**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-QSB**

**x**                              QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the quarterly period ended June 30, 2006**

**o**                                 TRANSITION REPORTUNDER 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 small business 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 124Plymouth, Minnesota 55447**(Address of principal executive offices)

**(952) 476-9093**(Issuer’s telephone number)

(Former Name, FormerAddress and Former Fiscal Year, if Changed Since Last Report)

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 ashell company (as defined in Rule 12b-2 of the Exchange Act): YES o  NO x

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date:  14,399,686 shares of common stock outstandingas of September 11, 2006 (par value $.00001 per share).

TransitionalSmall Business Disclosure Format (check one): YES o  NO x

 

----

** **

**ProUroCare Medical Inc.**

**Form 10-QSB for the**

**Quarter Ended June 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 2.               | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    |   |
|       |                  |                                                            |   |
|       | ITEM  6.              | EXHIBITS                                                        |   |
|       |                  |                                                            |   |
| SIGNATURES |                  |

 

----

** **

**PART I  FINANCIAL INFORMATION**

***Item 1.  Financial Statements***

**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Balance Sheets**
| ** **                                                                                                                                                               | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                               | ** ** | **(Unaudited)**             | ** ** | **(Audited)**                   | ** ** |
| **Assets**                                                                                                                                                               | ** ** |                        |       |                            |       |
| Current assets:                                                                                                                                                          |       |                        |       |                            |       |
|                                                                                                                                                                     |       |                        |       |                            |       |
| Cash                                                                                                                                                                     |       | $                           | 195        |                            | $          | 37 |   |
| Other  receivables                                                                                                                                                       |       | 23,736                      |       | —                          |       |
| Deposit                                                                                                                                                                  |       | 50,547                      |       | 547                             |       |
| Prepaid expenses                                                                                                                                                         |       | 42,437                      |       | 12,483                          |       |
|                                                                                                                                                                     |       |                        |       |                            |       |
| Total current  assets                                                                                                                                                    |       | 116,915                     |       | 13,067                          |       |
| Equipment and  furniture, net                                                                                                                                            |       | 5,687                       |       | 7,636                           |       |
| Deferred offering  expenses                                                                                                                                              |       | —                      |       | 37,881                          |       |
| Debt issuance costs,  net                                                                                                                                                |       | 836,786                     |       | 52,727                          |       |
|                                                                                                                                                                     |       | $                           | 959,388    |                            | $          | 111,311 |   |
| **Liabilities  and Shareholders’ Deficit**                                                                                                                          |       |                        |       |                            |       |
| Current liabilities:                                                                                                                                                     |       |                        |       |                            |       |
| Notes payable,  bank                                                                                                                                                     |       | $                           | —     |                            | $          | 400,000 |   |
| Notes payable,  net of original issue discount of $17,000 and $12,184                                                                                                    |       | 86,343                      |       | 87,816                          |       |
| Accounts payable                                                                                                                                                         |       | 353,705                     |       | 387,302                         |       |
| Accrued expenses                                                                                                                                                         |       | 130,695                     |       | 627,872                         |       |
| Due to Clinical  Network, Inc.                                                                                                                                           |       | —                      |       | 8,943                           |       |
| Total current  liabilities                                                                                                                                               |       | 570,743                     |       | 1,511,933                       |       |
|                                                                                                                                                                     |       |                        |       |                            |       |
| Long-term notes payable                                                                                                                                                  |       | 2,200,000                   |       | —                          |       |
| Convertible debentures,  net of original issue discount of $646,577 and $0                                                                                               |       | 86,757                      |       | —                          |       |
| Total  liabilities                                                                                                                                                       |       | 2,857,500                   |       | 1,511,933                       |       |
| Commitments and  contingencies                                                                                                                                           |       |                        |       |                            |       |
| Shareholders’ deficit:                                                                                                                                              |       |                        |       |                            |       |
| Common stock,  $0.00001 par. Authorized 50,000,000 shares; issued and outstanding 14,269,260  and 14,174,260 shares on June 30, 2006 and December 31, 2005, respectively |       | 143                         |       | 142                             |       |
| Additional  paid-in capital                                                                                                                                              |       | 9,838,458                   |       | 8,804,181                       |       |
| Deficit  accumulated during the development stage                                                                                                                        |       | (11,736,713                 | )          | (10,204,945                     | )          |
| Total  shareholders’ deficit                                                                                                                                        |       | (1,898,112                  | )          | (1,400,622                      | )          |
|                                                                                                                                                                     |       | $                           | 959,388    |                            | $          | 111,311 |   |

----

*See accompanying notes to financial statements.*

1

----

** **

**ProUroCare Medical Inc.A Development Stage CompanyConsolidated Statements of Operations(Unaudited)**
| ** **                                      | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **              | ** ** | ** ** | ** ** | **Period from**    | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------|------------|------------|------------|-------------------------|------------|
| ** **                                      | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **              | ** ** | ** ** | ** ** | **August 17,1999** | ** ** |
| ** **                                      | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | **(inception) to** | ** ** |
| ** **                                      | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** | **June 30,**       | ** ** |
| ** **                                      | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006**                | ** ** | **2005**   | ** ** | **2006**                | ** ** |
| Operating expenses:                             |       |                                                |       |                                              |       |                    |       |       |       |                    |       |
| Research and  development                       |       | $                                                   | 145,582    |                                              | $          | 23,007                  |       | $          | 233,509    |                    | $          | 127,709 |   | $ | 4,701,314 |   |
| General and  administrative                     |       | 397,578                                             |       | 438,551                                           |       | 803,121                 |       | 821,692    |       | 5,706,293               |       |
|                                            |       |                                                |       |                                              |       |                    |       |       |       |                    |       |
| Total operating  expenses                       |       | 543,160                                             |       | 461,558                                           |       | 1,036,630               |       | 949,401    |       | 10,407,607              |       |
|                                            |       |                                                |       |                                              |       |                    |       |       |       |                    |       |
| Operating loss                                  |       | (543,160                                            | )          | (461,558                                          | )          | (1,036,630              | )          | (949,401   | )          | (10,407,607             | )          |
| Interest income                                 |       | —                                              |       | —                                            |       | —                  |       | 445        |       | 16,480                  |       |
| Interest expense                                |       | (256,714                                            | )          | (3,688                                            | )          | (495,138                | )          | (6,335     | )          | (1,345,586              | )          |
|                                            |       |                                                |       |                                              |       |                    |       |       |       |                    |       |
| Net loss                                        |       | $                                                   | (799,874   | )                                                 | $          | (465,246                | )          | $          | (1,531,768 | )                       | $          | (955,291 | ) | $ | (11,736,713 | ) |
|                                            |       |                                                |       |                                              |       |                    |       |       |       |                    |       |
| Net loss per common  share:                     |       |                                                |       |                                              |       |                    |       |       |       |                    |       |
| Basic and  diluted                              |       | $                                                   | (0.06      | )                                                 | $          | (0.03                   | )          | $          | (0.11      | )                       | $          | (0.07 | ) | $ | (1.40 | ) |
|                                            |       |                                                |       |                                              |       |                    |       |       |       |                    |       |
| Weighted average number  of shares outstanding: |       |                                                |       |                                              |       |                    |       |       |       |                    |       |
| Basic and  diluted                              |       | 14,253,106                                          |       | 14,025,275                                        |       | 14,219,011              |       | 14,103,847 |       | 8,361,131               |       |
|                                            |       |                                                |       |                                              |       |                    |       |       |       |                    |       |

 

----

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

2

----

** **

**ProUroCare Medical Inc.**

**A Development Stage Company**

**Consolidated Statements of Cash Flows**

**(Unaudited)**
| ** **                                                                                                                                                  | ** ** | ** **                                        | ** ** | ** **                                   | ** ** | **Period from**        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **Six months ended June 30,** | ** ** | **August 17,1999  (inception) to** | ** ** |
| ** **                                                                                                                                                  | ** ** | **2006**                                          | ** ** | **2005**                                     | ** ** | **June 30, 2006** | ** ** |
| Cash flows from  operating activities:                                                                                                                      |       |                                              |       |                                         |       |                        |       |
|                                                                                                                                                        |       |                                              |       |                                         |       |                        |       |
| Net loss                                                                                                                                                    |       | $                                                 | (1,531,768 | )                                            | $          | (955,291                    | )          | $ | (11,736,713 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                                                                |       |                                              |       |                                         |       |                        |       |
| Depreciation and  amortization                                                                                                                              |       | 1,949                                             |       | 2,866                                        |       | 15,110                      |       |
| Stock-based  compensation                                                                                                                                   |       | 184,894                                           |       | 150,095                                      |       | 996,378                     |       |
| Issuance of  common stock for services rendered                                                                                                             |       | 44,800                                            |       | —                                       |       | 147,966                     |       |
| Warrants issued  for services                                                                                                                               |       | —                                            |       | —                                       |       | 468,636                     |       |
| Warrants issued  for debt guarantees                                                                                                                        |       | —                                            |       | —                                       |       | 320,974                     |       |
| Amortization of  note payable original issue discount                                                                                                       |       | 43,684                                            |       | —                                       |       | 58,000                      |       |
| Amortization of  convertible debt original issue discount                                                                                                   |       | 86,757                                            |       | —                                       |       | 86,757                      |       |
| Amortization of  debt issuance and deferred offering costs                                                                                                  |       | 239,891                                           |       | —                                       |       | 511,776                     |       |
| 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                                                                                                                                                    |       | (50,000                                           | )          | —                                       |       | (240,101                    | )          |
| Other  receivables                                                                                                                                          |       | (23,736                                           | )          | —                                       |       | (23,736                     | )          |
| Prepaid expenses                                                                                                                                            |       | 7,358                                             |       | 8,213                                        |       | 26,000                      |       |
| Accounts payable                                                                                                                                            |       | (33,597                                           | )          | 155,931                                      |       | 742,687                     |       |
| Accrued expenses                                                                                                                                            |       | (497,177                                          | )          | 283,169                                      |       | 249,415                     |       |
| Net cash used in  operating activities                                                                                                                      |       | (1,526,945                                        | )          | (355,017                                     | )          | (6,128,555                  | )          |
| 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                                                                                                                             |       | —                                            |       | 100,000                                      |       | 500,000                     |       |
| Payment of note  payable, bank                                                                                                                              |       | (400,000                                          | )          | —                                       |       | (500,000                    | )          |
| Proceeds of  notes payable                                                                                                                                  |       | 123,000                                           |       | —                                       |       | 223,000                     |       |
| Payment of notes  payable                                                                                                                                   |       | (156,969                                          | )          | (70,980                                      | )          | (937,011                    | )          |
| Payment for  rescission of common stock                                                                                                                     |       | —                                            |       | —                                       |       | (100,000                    | )          |
| Net payments to  Clinical Network, Inc.                                                                                                                     |       | (8,943                                            | )          | —                                       |       | —                      |       |
| Payments for  debt issuance costs                                                                                                                           |       | (229,985                                          | )          | (8,695                                       | )          | (258,812                    | )          |
| 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                                       |       | 5,184,926                   |       |
| Net cash  provided by financing activities                                                                                                                  |       | 1,527,103                                         |       | 70,325                                       |       | 6,149,547                   |       |
| Net increase  (decrease) in cash                                                                                                                            |       | 158                                               |       | (284,692                                     | )          | 195                         |       |
| Cash, beginning of the  period                                                                                                                              |       | 37                                                |       | 301,522                                      |       | —                      |       |
| Cash, end of the period                                                                                                                                     |       | $                                                 | 195        |                                         | $          | 16,830                      |       | $ | 195 |   |
|                                                                                                                                                        |       |                                              |       |                                         |       |                        |       |
| Supplemental cash flow  information:                                                                                                                        |       |                                              |       |                                         |       |                        |       |
| Cash paid for  interest                                                                                                                                     |       | $                                                 | 113,953    |                                         | $          | 6,202                       |       | $ | 257,425 |   |
| Non-cash  investing and financing activities:                                                                                                               |       |                                              |       |                                         |       |                        |       |
| Assumption of  liabilities in the Profile, LLC transaction                                                                                                  |       | $                                                 | —     |                                         | $          | —                      |       | $ | 25,000 |   |
| Warrants issued  for debt issuance costs                                                                                                                    |       | —                                            |       | —                                       |       | 242,612                     |       |
| Warrants issued  pursuant to note payable                                                                                                                   |       | 48,500                                            |       | —                                       |       | 157,000                     |       |
| 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                                            |       | 51,001                                       |       | 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                                                                                                      |       | —                                            |       | 143,772                                      |       | 142,696                     |       |
| Deposits applied  to accounts payable                                                                                                                       |       | —                                            |       | 45,326                                       |       | 45,782                      |       |
| Deposits applied to  accrued expenses                                                                                                                       |       | —                                            |       | —                                       |       | 1,076                       |       |

 

----

*See accompanying notes to financial statements.*

3

----

 

**ProUroCareMedical Inc.A Development Stage CompanyNotes to Consolidated Financial Statements**

**June30, 2006 and 2005 and the period fromAugust 17, 1999 (inception) to June 30, 2006**

(Unaudited)

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

***(a)***                                 Description of Business, Development StageActivities, and Basis of Presentation

ProUroCare Medical Inc. (“ProUroCare” or the “Company”) is adevelopment stage company that is developing diagnostic equipment andtreatments for enlarged prostates and other male urological conditions.  The Company’s developmental activities haveincluded the acquisition of several technology licenses, the development of astrategic business plan and a senior management team, product development, andfund raising activities.

The Company had 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 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.***

Theaccompanying unaudited financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americaand pursuant to the rules and regulations of the United States Securities andExchange Commission (the “SEC”) for interim financial information.  Accordingly, certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been omitted pursuant to such rules and regulations.  Operating results for the three and six monthperiods ended June 30, 2006 are not necessarily indicative of the results thatmay be expected for

4

----

 

the year ending December31, 2006 or any other period.  Theaccompanying financial statements and related notes should be read inconjunction with the audited financial statements of the Company, and notesthereto, contained in its Annual Report on Form 10-KSB for the year endedDecember 31, 2005.

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

***(c)           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 six month periods ended June 30, 2006 and 2005and the period from August 17, 1999 (inception) to June 30, 2006 since theCompany 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) Statementof Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting forStock-Based Compensation,” to record option and warrant issuances, includingstock-based employee compensation.  TheCompany’s policy is to grant stock options at fair value at the date of grant,and to record the expense at fair value as required by SFAS 123, using theBlack-Scholes pricing model.

Effective January 1, 2006 the Companyadopted the revision to SFAS 123 (“SFAS 123R”), “Share-Based Payment”, thatfocuses primarily on accounting for transactions in which an entity obtainsemployee 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 $374,000 and $185,000 for the years ending December 31, 2006 andDecember 31, 2007, respectively.

No options were granted during thethree months ended June 30, 2005.  Indetermining the compensation cost of the options granted during the three andsix months ended June 30, 2006 and 2005, as specified by SFAS 123R, the fairvalue of each option grant has been estimated on the date of grant

5

----

 

using the Black Scholes pricing model and the weightedaverage assumptions used in these calculations are summarized as follows: 
|                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Risk-free  Interest Rate          |       | 4.99                                                | %          | N/A                                               |       | 4.74 | % | 3.76 | % |
| Expected Life of  Options Granted |       | 4.0 years                                           |       | N/A                                               |       | 2.8 years |   | 5.8 years |   |
| Expected  Volatility              |       | 134.1                                               | %          | N/A                                               |       | 132.7 | % | 78.6 | % |
| Expected Dividend Yield           |       | 0                                                   |       | N/A                                               |       | 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 theoption.  For performance based optionsthat vest upon the occurrence of an event, the Company uses an estimate of whenthe event will occur as the vesting period used in the Black Scholescalculation for each option grant. Because of the limited trading history of the Company’s stock, theexpected volatility is based on a simple average of daily price data since thedate of the Merger on April 5, 2004.***

Based on the lackof history to calculate a forfeiture rate, the Company has not adjusted thecalculated value of the options for the three and six month periods ended June30, 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 98-5, “Accountingfor Convertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios,” the Company has elected to utilize thefair-value method of accounting for warrants issued to non-employees asconsideration for goods or services received, including warrants issued tolenders and guarantors of Company debt (see Notes 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 January, 2006, an immediately vested and exercisable warrant wasissued to a lender to acquire 50,000 shares of common stock at $0.50 per sharepursuant to a $23,000 loan.  The fair value of stock warrants estimatedat grant date using the Black-Scholes pricing model exceeded the amount of theloan.  Accordingly, the value of thiswarrant was recorded as $23,000, or $0.46 per share and was expensed during thethree months ended June 30, 2006 due to the note being paid in full.  In June, 2006, an immediately vested andexercisable warrant was issued to a lender to acquire 37,500 shares of commonstock at $0.50 per share pursuant to a $75,000 loan (see Note 4).  The fair value of stock warrants was estimated to be $0.68 per shareat the grant dateusing the Black-Scholes pricing model.  The total value of this warrant, $25,500, wasrecorded and is beingexpensed as interest expense over the 90-day term of the loan.  No other warrants were issued during thethree months ended June 30, 2006, and no warrants were granted during the threemonth period ended June 30, 2005.

***(g)***           Other receivables

Other receivablesrepresent amounts due within 30 days from a joint development partner for theirportion of the cost of the joint development project.  At June 30, 2006 and December 31, 2005 no reservewas recorded.

6

----

 

***(h)          ****GoingConcern*

We have incurred operatinglosses, accumulated deficit and negative cash flows from operations sinceinception.  As of June 30, 2006, we hadan accumulated deficit of approximately $11,737,000.  These factors, among others, raisesubstantial doubt about our ability to continue as a going concern.  The accompanying consolidated unauditedfinancial statements do not include any adjustments related to recoverabilityand classification of asset carrying amounts or the amount and classificationof liabilities that might result should we be unable to continue as a goingconcern.

**Note 2.  Shareholders’ Equity.**

***On January 25, 2006, ProUroCareInc. borrowed $23,000 from a lender (see Note 4).  Under the terms of the loan agreement, theCompany issued a five-year warrant to the lender to acquire 50,000 shares ofCompany common stock at $0.50 per share. These warrants, valued at $23,000 (see Note 1), were recorded asinterest expense during***the three months ended June 30,2006.

Effective September 1,2005 the Company engaged new outside corporate and securities law counsel,Venture Law Resources, PLLC (“VLR”), of Bloomington, Minnesota. Pursuant tosuch engagement, VLR agreed to represent the Company as its General Counsel andto assist with the introduction of strategic investors to the Company from timeto time, including success based compensation arising from any services as afinder to the Company. Under this agreement, the Company issued 25,000 sharesof common stock to VLR as a retainer in connection with VLR’s engagement.  The shares issued to VLRwere valued at $17,750 using the fair market value of the Company’s stock priceon the date of grant and along with a $2,500 retainer paid, was capitalized asdeferred offering expense during 2005. On February 22, 2006, an additional 25,000 common shares, valued at$22,750 using the fair market value of the Company’s stock price on the date ofgrant, were issued to VLR pursuant to their engagement.  The $42,750 aggregate value of the shares andinitial retainer is being amortized over the term of the debt guaranteed bystrategic investors introduced to the Company by VLR.

***On March 1, 2006, the Companyissued to five of its employees stock options to acquire a total of up to200,000 shares of common stock at $0.75 per share.  The five-year options, which vest upon theCompany securing FDA approval of its ProUroScan system, were valued at $0.56per share using the Black Scholes pricing model (see Note 1(e)), and are beingexpensed over the vesting period (estimated by the Company as one year) asgeneral and administrative expense.***

***On April 21, 2006 the Companyissued 70,000 shares of its common stock to its former Vice-President ofEngineering upon his resignation, pursuant to his employment agreement.  The shares were valued at $44,800 based onthe average closing share price during the five days before and after theissuance date, and were expensed in the three month period ended June 30, 2006.***

***On June 1, 2006, ProUroCare Inc.borrowed $75,000 from an individual investor (see Note 4).  Under the terms of the loan agreement, theCompany issued a five-year warrant to the investor to acquire 37,500 shares ofCompany common stock at $0.50 per share. These warrants were valued at $25,500 (see Note 1) and are beingexpensed as interest expense over the 90-day term of the loan.***

**Note 3.  Notes Payable – Bank.**

On September 14, 2005, ProUroCare Inc. borrowed $100,000 from afinancial institution and issued a secured promissory note to such institution.  The promissory note was collateralized by the

7

----

 

assetsof the business under an existing commercial security agreement with thefinancial institution and a commercial guaranty from an individualinvestor.  The promissory note boreinterest at an annual rate of 8.0% and was to mature on March 14, 2006.  In connection with the commercial guaranty,the Company issued two five-year warrants (immediately exercisable) to theinvestor to acquire a total of 50,000 shares of the Company’s common stock at$0.50 per share.  The warrants, valued at$29,000 using the Black Scholes pricing model (see Note 1(f)), were recorded asdebt issuance costs and expensed over the term of the promissory note asinterest expense.  The Company recorded$0 and $12,977 of expense related to the value of the warrants during the threeand six month periods ended June 30, 2006, respectively.  Interest expense recorded during the threeand six month periods ended June 30, 2006 related to this note was $1,079 and$1,079, respectively.

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.  In connection with the commercial guaranties,on October 19, 2005, the Company issued five-year warrants to the twoguarantors to acquire up to 150,000 shares of the Company’s common stock at$0.50 per share. The warrants issuedare immediately exercisable.  The warrants, valued at $79,500 using theBlack Scholes pricing model, were recorded as debt issuance costs and expensedover the term of the promissory note as interest expense.  The Company recorded $39,750 of expenserelated to the value of the warrants during the three months ended March 31,2006.  Interest expense recorded duringthe three months ended March 31, 2006 related to this note was $3,540.

***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), and the remaining original issuediscount was expensed.***

**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.  In connection with thepromissory note, the Company issued two five-year warrants (immediatelyexercisable) to the lender to acquire a total of 50,000 shares of the Company’scommon stock at $0.50 per share.  Thegross proceeds of $100,000 were allocated between the promissory note and thecommon stock warrants based on the relative fair values of the securities atthe time of issuance.***The warrants, valued at $26,500using the Black Scholes pricing model (see Note 1(f)), were recorded asoriginal issue discount as defined in EITF 98-5 and were expensed on astraight-line basis over the term of the promissory note, which approximatesthe interest method.  The Company recorded$0 and $12,184 of expense related to the value of the warrants during the threeand six month periods ended June 30, 2006, respectively.  Interest expense recorded during the threeand six month periods ended June 30, 2006 related to this note was $0 and $893,respectively.  This promissory note wasrepaid on February 16, 2006 from the net proceeds of the Company’s ongoingsenior debt financing (see Note 5).

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

***1.***                     $12,500 from Alexander Nazarenko, a Director of theCompany; in consideration, the Company executed and issued to Mr. Nazarenko a$12,500 unsecured demand promissory note, which bore interest at an annual rateof Prime Plus One Percent;

8

----

 

***2.***                     $12,500 from David F. Koenig, a Director of theCompany; in consideration, the Company executed and issued to Mr. Koenig a$12,500 unsecured demand promissory note, which bore interest at an annual rateof Prime Plus One Percent; and

***3.***                     $23,000 from Adron Holdings, LLC (“Adron”), aMinnesota limited liability company, pursuant to a loan agreement between theCompany, Adron, the Company’s Chief Executive Officer (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.  The gross proceeds of $23,000 were allocatedbetween the promissory note and the common stock warrants based on the relativefair values of the securities at the time of issuance. The warrants, valued at$23,000 (see Note 1(f)), were recorded as original issue discount as defined inEITF 98-5 and were expensed as interest expense during the three months endedMarch 31, 2006.

***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.  The promissory notebears an interest at the Prime rate.  Inconnection with the promissory note, the Company issued a five-year warrant(immediately exercisable) to the investor to acquire a total of 37,500 sharesof the Company’s common stock at $0.50 per share.  The gross proceeds of $75,000 were allocatedbetween the promissory note and the common stock warrants based on the relativefair values of the securities at the time of issuance.***The warrants, valued at$25,500 using the Black Scholes pricing model (see Note 1(f)), were recorded asoriginal issue discount as defined in EITF 98-5 and were expensed on astraight-line basis over the term of the promissory note, which approximatesthe interest method.  The Companyrecorded $8,500 and $8,500 of expense related to the value of the warrantsduring the three and six month periods ended June 30, 2006, respectively.  Interest expense recorded during the threeand six month periods ended June 30, 2006 related to this note was $515 and$515, respectively.  On August 24, 2006the promissory note was amended to mature on October 29, 2006 (see Note7).  The promissory note is to be repaidon the earlier of October 29, 2006 or with 15 days of the next closings of anaggregate of $1 million of net proceeds under the Company’s ongoing senior debtfinancing (see Note 5).

**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 received 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 ofJune 30, 2006.  Additional closings onsuch senior debt financing are anticipated in the near future. ***Nevertheless, management can give no assurance that these additionalclosings will occur, nor that the remaining $1.8 to $3.8 million will besecured on a timely basis in 2006, or at all.

9

----

 

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 4,000,000 shares of common stock (up to 6,666,667shares 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 June 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 1.0% (9.25% at June 30, 2006). This promissory note matures on February 29, 2008.  Two additional accredited individualsguaranteed the $1,000,000 face amount of this promissory note, and inconsideration, 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 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).  The valueso 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.***

10

----

 

***Note 7.  SubsequentEvents.***

***On July 21, 2006, the Company borrowed$7,500 from an investor, and in connection therewith issued to such lender apromissory note to mature on October 19, 2006. The promissory note bears an interest at 9.0% per annum.  In connection with the promissory note, theCompany issued a five-year warrant (immediately exercisable) to the investor toacquire a total of 3,750 shares of the Company’s common stock at $0.50 pershare.  The gross proceeds of $7,500 wereallocated between the promissory note and the common stock warrants based onthe relative fair values of the securities at the time of issuance. Thewarrants, valued at $2,025 using the Black Scholes pricing model (see Note1(f)), will be recorded as original issue discount and expensed as interestexpense over the life of the promissory note.***

***On August 24, 2006, the Company amendedthe $75,000 promissory note dated June 1, 2006 (see Note 4).  The amendment extends the due date of thepromissory note until October 29, 2006. The promissory note bears interest at the Prime Rate and is to be repaidout of the net proceeds of the Company’s current long term senior debtfinancing efforts.  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 for each day the promissory note is outstanding between August 30and October 29, 2006 at $0.50 per share. The warrants so issued will be exempt from registration under Section4(2) of the Securities Act of 1934, as amended, as they will be issued in anon-public offering to an accredited investor.***

***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 October 19, 2006. The promissory note bears an interest at 9.0% per annum.  In connection with the promissory note, theCompany issued a five-year warrant (immediately exercisable) to the individualto acquire a total of 5,000 shares of the Company’s common stock at $0.50 pershare.  The gross proceeds of $10,000will be allocated between the promissory note and the common stock warrantsbased on the relative fair values of the securities at the time of issuance.The warrants, valued at $2,300 using the Black Scholes pricing model (see Note1(f)), will be recorded as original issue discount and expensed as interestexpense over the life of the promissory note.***

On September 7, 2006 we sold58,140 shares of our common stock to Mr. Scott Smith, a Director of theCompany, and 58,140 shares of our common stock to an investor.  The per share selling price of $0.43 wasbased 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 sale was made in relianceon exemption from registration provided by under Section 4(2) of the SecuritiesAct of 1933, as amended (the “Act”), and/or Rule 506 promulgated thereunder, aswe reasonably believed that the investors are “accredited” (as defined by Rule501(a) of the Act), that no general solicitation was involved, and thetransaction did not otherwise involve a public offering.

On September 11, 2006 weissued 14,146 shares of our common stock to a vendor as payment for productdevelopment work valued at $8,938, earned and accrued as of June 30, 2006.

11

----

 

***Item 2. Management’sDiscussion 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 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 developingdiagnostic equipment and treatments for enlarged prostates and other maleurological conditions. Our developmental activities have included theacquisition of several technology licenses, the development of a strategicbusiness plan and a senior management team, product development and fundraising activities.

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 ProUroScanimaging system is being designed to show the size and symmetry of the prostateand detect certain soft-tissue abnormalities within the prostate that may beprecursors to a more clearly defined hardened area or nodule.

Screening for tissueabnormalities is currently accomplished by means of a digital rectalexamination (“DRE”). A DRE is a qualitative and subjective test in which aphysician wearing a latex glove inserts a lubricated finger into the rectum tofeel or palpate the prostate gland for abnormalities. The clinician must relyon his or her experience and the sensitivity of their finger to estimate thesize of the prostate and detect hardness or abnormalities within the prostatethat may indicate the presence of potentially life-threatening disease. Webelieve that the ProUroScan will enable a physician to detect abnormalities inthe prostate more accurately than with their finger, assess areas of theprostate that the physician cannot reach with their finger, and produce quantifiableand chartable results. Moreover, the ProUroScan offers the advantage of beingable to create an electronic record that can be stored within the system,printed and used for comparisons with new images created at a later date. Nosuch electronic records or color images are possible when performing atraditional DRE.

The ProUroScan systemconsists of a probe, a central processing unit containing proprietary imageconstruction algorithms, a computer with color monitor and keyboard, a colorprinter, and single-use disposable sheaths to cover the tip of the probe. TheProUroScan probe is specially designed for the rectal anatomy to minimizediscomfort. It is ergonomic for the clinician and similar to a traditional DREfor the patient. The probe utilizes pressure sensors located on the face of theprobe head to palpate the prostate. The probe’s positioning system ensures thatthe person administering the test examines the entire surface of the prostate,and assists prostate image construction. The probe attaches to the central

12

----

 

processingunit which converts the information from the probe sensors with proprietaryalgorithms and then translates the data into a multicolor image on the monitor.

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 systemsthemselves likely will be placed in clinics under a variety of programs,including operating leases, financing leases, outright sale, or placements paidfor by premiums paid on the usage of the system.

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. The ProUroScan will be marketed towards primarycare physicians and urologists. We believe the ProUroScan will help ensure thatprimary care physicians screen more effectively and quickly refer appropriatepatients to urologists for more definitive testing.

The ProUroScan is currently in product development stage. The designspecifications are being finalized and performance characteristics aregenerally known. Further development work in the areas of positioning systemrefinement, software, user interface, and sensor production, among others, mustbe completed before the system can be commercialized.

The current pre-clinical version of the ProUroScan was developed undertwo research and development agreements with Artann Laboratories (“Artann”). Twopre-clinical ProUroScan systems were delivered by Artann in late November 2004,and have undergone extensive bench and laboratory testing to confirm thefunction of the system components and the overall operating system. We continueto have on-going discussions with Artann concerning past and future developmentin connection with a prospective commercialization grant award from theNational Institute of Health.

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 will assist us in transferring technologyfrom Artann’s system, place design documentation under an FDA compliant qualitycontrol system, complete the design documentation required to submit an FDArequest for product clearance, perform verification and validation testingincluding certification of safety to medical device standards and prepare adocumentation package including the definition of assembly instructions andquality control processes for 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 be capable of providing physicians with anumber of different outputs, we are attempting to create a regulatory strategythat will enable us to begin marketing a basic system and then expand thelabeling claims to incorporate more sophisticated features as they aredeveloped and validated in clinical studies. The advantage of this approach isthat it allows us to minimize the time it will take to obtain FDA approval andto begin commercializing an operational system sooner. Having systems in placewill also be important in assessing future enhancements while physicians areusing it in actual clinical practice.

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 ofthis claim and the input received from consultants and clinical study sites, webelieve the initial system can be submitted to the FDA for market clearanceunder a 510(k) application, or be evaluated under the FDA’s*de novo*process. Following completion of the remaining engineering and developmentefforts on the current system, a

13

----

 

smallpre-clinical study will be conducted to ensure that all design criteria andoperating requirements of the system have been achieved. Systems will then beplaced in a select number of major medical centers that will screen patientsand collect data for the FDA submission. It is anticipated that the FDAclinical studies will require approximately three months to complete, and thatan additional month will be needed to analyze the data and prepare a formalsubmission to the agency. Centers participating in the study will be requiredto obtain approval from their Institutional Review Board (“IRB”) to protect therights and welfare of all participants. IRB approval has been granted for thefirst ProUroScan studies at the Minneapolis/St. Paul Veteran’s AdministrationMedical Center and at the Robert Wood Johnson University Hospital in NewBrunswick, 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 present information about the product and allrelevant and laboratory testing data. We will also propose a strategy forvalidating our labeling claim and a clinical protocol that all investigativecenters will be expected to follow, with the goal being to obtain enoughclinical data to have sufficient confidence that the system will perform asdefined 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 FDAstatistics indicate that the average time from receipt of a 510(k) applicationto final action is 65 days, with 90% completed in less than 180 days. Basedon this data, assuming that the results of the clinical trials pose nounanticipated problems, we expect to receive FDA concurrence within 90 – 180days after the 510(k) application is filed. Such concurrence will allow us tobegin active marketing of the ProUroScan 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 onthe exact nature of these claims, the approval process may require moreextensive clinical studies and possibly a full pre-market approval (“PMA”)application. Such an application will likely take significantly more time andbe more comprehensive than the 510(k) approval process.

We have also licensed rights to technology that offerssignificant enhancements to existing microwave thermal therapy for treatment ofbenign prostate hyperplasia (“BPH”). We intend to use this technology todevelop a means for urologists to observe and direct the application of heat todiseased portions of the prostate during thermal therapy procedures. This workwill be performed under a joint development agreement with Urologix, Inc.

*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 been pledged as security against promissory noteswith Crown Bank. We anticipate purchasing only a very limited amount ofequipment and other assets during the next 12 months. We do not anticipateselling any significant equipment or other assets in the near term.

*CurrentOperations*–*Employees and Expenses*.

We currently employ three executive officers, afunctional area Vice President and one other employee. We conduct our researchand development, market research, regulatory function, and other

14

----

 

business operationsthrough the use of a variety of consultants and medical device developmentcontractors. We believe that using consultants and contractors to perform thesefunctions is more cost effective than hiring full-time employees and affords usflexibility in directing our resources toward specific and changing goalsduring our development stage. As we prepare for FDA submission and marketlaunch of our ProUroScan product, we expect to add four to six employees in theareas of engineering and regulatory compliance within the next 12 months. Duringthe next 12 months, we expect to complete the development of clinicalProUroScan systems, conduct clinical trials, and file a 510(k) submission withthe FDA; fund development work on our therapeutic products; and prepare forinitial market launch.

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 facilitiesconsist of a month-to-month rental of approximately 2,200 square feet in anoffice that we share with another company. Other expenses incurred includetravel, insurance, telephone, supplies and other miscellaneous expenses. Overthe next 12 months, we anticipate spending approximately $1.3 million in marketingand administrative expenses. Of these, we expect that approximately $840,000will 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 ProUroScan system over thenext 12 months. Of this amount, approximately $850,000 to $900,000 will bespent on manufacturing, engineering, validation and documentation efforts witha contracted medical-products development company. Clinical trials and the510(k) filing with the FDA are expected to cost in the range of $250,000 to$275,000. ProUroScan systems created for development and clinical use areexpected to cost between $200,000 and $250,000. Internal salaries, benefits,and miscellaneous departmental expenses for software and hardware development,regulatory work, and project management are estimated to be $550,000 to$600,000.

For our thermal therapy products, we expect thatresearch and development efforts will be funded primarily through a jointdevelopment and marketing arrangement with Urologix Inc. We expect to spendbetween $175,000 and $200,000 over the next 12 months in this joint developmenteffort.

*Liquidity and Capital Resources.*

We had a working capitaldeficit of approximately $(454,000) and $(1,499,000) at June 30, 2006 andDecember 31, 2005, respectively. Cash used in operations was approximately$1,527,000 and $355,000 for the six month periods ended June 30, 2006 and 2005,and $6,129,000 for the period from August 17, 1999 (date of inception) to June30, 2006.

The primary use of cash inthe six months ended June 30, 2006 was to fund our operating losses, retire$548,000 of outstanding notes payable, pay approximately $531,000 ofoutstanding accounts payable and accrued expenses, and to deposit $50,000 witha vendor pursuant to a development engagement. The primary use of cash in theperiod from August 17, 1999 (inception) through June 30, 2006, in addition tofunding our net loss, was to pay $750,000 to Profile, LLC to redeem commonstock arising from their exercise of dissenter’s rights at the time of theMerger, including $650,000 (plus accrued interest) in relation to a notepayable. Cash was also used to fund the approximate $163,000 cost of theMerger, to repay approximately $242,000 pursuant to an unsecured promissorynote with a vendor, to deposit $50,000 with a vendor as noted above and toacquire approximately $21,000 of office furniture and computer equipment.

15

----

 

As of the date of this report, we had only a minimalamount of cash available, which is not sufficient to cover our normal operatingexpenses. To fund our working capital needs, we have commenced a senior debtcredit financing led by Crown Bank, Minneapolis, Minnesota. This $4 to $6million debt financing will be used to fund our losses, further the developmentof our products and fund us until we secure initial FDA market clearance on ourProUroScan product. This credit facility is secured by all the Company’sassets, and personally guaranteed by certain individual guarantors.

As consideration to the guarantors to provide theirguarantees for this $4 to $6 million bank credit facility, we intend to issueup to $2 million of unsecured convertible 10% debentures that are due in 36months. The debentures are convertible at the holders’ option into an aggregateof 4,000,000 shares of common stock (up to 6,666,667 shares if the underlyingsenior credit facility is not retired within approximately 20 months of eachdebenture’s issuance date). If additional funds are raised by the issuance of equitysecurities, such as through the issuance of stock or the issuance and exerciseof warrants, then existing shareholders will experience dilution of theirownership interest. If additional funds are raised by the issuance of debt orother equity instruments, we may become subject to certain operationallimitations, and such securities may have rights senior to those of existingholders of common stock.

As of the date of this report, we have closed on $2.2million of this credit facility and have received verbal commitments fromindividual guarantors or other lenders for a substantial portion of theremaining $1.8 to $3.8 million. Nevertheless, management can give no assurancethat these verbal commitments will be honored, nor that the remaining $1.8 to$3.8 million will be secured on a timely basis in 2006, or at all. The time ithas taken to close on these commitments has been longer than anticipated,forcing us to take measures to conserve cash, including substantiallyreducing development work on the ProUroScan system, reducing expenses, anddeferring vendor payments and staff salaries. Consequently, our anticipatedentry into the market will be delayed accordingly. If adequate funds are not available during 2006, ornot available on acceptable terms during 2006, we may be unable to fundexpansion or complete the development or enhancement of our products. If we areforced to continue to slow our development programs, or put them on holdpending securing financing, it could delay market entry. Ultimately, if noadditional financing is obtained on a timely basis, or at all, we could beforced to cease operations. See “RISK FACTORS ASSOCIATED WITH OURBUSINESS, OPERATIONS AND SECURITIES”, page 20.

**Going Concern**

We have incurred operatinglosses, accumulated deficit and negative cash flows from operations sinceinception. As of June 30, 2006, we had an accumulated deficit of approximately$11,737,000. These factors, among others, raise substantial doubt about ourability to continue as a going concern. The accompanying consolidated unauditedfinancial statements do not include any adjustments related to recoverabilityand classification of asset carrying amounts or the amount and classificationof liabilities that might result should we be unable to continue as a goingconcern.

**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 and estimates. Dueto the nature of our current operations, we do not believe we have any criticalpolicies or procedures.

16

----

 

**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 tothe goals, plan objectives, intentions, expectations, financial condition,results of operations, future performance and business of our Company, include,without limitation, (i) our ability to successfully complete all clinicaltrials and commercial development of our products and secure all necessaryfederal and other regulatory approvals to introduce and market our products inthe United States and around the world; (ii) our ability to fund our workingcapital needs over the next 12 to 24 months and until we generate sufficientongoing revenue from our products; (iii) our ability to successfully introduce,market and sell our products into the medical device markets; and (iv) allstatements preceded by, followed by or that include the words “may”, “would”, “could,”“should,” “expects,” “projects,” “anticipates,” “believes,” “estimates,” “plans,”“intends,” “targets” or similar 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-looking statements speak only as of the date they aremade. We do not undertake, and specifically disclaim, any obligation to updateany forward-looking statements to reflect events or circumstances occurringafter the date of such statements.

17

----

** **

**RISK FACTORSASSOCIATED WITH OUR BUSINESS, OPERATIONSAND SECURITIES**

**As a development-stage company, we have no operatinghistory and our business plan has not yet been fully tested.  We will incur material future losses until ourproducts are completed, FDA regulatory approval is secured, and our productsare successfully introduced into the United States and worldwide medical devicemarkets.**

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 industries. 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.

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

We have developed andmanufactured two working ProUroScan systems for testing, clinical validationsand demonstration purposes.  Previouslywe had developed and manufactured two working prototype ProUroScan systems toprove the feasibility of the device and to provide a means to test and developfuture systems.  Nevertheless, we havenot generated any revenues from the sale of the ProUroScan nor have wemanufactured any ProUroScan in commercial quantities.  The completion of the development of proposedproducts remains subject to all the risks associated with the development andmanufacture of new products based on innovative technologies, includingunanticipated technical or other problems, failures to meet FDA requirements orperformance objectives and the possible insufficiency of the funds allocatedfor the completion of such development, which could result in a change in thedesign, delay in the development or abandonment of such applications andproducts.  Consequently, there can be noassurance that our products will be successfully developed ormanufactured.  Our failure to completethe development of products will have a materially adverse effect on ourbusiness.

**Even if developed, ourproducts may not be commercially viable.**

Even if we are able tosuccessfully develop our products, we may not be able to manufacture suchproducts in commercial quantities and at prices that will be commerciallyviable.  Further, there is risk that ourproducts may not prove to be as effective as currently available medical ordiagnostic products.  The inability tosuccessfully complete development of a product or application or adetermination by us, for financial, technical or other reasons not to completedevelopment of any product or application, particularly in instances in whichwe have made sufficient capital expenditures will likely have a materialadverse effect on our business.

**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 need additionalfinancing during 2006 and 2007, and any such financing will likely be dilutiveto our existing shareholders.**

At September 11, 2006, wehad very limited cash on hand and no additional unused credit facilitiesin-place.  These funds are not sufficientfor us to meet normal operating expenses or complete

18

----

 

developmentof our products and gain FDA approval of them. Management’s plan is to raise sufficient capital to achieve theseobjectives through a combination of our ongoing debt financing in which we areestablishing a $4 to $6 million senior credit facility guaranteed by a limitednumber of accredited individuals.  Inaddition, we may also raise additional financing if the net proceeds of thecredit facility prove insufficient to reach these goals, or if financingbecomes available under attractive terms. As of the date of this quarterlyreport, the Company has only closed on $2.2 million of this facility, but hasreceived verbal commitments from various individual guarantors for asubstantial portion of the remaining $1.8 to $3.8 million.  Nevertheless, the Company cannot be certainthat these verbal commitments will be honored, nor that the remaining $1.8 to $3.8million will be secured on a timely basis during 2006, or at all.  See MANAGEMENT’S DISCUSSION AND ANALYSIS ORPLAN OF OPERATION - LIQUIDITY AND CAPITAL RESOURCES, page12.

As an incentive to theguarantors to provide their guarantees of the $4 to $6 million bank creditfacility, the Company intends to issue up to $2 million of unsecuredconvertible 10% debentures that are due in 36 months.  The debentures are convertible at the holders’option into an aggregate of 4,000,000 shares of common stock (up to 6,666,667shares if the underlying senior credit facility is not retired withinapproximately 20 monthsof each debenture’s issuance date).  If additionalfunds are raised by the issuance of equity securities, such as through theissuance of stock or the issuance and exercise of warrants, then existingshareholders will experience dilution of their ownership interest.  If additional funds are raised by theissuance of debt or other equity instruments, the Company may become subject tocertain operational limitations, and such securities may have rights senior tothose of existing holders of common stock.

If adequate funds are notavailable under the ongoing debt financing on a timely basis in 2006, or notavailable on other acceptable terms, the Company may be unable to fundexpansion, develop or enhance products. If the Company is forced to slow its development programs, or put themon hold, it would delay regulatory approvals needed, and thus market entry forour products. Ultimately, if no additional financing is obtained beyond whathas been secured to date, we could be forced to cease operations.

**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.

**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 currentlyintend to 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

19

----

 

margins.  In addition, the identification of newproduct candidates for development may require us to enter into licensing orother collaborative agreements with others, including medical-device andpharmaceutical 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 termsacceptable to us, if at all, which failure would materially and adverselyaffect our business.**

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 $1.2 to $1.3 million during thenext 12 months.  We plan to issuesecurities in partial satisfaction of certain development and consultingexpenses, including the Artann warrants discussed below.  Any such issuance could 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 over the nexttwo years at $2.00 per share or current market price, whichever is lower.

**The resale of our commonstock into the market under Rule 144 and under our prior SB-2 RegistrationStatement has depressed and adversely affected the market price of our commonstock in the public market, and thus, could cause additional dilution if andwhen the Company needs to raise additional working capital.  The resale of our common stock issued and tobe issued under our on-going senior debt financing will also likely adverselyaffect the market price of our common stock in the public market.**

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 SB-2 registrationstatement that became effective on January 24, 2005 has adversely affected theprevailing market price of our common stock, and will likely do so in thefuture. Furthermore, due to the 10,949,836 shares of restricted common stockthat have been held over one (1) year, and thus, are eligible for resale underRule 144, selling stockholders may continue to depress the price of our commonstock. Accordingly, the adverse market and pricing pressures resulting from theresale of our common stock may continue for an extended period of time andcontinue to depress the price of our common stock in the open market.

Pursuant to our ongoingsenior debt financing described above, we plan to issue debentures convertibleat the holders’ option into an aggregate of 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 the debenture’s issuance date).  The holders of these debentures have beengranted registration rights, whereby holders of 60% or more of the amount ofthe debentures can demand that the shares issued upon conversion be registeredwith the SEC for public resale.  Thesale, or availability for sale, of these additional shares of common stock inthe public market will likely increase the adverse market and

20

----

 

pricingpressure.  We may issue additional sharesin connection with our business and may grant additional stock options to ouremployees, officers, directors and consultants or warrants to third parties.

If these adverse marketconditions persist, and the Company needs to secure additional working capitalduring 2006 and 2007, such pricing pressure and market conditions could hinderour ability to raise capital, and/or raise capital on terms and conditionsacceptable to the Company. In addition, shareholders may experience dilution ifand when the Company raises additional capital by the sale of its equitysecurities under such 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 affect the Company andour 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 foreign agenciesis costly, time consuming and burdensome, especially for a pre-revenue,development stage company.  Although wehave secured the assistance of regulatory consultants to help direct ourregulatory compliance and filings, no assurances can be given that such filingswill be acceptable to the FDA or other regulatory bodies.  Further, even if acceptable, we may encountersignificant delays which will materially and adversely affect our businessplan.

**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 5,251,377shares of our commonstock, which represents approximately 34.0% of the voting power of our commonstock.  This represents a significantportion of 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 otherchange-of-control transaction that may otherwise be beneficial to ourshareholders.  As a result, the return onan investment in our common stock through the market price of our common stockor ultimate sale of our business could be adversely affected.

###### **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

21

----

 

withits senior lender, and personal guarantees are called and honored, the Companyand its lender have agreed that all the Company’s assets shall be assigned tosuch guarantors, pro rata, in consideration of such breach and obligation topay under the respective guarantees. Thus, common shareholders of the Company,and any existing and future investors in the Company’s common stock, would, ifthe foregoing breach and circumstances occurred, not have access or recourse tothe Company’s assets and collateral, and thus, would likely face a completeloss of their investment in the Company.

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

We have exclusively licensedfrom third parties intellectual property covered by patents and patentapplications.  Although we have beenadvised by patent counsel that such licensed technologies have receivedprotection in proposed major market areas, no assurance can be given that suchprotections will be properly maintained by the parties controlling suchintellectual properties, or that such licenses will be honored and notbreached.  The intellectual propertylicensed from third parties includes technology that is critical to ourproposed products.  If the partiescontrolling such intellectual property breach our licenses, or fail toadequately maintain, assert and defend such intellectual property, we may notbe able to maintain the technological (and thereby competitive) edge we believewe possess.  Any such loss ofintellectual property protections would likely have a materially adverse effecton 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 third parties.  Any challenge to our intellectual property,regardless of merit, would likely involve costly litigation which wouldmaterially and adversely affect the Company. Moreover, if a challenge were successful, it is possible that theviability of the Company’s business would be in question.  If a successful challenge were made tointellectual property that is critical to our proposed products, the pursuit ofany such alternative would likely cause significant delay in the developmentand introduction of such products.

**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 themedical marketplace in general, and the market for urologic products inparticular, may render our products obsolete or non-competitive.  Any such changes and advances could force usto abandon our currently proposed products, which would have a material andadverse effect on the Company and its business.

22

----

** **

**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, includinggovernment regulation, will likely encourage new competitors.  In particular, several large companies willcompete with us in the prostate-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 ProUroScanproduct will be eligible for reimbursement utilizing existing “CurrentProcedural Terminology” (“CPT”) codes (discussed below).  In addition, and as explained below, webelieve that our therapeutic products will be used in procedures eligible forreimbursement as well, without negatively affecting reimbursement for suchprocedures.  The success of our futuremedical device products will materially depend on the ability of medicalservice providers to obtain third-party reimbursement from private insurancesources Medicare, Medicaid, and various foreign governments when using ourproducts.  It may be difficult to predictthe 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 ProUroScan diagnostic system, it is anticipated thatthe product will initially be 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 andHartson) have suggested that a patient pay model that would require the testand the supporting services to be paid directly by the patient at the time thetest is performed is also a feasible approach in the short term.   Analogs exist that are 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 aMedicare Advance Beneficiary Notice (“ABN”) before furnishing a Part B servicewhen there is a reasonable doubt that Medicare will cover the procedure.  An ABN can be used for all situations,including laboratory tests, by

23

----

 

allphysicians and suppliers.  As the levelof clinical and payment experience expands, we anticipate filing for a formalCPT procedure code and reimbursement as previously described. There can be noassurance that we will be successful in obtaining a unique CPT code for use ofthe ProUroScan 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.  Over the past three months, the average dailytrading volume (as reported by BigCharts.com and Yahoo Finance) has been onlyapproximately 8,500 shares.  Therelatively small trading volume will likely make it difficult for ourshareholders to sell their shares as and when they choose.  Furthermore, small trading volumes generallydepress market prices.  As a result,investors may not always be able to resell shares of our common stock publiclyat the time and prices that they feel is fair or appropriate.

**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 wehave been operating for at least three years or $5,000,000 in the event we havebeen operating for

24

----

 

fewerthan three years and the recognition of average revenues equal to at least $6,000,000for each of the last three years.  We donot anticipate meeting any of the thresholds 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, 2004, and believes thatthey 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, could adverselyaffect 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 the foreseeablefuture.

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

We carried out anevaluation, with the participation of our chief executive and chief financialofficers, of the effectiveness, as of June 30, 2006, of our disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934, as amended).  Basedupon that evaluation, our chief executive officer and chief financial officerconcluded that as of June 30, 2006 our disclosure controls and procedures wereeffective.  There has been no significantchange in the internal controls over financial reporting during the last fiscalquarter that has materially affected or is likely to materially affect ourinternal control over financial reporting.

Nevertheless, due to our limitednumber of employees engaged in the authorization, recording, processing andreporting 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.

25

----

** **

**PARTII.  OTHER INFORMATION.**

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

*Stock Transactions:*

***On April 21, 2006 the Companyissued 70,000 shares of its common stock to its former Vice-President ofEngineering upon his resignation, pursuant to his employment agreement.  The shares were valued at $44,800 based theaverage closing share price during the five days before and after the issuancedate, and were expensed in the three month period ending June 30, 2006.  The issuance was made in reliance onexemption from registration provided by under Section 4(2) of the SecuritiesAct of 1933, as amended (the “Securities Act”), for issuance by an issuer notinvolving a public offering.***

*Warrant Issuances:*

***On June 1, 2006, pursuant to aloan agreement with a lender, and as consideration to provide such loan to us,issued a five-year warrant to the lender to acquire up to 37,500 shares ofCompany common stock at $0.50 per share. The warrants were issued in a privateplacement exempt from registration under Section 4(2) of the Securities Act assuch transaction was a non-public offering of common stock to a limited numberof subscribers.***

***Item6.  Exhibits***
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                   |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1         |       | Warrant issued to Mr. Roman Pauly in connection with  a loan to the Company dated June 1, 2006 (incorporated by reference to  Exhibit 4.1 to Current Report on Form 8-K filed January 31, 2006).                  |
|        |       |                                                                                                                                                                                                              |
| 10.1        |       | Agreement with Crown Bank to assign all security  interest, assets and licenses to guarantors upon default and satisfaction of  Company senior debt financing effective January 11, 2006 (filed herewith).        |
|        |       |                                                                                                                                                                                                              |
| 10.2        |       | 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). |
|        |       |                                                                                                                                                                                                              |
| 10.3        |       | Amendment #1 to Promissory Note Dated June 1, 2006  between ProUroCare Medical Inc. and Roman Pauly (filed herewith).                                                                                             |
|        |       |                                                                                                                                                                                                              |
| 31.1        |       | Certification of Principal Executive Officer  pursuant to Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002 (filed  herewith).                                                                           |
|        |       |                                                                                                                                                                                                              |
| 31.2        |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)/15d-14(a) of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                |
|        |       |                                                                                                                                                                                                              |
| 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 (filed herewith).                                             |
|        |       |                                                                                                                                                                                                              |
| 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 (filed herewith).                                             |

 

26

----

** **

**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:  September 18, 2006 |   | By:                                         |   /s/ Maurice R. Taylor |
|                      |   | Name: Maurice R. Taylor II                  |
|                      |   | Title: Chairman and Chief Executive Officer |
|                      |   |                                        |
|                      |   |                                        |
| Date: September 18, 2006  |   | By:                                         |   /s/ Richard Thon |
|                      |   | Name: Richard Thon                          |
|                      |   | Title: Chief Financial Officer              |

 

27

----