA”) CPT Editorial Panel, who determinesif an existing code should be used, or if a new code should be issued.  However, before reaching the Editorial Panel,it must first be screened by the CPT Advisory Committee and the appropriatenational medical specialty society seated in the AMA House of Delegates (forprostate-related procedures, this is the American Urology Association, orAUA).  The process of obtaining a new CPTcode can take from one to three years.

In the case of the ProUroScanTM diagnostic system, it is anticipated that theproduct will be initially positioned as an adjunctive test to be used incombination with the current DRE and PSA tests. This will create an opportunity for the test to be classified andpotentially reimbursed at comparable levels to these tests or in combinationwith the existing levels of reimbursement that are already provided.  Our reimbursement consultants, Hogan and Hartson,have suggested that a patient pay model that would require the test and thesupporting services to be paid directly by the patient at the time the test isperformed is also a feasible approach in the short term.   Existing analogs exist similar to our testsuggest that this approach could be implemented with appropriate marketing andpatient educational materials.  In theabsence of formal reimbursement coverage, providers must give beneficiaries a

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MedicareAdvance Beneficiary Notice (“ABN”) before furnishing a Part B service whenthere is a reasonable doubt that Medicare will cover the procedure.  An ABN can be used for all situations,including laboratory tests, by all physicians and suppliers.  As the level of clinical and paymentexperience expands, we anticipate filing for a formal CPT procedure code andreimbursement as previously described. There can be no assurance that we willbe successful in obtaining a unique CPT code for use of the ProUroScanTM system.

Our therapeutic products areanticipated to be “add-on” enhancements to existing thermal therapysystems.  These existing systems are usedin procedures that already have designated CPT codes.  The use of our add-on enhancements is notexpected to alter the established CPT codes for such procedures or otherwiseaffect reimbursement for such procedures. We anticipate that these products will be sold to established thermaltherapy companies and not directly to the medical service provider.  Because the thermal therapy proceduresutilizing the equipment provided by these established companies already havedesignated CPT codes, neither the reimbursement for such procedures nor ourfuture revenues are directly related to or dependent upon the establishment ofnew CPT codes.  Nevertheless, if reimbursementlevels under the existing CPT codes were reduced for applicable thermal therapyprocedures, such reduction may adversely affect our ability to sell therapeuticproducts at a reasonable price.

**Our common stock is illiquidand may be difficult to sell.**

Trading of our common stockis conducted on the Over-the-Counter Bulletin Board, or “OTC Bulletin Board.”  Management believes 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 lack of analyst research coverage ofour Company.  This may result in lowerprices for our common stock than might otherwise be obtained if our stock weretraded on a larger or more established exchange, such as NASDAQ Small MarketCap Market, or otherwise, and could also result in a larger spread between thebid and asked prices for our common stock.

**There is currently littletrading volume in our common stock, which may make it difficult to sell sharesof our common stock.**

Since the Merger, there hasbeen very little trading activity in our common stock.  The relatively small trading volume willlikely make it difficult for our shareholders to sell their shares as and whenthey choose.  Furthermore, small tradingvolumes generally depress market prices. As a result, investors may not always be able to resell shares of ourcommon stock publicly at the time and prices that they feel is fair orappropriate.

**Because our stock is deemeda “penny stock,” you may have difficulty selling shares of our common stock.**

Our common stock is a “pennystock” and is therefore subject to the requirements of Rule 15g-9 under theSecurities Exchange Act of 1934.  Underthis Rule, broker-dealers who sell penny stocks must provide purchasers ofthese stocks with a standardized risk-disclosure document prepared by the SEC.The penny-stock rules severely limit the liquidity of securities in thesecondary market, and many brokers choose not to participate in penny-stocktransactions.  As a result, there isgenerally less trading in penny stocks. If you become a holder of our common stock, you may not always be ableto resell shares of our common stock publicly at the time and prices that youfeel are fair or appropriate.  Underapplicable regulations, our common stock will generally remain a “penny stock”until and for such time as its per-share price is $5.00 or more (as determinedin accordance with SEC regulations), or until certain net asset or revenuethresholds are met by the Company.  Thesethresholds include the possession of net tangible assets (i.e., total assetsless intangible assets and liabilities) in excess of $2,000,000 in the event 

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wehave been operating for at least three years or $5,000,000 in the event we havebeen operating for fewer than three years and the recognition of averagerevenues equal to at least $6,000,000 for each of the last three years.  We do not anticipate meeting any of thethresholds in the foreseeable future.

**Our ability to use operatingloss carryforwards may be limited by future changes in equity ownership.**

We have generated netoperating loss carryforwards through December 31, 2005 of approximately $2.0million which, if not used, will begin to expire in 2021.  Federal and state tax laws impose significantrestrictions on the utilization of net operating loss carryforwards in theevent of a change in ownership of the Company that constitutes an “ownershipchange,” as defined by the Internal Revenue Code, Section 382.  Management has analyzed the merger andPrivate Placement transactions that occurred in April of 2004, and believesthat they do not constitute such an ownership change.  However, those transactions, together withpossible future changes during the subsequent 36-month period may constitute achange in ownership that could subject the Company’s use of its net operatingloss carryforwards to the above limitations. Specifically, under certain conditions, the convertible debentures beingissued and proposed to be issued pursuant to the Company’s current debtfinancing described above may be converted into enough common shares to triggersuch a change in ownership.  Based on theCompany’s estimates, the Section 382 limitation would apply to all of the $2.0million net operating loss carryforward.

**Our business and productssubject us to the risk of products liability claims.**

The manufacture and sale ofmedical products and the conduct of clinical trials using new technologyinvolve customary risks of products liability claims.  There can be no assurance that our insurancecoverage limits will be adequate to protect us from any liabilities which wemight incur in connection with the clinical trials or the commercialization ofany of our products.  Product liabilityinsurance is expensive and in the future may not be available on acceptableterms, if at all.  A successful productliability claim or series of claims brought against us in excess of ourinsurance coverage would have a materially adverse effect on our business,financial condition and results of operations. In addition, any claims, even if not ultimately successful, couldadversely affect the marketplace’s acceptance of our products.

**We have never paiddividends, and do not expect to pay dividends in the foreseeable future.**

We have never paid dividendson our capital stock and do not anticipate paying any dividends for theforeseeable 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, 2006, of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of theSecurities Exchange Act of 1934, as amended). Based upon that evaluation, our chief executive officer and chief financialofficer concluded that as of September 30, 2006 our disclosure controls andprocedures were effective.  There hasbeen no change in the internal controls over financial reporting during thelast fiscal quarter that has materially affected or is likely to materiallyaffect our 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 costversus benefit of adding the resources that would remedy or mitigate thissituation, and currently do not consider the benefits to outweigh the costs ofadding additional staff in light of the limited number of transactions due tothe start-up nature of our current operations.

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**PART II.  OTHERINFORMATION.**

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

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

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

*Stock Transactions:*

On September11, 2006 we issued 14,146 shares of our common stock to a vendor as payment forproduct development work valued at $8,938. The issuance was made in reliance on exemption from registrationprovided by under Section 4(2) of the Securities Act of 1933, as amended (the “SecuritiesAct”), for issuance by an issuer not involving a public offering.

*Warrant Issuances:*

***On July21, 2006, the Company borrowed $7,500 from an investor, and in connectiontherewith issued to such lender a promissory note to mature on October 19, 2006(see Note 4).  Under the terms of theloan agreement, the Company issued a five-year warrant to the investor toacquire 3,750 shares of Company common stock at $0.50 per share. The warrantwas issued in a private placement exempt from registration under Section 4(2)of the Securities as such transaction was issued in a non-public offering to asingle subscriber.***

***OnAugust 30, 2006, the Company borrowed $10,000 from an individual, and inconnection therewith issued to such lender a promissory note to mature onNovember 28, 2006 (see Note 4).  Underthe terms of the loan agreement, the Company issued a five-year warrant to theinvestor to acquire 5,000 shares of Company common stock at $0.50 per share.The warrant was issued in a private placement exempt from registration underSection 4(2) of the Securities as such transaction was issued in a non-publicoffering to a single subscriber.***

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

***Three matters were submitted to avote at the Annual Meeting of Shareholders held September 7, 2006. The votingresults on the three matters considered at the meeting are stated below.***

Matter 1: Electionof Directors

Thedirector nominees described in the Company’s Proxy Statement were elected asfollows:
|                       | ** ** | **For**   | ** ** | **Withhold** | ** ** | **Abstain** | ** ** |
|-----------------------|------------|-----------|------------|--------------|------------|-------------|------------|
| Maurice R.  Taylor II |       | 7,191,683 |       | 72,568       |       | 154,400     |       |
| Michael P.  Grossman  |       | 7,214,251 |       | 50,000       |       | 154,400     |       |
| David F. Koenig       |       | 7,214,251 |       | 50,000       |       | 154,400     |       |
| Alexander  Nazarenko  |       | 7,214,251 |       | 50,000       |       | 154,400     |       |
| Scott E. Smith        |       | 7,214,251 |       | 50,000       |       | 154,400     |       |

 

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

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Matter 2: Approval of Our Change in Domicile from Nevada to Delaware

The proposedchange in the Corporation’s domicile from Nevada to Delaware was ratified asfollows:

| For       | ** ** | **Against** | ** ** | **Not voted** | ** ** |
|-----------|------------|-------------|------------|--------------------|------------|
| 5,462,720 |       | 50,000      |       | 1,905,931          |       |

 

Matter 3:Appointment of Independent Auditors

Theappointment of Virchow, Krause & Company, LLP as Independent Auditors forthe 2006 fiscal year was ratified as follows:

| For       | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 7,367,651 |       | 50,000      |       | 1,000       |       |

 

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***Item6.  Exhibits***
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                   |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                              |
| 10.1        |       | Promissory Note in the amount of $75,000 issued by  ProUroCare Medical Inc. to Mr. Roman Pauly dated June 1, 2006 (incorporated  by reference to Exhibit 10.1 to Current Report on Form 8-K filed June 6,  2006). |
|        |       |                                                                                                                                                                                                              |
| 10.2        |       | Amendment #1 to Promissory Note Dated June 1, 2006  between ProUroCare Medical Inc. and Roman Pauly (incorporated by reference to  Exhibit 10.3 to Quarterly Report on Form 10-QSB filed September 18, 2006).     |
|        |       |                                                                                                                                                                                                              |
| 31.1*       |       | Certification of Principal Executive Officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002.                                                                                             |
|        |       |                                                                                                                                                                                                              |
| 31.2*       |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002.                                                                                                 |
|        |       |                                                                                                                                                                                                              |
| 32.1*       |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                              |
|        |       |                                                                                                                                                                                                              |
| 32.2*       |       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                              |

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|  |   | *Filed herewith. |
|--|--------|------------------|

 

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**SIGNATURES**

Pursuant to the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                          | **ProUroCare Medical Inc.**    |
|--------------------------|--------------------------------|
|                     | ** **                     |
|                     | ** **                     |
| Date: November  20, 2006 | By:                            | /s/ Richard C. Carlson |   |
|                     | Name: Richard C. Carlson       |
|                     | Title: Chief Executive Officer |
|                     |                           |
|                     |                           |
| Date: November  20, 2006 | By:                            | /s/ Richard Thon |   |
|                     | Name: Richard Thon             |
|                     | Title: Chief Financial Officer |
|                          |                                |  |  |  |  |

 

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