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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2010ORo

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


Commission File Number 333-143236

TECHNISCAN, INC.(Exact name of registrant as specified in its charter)

DELAWARE(State or other jurisdiction of
incorporation or organization)

27-1093363(I.R.S. Employer
Identification Number)


3216 South Highland Drive, Suite 200,
Salt Lake City, UT 84106(Address of principal executive offices) (Zip Code)

(801) 521-0444Registrant's telephone number, including area code



Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. ý Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

o Large accelerated filer

o Accelerated filer

o Non-accelerated filer (Do not check if a
small reporting company)

ý Smaller reporting company


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). o Yes    ý No

The number of shares outstanding of the registrant's common stock, par value $0.001 per share as of November 18, 2010 was 20,999,444.



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Table of Contents



Table of Contents



Page No.PART IFINANCIAL INFORMATIONITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009


1CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 AND FOR THE PERIOD FROM
JANUARY 1, 2002 (INCEPTION OF DEVELOPMENT STAGE) THROUGH SEPTEMBER 30, 2010


2CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 AND FOR THE PERIOD FROM JANUARY 1,
 2002 (INCEPTION OF DEVELOPMENT STAGE) THROUGH SEPTEMBER 30, 2010


3NOTES TO CONDENSED FINANCIAL STATEMENTS


4ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


16ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK


25ITEM 4.

CONTROLS AND PROCEDURES


25PART IIOTHER INFORMATIONITEM 6.

EXHIBITS


27SIGNATURES


29


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Table of Contents

PART IFINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS



TECHNISCAN, INC.  (A Development Stage Company)        CONDENSED BALANCE SHEETS        (unaudited)

September 30,
2010

December 31,
2009ASSETSCurrent assets:Cash and cash equivalents

$
47,868

$
232,706Prepaid expenses


495,760


271,209Total current assets


543,628


503,915Property and equipment, net


635,050


617,142Deposits


28,153


28,153Total assets

$
1,206,831

$
1,149,210LIABILITIES AND STOCKHOLDERS' DEFICITCurrent liabilities:Accounts payable

$
1,235,742

$
472,367Accrued liabilities


722,117


670,638Note payable to related party


135,000


Convertible notes payable


2,750,000


Embedded derivative liability


101,764


Common stock warrant liability


507,932


Related-party customer deposits


360,000


260,000Total current liabilities


5,812,555


1,403,005Deferred rent


144,449


139,330Accrued software license fees





250,000Total liabilities


5,957,004


1,792,335CommitmentsStockholders' deficit:Common stock, $.001 par value: 150,000,000 shares authorized; 20,724,444 shares outstanding


20,724


20,724Additional paid-in-capital


25,191,133


24,524,019Accumulated deficit prior to development stage


(389,393
)

(389,393
)Accumulated deficit during development stage


(29,572,637
)

(24,798,475
)Total stockholders' deficit


(4,750,173
)

(643,125
)Total liabilities and stockholders' deficit

$
1,206,831

$
1,149,210


See
accompanying notes to condensed financial statements.

1

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Table of Contents



TECHNISCAN, INC.  (A Development Stage Company)        CONDENSED STATEMENTS OF OPERATIONS        (unaudited)

For the Period
From January 1,
2002 (inception
of development
stage) Through
September 30,
2010For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,2010

2009

2010

2009Revenues:Government grant

$
6,764

$
118,939

$
101,105

$
750,738

$
3,146,569Related-party research





120,000





120,000


240,000Total revenues


6,764


238,939


101,105


870,738


3,386,569Operating expenses:Selling, general and administrative


701,667


417,461


2,379,434


961,379


15,343,019Research and development


361,789


405,508


1,395,466


990,210


14,243,223Direct grant


12,086


160,598


126,746


537,986


2,001,902Total operating expenses


1,075,542


983,567


3,901,646


2,489,575


31,588,144Loss from operations


(1,068,778
)

(744,628
)

(3,800,541
)

(1,618,837
)

(28,201,575
)Interest income


55


58


615


1,137


56,428Interest expense


(1,696,002
)

(8
)

(2,989,848
)

(118
)

(3,445,563
)Gain on derivatives, net


2,168,687





2,015,612





2,015,612Gain on sale of property and equipment














2,461Net loss

$
(596,038
)
$
(744,578
)
$
(4,774,162
)
$
(1,617,818
)
$
(29,572,637
)Net loss per common sharebasic and diluted

$
(0.03
)
$
(0.08
)
$
(0.23
)
$
(0.18
)Weighted average number of common shares outstandingbasic and diluted


20,724,444


8,769,206


20,724,444


8,747,742


See
accompanying notes to condensed financial statements.

2

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TECHNISCAN, INC.  (A Development Stage Company)        CONDENSED STATEMENTS OF CASH FLOWS        (unaudited)

For the Period
From January 1,
2002
(inception of
development
stage) Through
September 30,
2010For the Nine Months EndedSeptember 30,
2010

September 30,
2009CASH FLOWS FROM OPERATING ACTIVITIESNet loss

$
(4,774,162
)
$
(1,617,818
)
$
(29,572,637
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


139,503


29,688


641,450Impairment of intangible assets








14,179Gain on sale of property and equipment








(2,461
)Non-cash interest expense








383,610Issuance of common stock for services








375,000Stock-based compensation


667,114


23,429


1,793,215Debt discount amortization on convertible notes payable


2,625,308





2,625,308Gain on derivatives


(2,015,612
)




(2,015,612
)Changes in assets and liabilities:Accounts receivable








267Inventory








61,649Prepaid expenses


(224,551
)

137,051


701,086Accounts payable


763,375


49,168


1,226,822Accrued liabilities


51,479


9,761


382,299Related-party customer deposits


100,000


80,000


360,000Deferred rent


5,119


38,597


144,449Other liabilities


(250,000
)




Net cash used in operating activities


(2,912,427
)

(1,250,124
)

(22,881,376
)CASH FLOWS FROM INVESTING ACTIVITIESProceeds from sale of property and equipment








4,000Purchase of property and equipment


(157,411
)




(1,174,225
)Net cash used in investing activities


(157,411
)




(1,170,225
)CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on debt








(79,292
)Proceeds from exercise of stock options and warrants, and from the issuance of stock, net of issuance costs





1,407,291


18,748,587Payment of debt issuance costs








Proceeds from issuance of notes payable to related party


135,000





135,000Proceeds from issuance of convertible notes payable


2,750,000





5,150,000Net cash provided by financing activities


2,885,000


1,407,291


23,954,295Net increase (decrease) in cash and cash equivalents


(184,838
)

157,167


(97,306
)Cash and cash equivalents at beginning of period


232,706


269,192


145,174Cash and cash equivalents at end of period

$
47,868

$
426,359

$
47,868Supplemental Disclosure of Cash Flow Information:Cash paid for interest

$
12,814

$
110

$
26,581Cash paid for income taxes


200


100


1,000Supplemental Disclosure of Noncash Investing and Financing Activities:Embedded derivative liability associated with convertible notes payable

$
1,206,702

$


$
1,206,702Common stock warrant liability associated with convertible notes payable


2,587,367





2,587,367Common stock issued to stockholders of Castillo, Inc. in connection with the Merger








6,000Issuance of common stock for future services








225,000Conversion of preferred stock and common stock warrants to common stock








38,937Issuance of Series E convertible preferred stock for future services








1,000,000Conversion of notes payable, including accrued interest, to preferred stock








2,611,831


See accompanying notes to condensed financial statements.

3

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TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Organization

TechniScan, Inc. (the "Company") (formerly known as Castillo, Inc. or "Castillo") was originally formed as a Nevada
corporation on February 2, 2007. The Company changed its state of incorporation from the state of Nevada to the state of Delaware on October 8, 2009.

On
October 9, 2009, TechniScan Acquisition, Inc., a Utah corporation and wholly owned subsidiary of the Company, was merged with and into TechniScan, Inc., a Utah
corporation ("TechniScan Utah"). TechniScan Utah was then immediately merged into the Company (collectively referred to as the "Merger"). Pursuant to the Merger, the Company succeeded to the business
of TechniScan Utah as its sole line of business and changed its name to TechniScan, Inc. The Merger has been accounted for as a recapitalization of TechniScan Utah and the historical financial
statements prior to the Merger are those of TechniScan Utah.

Description of Business

TechniScan Utah was incorporated in 1984 for the purpose of conducting research on advanced ultrasound imaging and inverse scatter
technology. The Company is in the development stage, as defined by the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 915-10, Development Stage Entities,
 as it has not generated significant revenues. The development stage began January 1, 2002, when the Company was
capitalized for research, development and commercialization of innovative medical imaging products for the detection and diagnosis of breast cancer.

The
Company's commercial focus is the development of an ultrasound-based product known as the Warm Bath Ultrasound ("WBU") system that is expected to provide radiologists with unique
information about the bulk properties of tissue in the breast as well as clear images of the tissue structure.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed financial statements of the Company are presented on the accrual basis of accounting in accordance
with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they may not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2010 are
not necessarily indicative of results that may be expected for the year ending December 31, 2010. The condensed balance sheet as of December 31, 2009 has been derived from the Company's
audited financial statements as of that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information refer to the financial
statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission
("SEC") on March 22, 2010.

4

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TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all highly liquid investments with an initial maturity of three months or less to be cash equivalents.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash
equivalents. The Company places its cash with one financial institution. Accounts are secured by the Federal Deposit Insurance Corporation up to $250,000. At times, balances may exceed federally
insured limits.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives
of the related assets.

Impairment of Long-Lived Assets

Long-lived assets of the Company are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable.

Derivative Instruments

In connection with the sale of debt or equity instruments, the Company may sell warrants to purchase its common stock. In certain
circumstances, these warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as
conversion options, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative asset or liability.

The
accounting for derivative instruments is complex. The Company's derivative liabilities are re-valued at the end of each reporting period, with changes in the fair value
of the derivative liability recorded as charges or credits to other income (expense), in the period in which the changes in fair value occur. For embedded derivatives and warrants that are accounted
for as derivative instrument liabilities, the Company determines the fair value of these instruments using both the Black-Scholes option-pricing model and the Binomial option-pricing model (see
Note 7). These models require assumptions related to the expected term of the instrument, risk-free rates of return, the Company's

5

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TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

current
common stock price, expected dividend yield and the expected volatility corresponding to the expected life of the instrument.

Revenue Recognition

The Company's revenues are sourced from federal research grants and private and government research contracts. Revenue is recognized
when the following criteria are met: (1) a contractual agreement exists; (2) products have been delivered or services have been rendered;
(3) the fee is fixed or determinable, and (4) collectability is reasonably assured. Government grant revenue is recognized during the period qualifying expenses are incurred for research
and development of the WBU system as set forth under the terms of the grant award agreements. The Company has complied with the federal statutes and regulations, including the delivery of all required
periodic reports, and believes that no refunds will be required under the terms of the grant award agreements.

Direct Grant Expenses

Direct grant expenses consist of costs incurred directly related to performance on the government grants. These expenses consist
primarily of payroll, travel and direct material expenses. These expenses are charged to direct grant expense as incurred. Due to the fact that: (1) the Company is incurring the expenses
regardless of whether or not a government grant is obtained; (2) the Company is the primary obligor; (3) the Company has reasonable latitude in establishing the grant amount;
(4) the Company performs the services; (5) the Company has discretion in supplier selection; and (6) the Company determines the specifications of the research; the direct grant
expenses are presented gross of government grant revenues.

Fair Value Measurements

As defined in FASB ASC 820,Fair Value Measurements and Disclosures, fair value is
based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase
consistency and comparability in fair value measurements, FASB ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three
broad levels, which are described below:

Level 1

Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.Level 2

Other inputs that are observable directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.Level 3

Unobservable inputs that are used when little or no market data is available, which require the Company to develop its own assumptions about how market participants would value the assets or
liabilities.


Determining
which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosure each quarter. Assets and
liabilities measured

6

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TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

at
fair value on a recurring basis as of September 30, 2010 and December 31, 2009 are summarized as follows:

Fair Value as of September 30, 2010Level 1

Level 2

Level 3

TotalAssetsMoney market funds

$
972

$


$


$
972Total

$
972

$


$


$
972LiabilitiesEmbedded derivative liability

$


$


$
101,764

$
101,764Common stock warrant








507,932


507,932Total

$


$


$
609,696

$
609,696




Fair Value as of December 31, 2009Level 1

Level 2

Level 3

TotalAssetsMoney market funds

$
130,028

$


$


$
130,028Total

$
130,028

$


$


$
130,028


The
following table presents the fair value reconciliation of Level 3 liabilities measured at fair value on a recurring basis during the nine months ended September 30,
2010:

Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)Embedded
Derivative

Warrant Derivative

TotalBeginning balance, December 31, 2009

$


$


$
Issuances:Embedded derivatives issued in conjunction with convertible notes payable


1,206,702





1,206,702Warrants issued in conjunction with convertible notes payable





2,587,367


2,587,367Total gains included in earnings


(1,104,938
)

(2,079,435
)

(3,184,373
)Ending balance, September 30, 2010

$
101,764

$
507,932

$
609,696


Net Loss Per Common Share

Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding.
Diluted net income per common share is computed by dividing

7

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TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

net
income, if any, by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential common share equivalents
consist of the weighted average number of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock, and shares issuable upon conversion of convertible debt.
If the Company generates net income and these potential common share equivalents are dilutive, the Company computes diluted net income per share using the treasury stock method.

Due
to the fact that for all periods presented, the Company has incurred net losses, weighted average common share equivalents of 4,498,476 and 8,020,734 for the three months ended
September 30, 2010 and 2009, respectively, and 4,168,038 and 6,289,453 for the nine months ended September 30, 2010 and 2009, respectively, are not included in the calculation of diluted
net loss per common share because they are anti-dilutive.

Operating Segment

The Company conducts business within one operating segment. The Company's operations are all related to the research and development of
its WBU system. All assets of the business are located in the United States.

Recent Accounting Pronouncements

On September 15, 2010, the SEC issued Release No. 33-9142, "Internal Control Over Financial Reporting In
Exchange Act Periodic Reports of Non-Accelerated Filers." This release issued a final rule adopting amendments to its rules and forms to conform them to Section 404(c) of the
Sarbanes-Oxley Act of 2002 (SOX), as added by Section 989G of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. SOX Section 404(c) provides that Section 404(b) shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor
a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Release No. 33-9142 was effective September 21, 2010.

In
March 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-11, which is included in the Codification under ASC 815. This update clarifies the type of
embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only an embedded credit derivative that is related to the subordination of one financial instrument to
another qualifies for the exemption. This guidance became effective for the Company's interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have
a material impact on the Company's condensed financial statements.

In
February 2010, the FASB issued ASU No. 2010-09, which is included in the Codification under ASC 855,Subsequent
Events. This update removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated and became effective for interim and
annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on the Company's condensed financial statements.

In
January 2010, the FASB issued ASU No. 2010-06, which is included in the Codification under ASC 820,Fair Value Measurements and
Disclosures. This update requires the disclosure of transfers

8

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TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

between
the observable input categories and activity in the unobservable input category for fair value measurements. The guidance also requires disclosures about the inputs and valuation techniques
used to measure fair value and became effective for interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on the Company's
condensed financial statements.

Reclassifications

Certain reclassifications have been made to the 2009 information to conform to the 2010 presentation.

3. GOING CONCERN

Since entering the development stage, the Company has not generated revenues in excess of expenses and has been dependent on government grants and equity raised from individual investors
to sustain its operations. The WBU system has not yet been approved by the U.S. Food and Drug Administration ("FDA") for commercial sale. Therefore, the Company has not generated any revenues from
non-research product sales. The Company has incurred losses and used cash in operating activities since entering the development stage. As of September 30, 2010, the Company had an
accumulated deficit of $29,962,030, negative working capital of $5,268,927, and minimal revenues. These factors, among others, raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The
Company's plans to address its liquidity issues include the (1) sale of debt and equity securities, (2) collaboration with third parties to accelerate the introduction
of product and services into the market, and (3) continued focus on obtaining approval from the FDA for the Company's products and services to qualify for commercial sale.

There
can be no assurance that the Company's planned sales of debt and equity securities, its collaborative efforts, or its effort to obtain FDA approval will be successful or that the
Company will have the ability to commercialize its imaging system and ultimately attain profitability.

4. PREPAID EXPENSES

Prepaid expenses as of September 30, 2010 and December 31, 2009 consisted of the following:

September 30, 2010

December 31, 2009Deferred offering costs

$
492,837

$
42,568Prepaid professional services





150,000Prepaid payroll expense





59,709Other


2,923


18,932$
495,760

$
271,209


9

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TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. ACCRUED LIABILITIES

Accrued liabilities as of September 30, 2010 and December 31, 2009 consisted of the following:

September 30, 2010

December 31, 2009Accrued software license fees

$
375,000

$
150,000Accrued compensation and benefits


125,541


195,811Accrued interest


158,764


Other accrued liabilities


62,812


53,465Liabilities to dissenter stockholders





271,362$
722,117

$
670,638


6. RELATED-PARTY TRANSACTIONS

In connection with a European Market Development Agreement that the Company entered into during October 2008 with Esaote S.p.A. ("Esaote"), an Italian ultrasound equipment
manufacturer, which is also a 10% stockholder of the Company, the Company has delivered two prototype systems and Esaote has paid the Company an aggregate of $600,000. The Company has recorded
$240,000 of other research revenues for the period from January 1, 2002 (inception of development stage) through September 30, 2010, in conjunction with the shipment of prototype systems
per the terms of a product development agreement. The remaining balance is recorded in related-party customer deposits.

From
August 9, 2010 through September 8, 2010, the Company received $135,000 by issuing short-term notes to two related parties. The notes bear interest at 8%
per annum. The principal amount of the notes and accrued interest are due in full upon the earlier of: (1) the Company receiving cash proceeds from equipment sales, loans, investments or
otherwise in excess of an aggregate of $135,000; (2) the closing of an equity offering where the Company receives gross proceeds of not less than $2,000,000; or (3) December 31,
2010.

7. CONVERTIBLE NOTES PAYABLE AND DERIVATIVES

March 2010 Offering

On March 30, 2010, the Company entered into a Note and Warrant Purchase Agreement with five accredited investors pursuant to
which the investors purchased senior secured convertible notes ("Notes") in the aggregate amount of $1,850,000. Of this amount $500,000 was received from members of the Company's Board of Directors.
During the period from May 13, 2010 through May 27, 2010, the Company issued Notes in the aggregate amount of $700,000 to nine accredited investors. Of this amount $100,000 was received
from a member of the Company's Board of Directors.

On
September 30, 2010, the due date of the Notes was extended to October 8, 2010 (see Note 9), together with accrued interest at the rate of 10% per annum, unless
the principal amount of a note is converted into shares of common stock of the Company, in which case the interest is payable on the principal at a rate of 12% per annum. The Company is recording
interest at 12%. At its option, the Company may prepay all of the outstanding principal and accrued interest on the Notes, subject to a prepayment charge of 10% of the principal amount of the Notes.
The Notes are convertible in whole

10

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Table of Contents

TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. CONVERTIBLE NOTES PAYABLE AND DERIVATIVES (Continued)

or
in part at any time at the option of the holder of the Note into the number of shares equal to the principal amount of the Note and all accrued interest divided by $2.68, subject to customary
adjustments as set forth in the Notes for stock splits, stock dividends, etc. In addition, in the event that the Company receives cash investments from one or more investors in one or more
transactions for gross proceeds of not less than $5,000,000 in exchange for the issuance of shares or any other securities
that are convertible into or exercisable for shares at any time between March 30, 2010 and October 8, 2010, the Notes are convertible into shares at the same price and on the same terms
as the investors.

In
conjunction with the Notes, the Company issued warrants ("Warrants") to investors to purchase an aggregate of 951,499 shares of the Company's common stock. The exercise price per
share is $2.68, subject to customary adjustments as set forth in the Warrants for stock splits, stock dividends, etc. The Warrants expire March 30, 2015.

The
Notes and Warrants contain a provision which adjusts the exercise price of the Notes and Warrants if the Company issues or sells common stock or securities convertible into common
stock at a price per share, or equivalent price per share lower than $2.68. The Company assessed the terms of the Notes and Warrants in accordance with ASC Topic 815-40, and determined
that the underlying terms of the Notes and Warrants are not indexed to the Company's common stock. Therefore, the conversion option and the warrants are accounted for as an embedded derivative and as
a derivative, respectively, and are valued at fair value at the date of issuance and each subsequent interim period.

Pursuant
to certain prepayment provisions set forth in the Notes, the investors have the right, at the investors' option to require the Company to prepay all or a portion of the Notes in
cash at a price equal to the greater of (1) 125% of the aggregate principal amount of the Notes plus all accrued and unpaid interest and (2) the aggregate principal amount of the Notes
plus all accrued and unpaid interest, divided by the conversion price on the date the investor demands payment, pursuant to this provision or the date the payment is actually made by the Company to
the investor pursuant to this provision, whichever is less, multiplied by the daily volume weighted average price of the Company's common stock on the greater of either of the two dates used to
determine the conversion price in connection with a payment pursuant to this provision. The prepayment provisions are embedded derivates and the fair value of the prepayment penalties are included in
the embedded derivative liability.

July 2010 Offering

During the period from July 29, 2010 through August 24, 2010, two members of the Company's Board of Directors purchased
senior secured convertible promissory notes in the amount of $200,000. In conjunction with the notes, the Company issued warrants to purchase an aggregate of 74,627 shares of its common stock. Except
as adjusted for the later issuance date, the note and warrant have the same material terms as the Notes and Warrants, respectively, that the Company issued pursuant to a Note and Warrant Purchase
Agreement and other investment documents in connection with the March 2010 Offering.

On
March 30, 2010 (date of issuance) and on March 31, 2010, the fair value of the embedded derivatives and warrant liability was $1,016,897 and $2,001,864, respectively.
Because the embedded

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Table of Contents

TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. CONVERTIBLE NOTES PAYABLE AND DERIVATIVES (Continued)

derivatives
and warrant liability collectively exceeded the proceeds from the Notes of $1,850,000, the Company recorded an inception loss on derivatives of $1,168,761 and a discount of $1,850,000 on
the Notes.

During
May 2010 (date of additional issuance), the fair value of the embedded derivatives and warrant liability for the additional issuance was $180,566 and $501,174, respectively. As a
result, the Company recorded a discount of $681,740 on the Notes issued during May 2010.

During
July 2010 and August 2010 (date of additional issuance), the fair value of the embedded derivatives and warrant liability for the additional issuance was $9,239 and $84,329,
respectively. As a result, the Company recorded a discount of $93,568 on the Notes issued during July 2010 and August 2010.

The
revaluation of the derivatives as of September 30, 2010 resulted in the fair value of the liabilities of $101,764 and $507,932 for the embedded derivative liability on the
Notes and the common stock warrant liability, respectively. The decrease in the fair value resulted in a gain on derivatives of $2,168,687 for the three months ended September 30, 2010. The
Company uses the Black-Scholes option-pricing model to estimate the value of its embedded derivatives, and the Company uses the Black-Scholes and Binomial option-pricing models to estimate the value
of its common stock warrant liability. The assumptions used in the Black-Scholes and Binomial option-pricing models for the three and nine months ended September 30, 2010 and 2009 are set forth
in the following table. The expected volatility is based on the volatility of public companies that are similar to the Company's industry, size, financial leverage and stage of life cycle. The Company
calculated the historical volatility of these companies using the daily closing total returns for a period of time equal to the expected term of the embedded derivatives and common stock warrant
liability as of the valuation date. The expected term represents the period of time that the embedded derivatives and common stock warrant liability are expected to be outstanding. The risk free rate
is based on the U.S. treasury securities constant maturity rate that corresponds to the expected term.

Embedded Derivatives

September 30,
2010

July 29 - August 24,
2010

June 30,
2010

May 13 - 27,
2010

March 31,
2010Expected volatility


64.1
%

64.1
%

88.1
%

84.3
%

46.1
%Expected life, range in years


0.34


0.10


0.25


0.35


0.50Expected dividend yield on stock


0.0
%

0.0
%

0.0
%

0.0
%

0.0
%Risk free interest rate


0.23
%

0.21
%

0.24
%

0.24
%

0.28
%


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Table of Contents

TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. CONVERTIBLE NOTES PAYABLE AND DERIVATIVES (Continued)

Common Stock Warrant Liability

September 30,
2010

July 29 - August 24,
2010

June 30,
2010

May 13 - 27,
2010

March 31,
2010Expected volatility


74.0
%

73.6
%

78.1
%

76.4
%

69.0
%Expected life, range in years


4.50


4.60


4.75


4.84


5.00Expected dividend yield on stock


0.0
%

0.0
%

0.0
%

0.0
%

0.0
%Risk free interest rate


1.16
%

1.23
%

1.83
%

2.14
%

2.63
%


8. STOCKHOLDERS' DEFICIT

Retroactive Presentation for Reverse Common Stock Split

Effective June 28, 2010, the Company implemented a 1-for-4 reverse stock split of its issued and
outstanding common stock. All common share and per share information in the accompanying condensed financial statements have been retroactively restated to reflect the reverse common stock split.

Stock Warrants

A summary of the warrant activity and related information is presented below:

September 30, 2010

December 31, 2009Warrants

Weighted
average exercise
price

Warrants

Weighted
average exercise
priceOutstandingbeginning of period




$



641,322

$
1.00Granted


1,026,126


2.68


430,617


3.00Exercised








(1,042,239
)

1.84Canceled








(29,700
)

0.20Outstandingend of period


1,026,126


2.68





Exercisableend of period


1,026,126


2.68








Stock Options

Under the Company's Comprehensive Management Incentive Plan (the "Plan"), the number of options authorized is limited to
18 percent of the total outstanding common shares. As of September 30, 2010, the number of options authorized was 3,730,400.

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Table of Contents

TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. STOCKHOLDERS' DEFICIT (Continued)

A
summary of the Company's stock option activity for the nine months ended September 30, 2010 is as follows:

Number of
Options
Outstanding

Weighted
Average Exercise
Price

Weighted
Average
Contractual
Term (Years)

Aggregate
Intrinsic ValueOptions outstanding as of December 31, 2009


3,596,195

$
1.55


6.17

$
6,515,929Granted


10,000


2.62Exercised





Forfeited


(185,000
)

(1.97
)Options outstanding as of September 30, 2010


3,421,195


1.55


3.86


211,156Options exercisable as of September 30, 2010


3,141,195


1.55


3.77


211,156


As
of September 30, 2010 there was $1,058,407 of total unrecognized compensation cost with a weighted average vesting period of 1.46 years related to unvested share-based
compensation arrangements granted under the Plan. The total fair value of shares vested during the nine months ended September 30, 2010 was $679,898.

A
summary of the Company's non-vested options for the nine months ended September 30, 2010 is as follows:

Shares

Weighted Average
Grant-Date
Fair ValueNonvested as of December 31, 2009


525,000

$
3.34Granted


10,000


2.62Vested


(203,750
)

(3.88
)Forfeited


(10,000
)

(2.62
)Nonvested as of September 30, 2010


321,250


4.04


The
Company uses the Black-Scholes option-pricing model to estimate the value of its share-based payments. The assumptions used in the Black-Scholes option-pricing model for the three
and nine months ended September 30, 2010 and 2009 are set forth in the following table. Subsequent to the Merger, the expected volatility is based on the volatility of public companies that are
similar to the Company's industry, size, financial leverage and stage of life cycle. Prior to the Merger, the expected volatility is based on the volatility of the Dow Jones Small Cap Medical Index.
The Company calculated the historical volatility of these companies using the daily closing total returns for a period of time equal to the expected term of the options immediately prior to the grant
date. The Company uses historical data to estimate option exercise and employee termination patterns. The expected term of the options granted represents the period of time that options granted are
expected to be outstanding. The risk free rate for periods within the contractual life of the option is based on the U.S. treasury

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Table of Contents

TECHNISCAN, INC.
(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. STOCKHOLDERS' DEFICIT (Continued)

securities
constant maturity rate that corresponds to the expected term in effect at the time of grant. The fair value of common stock is based on closing stock quotes for the Company's common stock.

Three Months
Ended
September 30,

Nine Months Ended
September 30,2010

2009

2010

2009Expected volatility





22.80
%
89.36% - 91.04%


22.80
%Expected life, range in years





9.00

6.25


9.00Expected dividend yield on stock





0.00
%
0.00%


0.00
%Risk free interest rate range





3.52
%
3.56% - 3.85%


3.52
%Fair value of common stock




$
1.50

$3.36 - $3.44

$
1.50


9. SUBSEQUENT EVENTS

On July 28, 2010, the Company's Board of Directors implemented a furlough to reduce overhead costs and conserve cash. The furlough, which was effective August 13, 2010, was
for ten weeks. On October 25, 2010, the Company laid-off 9 of the Company's 17 employees, including employees in operations and engineering.

Subsequent
to September 30, 2010, the Company amended the Notes extending the maturity date from October 8, 2010 to January 31, 2011. The Notes may be extended to
April 15, 2011 at the request of the Company and with agreement from the first lien holders of the Notes. In conjunction with the extension of the Notes, the Company issued 275,000 restricted
shares of its common stock and warrants to purchase 1,026,126 shares of its common stock.

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Table of Contents

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

STATEMENT ON FORWARD-LOOKING INFORMATION

This report on Form 10-Q contains certain forward-looking statements. All statements other
than statements of historical fact are "forward-looking statements" for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the
plans, strategies, and objectives of management for future operations; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions
or performance; statements of belief; and any statement of assumptions underlying any of the
foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking
statements.

These forward-looking statements involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs, and
risk of declining revenues. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors. These forward-looking statements
are made as of the date of this filing, and we assume no obligation to update such forward-looking statements. The following discusses our financial condition and results of operations based upon our
financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. It should be read in conjunction with our financial
statements and the notes thereto included elsewhere herein.

The
following discussion and analysis provides information which our management believes to be relevant to an assessment and understanding of our results of operations and financial
condition. The discussion should be read together with our financial statements and the notes to the financial statements, which are included in this report.

Our
financial statements prior to the Merger are the financials of TechniScan Utah. Pursuant to the Merger, TechniScan Utah's financial statements became our financial statements.

Overview

We are a development stage company. Our development stage began January 1, 2002 when we were capitalized for the research,
development, and commercialization of innovative medical imaging products for the detection and diagnosis of breast cancer. We consider our operations to comprise one business segment.

Our
current commercial focus is the development of an ultrasound-based product, the WBU system, that is expected to provide radiologists with information about the bulk properties of
tissue in the breast as well as useful images of the tissue structure.

Our
technology has been developed through research supported, in part, by federal research grants and private and government research contracts.

From
inception through September 30, 2010, we have generated revenues solely from grants and research contracts. The WBU system has not yet been approved by the FDA for commercial
sale;
therefore, we have not yet generated revenues from non-research product sales. We have incurred losses since we began operating. As of September 30, 2010 and December 31,
2009, we had an accumulated deficit of $29,962,030 and $25,187,868 respectively. To date, we have been dependent on debt and equity funding to support our operations, and we will continue to be
dependent on similar financing to support our operations until we generate significant revenues from the WBU system. There is substantial doubt about our ability to continue as a going concern, and no
adjustments have been reflected in our financial statements that may result from the outcome of this uncertainty.

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Table of Contents

Recent Developments

Layoff

On July 28, 2010, our Board of Directors implemented a furlough to reduce overhead costs and conserve cash. The furlough, which
was effective August 13, 2010, was for ten weeks. On October 25, 2010, we laid-off 9 of our 17 employees, including employees in operations and engineering.

Senior Secured Convertible Promissory Notes

Subsequent to September 30, 2010, we amended the Notes extending the maturity date from October 8, 2010 to
January 31, 2011. The Notes may be extended to April 15, 2011 at our request and with agreement from the first lien holders of the Notes. In conjunction with the extension of the due
date of the Notes, we issued 275,000 restricted shares of our common stock and warrants to purchase 1,026,126 shares of our common stock.

Significant Accounting Policies

Revenues

Since inception, we have generated revenues from federal research grants and private and government research contracts. We recognize
revenues when services have been provided and invoiced to the federal government or other research partners.

During
the three and nine months ended September 30, 2010 and 2009, we recognized revenues in connection with federal grants from the Department of Health and Human Services for
cancer treatment research. In March 2009, a second no-cost extension was applied for and received on our Ultrasound Quantitative Backscatter and Inverse Scattering ("QUB") grant as well as
on our Thermoacoustic and Inverse Scattering Breast Cancer Scanner ("Thermoacoustic") grant extending the period on both grants to March 28, 2010 and March 31, 2010 respectively. The QUB
Grant was completed by March 31, 2010. In March 2010, we applied for and received a third no-cost extension on the Thermoacoustic Grant extending the period to March 31,
2011.

The
FDA has not approved the WBU system for commercial sale; therefore, we have not generated revenues from commercial product sales.

Operating Expenses

We classify our operating expenses between, selling, general and administrative expenses; research and development expenses; and direct
grant expenses.

Selling,
general and administrative expenses consist primarily of personnel and personnel-related costs for employees and contractors engaged in business development, regulatory,
executive, finance, accounting, human resources, information technology, marketing and legal roles. These costs also include general corporate costs such as rent for the corporate offices, insurance,
depreciation on information technology equipment, and stock-based compensation expenses that are not allocated to research and development and direct grant expenses.

Research
and development expenses consist primarily of personnel and personnel-related costs for employees and contractors engaged in the development of the WBU technology, as well as
indirect costs supporting these activities, including allocated depreciation and amortization of property and equipment and allocated rent for research facilities.

Direct
grant expenses consist primarily of personnel and personnel-related costs for employees and contractors engaged on projects specified within the scope allowed by specific federal
grants, as well as the cost of direct equipment and materials.

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Table of Contents

Income Taxes

We have significant deferred income tax assets resulting primarily from net operating loss carryforwards and research and development
tax credit carryforwards. These deferred income tax assets may reduce taxable income in future periods, if any. A valuation allowance is required when it is more likely than not that all or a portion
of the deferred income tax assets will not be realized. We have recorded a valuation allowance against the deferred income tax assets that are not offset by deferred income tax liabilities because
there is significant uncertainty as to our ability to generate sufficient profits to realize these deferred income tax assets.

Critical Accounting Policies and Use of Estimates

Derivative Instruments

In connection with the sale of debt or equity instruments, we may sell warrants to purchase our common stock. In certain circumstances,
these warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as conversion options,
which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative asset or liability.

The
accounting for derivative instruments is complex. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value
of the derivative liability recorded as charges or credits to other income (expense), in the period in which the changes in fair value occur. For embedded derivatives and warrants that are accounted
for as derivative instrument liabilities, we determine the fair values of these instruments using the Black-Scholes option-pricing model and the Binomial option-pricing model. These models require
assumptions related to the expected term of the instrument, risk-free rates of return, our current common stock price, expected dividend yield and the expected volatility corresponding to
the expected life of the instrument.

Revenue Recognition

Our revenues are sourced from federal research grants and private and government research contracts. Revenue is recognized when the
following criteria are met: (i) a contractual agreement exists; (ii) products have been delivered or services have been rendered; (iii) the fee is fixed or determinable, and
(iv) collectability is reasonably assured. Government grant revenue is recognized during the period qualifying expenses are incurred for research and development of the WBU system as set forth
under the terms of the grant award agreements. We have complied with the federal statutes and regulations, including the delivery of all required periodic reports, and believe that no refunds will be
required under the terms of the grant award agreements.

Direct Grant Expenses

Direct grant expenses consist of costs incurred directly related to performance on the government grants. These expenses consist
primarily of payroll, travel and direct material expenses. These expenses are charged to direct grant expense as incurred. Due to the fact that (1) we are incurring the expenses regardless of
whether or not a government grant is obtained, (2) we
are the primary obligor, (3) we have reasonable latitude in establishing the grant amount, (4) we perform the services, (5) we have discretion in supplier selection, and
(6) we determine the specifications of the research; the direct grant expenses are presented gross of government grant revenues.

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Table of Contents

Stock-based Compensation

We account for stock-based compensation in accordance with FASB ASC 718,Stock
Compensation. Stock-based compensation for stock options is estimated at the grant date based on each option's value as calculated by the Black-Scholes option-pricing model.
Prior to the Merger, stock-based payments to employees are grants of stock options that are recognized in the statement of operations based on the calculated value at the date of grant instead of the
fair value because it has not been practical to estimate the volatility of the share price. The calculated value method requires that the volatility assumption used in an option-pricing model be based
on the historical volatility of an appropriate industry sector index. Subsequent to the Merger, we calculate the fair value of stock options instead of the calculated value using the volatility of
comparable companies.

We
use the Black-Scholes option-pricing model to estimate the value of our share-based payments. Prior to the Merger, the fair value of common stock is based on the cash paid by
unrelated investors for the Company's stock. Subsequent to the Merger, the fair value of common stock is based on closing stock quotes for the Company's common stock. Prior to the Merger, the expected
volatility was based on the volatility of the Dow Jones Small Cap Medical Equipment Index. Subsequent to the Merger, the expected volatility is based on the volatility of public companies that are
similar to the Company's industry, size, financial leverage and stage of life cycle. We calculated expected volatility using the daily closing total returns for these similar companies for a period of
time equal to the expected term of the options immediately prior to the grant date. We use historical data to estimate option exercise and employee termination patterns. The expected term of the
options granted represents the period of time that the options granted are expected to be outstanding. The risk free rate for the periods within the contractual life of the option is based on the
United States treasury securities constant maturity rate that corresponds to the expected term in effect at the time of grant.

Results of Operations

For the Three and Nine Months Ended September 30, 2010 compared to the Three and Nine Months Ended September 30, 2009

Revenues

For the Three Months
Ended
September 30,

For the Nine Months
Ended
September 30,2010

2009

% Change

2010

2009

% ChangeGovernment grant

$
6,764

$
118,939


-94
%
$
101,105

$
750,738


-87
%


Government
grant revenues decreased $112,175 and $649,633 for the three and nine months ended September 30, 2010 as compared to the three and nine months ended
September 30, 2009. This decrease in revenues is the result of the Inverse Scatter Breast Scan ("SBIR") grant being completed as of December 31, 2009 and the QUB grant being completed as
of March 31, 2010. The Thermoacoustic grant decreased $1,348 and increased $45,613 for the three and nine months ended September 30, 2010 as compared to the three and nine months ended
September 30, 2009. Grant revenues are expected to decline with the primary emphasis shifting to the subcontract work of completing the clinical studies under our largest Small Business
Innovative Research Award.

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Table of Contents

Operating Expenses

Selling, General and Administrative Expenses

For the Three Months
Ended
September 30,

For the Nine Months
Ended
September 30,2010

2009

% Change

2010

2009

% ChangeSelling, general and administrative expenses

$
701,667

$
417,461


68
%
$
2,379,434

$
961,379


148
%


Selling,
general and administrative expenses increased $284,206 and $1,418,055 for the three and nine months ended September 30, 2010, as compared to the three and nine months
ended September 30, 2009.

This
increase in selling, general and administrative expenses for the three months ended September 30, 2010 was primarily due to the following:



The
foregoing increase in selling, general and administrative expenses for the three months ended September 30, 2010 was offset by a decrease in other selling, general and
administrative expenses of $2,878.

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Table of Contents

The increase in selling, general and administrative expenses for the nine months ended September 30, 2010, was primarily due to the
following:



Research and Development Expenses

For the Three Months Ended
September 30,



For the Nine Months Ended
September 30,2010

2009

% Change

2010

2009

% ChangeResearch and development expenses

$
361,789

$
405,508


-11
%
$
1,395,466

$
990,210


41
%


Research
and development expenses decreased $43,719 for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, and increased
$405,256 for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009.

This
decrease in research and development expenses for the three months ended September 30, 2010 was primarily due to the following:



The
foregoing decreases in research and development expenses for the three months ended September 30, 2010 were partially offset by an increase in the
following:



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Table of Contents

The
increase in research and development expenses for the nine months ended September 30, 2010, was primarily due to the following:



The
foregoing increase in research and development expense for the nine months ended September 30, 2010 was partially offset by a decrease in engineering and design support of
$122,051 pursuant to the Esaote OEM Agreement incurred during 2009.

Direct Grant Expenses

For the
Three Months Ended
September 30,



For the
Nine Months Ended
September 30,2010

2009

% Change

2010

2009

% ChangeDirect grant expenses

$
12,086

$
160,598


-92
%
$
126,746

$
537,986


-76
%


Direct
grant expenses decreased $148,512 and $411,240 for the three and nine months ended September 30, 2010, as compared to the three and nine months ended September 30,
2009. This decrease is primarily the result of decreased expenditures on the SBIR and QUB grants that were closed as of December 31, 2009 and March 31, 2010, respectively.

Other Income and Expenses

For the
Three Months Ended
September 30,



For the
Nine Months Ended
September 30,2010

2009

% Change

2010

2009

% ChangeOther income and expensesInterest income

$
55

$
58


-5
%
$
615

$
1,137


-46
%Interest expense


(1,696,002
)

(8
)

N/A


(2,989,848
)

(117
)

N/AGain on derivatives


2,168,687





N/A


2,015,612





N/A


Interest
income was consistent for the three months ended September 30, 2010 as compared to September 30, 2009, and decreased $522 for the nine months ended
September 30, 2010, as compared to the nine months ended September 30, 2009, primarily as the result of the reduced balance in interest-bearing cash and cash equivalent during the
periods.

Interest
expense increased as a result of interest expense being incurred on the convertible notes payable, debt issuance costs and the amortization of the convertible note discount.

Gain
on derivatives was $2,168,687 and $2,015,612 for the three and nine months ended September 30, 2010, as compared to $0 for the three and nine months ended
September 30, 2009. The gain on derivatives was a result of the valuation of our derivative financial instruments associated with our convertible notes payable issued during the three and nine
months ended September 30, 2010, as detailed in the notes to the financial statements.

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Table of Contents

Results of Operations for the Development Stage

Since the inception of our development stage (January 1, 2002) through September 30, 2010, we have generated $3,146,569
of revenues from government grants and have experienced cumulative net losses of $29,572,637. Selling, general and administrative expenses were $15,343,019, research and development expenses were
$14,243,223, and direct grant expenses were $2,001,902 for the development stage period. All research and development costs are expensed as they are incurred, which include, but are not limited to,
personnel, prototype materials, lab supplies, consulting and research-related overhead.

Liquidity and Capital Resources/Plan of Operations for the Next 12 Months

For the Nine Months Ended
September 30,2010

2009

% ChangeNet cash used in operating activities

$
(2,912,427
)
$
(1,250,124
)

133
%Net cash used in investing activities


(157,411
)




N/ANet cash provided by financing activities


2,885,000


1,407,291


105
%


During
the development stage, we have not generated revenues in excess of expenses and have been dependent on government grants and debt and equity funding to sustain our operations. Our
WBU system has not been approved by the FDA for commercial sale. Therefore, we have not generated revenues from non-research product sales. We have incurred losses and used cash in
operating activities since inception. As of September 30, 2010, we had an accumulated deficit of $29,962,030 and negative working capital of $5,268,927. We have had minimal revenues since
inception. Until (1) our WBU system is approved by the FDA for commercial sale, (2) we realize income from operations, and (3) we generate cash from operating activities, we
expect our short and long-term liquidity issues and uncertainties to remain.

We
plan to address our liquidity issues through the sale of equity securities, collaboration with third parties to accelerate the introduction of product and services into the market,
and continued focus on obtaining approval from the FDA for our product and services to qualify for commercial sale. We have implemented the following cost reductions to assist in decreasing our cash
needs:



Operating Activities

We used cash in operating activities of $2,912,427 for the nine months ended September 30, 2010, as compared to using $1,250,124
for the nine months ended September 30, 2009. We continue to use significant amounts of cash as we move our product development efforts forward. We have used cash in operating activities of
$22,881,376 from the inception of the development stage (January 1, 2002) through September 30, 2010.

Investing Activities

We used cash in investing activities of $157,411 for the nine months ended September 30, 2010, for the purchase of equipment. In
comparison, we used no cash in investing activities for the nine months ended September 30, 2009. We have used cash in investing activities of $1,170,225 from the inception of the development
stage (January 1, 2002) through September 30, 2010.

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Financing Activities

We generated cash from financing activities of $2,885,000 for the nine months ended September 30, 2010, as compared to
$1,407,291 for the nine months ended September 30,
2009, primarily from the issuance of convertible notes. We have generated cash from financing activities of $23,954,295 from the inception of the development stage (January 1, 2002) through
September 30, 2010. We expect to continue to seek additional funding to meet our working capital requirements through collaborative arrangements and securities, research grants, and/or bank
borrowings. There can be no assurance, however, that additional funds will be available from any of the foregoing or other sources on favorable terms, if at all.

Our
future capital requirements will depend on many factors, including cash flows from operating activities, technology developments, and our ability to develop and successfully market
the WBU system and other new products. We expect that we will need to raise additional capital, through other equity offerings or debt financings to satisfy our anticipated operations, expenses and
capital requirements for the next twelve months or longer. Because of our accumulated deficit, rate of cash used in operating activities, negative working capital, minimal revenues, and other factors,
substantial doubt exists about our ability to continue as a going concern.

Recent Accounting Pronouncements

On September 15, 2010, the SEC issued Release No. 33-9142, "Internal Control Over Financial Reporting In
Exchange Act Periodic Reports of Non-Accelerated Filers." This release issued a final rule adopting amendments to its rules and forms to conform them to Section 404(c) of the
Sarbanes-Oxley Act of 2002 (SOX), as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act. SOX Section 404(c) provides that
Section 404(b) shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in
Rule 12b-2 under the Securities Exchange Act of 1934. Release No. 33-9142 was effective September 21, 2010.

In
March 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-11, which is included in the Codification under ASC 815. This update clarifies the type of
embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only an embedded credit derivative that is related to the subordination of one financial instrument to
another qualifies for the exemption. This guidance became effective for our interim and annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material
impact on our condensed financial statements.

In
February 2010, the FASB issued ASU No. 2010-09, which is included in the Codification under ASC 855,Subsequent
Events.This update removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated and became effective for our interim and
annual reporting periods beginning January 1, 2010. The adoption of this guidance did not have a material impact on our condensed financial statements.

In
January 2010, the FASB issued ASU No. 2010-06, which is included in the Codification under ASC 820,Fair Value Measurements and
Disclosures. This update requires the disclosure of transfers between the observable input categories and activity in the unobservable input category for fair value
measurements. The guidance also requires disclosures about the inputs and valuation techniques used to measure fair value and became effective for our interim and annual reporting periods beginning
January 1, 2010. The adoption of this guidance did not have a material impact on our condensed financial statements.

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not required.

ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended, which we refer to as the Exchange Act), designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed,
summarized and reported on a timely basis and accumulated and made known to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding
required disclosures.

In
connection with the preparation of this Quarterly Report on Form 10-Q, as of the end of the fiscal period covered by this Quarterly Report on
Form 10-Q (September 30, 2010), the Company performed an evaluation, under the supervision and with the participation of the Company's management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-15(b)
and 15d-15(b) under the Exchange Act.

After
considering the restatement referred to below and based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this
Form 10-Q conducted by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures were ineffective in providing reasonable assurance that information required to be disclosed in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported when required and that such information is accumulated and communicated to management in a manner that allows timely decisions regarding
required disclosure. In light of this material weakness, the Company performed additional analysis and post-closing procedures to ensure the Company's financial statements were prepared in
accordance with U.S. generally accepted accounting principles. The Company's management has concluded that the financial statements included in this Form 10-Q present fairly in all
material respects the Company's financial position, results of operations and cash flows for the periods presented.

The
certifications of our Chief Executive Officer and our Chief Financial Officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as
exhibits to this Form 10-Q. The disclosures set forth in this Item 4 contain information concerning (1) the evaluation of our disclosure controls and procedures
referred to in paragraph 4 of the certifications, and (2) material weaknesses in the design or operation of our internal control over financial reporting referred to in
paragraph 5 of those certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.

Discussion of Material Weakness

On July 24, 2010, management identified a material weakness in the Company's internal control over financial reporting. The
material weakness first began on October 9, 2009 concurrent with the Company becoming a public registrant. As of March 31, 2010, the Company did not maintain effective controls over the
determination and reporting of stock-based compensation expense and the fair value calculation of the Company's derivative liabilities. This deficiency resulted in the restatement of the Company's
condensed interim financial statements for the quarter ended March 31, 2010. Management believes it has taken steps to substantially remediate this material weakness during the quarter ended
September 30, 2010 and through the date of filing this report.

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Changes in Internal Control Over Financial Reporting

The remediation efforts, as outlined below, are designed to address the material weakness identified by management and to strengthen
the Company's internal control over financial reporting.

The
Company implemented the following remediation step to address the material weakness discussed above and to improve its internal controls over financial
reporting:



We
intend to raise additional capital to facilitate hiring additional accounting staff as needed to assist with our financial reporting process. We believe that these remediation actions
will improve our internal control. While we have taken steps to remediate the material weakness, additional measures may be required, including assuring that the outside consultants are qualified and
continue to be qualified to provide the required expertise. The Company will test the additional internal control processes designed to remediate the previously disclosed material weakness in 2010. We
will continue
to assess the effectiveness of our remediation efforts in connection with our management's tests of internal control over financial reporting in conjunction with our annual and quarterly reports.

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PART IIOTHER INFORMATION

ITEM 6.    EXHIBITS

Exhibit

Identification of Exhibit3.1

Certificate of Incorporation, filed with the Secretary of State of the State of Delaware

Incorporated by reference to our Form 8-K filed with the SEC on October 16, 20093.1.1

Certificate of Amendment to the Certificate of Incorporation filed June 18, 2010

Incorporated by reference to our Form 8-K filed with the SEC on June 25, 20103.1.2

Certificate of Correction filed June 22, 2010

Incorporated by reference to our Form 8-K filed with the SEC on June 25, 20103.2

Bylaws

Incorporated by reference to our Form 8-K filed with the SEC on October 16, 20094.1

The Convertible Note

Incorporated by reference to our Form 8-K filed with the SEC on April 5, 20104.2

Warrant

Incorporated by reference to our Form 8-K filed with the SEC on April 5, 201010.1

Note and Warrant Purchase Agreement dated as of March 30, 2010 by and among TechniScan, Inc. and the investors party thereto.

Incorporated by reference to our Form 8-K filed with the SEC on April 5, 201010.2

Amendment to the Note and Warrant Purchase Agreement by and among TechniScan, Inc. and Biotex Pharma Investments LLC as Lead Investor.

Incorporated by reference to our Form 8-K filed with the SEC on August 4, 201010.2.1

Amendment to the Note and Warrant Purchase Agreement by and among TechniScan, Inc. and Biotex Pharma Investments LLC as Lead Investor.

Incorporated by reference to our Form 8-K filed with the SEC on October 1, 201010.2.2

Amendment to the Note and Warrant Purchase Agreement by and among TechniScan, Inc. and Biotex Pharma Investments LLC as Lead Investor.

Incorporated by reference to our Form 8-K filed with the SEC on October 11, 201010.2.3

Amendment to the Note and Warrant Purchase Agreement by and among TechniScan, Inc. and Biotex Pharma Investments LLC as Lead Investor.

Incorporated by reference to our Form 8-K filed with the SEC on October 19, 201010.2.4

Amendment to the Note and Warrant Purchase Agreement by and among TechniScan, Inc. and Biotex Pharma Investments LLC as Lead Investor.

Incorporated by reference to our Form 8-K filed with the SEC on November 3, 201010.3

Registration Rights Agreement dated as of March 30, 2010 by and among TechniScan, Inc. and the investors party thereto.

Incorporated by reference to our Form 10-K filed with the SEC on April 5, 2010


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Exhibit

Identification of Exhibit10.4

Amendment to the Registration Rights Agreement by and among TechniScan, Inc. and the stockholders party thereto.

Incorporated by reference to our Form 8-K filed with the SEC on May 14, 2010.10.4.1

Amendment to the Registration Rights Agreement by and among TechniScan, Inc. and the stockholders party thereto.

Incorporated by reference to our Form 8-K filed with the SEC on October 1, 2010.10.4.2

Amendment to the Registration Rights Agreement by and among TechniScan, Inc. and the stockholders party thereto.

Incorporated by reference to our Form 8-K filed with the SEC on October 11, 2010.10.4.3

Amendment to the Registration Rights Agreement by and among TechniScan, Inc. and the stockholders party thereto.

Incorporated by reference to our Form 8-K filed with the SEC on October 19, 2010.10.4.4

Amendment to the Registration Rights Agreement by and among TechniScan, Inc. and the stockholders party thereto.

Incorporated by reference to our Form 8-K filed with the SEC on November 3, 2010.10.5

Security Agreement dated as of March 30, 2010 by and between TechniScan, Inc. Biotex Pharma Investments LLC as Collateral Agent for the holders of the Senior Secured Convertible Promissory
Notes.

Incorporated by reference to our Form 8-K filed with the SEC on April 5, 201010.6

Patent, Trademark and Copyright Security Agreement dated March 30, 2010 by and between TechniScan, Inc. and Biotex Pharma Investments LLC as Collateral Agent for the holders of the Senior Secured
Convertible Promissory Notes.

Incorporated by reference to our Form 8-K and filed with the SEC on April 5, 201010.7

Form of Senior Secured Convertible Promissory Note of TechniScan, Inc. , as amended

Incorporated by reference to our Form 8-K filed with the SEC on May 14, 2010.10.8

Form of Common Stock Purchase Warrant of TechniScan, Inc.

Incorporated by reference to our Form 8-K filed with the SEC on May 14, 2010.31.1

Certification of Principal Executive Office pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

Filed herewith32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

Filed herewith


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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, as amended, the registrant has duly caused this quarterly report to be
signed on its behalf by the undersigned, in Salt Lake City, State of Utah, on November 22, 2010.

TECHNISCAN, INC.(Registrant)By:

/s/ DAVID C. ROBINSON David C. Robinson Chief Executive Officer
(principal executive officer)By:

/s/ STEVEN K. PASSEY Steven K. Passey Chief Financial Officer
(principal financial and accounting officer)


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