**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-KSB**
| **x**      | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|------------|-----------------------------------------------------------------------------------------|
| ** ** | ** **                                                                              |
| ** ** | ** **                                                                              | **For the fiscal year ended December 31, 2006** |
| ** ** | ** **                                                                              |
| **o**      | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** ** |
| ** ** | ** **                                                                              | **For the transition period from                                to                             ** |
| ** ** | ** **                                                                              |   |
| ** ** | ** **                                                                              | **Commission file number: 333-103781** |

 

**ProUroCareMedical Inc.**

(Exact name of registrant as specified in its charter)
| **Nevada**                                                      | ** ** | **20-1212923**       |
|-----------------------------------------------------------------|------------|----------------------|
| (State or other  jurisdiction                                   |       | (IRS Employer        |
| of  incorporation)                                              |       | Identification  No.) |
|                                                            |       |                 |
| **5500  Wayzata Blvd., Suite 310, Golden Valley, MN**           | ** ** | **55416**            |
| (Address of  principal executive offices)                       |       | (Zip Code)           |
|                                                            |       |                 |
| Registrant’s telephone number, including area code         | ** ** | **952-476-9093**     |
| ** **                                                      | ** ** | ** **           |
| ** **                                                      | ** ** | ** **           |
| (Former name or  former address, if changed since last report.) |

 

Securities registered pursuant to Section 12(b) of the ExchangeAct:  **None**

Securitiesregistered pursuant to Section 12(g) of the Act:

**Common Stock,$0.00001 par value**

Check whether theissuer (1) filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.    **Yes****x         No****o**

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB    o

Indicate by check markwhether the registrant is a shell company (as defined by Rule 12-b of theExchange Act).    **Yes****o     No****x**

State issuer’s revenuesfor its most recent fiscal year:  **$0**
| State the aggregate  market value of the voting and non-voting common equity held by  non-affiliates computed by reference to the |
|-----------------------------------------------------------------------------------------------------------------------------------|
| price  at which the common equity was sold, or the average bid and asked price of  such common equity, as of a specified date     |
| within the past 60 days. (See definition of  affiliate in Rule 12b-2 of the Exchange Act.)                                        | **$5,933,423  as of March 12, 2007** |

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date.

**15,354,259 Common shares at March 12, 200****7**

TransitionalSmall Business Issuer Format (check one):   **Yes****o         No****x**

 

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**INTRODUCTORY CAUTIONARY STATEMENT**

*This Annual Report on Form 10-KSBincludes forward-looking statements within the meaning of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).  These statements are based on management’scurrent beliefs and assumptions and on information currently available to us.Forward-looking statements include, among others, the information concerningpossible or assumed future results of operations of ProUroCare Medical, Inc.and its subsidiaries (the “Company,” “we,” “us,” or “our”) set forth under theheading “Management’s Discussion and Analysis or Plan of Operation” andelsewhere in this Annual Report. Forward-looking statements also include statements where the words “may,”““will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,”“estimate,” “predict,” “potential,” or similar expressions are used.  Forward-looking statements are not guaranteesof future performance. Our future actual results and shareholder values maylikely differ materially from those expressed in these forward-lookingstatements. We caution you not to put undue reliance on any forward-lookingstatements included in this document. See “Risk Factors Associated with our Business, Operations, andSecurities.”*

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**TABLE OF CONTENTS**
|                | ** ** | ** **                                                      | ** ** | ** ** |
|----------------|------------|-----------------------------------------------------------------|------------|------------|
| **PART I**     |       |                                                            |       |       |
| ITEM  1:       |       | DESCRIPTION  OF BUSINESS                                        |       |       |
|           |       |                                                            |       |       |
|           |       | RISK FACTORS                                                    |       |       |
|           |       |                                                            |       |       |
| ITEM  2:       |       | DESCRIPTION  OF PROPERTY                                        |       |       |
|           |       |                                                            |       |       |
| ITEM 3:        |       | LEGAL PROCEEDINGS                                               |       |       |
|           |       |                                                            |       |       |
| ITEM 4:        |       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             |       |       |
|           |       |                                                            |       |       |
| **PART II**    |       |                                                            |       |       |
| ITEM 5:        |       | MARKET FOR COMMON EQUITY AND RELATED                            |       |       |
|           |       |                                                            |       |       |
|           |       | STOCKHOLDER MATTERS                                             |       |       |
|           |       |                                                            |       |       |
| ITEM 6:        |       | MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF  OPERATION |       |       |
|           |       |                                                            |       |       |
| ITEM 7:        |       | FINANCIAL STATEMENTS                                            |       |       |
|           |       |                                                            |       |       |
| ITEM 8:        |       | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS                   |       |       |
|           |       |                                                            |       |       |
|           |       | ON ACCOUNTING AND FINANCIAL DISCLOSURES                         |       |       |
|           |       |                                                            |       |       |
| ITEM  8A:      |       | CONTROLS  AND PROCEDURES                                        |       |       |
|           |       |                                                            |       |       |
| ITEM 8B:       |       | OTHER INFORMATION                                               |       |       |
|           |       |                                                            |       |       |
| **PART III**   |       |                                                            |       |       |
| ITEM 9:        |       | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL  PERSONS      |       |       |
|           |       |                                                            |       |       |
|           |       | AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION  16(a)        |       |       |
|           |       |                                                            |       |       |
|           |       | OF THE EXCHANGE ACT                                             |       |       |
|           |       |                                                            |       |       |
| ITEM  10:      |       | EXECUTIVE  COMPENSATION                                         |       |       |
|           |       |                                                            |       |       |
| ITEM 11:       |       | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND             |       |       |
|           |       |                                                            |       |       |
|           |       | MANAGEMENT AND RELATED STOCKHOLDER MATTERS                      |       |       |
|           |       |                                                            |       |       |
| ITEM 12:       |       | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,                 |       |       |
|           |       |                                                            |       |       |
|           |       | AND DIRECTOR INDEPENDENCE                                       |       |       |
|           |       |                                                            |       |       |
| ITEM 13:       |       | EXHIBITS                                                        |       |       |
|           |       |                                                            |       |       |
| ITEM 14:       |       | PRINCIPAL ACCOUNTANT FEES AND SERVICES                          |       |       |
|           |       |                                                            |       |       |
| **SIGNATURES** |       |                                                            |

 

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**PART I**

**ITEM 1:  DESCRIPTION OF BUSINESS**

**Historyof Company; Overview**

See“RISK FACTORS ASSOCIATED WITH OUR BUSINESS, OPERATIONS AND SECURITIES”, page20.

ProUroCare Medical Inc. (“ProUroCare,”the “Company,” “us,” “we” or “our” (formerly known as Global InternetCommunications, Inc.) was organized on February 26, 2003 as a Nevadacorporation.  Pursuant to an Agreementand Plan of Merger and Reorganization dated as of April 5, 2004 (the ”MergerAgreement”), by and among the Company, GIC Acquisition Corp., a Minnesotacorporation and wholly owned subsidiary of the Company (“Acquisition Co.”), andProUroCare Inc., a privately held Minnesota corporation (“PUC”), AcquisitionCo. merged with and into PUC, with PUC remaining as the surviving company and awholly owned operating subsidiary of the Company (such transaction ishereinafter referred to as the “Merger”). The Merger was effective as of April 5, 2004, when articles of mergerwere filed with the Minnesota Secretary of State.  The Company entered into the Merger toacquire the business of PUC.  At the timeof the Merger, the Company had no material assets or liabilities, and since itsformation in February 2003 had not begun operating activities.

Effective upon the Merger,the legal existence of Acquisition Co. ceased, and all 3,501,001 shares ofcommon stock of PUC that were outstanding immediately prior to the Merger andheld by PUC shareholders were cancelled, with one share of PUC common stockissued to the Company.  Simultaneously,the former shareholders of PUC common stock received an aggregate of 9,603,003shares of common stock of the Company, representing approximately 82.1 percentof the Company’s common stock outstanding immediately after the Merger.  As a result of the Merger, PUC is now awholly owned operating subsidiary of the Company, and PUC’s business is theCompany’s sole business enterprise.  OnApril 26, 2004, the Company changed its name to ProUroCare Medical Inc.,pursuant to a short-form merger with a wholly owned subsidiary formed for thesole purpose of effecting the name change, as allowed under Nevada corporatelaw.  On May 5, 2004, the Company’strading symbol on the Over-The-Counter Bulletin Board changed to “PRRC.”

We are engaged in thebusiness of developing and marketing innovative products for the detection andtreatment of male urologic prostate disease. PUC was initially founded as a Minnesota corporation by shareholders ofClinical Network Inc. (“Clinical Network”) in August 1999.  Clinical Network was originally established in1990 for the purpose of pursuing treatments for stress urinary incontinence inwomen.  In July 2001, Clinical Networkbegan collaborating with CS Medical Technologies, L.L.C. (“CS Medical”), adeveloper of microwave treatment technology for prostate and cardiologytreatments, for the development of products for the male urology market.  PUC’s business plan and operations began atthat time by bringing together the capabilities and expertise of ClinicalNetwork in the urological field with the minimally invasive microwave therapytechnology developed by CS Medical to treat prostate disease.  PUC acquired the rights to this technology bya license, which covers all of CS Medical’s technology, know-how, and patentsrelated to urologic disorders that may be detected or treated using acatheter-based microwave technology.  CSMedical’s technology allows the user to direct microwave energy emitted at theend of a catheter in a specific direction, which is believed to be a distinctadvantage in the possible treatment of prostate disease.  Further development and clinical studies willbe required to bring this technology to market.

Also in July 2001, PUCobtained an exclusive worldwide license relating to an imaging system developedby Rensselaer Polytechnic Institute (“RPI”) that allows one to monitormicrowave therapy changes to tissue in real time.  The agreement with RPI covers all of RPI’sintellectual property rights, including its patent rights, to its electricalimpedance tomography technology in the field of diagnosis and treatment ofurological and liver conditions.    Thelicense with RPI was amended on July 27, 2005 to allow PUC to sublicense thetechnology and requires PUC to initiate an FDA approval process on the imagingsystem by July 13, 2008.

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In January 2002, PUCpurchased certain assets (furniture and equipment) from Profile L.L.C. (“Profile”)and obtained a license from Profile providing for worldwide exclusive rights toits prostate imaging system and related patented technology.  The field of use for the exclusive license islimited to the diagnosis and treatment of enlarged prostate, prostatitis,prostate cancer, or other conditions of or disorders of the prostate, whetherhealthy or diseased, and any other condition of urologic disorder which may bediagnosed, imaged, or treated using any diagnostic or imaging process.**** Profile’s imagingsystem had been acquired by Profile from ArMed, LLC, where the technology hadbeen developed by Dr. Armen Sarvazyan. At the time PUC acquired the technology, working prototypes of thesystem had been assembled, and clinical studies demonstrating its capabilitieshad been performed.

Our rights and obligationsunder the licenses from Profile, CS Medical and RPI are more fully describedbelow under the caption “Intellectual Property.”

In 2002 and early 2003, PUCcontinued to pursue the development of the technologies licensed from ClinicalNetwork, CS Medical, Profile and RPI. PUC began development of a next-generation prototype system for its proposedinitial product, the ProUroScanTM system, usingcontracted development services.  Thisactivity was largely funded by a private placement of $1.1 million completed in2002.  When this funding was exhausted,development activity was largely curtailed during 2003 while the Company soughtadditional funding.  In July 2004, aftercompletion of the Merger and closing of the private equity offering, we resumeddevelopment activities, and entered into two development agreements with Dr.Sarvazyan’s company, Artann Laboratories Inc. (“Artann”) to developpre-clinical systems.

Under the first agreement,the “Development Agreement,” Artann developed two working, pre-clinicalProUroScanTM systems. These development-level systems were delivered to us in late November2004.  We paid Artann $180,000 for this2004 development work.

Under the second agreement, the “Research and Development Agreement,”Artann was named a research and development partner to the Company, supportingthe further development of the ProUroScanTM and other to-be-determined technologies in theurologic field.  Any intellectualproperty and know-how resulting from the advancement of the ProUroScanTM under this agreement will beassigned to the Company.  For its role,Artann will receive a total of $250,000 (plus incentives as explained below)payable upon certain milestone events.  Apayment of $50,000 was made to Artann upon the execution of the agreement inJuly 2004.  In December 2004, the Companypaid Artann $110,000 following the shipment of the ProUroScanTM prototypes in accordance withthe Development Agreement (including a $10,000 bonus for delivery of thesystems ahead of schedule).  On May 6 andJune 6, 2005, Artann filed additional patent applications relating to a newprobe positioning technology, for which the Company will pay Artann $50,000plus $10,000 in legal fees related to the patent filing.  Artann will also receive additionalcompensation in the form of five-year warrants to purchase up to 500,000 sharesof Company common stock, similarly issuable upon certain milestone events, ofwhich 300,000 shares were issued in 2004.

In September 2006, Artannwas awarded a Small Business Innovation Research Phase II Competitive Renewalgrant from the National Cancer Institute. The aim of the grant is to helpadvance the development and application for the Food and Drug Administration (“FDA”)clearance of our ProUroScanTM system.  The three-year grantwill provide up to $3 million for ProUroScanTM development,effective September 29, 2006.  It is ourintent to work with Artann under this grant, and to expand our workingrelationship with Artann to include their participation in the development andcommercialization of future generations of the ProUroScanTM.

On July 27, 2005, we entered into an agreement with Urologix, Inc. (“Urologix”)to co-develop new products utilizing our electrical impedance tomography (“EIT”)technology licensed from RPI. The EIT technology is expected to be assembledinto modules that will be compatible with and incorporated into Urologix’existing thermal therapy systems. The parties expected the project to requireseveral phases of research, testing and development, for which they have agreedto equally share the development cost. If the development of the modules is successful, the parties contemplateentering into definitive agreements pursuant to which Urologix would market thenew products subject to

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a licenseagreement.  After completing Phase I inSeptember 2006, it was determined that an assessment of certain key factorsaffecting the compatibility of our EIT technology with Urologix’ equipment willbe required before proceeding with Phase II.

On March 20, 2007, the Company executed an amendment to the Urologix agreement.Under the terms of the amendment, Urologix agreed to postpone any decisionregarding the continuance of the remaining phases contemplated under the agreement,while the Company agreed that the assessments described above will be done andfunded solely by the Company. In addition, Urologix has the right to abandonthe project for any reason with 5 days’ notice to the Company, and the Companyhas the right to abandon the project for any reason by providing 5 days’ noticeto Urologix.  ProUroCare plans to conductresearch related to the compatibility issues when sufficient funding becomesavailable before a decision is made to move to Phase II of the program.  The Company believes thatapproximately two to three months will be required to obtain answers to thesequestions, but the cost of the study has not been estimated, and initiatingthis study is dependent upon our obtaining sufficient financing to complete thework.  Accordingly, the project has beentemporarily suspended.

Further, and as noted above, certaintechnology critical to the project is licensed by the Company from RPI.  Under the terms of the license, as amended,the Company must initiate the FDA approval process by filing with the FDA andcommencing human clinical trials before July 13, 2008.  Management believes that due to theadditional project work required it is unlikely this deadline will beachieved.  Management believes that itwill be able to successfully negotiate an extension of this deadline with RPI,but cannot give assurance of this.  Ifthe Company is unsuccessful in obtaining sufficient funds to continuedevelopment of this technology, resolving the two key project factors notedabove, or negotiating an extension of the RPI license, the development effortswith Urologix may be terminated, and the Company’s EIT technology may be abandoned. See section below entitled “Initial ProductOfferings - ProUroVisionTM EIT Research and Development Status.”

During 2005 and 2006, we were unable to obtain sufficient financing tofully fund our product development efforts. As a result, development activitieswere significantly limited.  In February2006, we closed on a $2.2 million senior credit facility.  After payment of liabilities to key vendors,development partners, and employees, the net proceeds from this offering werenot sufficient to complete development of our products.  In January 2007, we obtained a $500,000equity investment to fund operations while we explore new fundingopportunities.  Despite this investment,our development efforts continue to be limited by the availability of financing.  We are working to obtain the financing tocomplete our product development, perform clinical trials, obtain FDAconcurrence, and prepare to launch our products into the market (see “Plan ofOperation – Financing Plan,” page 34).

**ProstateDisease**

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

·                  Early detection and diagnosis of prostatecancer, and

·                  Improvingthe effectiveness and usability of existing treatments for Benign ProstaticHyperplasia (“BPH”), also known as enlarged prostate.

Each year in the United States, approximately 232,000 men are diagnosedwith prostate cancer, and over 30,000 men die from the disease.  Over 60 million prostate disease screeningtests are given annually.  We believethat the percentage of men with moderate to severe symptoms from prostatedisease (BPH or prostate cancer) who seek screening, diagnosis and treatmentwill increase in the future as a result of increased awareness of prostaterelated diseases and the development of quantitative diagnostic systems (suchas our ProUroScanTM system) and improved treatment options (suchas our ProUroVisionTM technology for thermal therapy) that are lessinvasive and result in less severe complications and side effects. In addition,the number of potential patients will increase as a result of an agingpopulation and the increased awareness and standard of living in many othercountries around the world.

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**Initial Product Offerings**

***ProUroScan****TM**SystemDescription.*

Our initial product is theProUroScanTM system, developed and designed as a uniquediagnostic-imaging system that enables physicians to accurately display, chartand monitor prostate examinations for more effective disease diagnosis.  Current screening approaches are accomplishedby means of a digital rectal examination (“DRE”) and a Prostate SpecificAntigen (“PSA”) blood test.

A DRE is a qualitative andsubjective test in which a physician wearing a latex glove inserts a lubricatedfinger into the rectum to palpate the prostate gland to detectabnormalities.  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 a potentially life-threatening disease.  The ProUroScanTM is designedto produce a digital image of the prostate showing the size and symmetry of theprostate and the location of soft-tissue abnormalities within theprostate.  We believe that the ProUroScanTM will enable a physician to detectabnormalities in the prostate more accurately than with their finger, assessareas of the prostate that the physician cannot reach with their finger,produce quantifiable and chartable results and monitor the progression of thedisease over time.

The ProUroScanTM imaging system is being designed to detectcertain abnormalities that may be missed by other diagnostic techniques.  These abnormalities include areas on the surfaceor within the prostate where the tissue has a different level of elasticity orstiffness when compared with the rest of the gland, which can be precursors toa more clearly defined hardened area or nodule. The system’s operation is based on measurement of the stress pattern onthe rectal wall when the probe is pressed against the prostate.  Temporal and spatial changes in the stresspattern provide information on the elastic structure of the gland and allow two-dimensionaland three-dimensional reconstruction of prostate anatomy and assessment ofprostate mechanical properties.  The dataacquired allow the calculation of prostate features such as size, shape,nodularity, consistency/hardness, and mobility. The prostate image is displayed on a screen that allows a physician toidentify the specific location of soft-tissue abnormalities and determine therelative size of the prostate upon completion of the imaging procedure.  The ProUroScanTM system prototype has been validated inlaboratory experiments on prostate phantoms and in a pre-clinical study**.**  The system has beenused for more than two years and on more than 160 patients at the Robert WoodJohnson Medical Center in New Brunswick, New Jersey. ** **We believe the results obtained onmodel systems and in vivo images from patients demonstrate that the ProUroScanTM system has potential to become adiagnostic tool that could largely supplant DRE’s through its highersensitivity, quantitative record storage, ease of use, and inherent low cost**.**

The ProUroScanTM system consists of a probe, a centralprocessing unit containing proprietary image construction algorithms, acomputer with color monitor and keyboard, a color printer, and single-usedisposable sheaths to cover the tip of the probe.  The ProUroScanTM system’sprobe is specially designed for the rectal anatomy to minimize patientdiscomfort.  It is ergonomic for theclinician and similar to a traditional DRE for the patient.  The probe utilizes pressure sensors locatedon the face of the probe 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.

To perform a test, theclinician must first place a single-use disposable sheath over the probe headand shaft and cover it with a lubricant. The clinician then inserts the tip of the probe into the patient’srectum and palpates the prostate.  As theprostate is palpated, a color image of the prostate is produced and displayedon the computer monitor, along with indicators of the amount of pressure beingapplied to help guide the clinician. Differences in tissue stiffness and elasticity will be depicted on themonitor in different colors.  Totaltesting time for a healthy prostate is under one minute.

Ideally, the ProUroScanTM examination will be administered by a trainedclinician on all patients in need of a prostate exam. Standardizing theprocedure using the ProUroScanTM mechanicalimaging device should minimize the

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differencesin abilities between physicians in this otherwise subjective procedure.  We expect the system will also be moresensitive and have the ability to detect abnormalities that the normal humanfinger cannot detect, thereby improving the quality of the diagnosticprocess.  It will also enable physiciansto literally see the differences in tissue elasticity or stiffness on the colormonitor instead of a traditional DRE that is “blind” and relies exclusively onthe clinician’s sense of touch.  Thesystem will create a hard copy of the prostate diagnostic procedure which canbe placed into the patient’s file, and a digital record of the exam that can bestored and used for comparison to subsequent exams. This is advantageous forphysicians and patients in that it gives physicians the ability to compare andcontrast the patient’s results from exam to exam, and to get second opinions onthe patient’s status in regards to the diagnosis.  Comparisons of multiple tests over time canalso be done providing longitudinal assessments of the patient’s disease.

We believe the ProUroScanTM system will be truly unique in themarket.  The closest comparison in termsof imaging capability is to an examination using a transrectal ultrasound (“TRUS”)device.  TRUS is a test that uses arectal probe and sound wave echoes to create an image of the prostate gland,thus allowing visual inspection for abnormal conditions.  Although well established as a highlyaccurate test, TRUS is used primarily as a guide for prostate biopsies, and isseldom used as a screening test.  It is avery expensive test, costing hundreds of dollars each, difficult to interpret,and requires approximately 20 to 40 minutes to perform.  The ProUroScanTM system usesmechanical imaging rather than sound waves echoes, has a probe that is smallerthan that of an ultrasound probe, will be performed in less than one minute,and at a much lower cost.  The results ofthe test are displayed in color, making the results of the diagnostic test easyto interpret.

We anticipate that themajority of our revenue generated by the ProUroScanTM system will be tied to procedure fees forperforming the test and the consumption of proprietary disposable sheathsand/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 this product as an “adjunctive” test to DRE andPSA testing, which have low sensitivity and specificity and cannot bedocumented with color images.  TheProUroScanTM systemwill initially be marketed to urologists during the first two years toestablish the clinical and economic efficacy of this approach.  Obtaining the support of urologists iscrucial prior to active marketing to primary/general practice and internalmedicine physicians.  Once established asa “standard of care” in urology, other physicians will have an incentive to usethe test because of the incremental value that it provides in assistingpatients and physicians in making educated choices about the scope of treatmentthat will be needed.   As confidence isestablished regarding use of the system and the value of the test, we hope thatfamily and general practices and practitioners and internal medicine physicianswill want to use the test as a standard of care providing a third detectionassessment for patients with an abnormal DRE or PSA.

The ProUroScanTM system is currently in the late stages ofproduct development.  The designspecifications are nearly finalized and performance characteristics aregenerally known.  Further developmentwork in the areas of positioning system refinement, software, user interface,and sensor production, among others, must be completed before the system can becommercialized.  It is anticipated that,once sufficient financing is obtained to undertake such work, an additionalnine to ten months will be needed to complete the remaining development tasksleading to the production of clinical study units.  As discussed below, the clinical study unitswill be used to conduct the clinical trials necessary to obtain marketclearance from the FDA.

***ProUroScan******TM****** Research and Development Status*****.**

We anticipate that we willspend $2.0 million to $2.1 million on ProUroScanTM systemresearch and product development and preparation for pivotal FDA clinicalstudies over the next 12 months.  Ourefforts in this regard will be primarily focused on completing the ProUroScanTM system that we will take into clinicaltrials.  We estimate that over the pastfive years, we have spent approximately $3.0 million on research anddevelopment activities, including approximately $386,000, and $413,000 duringthe years ended December 31, 2006 and 2005, respectively.  Much of this work was performed undercontracted research and development agreements with third parties;approximately

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$2.1million of the $3.0 million spent on research and development activities overthe last five years was so contracted.

Much of the ProUroScanTM system’s development to date has beenaccomplished under two development agreements between the Company and Artann.Under the first agreement, the “Development Agreement,” Artann developed twoworking, pre-clinical ProUroScanTM systems.  These development-level systems were deliveredto us in late November 2004.  We paidArtann $180,000 for this 2004 development work.

Under the second agreement, called the “Research and DevelopmentAgreement,” Artann was named a research and development partner to the Company,supporting the further development of the ProUroScanTM system and other to-be-determined technologiesin the urologic field.  Any intellectualproperty and know-how resulting from the advancement of the ProUroScanTM system under this agreement willbe assigned to the Company.  For itsrole, Artann will receive a total of $250,000 payable upon certain milestoneevents.  A payment of $50,000 was made toArtann upon the execution of the agreement in July, 2004.  In December 2004, the Company paid Artann$110,000 following the shipment of the ProUroScanTM prototypes in accordance with the DevelopmentAgreement (including a $10,000 bonus for delivery of the systems ahead ofschedule).  On May 6 and June 6, 2005,Artann filed additional patent applications relating to a new probe positioningtechnology, for which the Company will pay Artann $50,000 plus $10,000 forlegal fees associated with the patent applications.  Artann will also receive additional compensationin the form of five-year warrants to purchase up to 500,000 shares of Companycommon stock, similarly issuable upon certain milestone events.  Of these warrants, warrants for the purchaseof 100,000 shares were issued upon the execution of the agreement, and warrantsfor the purchase of 200,000 shares were issued in December 2004.  The warrants issued are exercisable at aper-share price of $2.00, and were expensed as research and developmentexpenses.  The final 200,000 warrantswere to be issued, contingent on the delivery of a system ready for clinicaltrials, in two equal 100,000-share installments on the one-year and two-yearanniversaries of the Research and Development Agreement.  To date, we have not issued these warrantsbut expect to do so contingent on the parties entering a new research anddevelopment agreement that will replace both of these original agreements andexpand the future relationship between Artann and the Company.  We are in final negotiations with Artann tocomplete this anticipated new research and development agreement, and expect toexecute this agreement in April 2007, although no assurances can be given inthis regard.  As part of this agreement,and coincident with its execution, we expect to complete our financialobligations to Artann under the two original agreements.

In September 2006, Artannwas awarded a Small Business Innovation Research Phase II Competitive Renewalgrant from the National Cancer Institute. The aim of the grant is to helpadvance the development and application for the FDA clearance of our ProUroScanTM system.  The three-year grant will provide up to $3million for ProUroScanTM system development, effective September 29,2006.  It is our intent to work withArtann under this grant, and to expand our working relationship with Artann toinclude their participation in the development and commercialization of futuregenerations of the ProUroScanTM system.

In March 2006, we engagedDevicix, LLC of Chaska, Minnesota, a firm that provides electrical, mechanical,biomedical, and software engineering services to early-stage medical devicecompanies.  We expect this firm willassist us and Artann in transferring technology from research and developmentto clinical study status, place design documentation under an FDA compliantquality control system, complete the design documentation required to submit anFDA request for product clearance, perform verification and validation testingincluding certification of safety related testing standards, and qualitycontrol processes for transfer to manufacturing.

We believe that the existingtechnology platform is robust and provides a platform on which to developmultiple future generation systems.  Thefirst generation system will provide an overall assessment of the prostateresulting in a map or record of the pressures that are generated from anassessment of the posterior surface of the prostate using the current sensorprobe.  The first generation system willmost likely be the system of choice for general, family practice and internalmedicine physicians that want to be able provide a more general assessment ofthe patient’s condition prior to referring them to urologists for a morethorough diagnostic workup. We believe that

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thenext or “second generation system” will be capable of identifying the specificlocation (X, Y, and Z coordinates) of lesions found in the prostate.  We believe that this system will also be ableto create a three dimensional image of the position of the lesions and allowthe physician to rotate the image to assist in identifying the actual positionof the lesion in the prostate gland.  Webelieve that this next generation system will be ideally suited for urologiststhat are can provide a more thorough diagnosis of the patient.  Future generations of the ProUroScanTM system may include the capability of guidingbiopsies to suspected cancer sites, at a lower cost than current ultrasoundsystems.

***Pre-ClinicalTrial and Regulatory Status*****.**

Initial human clinical testing of the ProUroScanTM system began in 1998 with aseries of patients that were studied at the Robert Wood Johnson UniversityHospital in New Brunswick, New Jersey in collaboration with Artann.  The results of this first study werepresented by the Division of Urology and the Department of Pathology in anarticle published in the September 1998 issue of the Journal of Urology (Vol.60).  A second series of studies wereconducted in February 2000, at the Veteran’s Administration Medical Center inMinneapolis, Minnesota (“VA”) and at the Grand Strand Urology Clinic in MyrtleBeach, South Carolina (“Grand Strand”). During these trials, traditional DRE and PSA tests were performed on allpatients.  In addition, patients withsuspicious test results were often referred for prostate biopsy and in somecases, radical prostatectomies were performed.

In the initial 1998 trials, mechanical imaging was capable of detectingareas of heterogeneity in prostate tissue which correlated with cancer.  The results of the imaging correlated closelywith nodules palpated in all specimens and in one, it revealed a suspiciousarea undetected by palpation but which was subsequently verified onhistological analysis.  Mechanicalimaging also confirmed the absence of nodules in a control group of patientsthat had negative biopsy results.  Thefindings from this initial study provided the basis for the development of moreadvanced mechanical imaging systems and probes.

In the second series of patients evaluated at the VA and Grand Strandin 2000, a similar system was used with a comparable sensor probe.  A total of 19 patients were evaluated and theresults compared to DRE and PSA testing. In the VA series, the imaging systemdifferentiated between patients with a known nodularity and those without.  The system was also able to detect therelative size of the prostate.

A more recent study of tests on 5 patients as well as “phantom”prostate models was published in an article in the journal **IEEETransactions on Medical Imaging****(1)**. In this study, which was an extension ofthe existing work done at the Robert Wood Johnson University Hospital, the 3-Dimages generated by the ProUroScanTM system provided quantitative measures of keyprostate features like size, shape, hardness, nodularity and mobility superiorto comparable measures that can be achieved with DRE.  The article abstract states, “the resultsobtained on model systems and in vivo images from patients prove that the PMI (*the ProUroScan**TM** system*) has potential to become a diagnostic tool that could largely supplantDRE through its higher sensitivity, quantitative record storage, ease of useand inherent low cost.”  The articleconcludes “MI *(mechanical imaging)* has apotential to be positioned as an objective substitute for DRE in screening forprostate cancer, in expectant management, and in an assessment whether or notthere is any sign of local disease recurrence after treatment with curativeintent that can potentially improve early-stage diagnosis and treatment ofprostate cancer.”

Based on the results of these clinical trials, the Company is pursuingadditional clinical information that will permit continued assessment andcomparisons of patient data from the ProUroScanTM System to DRE, PSA, TRUS, and actualpathological findings.  One of theinterim steps will be a correlation study performed by pathologists that willcompare the specifically defined pathological analysis of excised cancerousprostates to visual and quantitative outputs from the ProUroScanTM system obtained from patientsjust prior to a radical prostatectomy. We anticipate performing these correlation studies on approximately 10to 15 patients before moving to our definitive FDA clinical studies.  A strong correlation between the results ofProUroScanTM examinations and verified pathology would bea

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(1) **IEEE Transactions on Medical Imaging** (“****Prostate MechanicalImaging: 3-D Image Composition and Feature Calculations”****,vol. 25, no. 10, pp. 1329-1340, 2006 V. Egorov, S. Ayrapetyan, A.P. Sarvazyan).

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strongindication of the system’s capability and diagnostic value.  Given that the results of the early studieswere positive, but not confirmed by independent studies, we intend to pursuethe correlation study and the pivotal FDA studies defined above as part of ouroverall clinical plan.  Our targetedcustomers may not accept our interpretation of these results and may requireadditional independent verifications.

We are currently in the process of establishing a series of labelingclaims reflecting the current needs of the market and the capabilities of thesystem.  Given that the system will becapable of providing physicians with a number of different outputs, we areattempting to create a regulatory strategy that will enable us to beginmarketing a basic system and then expand the labeling claims to incorporatemore sophisticated features and functionalities as they are developed andvalidated in clinical studies.  Theadvantage of this approach is that it allows us to minimize the time it willtake to obtain initial FDA approval and to begin commercializing an operationalsystem 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 a record of tissue elasticity measurements taken from theprostate to aid in documenting palpable lesions identified during clinicalprostate examinations.  Based onthe scope of the claim and the input received from consultants and clinicalstudy sites, we believe the initial system can be submitted to the FDA formarket clearance under a 510K application, or be evaluated under the FDA’s*de novo* process (See “Government Regulation,” below).  Assuming the results from the “correlationstudies” are positive, we will begin placing systems in a select number ofmajor medical centers to screen patients and collect data for the FDAsubmission.  It is anticipated that theFDA clinical studies will require approximately three months to complete, andthat an additional month will be needed to analyze the data and prepare aformal submission to the agency.  Centersparticipating in the study will most likely be required to obtain approval fromeach center’s Institutional Review Board (“IRB”) to protect the rights andwelfare of all participants.  IRBapproval has been granted for the first ProUroScanTM studies at the VA and at the Robert WoodJohnson University Hospital.

The actual number of patients that will be studied and the specificclinical protocol that will be followed will be significantly determined at apre- Investigational Device Exemption (“IDE) meeting that we anticipate havingwith the FDA during 2007, prior to conducting clinical trials.  At that meeting we will present informationabout the product and all relevant 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. Published FDA statistics from 2004 (the most recent available) indicatethat the average total time from receipt of a 510K application to final action is100 days, with 65 percent completed in less than 90 days.  Based on this data, assuming that the resultsof the clinical trials pose no unanticipated problems, we expect to receive FDAconcurrence within 90 to 180 days after the 510K application is filed.  Such concurrence will allow us to beginactive marketing of the ProUroScanTM system within the United States.

As new and more enhanced product features are developed, we plan tofile additional submissions with the FDA and to obtain expanded labelingclaims.  Depending on the exact nature ofthese claims, the approval process may require more extensive clinical studiesand possibly a full pre-market approval (“PMA”) application.  Such an application will likely takesignificantly more time and be more comprehensive than the 510K approval process.  The 510K and *de novo*filing processes are described in more detail in the “Government Regulation”section, below.

Simultaneous with the FDAsubmission, we expect to apply for a Conformité Européene (“CE”) mark, a markdisplayed prominently on products indicating compliance with the regulatorydirectives of the European Union.  The CEmark is required to market medical products within the European Union.  We will utilize the services of a notified

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bodysuch as Technischen Überwachungsvereine or Technical Inspections Organizations(“TÜV”), a German company specialized in meeting the regulatory directives ofthe European Union, to obtain CE mark approval. It is believed the CE mark approval process will be similar in durationto the FDA 510K process, or approximately six months.

***Reimbursement – Patient Pay Model.***

We are working to formulate the appropriate approach to obtaining andoptimizing government and third-party reimbursement for the use of ourproducts.  In the case of the ProUroScanTM diagnostic system, it is anticipated that the product will initially bepositioned as an adjunctive test to be used in combination with the current DREand PSA tests.

Initially, we anticipate using a “patient pay model” for physicians toreceive payment for performing the ProUroScanTM system test. Under a patient pay model, in the absence of reimbursement from theirhealth insurance, patients who perceive sufficient value in a procedure agreeto pay for the test out of their own funds. This approach was recommended by Hogan & Hartson, our reimbursementconsultants, based on the perceived value of the test for patients that have anabnormal DRE or PSA value.  Only one infour biopsies performed based on an abnormal PSA reading reveal prostate cancer(2),and only 50 percent of suspicious lesions found by DRE presented cancer onprostate biopsy(3).  Given thesestatistics, in cases where patients have abnormal DRE or PSA test results orwhen a test result may not be clear, there is a high incentive to seekadditional diagnostic inputs so that patients can make an informed andreasonable decision for themselves and their family.  We believe that a sufficient number ofpatients will be willing to pay $50 to $200 for the ProUroScanTM system test out of theirpersonal funds to support the launch of our product in advance of receiving aformal coverage position from third-party insurers.  The concept of a patient pay model has beenused successfully for other procedures (e.g., mammography enhancement) andwould appear to be the preferred approach for generating revenues during theearly phases of product rollout.

We expect that the use of our ProUroScanTM system will not be immediately eligible forreimbursement utilizing existing Current Procedural Terminology (“CPT”) codes.  When a new product or procedure isintroduced, it must be submitted to the American Medical Association’s (“AMA”)CPT Editorial Panel, who determines if an existing code should be used, or if anew code should be issued.  However,before reaching the Editorial Panel, it must first be screened by the CPTAdvisory Committee and the appropriate national medical specialty societyseated in the AMA House of Delegates (for prostate-related procedures, this isthe American Urology Association, or AUA). The process of obtaining a new CPT code can take from one to threeyears.  When a procedure is performed,the physician must use the CPT code when billing third-party payers such asinsurance companies or the government. The amount of reimbursement the physician receives depends on therelative value assigned to the procedure by the third-party payer via the CPTcoding.

In the absence of formal reimbursement coverage, providers must givebeneficiaries a Medicare Advance Beneficiary Notice (“ABN”) before furnishingcertain services when there is a reasonable doubt that Medicare will cover theprocedure.  An ABN can be used for allsituations, including laboratory tests, by all physicians and suppliers.  An alternative to using a patient pay modelin the United States is to submit claims using a “Miscellaneous Code,” whichcan often result in a favorable coverage position.  This approach will require the submission ofmore product and clinical data and all cases will be reviewed on an individualbasis.

As the level of clinical and payment experienceexpands during the initial period of “patientpay” usage, we anticipate filing for a formal CPT procedure code andreimbursement as previously described. Having a formal reimbursement code willdrive additional utilization and will be helpful in obtaining reimbursement andtesting acceptance in other markets. There can be no assurance that we will be successful in obtaining aunique CPT code for use of the ProUroScanTM system.

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(2) “Practice Guidelines”, *AmericanFamily Physician*, August 15, 2000.

(3) “Digital Rectal Examination”, *Campbell’sUrology*, Eighth Edition, pp. 3063.

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***ProUroVision******TM****** EIT Technology Description.***

In addition to ourProUroScanTM technology, we have secured licensed rights totechnology that offers potentially significant enhancements to existingtreatments of BPH and other urologic applications.  These technologies are covered by patentsheld by the licensors.  See “IntellectualProperty” below.  We are not aware of anypatents held by others that would present any uncertainties regarding theprotection of our intellectual property rights.

Current microwave thermaltherapy treatment utilizes a catheter that is inserted into the patient’surethra.  The catheter contains anantenna that radiates microwave energy in an omni-directional, 360°pattern.  The tissue of the prostateabsorbs this energy and heat is inductively generated to increase thetemperature above 45° C, which is necessary to cause necrosis of the tissue.  After this tissue dies and is eliminated bythe body, the enlargement of the prostate is reduced, restoring urineflow.  With our EIT technology, theclinician will be capable of monitoring the migration of heat within theprostate and thus optimize the therapeutic effects of the treatment.

We believe that our uniqueand proprietary EIT technology has the potential to be a significantadvancement to thermal therapy.  EIT isan imaging technology in which an image of the conductivity or resistivity ofpart of the body is inferred from surface electrical measurements.  The heating that occurs during a thermaltherapy procedure produces a change in the local conductivity or resistivitythroughout the treatment volume.  Theselocal changes in the electrical properties of the tissue will be measured by asystem of miniature electrodes placed on the patient’s body, and a rectalprobe, all of which connect to an electronically controlled low-frequency powersupply.  Each individual electrode willreceive a specific current and electronically measure all the possible inducedvoltages among the electrode array.  Aninversion algorithm is then employed to create a real-time image of the thermalpattern.

The EIT system will beassembled into modules that will be compatible with, and added on to, existing thermaltherapy systems.  The modules willinclude a low-frequency power supply, electrodes, a rectal probe, monitor andsoftware containing the proprietary algorithms. The upgraded systems will continue to utilize transurethral microwavecatheters to generate the heat necessary to cause necrosis.  This system will enable urologists to observethe real-time migration of heat through the prostate during treatment andadjust the amount of energy applied in order to protect the urethral tissue andadjacent organs.  This information andincreased energy efficiency will also help to minimize damage to healthytissue.

***ProUroVision******TM*** ***Research and Development Status.***

On July 27, 2005, we entered into a Memorandum of Understanding (the “MOU”)with Urologix, Inc., pursuant to which the parties were to co-develop newproducts utilizing our EIT technology. The EIT technology was expected to beassembled into modules that would be compatible with and incorporated intoUrologix’ existing thermal therapy systems. The project was designed into multiple phases of research, testing anddevelopment.  The first three phases wereprojected to cost approximately $550,000 over a period of 18 to 24 months.  The Company and Urologix had agreed toequally share in the development costs of these phases.  The MOU was projected to be in effect over afive-year period following the date on which the FDA first approves a UrologixEIT urology product for sale in the United States.

Following completion of all phases of the development program and ifthe modules are successful, the parties would enter into definitive agreementspursuant to which Urologix would market the new products subject to a licenseagreement with ProUroCare.

After completing Phase I in September 2006, it was determined that anassessment of two key factors would be required before proceeding with thesecond development phase.  The firstinvolved an assessment of the number of electrodes that will be needed toaccurately measure a one degree change in the temperature across a 6 to 8 cmwidth to allow for a complete evaluation of a normal prostate being treatedwith Urologix’ microwave system.  Itappears that more than one electrode may be needed on the urethral catheter toachieve this level of performance. Further studies are needed to determine if the use of electrodes on aurethral catheter will interfere with Urologix’ microwave

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system.  Second, we need to evaluate the level oftissue necrosis and the level of hydration that exists throughout the Urologix’treatment cycle to determine at what level tissue conductivity ceases toexist.  As both of these issues wereoutside of the Phase I development definition, ProUroCare plans to conductresearch on both issues at our own expense before a decision is made to move toPhase II of the program.

On March 20, 2007, the Company executed anamendment to the MOU.  Under the terms ofthe MOU amendment, Urologix agreed to postpone any decision regarding thecontinuance of the remaining phases contemplated under the MOU, while the Companyagreed that the assessments described above will be done and funded solely bythe Company. In addition, Urologix has the right to abandon the project for anyreason with 5 days’ notice to the Company, and the Company has the right toabandon the project for any reason by providing 5 days’ notice to Urologix.

The Company believes that approximately twoto three months will be required to obtain answers to these two questions, butthe cost of the study has not been estimated, and initiating this study isdependent upon our obtaining sufficient financing to complete the work.  Accordingly, the project has been temporarilysuspended.  Further, certain technologycritical to the project is licensed by the Company from RPI.  Under the terms of the license, as amended,the Company must initiate the FDA approval process by filing with the FDA andcommencing human clinical trials before July 13, 2008.  Management believes that due to theadditional project work required, as outlined above, it is unlikely this deadlinewill be achieved.  Management believesthat it will be able to successfully negotiate an extension of this deadlinewith RPI, but cannot give assurance of this. If the Company is unsuccessful in obtaining sufficient funds to continuedevelopment of this technology, resolving the two key project factors notedabove, or negotiating an extension of the RPI license, the development effortswith Urologix may be terminated, and the Company’s EIT technology may beabandoned.

***Other Technology.***

We have also licensedtechnology that will allow us in the future to develop a focused-beam microwavearray based on our licensed technology. We expect that such a focused-beam array will enhance the safety andefficacy of microwave-based thermal therapy treatments by allowing the treatingphysician to direct treatment in a much narrower (approximately 45 degree)pattern rather than the unfocused 360 degree pattern of current systems, and tocontrol the depth of treatment.  Thiswill enable the physician to selectively treat an area of the prostate, andspare healthy tissue, helping to avoid damaging the rectal wall and adjacentorgans.  Because the energy applied willbe more focused, less total energy can be used during treatment.  Lower energy levels are believed to reducecollateral damage to surrounding tissues when treating a patient and aretherefore believed to be a safer way to treat patients than microwave systemscurrently being used.  We are notactively developing this technology at the present time due to resourceconstraints, but plan to initiate such development when sufficient funds becomeavailable.

We believe that thecombination of real-time visioning of the prostate and the ability to directtreatment will enable a physician to treat specific areas of the prostate thatmay have BPH without damaging healthy prostate tissue or medial nerves, thusavoiding potential impotence and erectile dysfunction complications.  As a result, we believe that the technologywill be positioned as significant enhancements to current microwave therapydevices, minimizing the types of complications and side effects inherent inmost current treatments and, as such, can encourage more rapid acceptance andadoption rates for the systems that incorporate this technology.

**Competition**

***ProstateImaging*****.**

We are not aware of anycompetitive product currently being sold based on the same technologicalfeatures as the ProUroScanTM system.  Nonetheless, we expectcompetition to intensify in the market for prostate screening and diagnosis.  Currently available screening methods thatcompete with the ProUroScanTM system include the traditionalDRE and the PSA test.  The DRE incombination with a PSA test comprises today’s “standard of care” to evaluate

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patientsfor prostate cancer or other ailments relating to the prostate.  We believe the ProUroScanTM will prove to be a highly reliable andreproducible test, and that when used in combination with DRE and PSA willsignificantly improve the overall level of detection that can be achieved. As aresult, we believe that use of the ProUroScanTM system willbecome a key part of a new “standard of care” that all physicians willfollow.  We believe that we can becompetitive in the prostate-imaging market due to our strong patent positionand anticipated ability to deliver high-quality imaging and screening devicesand results.  We anticipate that oursystems and tests will be very cost effective, with system costs expected to beless than $15,000 and with per test cost to the patient expected to be in therange of $100.

·                  Digital Rectal Examination (DRE):  For most physicians performingprostate cancer screening today, the first step is to perform a DRE.  The DRE is done at a nominal cost and may beviewed by many physicians as a “sufficient” screening tool for identifyingabnormal tissue in the prostate. However, we believe the ProUroScanTM will ultimately gain acceptance because itoffers distinct advantages in prostate screening compared to the standard DRE:

·                  it will be more sensitiveand able to detect smaller nodules or tissue abnormalities on the surface orwithin the prostate;

·                  it will be less affected byanatomic anomalies or obesity that now prevents physicians from fully palpatingthe prostate in a significant percentage of their patients;

·                  it will produce a real-timecolor image of the prostate;

·                  it will enable physicians toelectronically store and compare the test results in patient files; and

·                  the test will bestandardized, minimizing the differences in technique and experience of clinicians.

We expect that the ProUroScanTM system’ssensitivity, standardization, and ability to electronically store images willallow physicians to observe changes in the prostate over time moreaccurately.  This is a significantcapability for monitoring changes in patients that have early clinicalindications of prostate cancer.

The ProUroScanTM system’s capability is limited to theexamination of the prostate, and will not detect other conditions unrelated tothe prostate that a physician may detect in the course of a standard DRE, suchas internal hemorrhoids, rectal cancer, stenosis (narrowing of the rectum), anda typical sphincter tone that may suggest neurological pathology.

·                  Prostate-Specific Antigentests:** The PSA testis used to detect and quantify Prostate Specific Antigen, a substance producedonly by the prostate.  The PSA test is ascreening tool usually used in conjunction with a traditional DRE.  This test only screens for cancer and doesnot provide any indication to the physician regarding the size of the prostateor the presence of any other tissue abnormalities.  An elevated PSA result does not necessarilymean a patient has prostate cancer nor does a normal PSA mean a patient doesnot have prostate cancer.  A falsepositive PSA test values can be generated leading to unnecessary diagnosticprocedures, such as prostate biopsy. According to the Prostate Cancer Foundation, only 25 percent of men witha PSA level of 4 to 10 ng/mL are found to have prostate cancer (a reading above4 is considered abnormal).  Although itis difficult to quantify, it can also be assumed that false negative PSA testresults can also occur.  Also accordingto the Prostate Cancer Foundation, approximately 25 percent of men diagnosedwith prostate cancer have a PSA level below 4 ng/mL.  Some diagnostics companies are working todevelop tests with improved sensitivity and specificity to reduce the number offalse positives and false negatives that are recorded.  Improvements in PSA testing should be viewedpositively because the use of this test in conjunction with a physicalassessment of the prostate using ProUroScanTM system willenhance the overall capabilities of physicians to detect early stage prostatecancer.

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·                  PCA3 Marker:  PCA3 is a non-coding ribonucleic acid (“RNA”)believed to be a more accurate marker of prostate cancer than currently useddiagnostics tests.  The PCA3 marker wasin-licensed in 2000 by DiagnoCure Inc. of Quebec, Canada.  In 2004, DiagnoCure granted a worldwidelicense to Gen-Probe (San Diego, CA) for the development and commercializationof a second generation PCA3-based test using their proprietary platform.  In 2006, Gen-Probe made the test available inanalyte specific reagent format to U.S. laboratories and launched a fullCE-marked PCA3 test in Europe.  Althoughthis test has not been approved in the United States, it potentially representsa significant advance in the development of more sophisticated and sensitivedetection methods for identifying early stage prostate cancer.  The key for patients and physicians is tohave multiple and complimentary detection approaches that can be used incombination with each other to enhance the overall scope and accuracy of theclinical findings.  Experts in the fieldhave stressed that it is important to have both chemical and physicalassessment tools so that the early stages of the disease can be detected andproper therapeutic approaches applied. Using the ProUroScanTM system in combination with anaccurate chemical test should result in more patients with the disease beingidentified more accurately in a timely manner and the number of false positivereduced, minimizing the number of unnecessary biopsies.

Othermodalities that are available, but utilized on a very limited basis forscreening applications, include transrectal ultrasound, magnetic resonanceimaging, computed tomography and nuclear medicine, include:

·                  Transrectal Ultrasound (“TRUS”):  TRUS is a diagnostic imaging tool that isused to guide prostate biopsy to determine if cancer exists.  It is employed primarily by urologistsfollowing the referral of a patient that has been screened by a primary carephysician using DRE and PSA.  Whensuspicious findings occur, TRUS is used to guide the position of the biopsyneedle prior to taking a core sample of tissue. TRUS is not considered a primary screening tool by the American UrologicAssociation and is more costly and difficult to operate for mostphysicians.  We believe that ProUroScanTM will be much easier to operate and, thus, willrequire significantly less training.  Wealso believe it will be less costly to acquire and maintain in a traditionalmedical office setting.

·                  Magnetic Resonance Imaging (“MRI”):  MRI is effective in providing high contrast,high-resolution images of anatomy deep inside the human body.  Nevertheless, full-sized, high-field strengthMRI systems may cost $1 million to $1.5 million, with smaller, lower-fieldstrength magnets ranging from $700,000 to $1 million.  Dedicated limited-purpose units for such applicationsas prostate evaluation or breast imaging have not been shown to be commerciallyviable.  Thus, MRI is currently tooexpensive to use for prostate-disease screening.

·                  Computed Tomography (“CT”):  CT involves placing the patient inside of arotating array of X-ray detectors, which are analyzed and processed into aseries of cross-sectional images of the body and then reconstructed to form acomputerized three-dimensional image (like a loaf of bread comprised ofmultiple “slices”).  CT can be effectivein prostate imaging, but CT equipment is expensive, approximately $500,000 perunit; transrectal ultrasound (TRUS) is generally preferable to the CT in termsof time and cost-effectiveness.

·                  Nuclear Medicine (“NM”):  NM involves the injection into the body ofradioactive isotopes that emit radiation that is detected and analyzed by adedicated computer.  NM is highlyeffective in staging of soft-tissue tumors. NM is not suited as amass-screening device, although NM can be used for later-stage prostate cancerassessment.  NM equipment is also veryexpensive, with each unit costing between $1.9 and $10.0 million), andtherefore not a very cost effective screening tool.

***Treatment of BPH.***

Our anticipated therapeuticproducts are designed to provide significant enhancements to existingthermal-therapy devices.  Once developed,we anticipate they will be sold to companies that utilize catheter-basedmicrowave

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energyto treat BPH and certain prostate cancers. Competition in the BPH treatment market for therapeutic products inwhich these companies compete is intense and expected to increase.  We believe that the principal competition inthis area will come from both surgical and non-surgical therapies.

·                  Surgical Treatments for BPH: Surgical therapies include transurethral prostatectomy (“TURP”), laserprostatectomy, transurethral incision of the prostate (“TUIP”) or alternativesurgical procedures for vaporizing prostate tissue using laser or radiofrequency (“RF”) energy.  Surgicaltreatments for BPH typically use various means to completely remove theprostatic urethra along with a substantial portion of the diseased tissuewithin the prostate.  A large number ofprostate surgeries were done worldwide in 2002, of which 195,000 were performedin the United States according to the 2002 National Hospital Discharge Surveypublished by the Center for Disease Control.

·                  Themost common surgical procedure for the treatment of BPH is TURP, whereby arigid instrument is inserted into the patient’s urethra and through which thesurgeon passes an electrosurgical loop that is used to remove the urethra andthe diseased tissue within the prostate. While TURP results in a dramatic improvement in urine flow and areduction in the AUA Symptom Score (a standardized questionnaire developed bythe American Urological Association to assess the severity of urologicalsymptoms experienced by men), a significant number of patients experiencecomplications.  These complications (asdescribed in the AUA Guideline on the Management of Benign ProstaticHyperplasia (2003)) include ejaculation problems, (65 percent of patients),erectile dysfunction (10 percent), excessive hemorrhaging requiring transfusion(8 percent), urethral stricture (7 percent) infection (6 percent), hematuria orblood in the urine (6 percent), and long-term incontinence (3 percent).  There has been a steady decline in thenumbers of TURP procedures being performed in the U.S.

·                  Ina laser ablation procedure, a probe is inserted into the urethra and theprostatic tissue is ablated using a “green light” laser.  This approach was developed by Laserscope(since acquired by American Medical Systems) and it has become a commonly usedalternative for traditional TURP procedures. The benefit of using a laser is that it allows the physician to see theextent of the tissue being ablated while simultaneously minimizing the amountof bleeding that occurs because of the coagulation affect of the laser.

·                  Otherprevalent procedures are TUIP and transurethral vaporization of the prostate (“TVP”).  In TUIP, a surgeon inserts an instrument intothe urethra that is able to make incisions in the prostate.   The TUIP allows the bladder neck to springopen and urine to flow freely.  During aTVP procedure, a surgeon inserts an electrode into the urethra which generatesenough heat to vaporize the tissue constricting the urethra.  While these alternative surgical treatmentshave been effective in reducing some side effects associated with TURP, such asreduced risk of blood loss, they still require a general or regional anesthesiaand are performed in an operating room.

·                  Non-Surgical Therapies forBPH.  Non-surgical alternativesinclude drug therapy and emerging less invasive and more specific technologies.

·                  Drug therapy for BPH hasbeen available in the United States since 1992, when the FDA approved themarketing of four orally administered pharmaceutical products.  By 1996, drug therapy for the treatment ofBPH symptoms was being administered to approximately 1.5 million men in theUnited States.  By 2000, according to TheNational Institute of Diabetes & Digestive & Kidney Diseases, 2.2million prescriptions were written for drugs to treat BPH.  In addition, combination therapy using alphablockers and 5—alpha reductase inhibitors has proven beneficial.  We believe the dramatic growth of drugtherapy in the short period since FDA approval can be attributed to extensivedrug company marketing, resulting in increased patient awareness, and thedesire of these patients to seek effective treatments which have less severecomplications and side effects than currently available surgicalprocedures.  Some of the adverse commonside effects to drug therapy as described in the

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AUA Guideline on the Management of Benign Prostatic Hyperplasia (2003)are: dizziness (15%), headache (12%), stuffy nose (11%), stomach/intestinal(11%), erection problem (8%), and decreased sexual desire (5%).  For many drugs, a long period of time isoften required (6 months or more) to effect significant symptomatic relief.

·                  In an effort to eliminatehospitalization and the complications arising from surgical treatments, othertechnologies have been developed, or are under development for the treatment ofBPH.  Two of these technologies areinterstitial radio frequency therapy (“RF”), which is currently being marketedin the United States, and interstitial laser therapy, which has only beenrecently approved for commercialization in the United States.  In an interstitial therapy procedure, a rigidscope is inserted into the patient’s urethra and either needle electrodes orlaser fibers pierce the urethra and are advanced into the lobes of theprostate.  RF or laser energy is thendelivered, causing necrosis of the surrounding tissues. Due to the limitedamount of tissue necrosis caused by each electrode or laser fiber, multiplepunctures of the urethra are required in order to coagulate a sufficient amountof tissue.  While these procedures aredesigned to be performed in approximately 30-45 minutes with local anesthesia,we believe that intravenous sedation or regional anesthesia will be required inmost patients due to the need to repeatedly puncture the urethra and manipulatethe large, rigid instrument in the urethra. As a result, we believe that it will be difficult to consistentlyperform interstitial therapies in an office setting, and that its therapeuticproducts will therefore be a cost-effective alternative.

In addition to thecompetitive treatments discussed above, we are aware of other companies thathave developed or are developing technologies for BPH treatment.  These technologies include stents (atube-shaped structure that holds the urethra open enabling urine to pass morefreely), transurethral and transrectal hyperthermia (heating the prostate,either through the urethra or the rectum, to a point that causes necrosis ofthe tissue and relieves the pressure on the urethra), and high-intensityfocused ultrasound (a method involving the heating of the prostate sufficientlyto cause tissue necrosis using ultrasound waves).  We expect that competition in the BPH fieldwill be based, among other things, on the ability of the therapy to providesafe, effective and lasting treatment, cost effectiveness, continued Medicarereimbursement, acceptance of the procedure by physicians, healthcare payors andpatients, marketing and sales programs, and third-party reimbursement policies.

**IntellectualProperty**

Our objective as a medicaldevice company is to effectively and aggressively obtain, maintain and enforcepatent protection for our products, formulations, processes, methods and otherproprietary technologies, preserve our trade secrets and licenses, and operatewithout infringing the proprietary rights of other parties both in the UnitedStates and in all other countries where we may do business.  Our policy is to actively seek to obtain,where appropriate, the broadest intellectual property protection possible forour products, proprietary information and proprietary technology through acombination of contractual arrangements, licenses, and patents, both in theUnited States and throughout the rest of the world.  We have, to date, licensed the rights to 20U.S. patents and two U.S. patent applications. In addition, we have licensed rights to seven patents and seven patentapplications in Japan and several European countries**.**

We also depend upon theskills, knowledge and experience of scientific and technical personnel that wehire or contract with outside organizations, as well as our advisors andconsultants.   To help protect ourproprietary know-how that is not patentable, and for inventions for whichpatents may be difficult to enforce, we rely on trade-secret protection andconfidentiality agreements.  To this end,we require all employees, consultants, advisors and other contractors to enterinto confidentiality agreements that prohibit the disclosure of confidentialinformation and, where applicable, require disclosure and assignment to us ofthe ideas, developments, discoveries and inventions important to our business.

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We license from thirdparties various intellectual properties essential to our business.  The significant intellectual property rightswe license include:

·                  Certain rights associatedwith prostate-imaging systems and related patented technology, from Profile.These rights are limited to the field of use of the diagnosis and treatment ofenlarged prostate, prostatitis, prostate cancer, or other conditions of ordisorders of the prostate, whether healthy or diseased, and any other conditionof urologic disorder which may be diagnosed, imaged, or treated using anydiagnostic or imaging process.  Theserights include the rights to patents covering a method and device formechanical imaging of the prostate (patent expires in 2016), a device forpalpation and mechanical imaging of the prostate (patent expires in 2019),real-time mechanical imaging of the prostate (patent expires in 2021), and amethod for using a transrectal probe to mechanically image the prostate gland(patent expires in 2017).  Together, thetechnology licensed from Profile is protected by seven U.S. and seven foreignpatents, and six foreign patent applications (foreign patents expire in 2017)and, along with the patent applications assigned to us by Artann (see below),is the basis for the imaging technology used in our ProUroScanTM system. The license requires that we report our development activities toProfile each year and to pay for ongoing patent prosecution and maintenancecosts.  The license requires no specificexpenditure level to remain in force**.**

·                  Certainrights to two U.S. patent applications (filed in May and June, 2005) associatedwith prostate-imaging systems and related patented technology, assigned to usfrom Artann under the terms of our Research and Development Agreement.  These patent applications cover a method anddevice for real-time imaging of the prostate and a method and dual-arraytransducer probe for real-time mechanical imaging of the prostate.  Under the terms of the Research andDevelopment Agreement, we were to pay Artann $50,000 plus $10,000 of legal feesrelated to the patent applications.  Todate, we have not made these payments but expect to do so contingent on theparties entering a new research and development agreement that will replace theoriginal agreement and expand the future relationship between Artann and theCompany.  We are in final negotiationswith Artann to complete this anticipated new research and development agreementand expect to execute this agreement in April 2007, although no assurances canbe given in this regard.  As part of thisagreement, and coincident with its execution, we expect to complete ourfinancial obligations to Artann related to these patent applications.

·                  Certain rights associatedwith EIT imaging systems and related patented technology from RPI, includingrights to processes for producing optimal current patterns for EIT (patentexpires 2014) and a process and apparatus for distinguishing conductivities byelectric computed tomography (patent expires in 2010).  Together, the methods covered by eight U.S.patents licensed from RPI (patents expire between 2010 and 2014) are the basisfor the vision system portion of our proposed focused-beam microwave therapyproduct.  This license requires that weinitiate an FDA approval process prior to July 13, 2008, but requires nospecific level of development expenditures. If we cease to carry on ourbusiness, the RPI license agreement will terminate immediately**.**

Wehave undertaken a product development effort in conjunction with Urologix (see section above entitled “InitialProduct Offerings - ProUroVisionTM EIT Research and Development Status”).  Management believes that due to theadditional project work required, as outlined in that reference section, it isunlikely that we will file an FDA application prior to the July 13, 2008deadline.  Management believes that itwill be able to successfully negotiate an extension of this deadline with RPI,but cannot give assurance of this.  Ifthe Company is unsuccessful in obtaining sufficient funds to continuedevelopment of this technology, resolving the key project issues, ornegotiating an extension of the RPI license, the development efforts withUrologix may be terminated, and the Company’s EIT technology may be abandoned.

·                  Certain rights associatedwith minimally invasive microwave therapy for the treatment prostate diseasefrom CS Medical.  These rights arelimited to the field of use of the treatment of BPH, prostatitis, prostate

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cancer, or any other conditions of urologic disorder which may bediagnosed, imaged or treated using a catheter-based microwave technology orsensor imaging.  The rights includerights to two patents covering medical hyperthermia treatment and diagnosisusing microwave devices (patents for both of which expire in 2019), microwaveballoon angioplasty (patent expires 2009), and a microwave heat pipe array forhyperthermia (patent expires 2019).  Wealso have rights to a patent application for treatment of prostatic tissue thatare pending in Europe.  Together, the sixU.S. patents (expiration dates between 2007 and 2019) and one foreign patentapplication licensed from CS Medical is the basis for our proposed focused-beammicrowave therapy product.  This licenserequires that we report our development activities to CS Medical each year, butrequires no specific level of development expenditures.

·                  The patent application thatwe initially filed as an intelligent medical device barrier was dropped becauseof a new approach that we are pursuing and because of concerns about existingpatents that existed in these fields of use. We will continue to use a protective sheath to ensure the sterility andfunction of the ProUroScanTM probe but without protection.

**Manufacturing**

We intend to identify andcontract with outside companies to manufacture and assemble our clinicalsystems and commercially available products. All pre-clinical systems will be produced by Artann as part of theplanned product development program. Because of our desire to contract with a large urology device company toobtain dedicated marketing and sales support, we may ultimately use the samecompany to manufacture commercial units for sale into the urology marketsegment.

**Government Regulation**

The proposed products weintend to develop, and market are subject to regulation by the FDA and bycomparable agencies in various states and various foreign countries.  The process of complying with therequirements of the FDA, related agencies, and other state and foreign agenciescan be costly and time consuming.  Wehave developed and continue to refine regulatory strategies for our proposedinitial product offerings, described above under the caption “Research andDevelopment.”  Although we have engagedWashington, D.C. based regulatory consultants to help direct our regulatorycompliance and filings, no assurances can be given that such filings will beacceptable to the FDA or other regulatory governing bodies.  Moreover, even if our filings are acceptableto the regulatory bodies with which we file applications, we may encountersignificant delays which will materially and adversely affect our business andoperations.

A *Class II device* is one that requiresperformance standards and post-market surveillance to assure safety andefficacy.  We believe that the ProUroScanTM system will meet thisdefinition.  These devices typically gainconcurrence from FDA for marketing through a notification, commonly referred toas a 510K application.  This pathway isgenerally shorter and less expensive than a Pre-Market Approval (“PMA”)application, which is required of *Class III devices*that are generally used for life sustaining, implantable products or those thatpose a high risk of injury to the patient. In order to obtain 510K concurrences, the Company must demonstrate thatthe ProUroScanTM systemis substantially equivalent to a previously approved product referred to as a “predicatedevice”.  A device is substantiallyequivalent if it has (a) the same intended use, and (b) either (i) the sametechnological characteristics of a predicate device, or (ii) differenttechnological characteristics, but is shown to be as safe and effective as thepredicate device.

In general, the datarequired to prove substantial equivalence in a 510K application is easier tocollect than the safety and efficacy data required for a PMA.  In the case of the ProUroScanTM system, much of the supporting data will begathered during the product-development phase. Once filed, the FDA has 90 days in which to review the 510K applicationand respond.  Typically, the FDA’sresponse after reviewing a 510K is a request for additional data orclarification.  Depending on thecomplexity of the application and the amount of data required, the process maybe

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lengthenedby several weeks.  If additional data isneeded to support our claims, the 510K application process may be significantlylengthened.  Published FDA statisticsfrom 2004 (the most recent available) indicate that the average total time fromreceipt of a 510K application to final action is 100 days, with 65 percentcompleted in less than 90 days.

If the FDA issues an order declaring the device to be Not SubstantiallyEquivalent (“NSE”) and places it into a Class III category, the company canthen request a *de novo* classification of theproduct.  The request must be in writingand sent within 30 days from the receipt of the NSE determination.  The request should include a description ofthe device, labeling for the device, reasons for the recommended classificationand information to support the recommendation. The *de novo* process has a 60 day reviewperiod.  If FDA classifies the deviceinto Class II, the Company will then receive an approval order to market thedevice. This device type can then be used as a predicate device for future 510Ksubmissions. However, if FDA subsequently determines that the device willremain in the Class III category, the device cannot be marketed until theCompany has obtained an approved PMA.  Ifwe are required to follow a *de novo*process, an additional 60 to 90 days will be added on to the original 90 daysrequired for the initial 510K review.

We are currently in the process of establishing a series of labelingclaims reflecting the current needs of the market and the capabilities of thesystem.  Given that the system will becapable of providing physicians with a number of different outputs, we areattempting to create a regulatory strategy that will enable us to beginmarketing a basic system and then expand the labeling claims to incorporatemore sophisticated features as they are developed and validated in clinicalstudies.  The advantage of this approachis that it allows us to minimize the time it will take to obtain FDA approvaland begin commercializing an operational system.

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 a record of tissue elasticity measurements taken from aprostate to aid in documenting palpable lesions identified during a clinicalprostate examination.  Based onthe scope of this claim and the input received from consultants and clinicalstudy sites, we believe the initial system can be submitted to the FDA formarket clearance under a 510K application as a non-significant risk device.

It is anticipated that the FDA clinical studies will requireapproximately three to four months to complete, and that an additional monthwill be needed to analyze the data and prepare a formal submission to theagency.  Centers participating in thestudy may be required to obtain approval from their IRB to protect the rightsand welfare of all participants.  IRBapproval has been granted for the first ProUroScanTM system studies at the VA and at the RobertWood Johnson University Hospital.  As newand more enhanced product features are developed, the Company plans to fileadditional submissions with the FDA and to obtain expanded labelingclaims.  Depending on the exact nature ofthese claims, the approval process may require more extensive clinical studies andpossibly a pre-market approval (PMA) application.

In regard to our proposedtherapeutic products, our development partner, Urologix, will likely determinethe strategy and seek approval from the FDA. Due to this and the early-development stages of our proposed therapeuticproducts, the type of FDA filing that will be required for our proposedthermal-therapy products has not yet been determined.

Our clinical investigationswill follow the FDA’s Investigational Device Exemption (“IDE”) regulations,including the requirements of informed consent and IRBs.  Prior to the commencement of clinicalinvestigations, we will have in place a complete set of standard operatingprocedures (“SOP”s) as to clinical monitoring, responsibilities, selectinginvestigators, selecting monitors, device control, agreements, records,reports, labeling, among others.  All ofthese SOPs will conform to applicable FDA regulations.  Finally, prior to commercialization and 510Kclearance, we will comply with FDA registration and listing regulations byregistering with the FDA, using Form 2891 and listing the device on FDA Form2892.

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Once approved, themanufacturing, sale and performance of our products will be subject to theongoing FDA regulation and inspection processes.  For example, the FDA reviews design andmanufacturing practices, labeling and record keeping, and manufacturers’required reports of adverse experience and other information to identifypotential problems with marketed medical devices.  We and our contract manufacturers will besubject to periodic inspection by the FDA for compliance with the FDA’s goodmanufacturing practice regulations. These regulations, also known as the Quality System Regulations, governthe methods used in, and the facilities and controls used for, the design,manufacture, packaging and servicing of all finished medical devices intendedfor human use.  If the FDA were toconclude that we are not in compliance with applicable laws or regulations, orthat any of our medical devices are ineffective or pose an unreasonable healthrisk, the FDA could ban such medical devices, detain or seize adulterated ormisbranded medical devices, order a recall, repair, replacement, or refund ofsuch devices, and require us to notify health professionals and others that thedevices present unreasonable risks of substantial harm to the publichealth.  The FDA may also imposeoperating restrictions, enjoin and restrain certain violations of applicablelaw pertaining to medical devices, and assess civil or criminal penaltiesagainst our officers, employees or us. The FDA may also recommend prosecution to the Department of Justice.

**Employees**

We currently employ only twoemployees, and expect to conduct much of our research and development, marketresearch, regulatory function, and other business operations through the use ofa variety of consultants and medical-device development contractors.  Management believes that using consultantsand contractors, including the significant scientific and engineering resourcesof Artann, to perform these functions is more cost effective than hiringfull-time employees, and affords us flexibility in directing our resourcestoward specific and changing goals during our development stage.  We anticipate hiring four to five additional employeesin the areas of quality assurance, engineering and regulatory compliance withinthe next 12 months.  Some or all of thesefunctions may be performed by contracted individuals or consultants asmanagement deems most effective.  Todate, we have conducted our research and development activities related to ouracquired technologies and proposed products on a contract basis withMinnetronix, Inc., Devicix, LLC and Artann Laboratories Inc.

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**IMPORTANT NOTICES TO INVESTORS; SAFE HARBOR STATEMENT**

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

Forward-looking statements involve inherent risks and uncertainties,and important factors (many of which are beyond our control) that could causeactual results to differ materially from those set forth in the forward-lookingstatements, including the following, in addition to those contained in ourCompany’s reports on file with the Securities and Exchange Commission: generaleconomic or industry conditions, nationally and in the physician, urology andmedical device communities in which we intend to do business; our ability tofund our working capital needs over the next 12 to 24 months; our ability tocomplete the development of our existing and proposed products on a timelybasis if at all; legislation or regulatory requirements, including our securingall FDA and other regulatory approvals on a timely basis, if at all, prior to beingable to market and sell our products in the United States; competition fromlarger and more well established medical device and other competitors; thedevelopment of products that may be superior to the products offered by us;securing and protecting our intellectual property and assets and enforcingbreaches of the same; clinical results not anticipated by management of theCompany; the quality or composition of our products and the strength andreliability of our contract vendors and partners; ability to raise capital tofund our 2007 and 2008 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, results actually achieved may differ materially fromexpected results in these statements. Forward-looking statements speak only as of the date they are made.  We do not undertake, and specificallydisclaim, any obligation to update any forward-looking statements to reflectevents or circumstances occurring after the date of such statements.

**RISKFACTORS ASSOCIATED WITH OUR BUSINESS**,OPERATIONS AND SECURITIES

**As adevelopment-stage company, we have no operating history and our business planhas not yet been fully tested.  Weanticipate incurring future losses until our products are completed, regulatoryapproval is secured, and our products are introduced into the United States andworldwide markets.**

The Company, conducting business through ourwholly-owned subsidiary, ProUroCare Inc., is a development-stage company.  We have yet to commence active operations ormanufacture or sell any products associated with the proprietary urology-basedimaging and therapeutic technologies that we intend to market.  We have no prior operating history from whichto evaluate our success, or our likelihood of success in operating ourbusiness, generating any revenues or achieving profitability.  To date, we have generated no revenue and areproposing to enter the highly competitive urology-imaging and therapeuticindustries.  There can be no assurancethat our plans for developing and marketing our urology-based products will besuccessful, or that we will ever attain significant sales orprofitability.  We anticipate that wewill incur losses in the near future.

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**We are currently in need of need additional financingand will need further additional financing during 2007 and 2008, and any suchfinancing will likely be dilutive to our existing shareholders.**

As of March 12, 2007, we had cash on hand ofapproximately $63,000 and an equity subscription receivable of $125,000.  These funds are not sufficient for us tocomplete development of our products and gain FDA approval of them.  In addition, the Company has currentliabilities exceeding $3.2 million. Consequently, management has taken several measures to conserve cash,including reducing executive headcount, substantially reducing development workon the ProUroScanTM system, reducing expenses, and deferringvendor payments and staff salaries.

Management’s plan is to actively raise an additional$10 million that will be used to support ongoing operations and the retirementof existing debt and other obligations. Of the total, approximately $6 million will be used to bring theexisting first generation system through clinicals trials, final FDA concurrence,and preparation for market launch.  Thesefunds will be in addition to funds available on a reimbursement basis todevelop the ProUroScanTM system under Artann’s Small Business Innovation Research PhaseII Competitive Renewal grant from the National Cancer Institute.  The remaining $4 millionwill be used to retire existing liabilities and provide working capital.

The plan for raising this level of funding consists of three separateinitiatives.

·                  Wehave identified several prospective investors who are prospective investors,interested in the Company and able to invest significant amounts ofcapital.  All of our funding to date hasbeen provided or guaranteed by highly qualified, accredited individualinvestors.

·                  Weare in contact with potential medical device companies that are interested inmarketing products in the prostate cancer detection market.  Conversations are in the early stages with atleast two such companies.  In addition tofinancial support, a successful collaboration with this type of company wouldallow us to gain access to down stream marketing, manufacturing and salessupport.

·                  Weare in preliminary discussions with an investment banking company to initiate apublic equity offering.

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

If adequate funds are not available through theseinitiatives on a timely basis in 2007, or are not available on acceptableterms, the Company may be unable to fund expansion, or to develop or enhanceour products.  If the Company is forcedto slow its development programs, or put them on hold, it would delayregulatory approvals needed, and thus market entry for our products.Ultimately, if no additional financing is obtained beyond what has been securedto date, we could potentially be forced to cease operations.

###### **Our Assets are Pledged to Secure a SeniorBank Note and are Not Available to Secure Other Senior Debt Financing, andEvent of Default will be Assigned to Guarantors of the Senior Bank Note.**

Our senior debt financing through Crown Bank, Minneapolis, Minnesota,has required us to pledge all our assets and certain licenses, as well asprovide certain accredited investors’ personal guarantees. As such, the Companywill not be in a position in the future to pledge its assets to secure any debtor lending facility, in the event we desire or need to borrow such funds on a securedlending basis. Moreover, under the terms and conditions of the foregoingfacility, and our agreement with such guarantors, in the event of any defaultby the Company with its senior lender,

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andpersonal guarantees are called and honored, the Company and its lender haveagreed that all the Company’s assets shall be assigned to such guarantors, prorata, in consideration of such breach and obligation to pay under therespective guarantees. Thus, common shareholders of the Company, and anyexisting and future investors in the Company’s common stock, would, if theforegoing breach and circumstances occurred, not have access or recourse to theCompany’s assets and collateral, and thus, would likely face a complete loss oftheir investment in the Company.

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

Only three complete ProUroScanTM systems have been built for testing, clinicalvalidations, and demonstration purposes. Previously, we had developed and manufactured two working prototypeProUroScanTM systems to prove the feasibility of thedevice and to provide a means to test and develop future systems.  Nevertheless, we have not generated anyrevenues from the sale of the ProUroScanTM system,  nor have we manufactured any ProUroScanTM systems 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, including unanticipatedtechnical or other problems, failures to meet FDA requirements or performanceobjectives, and the possible insufficiency of the funds allocated for thecompletion of such development, which could result in a change in the design,delay in the development, or abandonment of such applications andproducts.  Consequently, there can be noassurance that our products will be successfully developed ormanufactured.  Of course, our failure tocomplete the development of products will have a materially adverse effect onour business.

**Evenif successfully developed, our products may not be commercially viable.**

Even if we are able to successfully develop ourproducts, we may not be able to manufacture such products in commercialquantities and at prices that will be commercially viable.  Further, there is risk that our products maynot prove to be as effective as currently available medical or diagnosticproducts.  The inability to successfullycomplete development of a product or application or a determination by us, forfinancial, technical or other reasons not to complete development of anyproduct or application, particularly in instances in which we have madesufficient capital expenditures, could have a materially adverse affect on ourbusiness.

**Evenif successfully developed, our products may not be accepted by the marketplace.**

Our products, even if successfully developed, will becompeting against existing treatments and competing products in the medicaldevice marketplace.  There can be noassurance that physicians, urologists or the medical device market in generalwill accept our products.

**Wewill depend upon others for the manufacturing of our products, which willsubject our business to the risk that we will be unable to fully control thesupply of our products to the market.**

Our ability to develop, manufacture and successfullycommercialize our proposed products depends upon our ability to enter into andmaintain contractual and collaborative arrangements with others. We do notintend to initially manufacture any of our proposed products.  In this regard, we intend to retain contractmanufacturers.  There can be no assurancethat such manufacturers will be able to supply our products in the requiredquantities, at appropriate quality levels or at acceptable costs.  We may be adversely affected by anydifficulties encountered by such third-party manufacturers that result inproduct defects, production delays or the inability to fulfill orders on atimely basis.  If a manufacturer cannotmeet our quality standards and delivery requirements in a cost-efficientmanner, we would likely suffer interruptions of delivery while we arrange foralternative manufacturing sources.  Anyextended disruption in the delivery of products could result in our inabilityto satisfy customer demand for our products. Consequently, our inability to obtain alternative sources on a timelybasis may have a material adverse effect on our business and results ofoperations.

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**Our reliance on third-party manufacturers and otherthird parties in other aspects of our business will reduce any profits we mayearn from our products, and may negatively affect future product development.**

As noted above, we currently intend to market andcommercialize products manufactured by others, and in connection therewith wewill likely be required to enter into manufacturing, licensing and distributionarrangements with third parties.  Thesearrangements will likely reduce our product profit 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.

**Wemay not be able to enter into manufacturing agreements or other collaborativeagreements on terms acceptable to us, if at all, which failure would materiallyand adversely affect our business.**

We cannot be sure that we will be able to enter intomanufacturing or other collaborative arrangements with third parties on termsacceptable to us, if at all.  If we failto establish such arrangements when and as necessary, we could be required toundertake these activities at our own expense, which would significantlyincrease our capital requirements and may delay the development, manufactureand commercialization of our products. If we could not find ways of addressing these capital requirements, wewould likely be forced to sell or abandon our business.

**Wematerially rely on consultants and contractors, some of whom have beenpartially or wholly paid through issuances of common stock dilutive to ourshareholders.**

In each of the past two years, the Company (incombination with PUC) has incurred consulting and contracted research anddevelopment fees that represent a material expenditure in relation to our totaloperating costs.  During the year endedDecember 31, 2006, we incurred consulting and contracted research anddevelopment fees totaling approximately $178,000.  Of this amount, approximately $141,000 wasincurred for research and development activities, $39,000 was incurred forbusiness brokerage services rendered in connection with financing activities;and $7,000 was incurred for services rendered in connection with regulatory andreimbursement matters. Approximately $23,000 of this amount was paid throughthe issuance of 25,000 shares of common stock.

During the year ended December 31, 2005, we incurredconsulting fees totaling approximately $282,000.  Of this amount, approximately $116,000 wasincurred for research and development activities; $92,000 was incurred forbusiness brokerage services rendered in connection with financing activities;$36,000 was incurred for services rendered in connection with regulatory andreimbursement matters; $15,000 for medical advisory services; $14,000 wasincurred for manufacturing and engineering services; $8,000 was incurred formarket research services, and $2,000 was incurred for management and accountingservices.  Approximately $69,000 of thisamount was paid through the issuance of 75,000 shares of common stock.

We expect to continue to materially rely onconsultants and contractors to perform a significant amount of research anddevelopment, pre-manufacturing, clinical, regulatory, and marketingactivities.  Expenses for theseactivities are anticipated to be approximately $2.4 to 2.5 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 a research and development agreement with Artann, weare committed to issue warrants for up to an additional 200,000 shares ofcommon stock over the next two years at $2.00 per share or current marketprice, whichever is lower. To date, we have not issued these warrants, butexpect to do so contingent on the parties entering a new research anddevelopment agreement that will replace both of these original agreements andexpand the future relationship between Artann and the Company.  We are in final negotiations with Artann tocomplete this

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anticipatednew research and development agreement, and expect to execute this agreement inApril, 2007, although no assurances can be given in this regard.

**Theresale of our common stock into the market under Rule 144 and under our priorSB-2 Registration Statement, has depressed and adversely affected the marketprice of our common stock in the public market, and thus, could causeadditional dilution if and when the Company needs to raise additionalworking  capital.**

The sale, or availability for sale, of our restrictedcommon stock in the public market pursuant to Rule 144, in the ordinary course,has adversely affected the prevailing market price of our common stock, andwill likely to do so in the future. Furthermore, due to the 9,965,961 shares ofrestricted common stock that have been held over one (1) year by shareholderswho are not officers or directors, and thus, are eligible for resale under Rule144, selling stockholders may continue to depress the price of our commonstock. Accordingly, the adverse market and pricing pressures resulting from theresale of their common stock may continue for an extended period of time andcontinue to depress the price of our common stock in the open market.  If these adverse market conditions persist,and the Company needs to secure additional working capital during 2007 and2008, such pricing pressure and market conditions could hinder our ability toraise capital, and/or raise capital on terms and conditions acceptable to theCompany. In addition, shareholders may experience dilution if and when theCompany raises additional capital by the sale of its equity securities undersuch adverse market conditions.

We may issue additional shares in connection with ourbusiness and may grant additional stock options to our employees, officers,directors and consultants or warrants to third parties.  Sales of a substantial number of shares ofour common stock in the public market under Rule 144, or otherwise, wouldadversely affect the market price for our common stock and make it moredifficult to sell our shares.

**Thecommercialization of our products may be significantly delayed by governmentalregulation and any and all such delays, if they occur, may materially adverselyaffect the Company and our operations.**

The proposed products we intend to develop, assembleand market are subject to regulations by the United States Food and DrugAssociation (the “FDA”), and by comparable agencies in certain states andvarious foreign countries.  The processof complying with the requirements of the FDA, related agencies, and otherstate and foreign agencies is costly, time consuming, and burdensome,especially for a pre-revenue, development stage company.  Although we have secured the assistance ofregulatory consultants to help direct our regulatory compliance and filings, noassurances can be given that such filings will be acceptable to the FDA orother regulatory bodies.  Further, evenif acceptable, we may encounter significant delays which will materially andadversely affect our business plan.

**Weare highly dependent on the services provided by certain key personnel.**

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

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

Our officers and directors collectively possessbeneficial ownership of 6,549,674 shares of our common stock, which representsapproximately 36.9 percent of the voting power of our common stock.  This represents a significant portion of thevoting power of the Company’s shareholders. As a result, our directors and officers will have the ability tosubstantially (but not wholly) control our management and affairs through theelection and removal of our entire board of directors, and all other mattersrequiring shareholder approval, including the future merger, consolidation orsale of all or substantially all of our assets. This concentrated control could discourage others from 

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initiating any potentialmerger, takeover or other change-of-control transaction that may otherwise bebeneficial to our shareholders.  As aresult, the return on an investment in our common stock through the market priceof our common stock or ultimate sale of our business could be adverselyaffected.

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

We have exclusively licensed from third partiesintellectual properties covered by patents and patent applications.  Although we have been advised by patentcounsel that such licensed technologies have received protection in proposedmajor market areas, no assurance can be given that such protections will beproperly maintained by the parties controlling such intellectual properties, orthat such licenses will be honored and not breached.  The intellectual property licensed from thirdparties includes technology that is critical to our proposed products.  If the parties controlling such intellectualproperty breach our licenses, or fail to adequately maintain, assert and defendsuch intellectual property, and we are unable to defend the intellectualproperty in case of such failure, we may not be able to maintain thetechnological (and thereby competitive) edge we believe we possess.  Any such loss of intellectual propertyprotections would likely have a materially adverse effect on the Company andour business.

**Ifwe lose our right to license from third parties certain critical intellectualproperties, our entire business would be in jeopardy.**

The agreements pursuant to which we license criticalintellectual properties are not irrevocable. If we should lose our right to license and use any technology covered byour licenses, such loss would have a materially adverse effect on the Companyand our business.  In such a case, theviability of the Company’s business would be in question. Our only alternativeswould be to find existing and non-infringing technology to replace that lost(if any exists), or develop new technology ourselves.  The pursuit of any such alternative wouldlikely cause significant delay in the development and introduction of ourproposed products.

**Theprotections for the intellectual property we own and license from other partiesmay be successfully challenged by third parties.**

We own and, as noted above, license from third partiesvarious key intellectual properties.  Noassurance can be given that any intellectual-property claims will not besuccessfully challenged by third parties. Any challenge to our intellectual property, regardless of merit, wouldlikely involve costly litigation which would materially and adversely affectthe Company.  Moreover, if a challengewere successful, it is possible that the viability of the Company’s businesswould be in question.  If a successfulchallenge were made to intellectual property that is critical to our proposedproducts, the pursuit of any such alternative would likely cause significantdelay in the development and introduction of such products.

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

The urologic imaging and medical device markets areextremely competitive, dominated by large and well financed competition, andsubject to rapid technological advances and changes.  The discovery of new technologies andadvances in the application of such technologies to the medical marketplace ingeneral, and the market for urologic products in particular, may render ourproducts obsolete or non-competitive. Any such changes and advances could force us to abandon our currentlyproposed products, which would have a material and adverse effect on theCompany and its business.

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**We may not be able to successfully compete againstcompanies in our industry with greater resources, or with any competition.**

The urology imaging and therapeutic businesses and themedical device and life sciences business in general, are extremelycompetitive.  We have experienced, andexpect to continue experiencing significant competition in the medical devicemarket.  Although we believe we may havea proprietary niche in the prostate-imaging and prostate-therapeuticmarketplaces, many factors beyond our control, including government regulation,will likely encourage new competitors. In particular, several large companies will compete with us in theprostate-imaging and prostate-therapeutic business.  Many of the companies that will be in directcompetition with us have significantly greater resources, more personnel andlonger operating histories than we do. Therefore, no assurance can be given that we will be able tosuccessfully compete with these, or any other companies in the marketplace, ifat all.

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

We do not currently receive reimbursement from anyparty for the use of our products because there are no products fully developedand currently available for sale in the marketplace.  As a result, we have not taken any steps toobtain approval for reimbursement for the use of any of our proposedproducts.  Nevertheless, we are workingto formulate the appropriate approach to obtaining and optimizing governmentand third-party reimbursement for the use of our products.  The success of our future medical deviceproducts will materially depend on the ability of medical service providers toobtain third-party reimbursement from private insurance sources, such asMedicare, 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.

We expect that the use of our ProUroScanTM system will not be immediately eligible forreimbursement utilizing existing Current Procedural Terminology (“CPT”)codes.  When a new product or procedureis introduced, it must be submitted to the American Medical Association’s (“AMA”)CPT Editorial Panel, who determines if an existing code should be used, or if anew code should be issued.  However,before reaching the Editorial Panel, it must first be screened by the CPTAdvisory Committee and the appropriate national medical specialty societyseated in the AMA House of Delegates (for prostate-related procedures, this isthe American Urology Association, or AUA). The process of obtaining a new CPT code can take from one to threeyears.  When a procedure is performed,the physician must use the CPT code when billing third-party payers such asinsurance companies or the government. The amount of reimbursement the physician receives depends on therelative value assigned to the procedure by the third-party payer via the CPTcoding.

In the absence of formal reimbursement coverage, providers must givebeneficiaries a Medicare Advance Beneficiary Notice (“ABN”) before furnishingcertain services when there is a reasonable doubt that Medicare will cover theprocedure.  An ABN can be used for allsituations, including laboratory tests, by all physicians and suppliers.  An alternative to using a patient pay modelin the United States is to submit claims using a “Miscellaneous Code” which canoften result in a favorable coverage position. This approach will require the submission of more product and clinicaldata and all cases will be reviewed on an individual basis.

Initially, we anticipate using a “patient pay model” for physicians toreceive payment for performing the for the ProUroScanTM system test, in which patientsperceiving sufficient value in a procedure agree to pay for the test out oftheir own funds in the absence of reimbursement from their healthinsurance.  This approach was recommendedby Hogan & Hartson, our reimbursement consultants, based on the perceivedvalue of the test for patients that have an abnormal DRE or PSA value.  As the level of clinical and paymentexperience expands during theinitial period of “patient pay” usage, we anticipate filing for a formal CPTprocedure code and reimbursement as previously described. Having a formalreimbursement code will drive additional utilization and will be helpful inobtaining reimbursement and testing acceptance in other markets.  There can be no assurance that we will besuccessful in obtaining a unique CPT code for use of the ProUroScanTM system.

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Our therapeutic products are anticipated to be “add-on”enhancements to existing thermal therapy systems.  These existing systems are used in proceduresthat already have designated CPT codes. The use of our add-on enhancements is not expected to alter theestablished CPT codes for such procedures or otherwise affect reimbursement forsuch procedures.  We anticipate thatthese products will be sold to established thermal therapy companies and notdirectly to the medical service provider. Because the thermal therapy procedures utilizing the equipment providedby these established companies already have designated CPT codes, neither thereimbursement for such procedures nor our future revenues are directly relatedto or dependent upon the establishment of new CPT codes.  Nevertheless, if reimbursement levels underthe existing CPT codes were reduced for applicable thermal therapy procedures,such reduction may adversely affect our ability to sell therapeutic products ata reasonable price.

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

Trading of our common stock is conducted on theOver-the-Counter Bulletin Board. Management believes that this has an adverse effect on the liquidity ofour common stock, not only in terms of the number of securities that can bebought and sold at a given price, but also through delays in the timing oftransactions and reduction in analyst coverage of our Company.  This may result in lower prices for ourcommon stock than might otherwise be obtained if our stock were traded on alarger or more established exchange, such as NASDAQ Small Market Cap Market, orotherwise, and could also result in a larger spread between the bid and askedprices for our common stock.

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

Since the Merger, there has been very little tradingactivity in our common stock.  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.

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

Our common stock is a “penny stock” and is thereforesubject to the requirements of Rule 15g-9 under the Securities Exchange Act of1934.  Under this Rule, broker-dealerswho sell penny stocks must provide purchasers of these stocks with astandardized risk-disclosure document prepared by the SEC. The penny-stockrules severely limit the liquidity of securities in the secondary market, andmany brokers choose not to participate in penny-stock transactions.  As a result, there is generally less tradingin penny stocks.  If you become a holderof our common stock, you may not always be able to resell shares of our commonstock publicly at the time and prices that you feel are fair orappropriate.  Under applicableregulations, our common stock will generally remain a “penny stock” until andfor such time as its per-share price is $5.00 or more (as determined inaccordance with SEC regulations), or until we meet certain net asset or revenuethresholds.  These thresholds include thepossession of net tangible assets (i.e., total assets less intangible assetsand liabilities) in excess of $2,000,000 in the event we have been operatingfor at least three years or $5,000,000 in the event we have been operating forfewer than three years, and the recognition of average revenues equal to atleast $6,000,000 for each of the last three years.  We do not anticipate meeting any of thethresholds in the foreseeable future.

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

The Company has generatednet operating loss carryforwards of approximately $3.0 million which, if notused, will begin to expire in 2021. Federal and state tax laws impose significant restrictions on theutilization of net operating loss carryforwards in the event of a change inownership of the Company that constitutes an “ownership change,” as defined bythe Internal Revenue Code, Section 382. The Company has analyzed the Merger and Private 

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Placement transactions that occurred in April2004, and believes that they do not constitute such an ownership change.  However, those transactions, together withpossible future changes during the subsequent 36-month period may constitute achange in ownership that could subject the Company’s use of its net operatingloss carryforward to the above limitations. Specifically, additional shares and warrants likely to be issuedpursuant to the Company’s current financing efforts may trigger such a changein ownership.  Based on the Company’sestimates, the limitation would apply to approximately $1.2 million of the $3.0million net operating loss carryforwards.

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

The manufacture and sale of medical products and theconduct of clinical trials using new technology involve customary risks ofproduct liability claims.  There can beno assurance that our insurance coverage limits will be adequate to protect usfrom any liabilities which we might incur in connection with the clinicaltrials or the commercialization of any of our products.  Product-liability insurance is expensive andin the future may not be available on acceptable terms, if at all.  A successful product-liability claim orseries of claims brought against us in excess of our insurance coverage wouldhave a materially adverse effect on our business, financial condition andresults of operations.  In addition, anyclaims, even if not ultimately successful, could adversely affect themarketplace’s acceptance of our products.

**Wehave never paid dividends, and do not expect to pay dividends in theforeseeable future.**

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

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###### **ITEM 2:  DESCRIPTION OF PROPERTY**

Our executive offices are temporarily located at 5500Wayzata Boulevard, Suite 310, Golden Valley, MN 55416, where we rent excessspace in the offices of one of our Company directors on a month-to-monthbasis.  Our rental cost for thesetemporary offices is approximately $2,073 per month, which we believe is at orbelow market for similar office space in Minneapolis, Minnesota.  The director/landlord has informally agreedto defer payment of this rent until the Company receives significant funding.  We expect to locate new, permanent officespace in the first half of 2007.

During 2006, we rented office space on amonth-to-month basis from a company majority-owned and controlled by our formerchief executive officer, Maurice Taylor at One Carlson Parkway, Suite 124,Plymouth, Minnesota 55447.  Our rentexpense for this location for the year ended December 31, 2006 was $47,518,which we believe was at or below market for similar office space inMinneapolis, Minnesota.  We do not ownany real property.  We have no officialpolicy on investments in real estate, interests in real estate, real-estatemortgages, or securities of or persons primarily engaged in real estateactivities.

**ITEM 3: LEGAL PROCEEDINGS**

**On April 2, 2004, a former officer and employee ofProUroCare Inc. filed a lawsuit against ProUroCare Inc. and the Companyrelating to his separation of employment with ProUroCare Inc. prior to theMerger.  On March 3, 2006, the Companyand ProUroCare Inc. settled this lawsuit. Under the settlement agreement, the Company paid $177,000 plus $1,924 ofpayroll taxes in complete settlement of all claims and a dismissal of theformer employee’s claim.  The entireamount paid in the settlement was recorded as a reserve as of December 31,2005.**

**ITEM 4:  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

None.

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**PART II**

**ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERMATTERS**

**General**

Our common stock has beenquoted on the Over-the-Counter Bulletin Board, or “OTC Bulletin Board,” sinceDecember 2003.  Our common stockcurrently trades on the OTC Bulletin Board under the trading symbol “PRRC.”  Prior to May 5, 2004, the Company’ssecurities traded on the OTC Bulletin Board under the trading symbol “GICI.”  This change was made following the Merger ofGlobal internet Communications and ProUroCare Inc. on April 5, 2004.  The following table lists the high and lowbid information for the Company’s common stock as quoted on the OTC BulletinBoard by quarter for the years ended December 31, 2006 and 2005:

|                        | ** ** | **Price Range** | ** ** |
|------------------------|------------|----------------------|------------|
| **Quarter Ended** | ** ** | **High**             | ** ** | **Low** | ** ** |
| March 31, 2005         |       | $                    | 2.35       |   | $ | 1.05 |   |
| June 30, 2005          |       | $                    | 1.35       |   | $ | 0.55 |   |
| September 30,  2005    |       | $                    | 1.02       |   | $ | 0.55 |   |
| December 31,  2005     |       | $                    | 1.23       |   | $ | 0.35 |   |
| March 31, 2006         |       | $                    | 1.00       |   | $ | 0.50 |   |
| June 30, 2006          |       | $                    | 0.85       |   | $ | 0.37 |   |
| September 30,  2006    |       | $                    | 0.68       |   | $ | 0.42 |   |
| December 31, 2006      |       | $                    | 0.66       |   | $ | 0.35 |   |

 

The above quotations fromthe OTC Bulletin Board reflect inter-dealer prices, without retail mark-up,mark-down or commission, and may not represent actual transactions.  The number of holders of record of our commonstock as of December 31, 2006 was approximately 254.  We have not paid or declared any dividends onour common stock and we do not anticipate paying dividends on our common stockin the foreseeable future.

**Recent Sales ofUnregistered Securities**

None.

**ITEM 6:MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

The accompanying Plan of Operation should be read inconjunction with the audited financial statements, and notes thereto, includedin this Annual Report on Form 10-KSB.

**Plan of Operation**

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

Our primary assets are cash and intellectual propertyrights, which are the foundation for our proposed product offerings.  We currently employ only two employees.  As we prepare for FDA submission and marketlaunch of our ProUroScanTMproduct, we expect toadd four to five employees in the areas of engineering, quality assurance, andregulatory compliance within the next 12 months.  Other than certain computer equipment andsoftware acquisitions with a total cost of under $100,000, we do not anticipatepurchasing or selling any significant equipment or other assets in the nearterm.

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***I******nitial Product Offerings.***

Our initial product is theProUroScanTM system, developed and designed as a uniquediagnostic-imaging system that enables physicians to accurately display, chartand monitor prostate examinations for more effective disease diagnosis.  The system is being designed to detectcertain abnormalities that may be missed by other diagnostic techniques.  These abnormalities include areas on thesurface or within the prostate where the tissue has a different level ofelasticity or stiffness when compared with the rest of the gland, which can beprecursors to a more clearly defined hardened area or nodule.  The system’s operation is based onmeasurement of the stress pattern on the rectal wall when the probe is pressedagainst the prostate.  Temporal andspatial changes in the stress pattern provide information on the elastic structureof the gland and allow two-dimensional and three-dimensional reconstruction ofprostate anatomy and assessment of prostate mechanical properties.  The data acquired allow the calculation ofprostate features such as size, shape, nodularity, consistency or hardness, andmobility.  The prostate image isdisplayed on a screen that allows a physician to identify the specific locationof soft-tissue abnormalities and to determine the relative size of the prostateupon completion of the imaging procedure.

Assuming our financing efforts (see below) are successful, over thenext year we plan to complete the development of the ProUroScanTM system, perform clinical trials, and make a submission to the FDA for510K clearance to market the system in the United States.  During this period, we also intend to beginefforts to obtain the CE mark registration necessary for marketing the systemin Europe.

The ProUroScanTM systemis currently in the late stages of product development.  The design specifications are nearlyfinalized and performance characteristics are generally known.  Further development work in the areas ofpositioning system refinement, software, user interface, and sensor production,among others, must be completed before the system can be commercialized.  It is anticipated that an additional nine orten months will be needed to complete the remaining development tasks leadingto the production of clinical study units. As discussed below, the clinical study units will be used to conduct theclinical trials necessary to obtain market clearance from the FDA.

The exact path we will follow to gain FDA clearance will depend uponfeedback we will receive at a meeting we intend to have with the FDA in2007.  Assuming the path is acceptable tothe FDA, we expect to conduct clinical trials and make a formal submission tothe FDA by mid-2008.  Published FDAstatistics from 2004 (the most recent available) indicate that the averagetotal time from receipt of a 510K application to final action is 100 days, with65 percent completed in less than 90 days. Based on this data, assuming that the results of clinical trials pose nounanticipated problems, we expect to receive FDA concurrence within 90 to 180days after the 510K application is filed. See Part I, Item 1 under the caption “Government Regulation”.

Over time, after receivingour initial FDA 510K approval and launching the system into the market, we planto file more advanced claims involving enhanced features and functions of theProUroScanTM system.  Depending on the exact nature of these moreadvanced claims, the approval process may require more extensive clinicalstudies and possibly a full pre-market approval application.  Such an application likely will takesignificantly more time and be more expensive than our 510K approval process.

In addition to our ProUroScanTM technology, wehave secured licensed rights to technology that offers potentially significantenhancements to existing treatments of BPH, prostate cancer, and other urologicapplications.  Currentmicrowave thermal therapy treatment utilizes a catheter that is inserted intothe patient’s urethra.  The cathetercontains an antenna that radiates microwave energy in an omni-directional, 360degree pattern.  The tissue of theprostate absorbs this energy and heat is inductively generated to increase thetemperature above 45 degrees Celsius (113 degrees Fahrenheit), which isnecessary to cause necrosis of the tissue. After this tissue dies and is eliminated by the body, the enlargement ofthe prostate is reduced, restoring urine flow. Currently, the clinician is unable to monitor the migration of heatwithin the prostate, which means that either too much energy may be applied,potentially causing collateral damage to adjacent healthy organs, or too littleenergy may be applied, limiting its therapeutic effectiveness.

We believe that our uniqueand proprietary technology has the potential to be a significant advancement tothermal therapy.  Our technology is animaging technology in which an image of the conductivity or resistivity of part

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ofthe body is inferred from surface electrical measurements.  The heating that occurs during a thermaltherapy procedure produces a change in the local conductivity or resistivitythroughout the tissue being treated. These local changes in the electrical properties of the tissue will bemeasured by a system of miniature electrodes placed on the patient’s body, anda rectal probe, all of which connect to an electronically controlledlow-frequency power supply.  Eachindividual electrode will receive a specific current and electronically measureall the possible induced voltages among the electrode array.  An inversion algorithm is then employed tocreate a real-time image of the thermal pattern.

***Current Operations and Expenses*****.**

We currently employ only two employees.  We conduct our research and development,market research, regulatory function, and other business operations through theuse of a variety of consultants and medical-device development contractors.  We believe that using consultants andcontractors, including the significant scientific and engineeringresources of Artann, toperform these functions is more cost effective than hiring full-time employees,and affords the Company flexibility in directing our resources toward specificand changing goals during our development stage.  As we prepare for FDA submission and marketlaunch of our ProUroScanTMsystem, we expect toadd four to five employees in the areas of engineering, quality assurance andregulatory compliance within the next 12 months.  During the next 12 months, we expect tocomplete the development of clinical ProUroScanTM systems, conduct clinical trials, and file a 510(k) submission with theFDA; fund development work on our therapeutic products; and prepare for initialmarket launch.

***Generaland Administrative Expenses.***

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.  We currently occupy temporary offices withinthe office of a Company director, for which we accrue rent on a month-to-monthbasis of approximately $2,073 per month. The director has informally agreed to defer payment of this rent untilthe Company receives significant funding. We expect to find and relocate to permanent offices of approximately2,000 square feet in the first half of 2007. Other expenses incurred includeexecutive officer compensation, expensing of stock options, travel, insurance,telephone, supplies, and other miscellaneous expenses.  In the next twelve months, the Companyanticipates that it will spend approximately $1.0 million in marketing andadministrative expenses.  Of these, theCompany expects that approximately $410,000 will be for compensation, benefits,and payroll taxes.

***Research and Development***.

The Company anticipates that it will spend between$2.0 and $2.1 million on research and product development of the ProUroScanTM system over the next 12 months.  Of this amount, approximately $1.2 millionwill be spent on manufacturing, engineering, validation and documentationefforts on a contracted basis with our development partners.  Clinical trials and the 510(k) filing withthe FDA are expected to cost in the range of $250,000 to $300,000.  ProUroScanTM systems created for development and clinicaluse are expected to cost the Company between $100,000 and $150,000.  Internal salaries, benefits, andmiscellaneous departmental expenses for software and hardware development,regulatory work, and project management are estimated to cost between $200,000and $250,000.  Contracted projectmanagement and engineering is expected to range from $150,000 to $200,000.

Much of the ProUroScanTM’s development to date hasbeen accomplished under two development agreements between ProUroCare andArtann. Under the first agreement, the “Development Agreement,” Artanndeveloped two working, pre-clinical ProUroScanTM systems.  These development-level systems weredelivered to us in late November 2004. We paid Artann $180,000 for this 2004 development work.

Under the second agreement, called the “Research and DevelopmentAgreement,” Artann was named a research and development partner to the Company,supporting the further development of the ProUroScanTM and other to-be-determined technologies in theurologic field.  Any intellectualproperty and know-how resulting from the advancement of the ProUroScanTM under this agreement will beassigned to ProUroCare.  For its role,Artann will 

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receivea total of $250,000 (plus incentives as explained below) payable upon certainmilestone events.  A payment of $50,000was made to Artann upon the execution of the agreement in July 2004.  In December 2004, the Company paid Artann$110,000 following the shipment of the ProUroScanTM prototypes in accordance with the DevelopmentAgreement (including a $10,000 bonus for delivery of the systems ahead ofschedule).  On May 6 and June 6, 2005,Artann filed additional patent applications relating to a new probe positioningtechnology, for which the Company will pay Artann $50,000.  Artann will also receive additionalcompensation in the form of five-year warrants to purchase up to 500,000 sharesof Company common stock, similarly issuable upon certain milestone events.  Of these warrants, warrants for the purchaseof 100,000 shares were issued upon the execution of the agreement, and warrantsfor the purchase of 200,000 shares were issued in December 2004.  The warrants are exercisable at a per-shareprice of $2.00, and were expensed as research and development expenses.  The final 200,000 warrants were to be issued,contingent on the delivery of a system ready for clinical trials, in two equal100,000-share installments on the one-year and two-year anniversaries of theResearch and Development Agreement.  Todate, we have not issued these warrants but expect to do so contingent on theparties entering into a new research and development agreement that willreplace both of these original agreements and expand the future relationshipbetween Artann and the Company.  We arein final negotiations with Artann to complete this anticipated new research anddevelopment agreement, and expect to execute this agreement in April 2007,although no assurances can be given in this regard.  As part of this agreement, and coincidentwith its execution, we expect to complete our financial obligations to Artannunder the two original agreements.

In September 2006, Artann was awarded a Small BusinessInnovation Research Phase II Competitive Renewal grant from the National CancerInstitute. The aim of the grant is to help advance the development andapplication for the FDA clearance of our ProUroScanTM system.  The three-year grantwill provide up to $3 million for ProUroScanTM development, effective September 29,2006.  It is our intent to work withArtann under this grant, and to expand our working relationship with Artann toinclude their participation in the development and commercialization of futuregenerations of the ProUroScanTM.  In addition, we expectcertain tasks in this project will be performed by other contracted medicalproduct development firms, including Devicix, LLC.

For the Company’s thermal therapy products,on July 27, 2005, weentered into a Memorandum of Understanding with Urologix to co-develop newproducts utilizing our EIT technology licensed from RPI. The EIT technology isexpected to be assembled into modules that will be compatible with andincorporated into Urologix’ existing thermal therapy systems. The partiesexpected the project to require several phases of research, testing anddevelopment, for which they have agreed to equally share the developmentcost.  If the development of the modulesis successful, the parties contemplate entering into definitive agreementspursuant to which Urologix would market the new products subject to a licenseagreement.  After completing Phase I inSeptember 2006, it was determined that an assessment of certain key factorsaffecting the compatibility of our EIT technology with Urologix’ equipment willbe required before proceeding with the second development phase.

On March 20, 2007, the Company executed an amendment to the UrologixMemorandum of Understanding. Under the terms of the amendment, Urologix agreedto postpone any decision regarding the continuance of the remaining phasescontemplated under the agreement, while the Company agreed that the assessmentsdescribed above will be done and funded solely by the Company. In addition,Urologix has the right to abandon the project for any reason with 5 days’notice to the Company, and the Company has the right to abandon the project forany reason by providing 5 days’ notice to Urologix.  ProUroCare plans to conduct research relatedto the compatibility issues when sufficient funding becomes available before adecision is made to move to Phase II of the program.  The Company believes thatapproximately two to three months will be required to obtain answers to thesequestions, but the cost of the study has not been estimated, and initiatingthis study is dependent upon our obtaining sufficient financing to complete thework.  Accordingly, the project has beentemporarily suspended.

Further, certain technology critical to the project is licensed by theCompany from RPI.  Under the terms of thelicense, as amended, the Company must initiate the Food and Drug Administration(“FDA”) approval process by filing with the FDA and commencing human clinicaltrials before July 13, 2008.  Managementbelieves that due to the 

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additional projectwork required it is unlikely this deadline will be achieved.  Management believes that it will be able tosuccessfully negotiate an extension of this deadline with RPI, but cannot giveassurance of this.  If the Company isunsuccessful in obtaining sufficient funds to continue development of this technology,resolving the two key project factors noted above, or negotiating an extensionof the RPI license, the development efforts with Urologix may be terminated,and the Company’s EIT technology may be abandoned.  See section above entitled “Initial ProductOfferings - ProUroVisionTM EIT Research and Development Status.”

***Financing Plan.***

We had a working capitaldeficit of approximately $1,220,000 and $1,499,000 at December 31, 2006 and2005, respectively.  Cash used inoperations was approximately $1,660,000 and $732,000 for the years endedDecember 31, 2006 and 2005, respectively, and $6,261,000 for the period fromAugust 17, 1999 (date of inception) to December 31, 2006.  In addition, as of the date of this report, theCompany has current liabilities exceeding $3.2 million.  Consequently, management has taken severalmeasures to conserve cash, including reducing executiveheadcount, substantially reducing development work on the ProUroScanTM system, reducing expenses, and deferringvendor payments and staff salaries.

Management’s plan is to actively raise an additional$10 million that will be used to support ongoing operations and the retirementof existing debt and other obligations. Of the total, approximately $6 million will be used to bring the existingfirst generation system through clinical trials, final FDA concurrence, andpreparation for market launch.  Thesefunds will be in addition to funds available to develop the ProUroScanTM system under Artann’s Small Business Innovation Research PhaseII Competitive Renewal grant from the National Cancer Institute.  The remaining $4 million will be used toretire existing liabilities and provide working capital.

The plan for raising this level of funding consists of three separateinitiatives:

·                  TheCompany has successfully identified prospective investors who are, interestedin the company and able to invest significant amounts of capital.  All of our funding to date has been providedor guaranteed by highly qualified, accredited individual investors.

·                  Weare in contact with potential medical device companies that are interested inmarketing products in the prostate cancer detection market.  Conversations are in the early stages with atleast two such companies.  In addition tofinancial support, a successful collaboration with this type of company wouldallow us to gain access to down stream marketing, manufacturing and salessupport.

·                  Weare in preliminary discussions with an investment banking company to initiate apublic equity offering.

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

If adequate funds are not available through theseinitiatives on a timely basis in 2007, or are not available on acceptableterms, the Company may be unable to fund expansion, to develop or to enhanceour products.  If the Company is forcedto slow its development programs, or to put them on hold, it would delayregulatory approvals needed, and thus delay market entry for our products.Ultimately, if no additional financing is obtained beyond what has been securedto date, we could potentially be forced to cease operations. See Part I,Item 1 under the caption “RISK FACTORS ASSOCIATED WITH OUR BUSINESS, OPERATIONSAND SECURITIES”.

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**CriticalAccounting Policies**

The Company’s critical accounting policies are those(i) having the most impact on the reporting of its financial condition andresults, and (ii) requiring significant judgments and estimates.  Due to the development-stage nature of theCompany’s current operations, the Company does not believe it has any criticalpolicies or procedures. 

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**ITEM 7:  FINANCIAL STATEMENTS**
| The following financial statements are  included:              |   |   |
|----------------------------------------------------------------|--------|--------|
|                                                           |   |   |
| Report  of Independent Registered Public Accounting Firm       |   |   |
|                                                           |   |   |
| Audited  Financial Statements:                                 |   |   |
|                                                           |   |   |
| Consolidated  Balance Sheets                                   |   |   |
|                                                           |   |   |
| Consolidated  Statements of Operations                         |   |   |
|                                                           |   |   |
| Consolidated  Statement of Shareholders’ Equity (Deficit) |   |   |
|                                                           |   |   |
| Consolidated Statements of Cash Flows                          |   |   |
|                                                           |   |   |
| Notes to Consolidated Financial Statements                     |   |   |

 

F-1

----

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

To the Shareholders, AuditCommittee and Board of DirectorsProUroCare Medical Inc.Golden Valley, MN

Wehave audited the accompanying consolidated balance sheets of ProUroCare MedicalInc. (a development stage company) as of December 31, 2006 and 2005, and the relatedconsolidated statements of operations, shareholders’ deficit and cash flows forthe years then ended and the period from August 17, 1999 (inception) toDecember 31, 2006.  These consolidatedfinancial statements are the responsibility of the company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of ProUroCare MedicalInc. as of December 31, 2006 and 2005 and the results of their operations and theircash flows for the years then ended and the period from August 17, 1999(inception) to December 31, 2006, in conformity with U.S. generally acceptedaccounting principles.

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, theCompany has recurring operating losses, negative cash flows from operations, aworking capital deficit, and a shareholders’ deficit that raise substantial doubt about its ability to continue as agoing concern.  Management’s plans(including pending financing) in regards to these matters are also described inNote 2.  The consolidated financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.
|  | /s/ Virchow, Krause & Company, LLP |
|--|----------------------------------------|

Minneapolis, MinnesotaMarch 24, 2007

F-2

----

**ProUroCare MedicalInc.**

**(ADevelopment Stage Company)**

ConsolidatedBalance Sheets
| ** **                                                                                                                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                       | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| **Assets**                                                                                                                       | ** ** | ** **            | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                  |       |                  |       |                  |       |
| Cash                                                                                                                             |       | $                     | 2,407      |                  | $          | 37 |   |
| Deposit                                                                                                                          |       | —                |       | 547                   |       |
| Prepaid expenses                                                                                                                 |       | 15,459                |       | 12,483                |       |
| Total current  assets                                                                                                            |       | 17,866                |       | 13,067                |       |
| Equipment and  furniture, net                                                                                                    |       | 3,739                 |       | 7,636                 |       |
| Deferred offering  expenses                                                                                                      |       | —                |       | 37,881                |       |
| Debt issuance costs,  net                                                                                                        |       | 573,013               |       | 52,727                |       |
|                                                                                                                             |       | $                     | 594,618    |                  | $          | 111,311 |   |
| **Liabilities and Shareholders’ Deficit**                                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                             |       |                  |       |                  |       |
| Notes payable,  bank                                                                                                             |       | $                     | —     |                  | $          | 400,000 |   |
| Notes payable,  net of original issue discount                                                                                   |       | 174,338               |       | 87,816                |       |
| Accounts payable                                                                                                                 |       | 385,793               |       | 387,302               |       |
| Accrued expenses                                                                                                                 |       | 662,226               |       | 627,872               |       |
| Loans from  officers and directors                                                                                               |       | 15,450                |       | —                |       |
| Due to Clinical  Network, Inc.                                                                                                   |       | —                |       | 8,943                 |       |
| Total current  liabilities                                                                                                       |       | 1,237,807             |       | 1,511,933             |       |
|                                                                                                                             |       |                  |       |                  |       |
| Commitments and  contingencies (note 6)                                                                                          |       |                  |       |                  |       |
| Long-term bank debt                                                                                                              |       | 2,200,000             |       | —                |       |
| Long-term  convertible debentures, net of original issue discount                                                                |       | 209,983               |       | —                |       |
| Total  liabilities                                                                                                               |       | 3,647,790             |       | 1,511,933             |       |
|                                                                                                                             |       |                  |       |                  |       |
| Shareholders’ deficit:                                                                                                      |       |                  |       |                  |       |
| Common stock,  $0.00001 par value. Authorized 50,000,000 shares; issued and outstanding 14,399,686  and 14,174,260, respectively |       | 144                   |       | 142                   |       |
| Additional  paid-in capital                                                                                                      |       | 10,111,482            |       | 8,804,181             |       |
| Deficit  accumulated during the development stage                                                                                |       | (13,164,798           | )          | (10,204,945           | )          |
| Total  shareholders’ deficit                                                                                                |       | (3,053,172            | )          | (1,400,622            | )          |
|                                                                                                                             |       | $                     | 594,618    |                  | $          | 111,311 |   |

 

See accompanying notes toconsolidated financial statements.

F-3

----

 

**ProUroCare Medical Inc.**

(A Development StageCompany)

Consolidated Statements of Operations
| ** **                                      | ** ** | **Year ended  December 31,  2006** | ** ** | **Year ended  December 31,  2005** | ** ** | **Period from  August 17,  1999  (inception) to  December 31,  2006** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
|                                            |       |                                         |       |                                         |       |                                                                                      |       |
| Operating expenses:                             |       |                                         |       |                                         |       |                                                                                      |       |
| Research and  development                       |       | $                                            | 246,119    |                                         | $          | 261,729                                                                                   |       | $ | 4,713,924 |   |
| General and  administrative                     |       | 1,596,050                                    |       | 1,670,893                                    |       | 6,499,222                                                                                 |       |
| Total operating  expenses                       |       | 1,842,169                                    |       | 1,932,622                                    |       | 11,213,146                                                                                |       |
| Operating loss                                  |       | (1,842,169                                   | )          | (1,932,622                                   | )          | (11,213,146                                                                               | )          |
| Interest income                                 |       | —                                       |       | 446                                          |       | 16,480                                                                                    |       |
| Interest expense                                |       | (1,117,684                                   | )          | (95,880                                      | )          | (1,968,132                                                                                | )          |
| Net loss                                        |       | $                                            | (2,959,853 | )                                            | $          | (2,028,056                                                                                | )          | $ | (13,164,798 | ) |
|                                            |       |                                         |       |                                         |       |                                                                                      |       |
| Net loss per common  share:                     |       |                                         |       |                                         |       |                                                                                      |       |
| Basic and  diluted                              |       | $                                            | (0.21      | )                                            | $          | (0.14                                                                                     | )          | $ | (1.50 | ) |
|                                            |       |                                         |       |                                         |       |                                                                                      |       |
| Weighted average number  of shares outstanding: |       |                                         |       |                                         |       |                                                                                      |       |
| Basic and diluted                               |       | 14,285,397                                   |       | 14,063,160                                   |       | 8,770,370                                                                                 |       |

 

See accompanyingnotes to consolidated financial statements.

F-4

----

 

**ProUroCare Medical Inc.**

(ADevelopment Stage Company)

Consolidated Statements ofShareholders’ Equity (Deficit)
| ** **                                                                                                                                                 | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**            | ** ** | ** **                | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                                 | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **accumulated**        | ** ** | ** **                | ** ** |
| ** **                                                                                                                                                 | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | **during the**    | ** ** | **Total**                 | ** ** |
| ** **                                                                                                                                                 | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **development** | ** ** | **shareholders’** | ** ** |
| ** **                                                                                                                                                 | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **capital**     | ** ** | **stage**              | ** ** | **equity (deficit)** | ** ** |
| **Balance at inception, August  17, 1999**                                                                                                                 |       |                  |       |        |       |            |       |                   |       |                      |       |
| Net loss for the period  from inception to December 31, 1999                                                                                               |       | —                |       | $           | —     |            | $          | —                 |       | $                    | —     |   | $ | — |   |
| **Balance, December 31, 1999**                                                                                                                             | ** ** | **—**            | ** ** | **—**  | ** ** | **—**      | ** ** | **—**             | ** ** | **—**                | ** ** |
| Net loss for the year  ended December 31, 2000                                                                                                             |       | —                |       | —      |       | —          |       | —                 |       | —                    |       |
| **Balance, December 31, 2000**                                                                                                                             | ** ** | ** **            | ** ** | ** **  | ** ** | —          |       | —                 |       | —                    |       |
| Issuance of common stock  to founders at $3.33 per share on March 1, 2001                                                                                  |       | 6                     |       | —      |       | 20              |       | —                 |       | 20                        |       |
| Cancellation of  founders’ shares, March 6, 2001                                                                                                      |       | (6                    | )          | —      |       | (20             | )          | —                 |       | (20                       | )          |
| Recapitalization and transfer  of common stock to Clinical Network, Inc. July 6, 2001                                                                      |       | 3,000,000             |       | 30          |       | (30             | )          | —                 |       | —                    |       |
| Issuance of common stock  to CS Medical Technologies, LLC as consideration for technology license  agreement on July 6, 2001, valued at $0.158 per share   |       | 3,000,000             |       | 30          |       | 474,970         |       | —                 |       | 475,000                   |       |
| Net loss for the year  ended December 31, 2001                                                                                                             |       | —                |       | —      |       | —          |       | (612,533               | )          | (612,533                  | )          |
| **Balance, December 31, 2001**                                                                                                                             | ** ** | **6,000,000**         | ** ** | **60**      | ** ** | **474,940**     | ** ** | **(612,533**           | **)**      | **(137,533**              | **)**      |
| Issuance of common stock  valued at $0.429 per share to Profile LLC for technology license, January 14,  2002                                              |       | 3,999,999             |       | 40          |       | 1,713,560       |       | —                 |       | 1,713,600                 |       |
| Issuance of common stock  at $2.33 per share for services rendered, November 14, 2002                                                                      |       | 44,214                |       | —      |       | 103,166         |       | —                 |       | 103,166                   |       |
| Issuance of common stock  for cash at $2.33 per share on November 22, 2002, net of costs of $193,386                                                       |       | 453,345               |       | 5           |       | 864,414         |       | —                 |       | 864,419                   |       |
| Options to purchase  900,000 shares issued to officers and directors, valued at $0.46 per share,  granted March 19, 2002; portion vested in 2002           |       | —                |       | —      |       | 124,583         |       | —                 |       | 124,583                   |       |
| Options to purchase  60,000 shares issued to consultants for services rendered, valued at $0.46  per share, granted March 19, 2002; portion vested in 2002 |       | —                |       | —      |       | 18,400          |       | —                 |       | 18,400                    |       |
| Warrant for 30,000  shares valued at $0.46 per share, issued to a director on April 19, 2002;  portion vested in 2002                                      |       | —                |       | —      |       | 4,025           |       | —                 |       | 4,025                     |       |
| Warrant for 1,500 shares  valued at $0.33 per share issued for services rendered, November 11, 2002                                                        |       | —                |       | —      |       | 490             |       | —                 |       | 490                       |       |
| Net loss for the year  ended December 31, 2002                                                                                                             |       | —                |       | —      |       | —          |       | (3,613,003             | )          | (3,613,003                | )          |
| **Balance, December 31, 2002**                                                                                                                             | ** ** | **10,497,558**        | ** ** | **105**     | ** ** | **3,303,578**   | ** ** | **(4,225,536**         | **)**      | **(921,853**              | **)**      |
| Stock issued in lieu of  cash for accounts payable, valued at $2.33 per share, February 25, 2003                                                           |       | 5,445                 |       | —      |       | 12,705          |       | —                 |       | 12,705                    |       |
| Warrants for 192,861  shares valued at $0.30 per share, issued to bank line of credit guarantors,  March 1, 2003                                           |       | —                |       | —      |       | 57,858          |       | —                 |       | 57,858                    |       |
| Warrant for 21,429  shares valued at $0.30 per share, issued to director as a bank line of credit  guarantor, March 1, 2003                                |       | —                |       | —      |       | 6,429           |       | —                 |       | 6,429                     |       |
| Warrant for 92,148 shares  issued for services rendered, valued at $2.03 per share, June 30, 2003                                                          |       | —                |       | —      |       | 187,060         |       | —                 |       | 187,060                   |       |
| Warrants for 225,006  shares valued at $0.36 per share, issued to bank line of credit guarantors,  August 5, 2003                                          |       | —                |       | —      |       | 81,003          |       | —                 |       | 81,003                    |       |
| Warrant for 21,429  shares valued at $0.36 per share, issued to director as a bank line of credit  guarantor, August 5, 2003                               |       | —                |       | —      |       | 7,714           |       | —                 |       | 7,714                     |       |
| Warrants for 64,287  shares valued at $0.34 per share, issued to bank line of credit guarantors,  September 11, 2003                                       |       | —                |       | —      |       | 21,858          |       | —                 |       | 21,858                    |       |
| Warrant for 117,858  shares valued at $0.35 per share, issued to bank line of credit guarantor,  December 22, 2003                                         |       | —                |       | —      |       | 41,250          |       | —                 |       | 41,250                    |       |
| Options to purchase  900,000 shares issued to officers and directors, valued at $0.46 per share,  granted March 19, 2002; portion vested in 2003           |       | —                |       | —      |       | 133,400         |       | —                 |       | 133,400                   |       |
| Options to purchase 60,000 shares issued to consultants for services  rendered, valued at $0.46 per share, granted March 19, 2002; portion vested  in 2003 |       | —                |       | —      |       | 6,900           |       | —                 |       | 6,900                     |       |
|                                                                                                                                                            |            |                       |            |             |            |                 |            |                        |            |                           |            |  |  |  |  |

 

F-5

----

**ProUroCare Medical Inc.**(A Development StageCompany)Consolidated Statements of Shareholders’ Equity (Deficit)
| ** **                                                                                                                                                                                                                                                                              | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**            | ** ** | ** **                | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                                                                                                                                                              | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **accumulated**        | ** ** | ** **                | ** ** |
| ** **                                                                                                                                                                                                                                                                              | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | **during the**    | ** ** | **Total**                 | ** ** |
| ** **                                                                                                                                                                                                                                                                              | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **development** | ** ** | **shareholders’** | ** ** |
| ** **                                                                                                                                                                                                                                                                              | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **capital**     | ** ** | **stage**              | ** ** | **equity (deficit)** | ** ** |
| Warrant for 30,000  shares valued at $0.46 per share, issued to a director on April 19, 2002;  portion vested in 2003                                                                                                                                                                   |       | —                |       | —      |       | 6,900           |       | —                 |       | 6,900                     |       |
|                                                                                                                                                                                                                                                                                    |       |                  |       |        |       |            |       |                   |       |                      |       |
| Net loss for the year  ended December 31, 2003                                                                                                                                                                                                                                          |       | —                |       | —      |       | —          |       | (1,632,457             | )          | (1,632,457                | )          |
|                                                                                                                                                                                                                                                                                    |       |                  |       |        |       |            |       |                   |       |                      |       |
| **Balance, December 31, 2003**                                                                                                                                                                                                                                                          | ** ** | **10,503,003**        | ** ** | **105**     | ** ** | **3,866,655**   | ** ** | **(5,857,993**         | **)**      | **(1,991,233**            | **)**      |
|                                                                                                                                                                                                                                                                                    |       |                  |       |        |       |            |       |                   |       |                      |       |
| Options to purchase  30,000 shares issued to a consultant valued at $0.67 per share, granted  February 1, 2004, portion vested in 2004                                                                                                                                                  |       | —                |       | —      |       | 10,100          |       | —                 |       | 10,100                    |       |
| Options to purchase  450,000 shares issued to officer valued at $0.67 per share, granted February  1, 2004; portion vested in 2004                                                                                                                                                      |       | —                |       | —      |       | 84,173          |       | —                 |       | 84,173                    |       |
| Repurchase of 900,000  shares pursuant to the exercise of dissenters’ rights at time of merger,  April 5, 2004 in connection with $750,000 note payable                                                                                                                            |       | (900,000              | )          | (9          | )          | (749,991        | )          | —                 |       | (750,000                  | )          |
| Issuance of shares to  shareholders of Global Internet Communications, Inc. pursuant to merger April  5, 2004                                                                                                                                                                           |       | 2,097,000             |       | 21          |       | (21             | )          | —                 |       | —                    |       |
| Issuance of common stock  for cash at $2.00 per share on April 5, 2004, net of costs of $125,259                                                                                                                                                                                        |       | 1,980,000             |       | 20          |       | 3,834,721       |       | —                 |       | 3,834,741                 |       |
| Cost associated with  Global Internet Communications, Inc. reverse merger effective April 5, 2004                                                                                                                                                                                       |       | —                |       | —      |       | (162,556        | )          | —                 |       | (162,556                  | )          |
| Effect of anti-dilution  and price-protection provisions of warrants issued to loan guarantors in  2003, triggered by April 5, 2004 closing of private placement; shares subject  to warrants increased by 375,012; exercise price reduced from $2.00 to $1.67  per share (see note 10) |       |                  |       |        |       |            |       |                   |       |                      |       |
|                                                                                                                                                                                                                                                                                    |       | —                |       | —      |       | 320,974         |       | —                 |       | 320,974                   |       |
| Issuance of common stock  for cash at $2.00 per share on April 27, 2004, net of costs of $1,582                                                                                                                                                                                         |       | 25,000                |       | —      |       | 48,418          |       | —                 |       | 48,418                    |       |
| Issuance of common stock  valued at $2.00 per share for accrued                                                                                                                                                                                                                         |       | —                |       | 77,225      |       | —          |       | 77,225                 |       |                      |       |
| expenses in lieu of  cash, May 21, 2004                                                                                                                                                                                                                                                 |       | 38,613                |       |        |       |            |       |                   |       |                      |       |
| Issuance of common stock  for cash at $2.00 per share on June 1, 2004, net of costs of $3,796                                                                                                                                                                                           |       | 60,000                |       | 1           |       | 116,203         |       | —                 |       | 116,204                   |       |
| Issuance of common stock  for cash at $2.00 per share on July 13, 2004, net of costs of $6,326                                                                                                                                                                                          |       | 100,000               |       | 1           |       | 193,673         |       | —                 |       | 193,674                   |       |
| Warrants for 100,000  shares issued for services rendered valued at $1.15 per share on July 19,  2004                                                                                                                                                                                   |       | —                |       | —      |       | 114,914         |       | —                 |       | 114,914                   |       |
| Options to purchase 200,000  shares issued to officer valued at $1.50 per share, granted July 21, 2004;  portion vested in 2004                                                                                                                                                         |       | —                |       | —      |       | 41,670          |       | —                 |       | 41,670                    |       |
| Issuance of common stock  for cash at $2.00 per share                                                                                                                                                                                                                                   |       |                  |       |        |       |            |       |                   |       |                      |       |
| on July 30, 2004, net of  costs of $2,530                                                                                                                                                                                                                                               |       | 40,000                |       | —      |       | 77,470          |       | —                 |       | 77,470                    |       |
| Issuance of common stock  valued at $2.00 per share for accrued interest in lieu of cash, October 12,  2004                                                                                                                                                                             |       | 44,441                |       | 1           |       | 88,881          |       | —                 |       | 88,882                    |       |
| Warrants for 200,000  shares issued for services rendered valued at $0.83 per share on December 2,  2004                                                                                                                                                                                |       | —                |       | —      |       | 166,172         |       | —                 |       | 166,172                   |       |
| Options to purchase  900,000 shares issued to officers and directors, valued at $0.46 per share,  granted March 19, 2002; portion vested in 2004                                                                                                                                        |       | —                |       | —      |       | 82,452          |       | —                 |       | 82,452                    |       |
| Warrant for 30,000  shares valued at $0.46 per share, issued to a director on April 19, 2002;  portion vested in 2004                                                                                                                                                                   |       | —                |       | —      |       | 1,150           |       | —                 |       | 1,150                     |       |
| Net loss for the year  ended December 31, 2004                                                                                                                                                                                                                                          |       | —                |       | —      |       | —          |       | (2,318,896             | )          | (2,318,896                | )          |
| **Balance, December 31, 2004**                                                                                                                                                                                                                                                          | ** ** | **13,988,057**        | ** ** | **140**     | ** ** | **8,212,283**   | ** ** | **(8,176,889**         | **)**      | **35,534**                | ** ** |
|                                                                                                                                                                                                                                                                                    |       |                  |       |        |       |            |       |                   |       |                      |       |
| Options to purchase  900,000 shares issued to officers and directors, valued at $0.46 per share,  granted March 19, 2002; portion vested in 2005                                                                                                                                        |       | —                |       | —      |       | 5,734           |       | —                 |       | 5,734                     |       |
| Options to purchase  450,000 shares issued to officer valued at $0.67 per share, granted February  1, 2004; portion vested in 2005                                                                                                                                                      |       | —                |       | —      |       | 111,108         |       | —                 |       | 111,108                   |       |
| Options to purchase 200,000 shares issued to officer valued at $1.50  per share, granted July 21, 2004; portion vested in 2005                                                                                                                                                          |       | —                |       | —      |       | 100,008         |       | —                 |       | 100,008                   |       |

 

F-6

----

**ProUroCare Medical Inc.**

(A Development StageCompany)

ConsolidatedStatements of Shareholders’ Equity (Deficit)

 
| ** **                                                                                                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**            | ** ** | ** **                | ** **      |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|---------------------------|-----------------|
| ** **                                                                                                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **accumulated**        | ** ** | ** **                | ** **      |
| ** **                                                                                                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | **during the**    | ** ** | **Total**                 | ** **      |
| ** **                                                                                                                                       | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **development** | ** ** | **shareholders’** | ** ** |
| ** **                                                                                                                                       | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **capital**     | ** ** | **stage**              | ** ** | **equity (deficit)** | ** **      |
| Options to purchase  150,000 shares issued to officer valued at $0.67 per share, granted January  3, 2005; portion vested in 2005                |       | —                |       | —      |       | 74,256          |       | —                 |       | 74,256                    |            |
| Options to purchase  150,000 shares issued to officer valued at $0.67 per share, granted September  6, 2005; portion vested in 2005              |       | —                |       | —      |       | 6,625           |       | —                 |       | 6,625                     |            |
| Issuance of common stock  for services rendered at $1.02 per share on May 13, 2005                                                               |       | 50,000                |       | 1           |       | 50,999          |       | —                 |       | 51,000                    |            |
| Issuance of common stock  for cash at $0.76 per share on June 15, 2005                                                                           |       | 65,790                |       | 1           |       | 50,000          |       | —                 |       | 50,001                    |            |
| Issuance of common stock  for deferred offering costs at $0.71 per share on September 1, 2005                                                    |       | 25,000                |       | —      |       | 17,750          |       | —                 |       | 17,750                    |            |
| Issuance of common stock  for in lieu of cash for accrued expenses at $0.89 per share on December 31,  2005                                      |       | 45,413                |       | —      |       | 40,418          |       | —                 |       | 40,418                    |            |
| Warrants for 25,000  shares valued at $0.63 per share, issued to bank loan guarantor, September  14, 2005                                        |       | —                |       | —      |       | 15,750          |       | —                 |       | 15,750                    |            |
| Warrants for 25,000  shares valued at $0.53 per share, issued in connection with notes payable on  September 21, 2005                            |       | —                |       | —      |       | 13,250          |       | —                 |       | 13,250                    |            |
| Warrants for 200,000  shares valued at $0.48 per share, issued to bank loan guarantors, October 19,  2005                                        |       | —                |       | —      |       | 106,000         |       | —                 |       | 106,000                   |            |
| Net loss for the year  ended December 31, 2005                                                                                                   |       | —                |       | —      |       | —          |       | (2,028,056             | )          | (2,028,056                | )               |
| **Balance, December 31, 2005**                                                                                                                   | ** ** | **14,174,260**        | ** ** | **$**       | **142**    | ** **      | **$**      | **8,804,181**          | ** ** | **$**                     | **(10,204,945** | **)** | **$** | **(1,400,622** | **)** |
| Options to purchase  450,000 shares issued to officer valued at $0.67 per share, granted February  1, 2004; portion vested in 2006               |       | —                |       | —      |       | 101,008         |       | —                 |       | 101,008                   |            |
| Options to purchase  200,000 shares issued to officer valued at $1.50 per share, granted July 21,  2004; portion vested in 2006                  |       | —                |       | —      |       | 100,008         |       | —                 |       | 100,008                   |            |
| Options to purchase  150,000 shares issued to officer valued at $0.67 per share, granted January  3, 2005; portion vested in 2006                |       | —                |       | —      |       | 81,006          |       | —                 |       | 81,006                    |            |
| Options to purchase  150,000 shares issued to officer valued at $0.67 per share, granted September  6, 2005; portion vested in 2006              |       | —                |       | —      |       | 8,834           |       | —                 |       | 8,834                     |            |
| Options to purchase  175,000 shares issued to officers and an employee valued at $0.56 per share,  granted March 1, 2006; portion vested in 2006 |       | —                |       | —      |       | 48,215          |       | —                 |       | 48,215                    |            |
| Options to purchase  30,000 shares issued to a director valued at $0.59 per share, granted May 30,  2006; portion vested in 2006                 |       | —                |       | —      |       | 5,163           |       | —                 |       | 5,163                     |            |
| Original issue discount  on convertible debentures issued on February 16, 2006                                                                   |       | —                |       | —      |       | 400,000         |       | —                 |       | 400,000                   |            |
| Warrants for 50,000  shares valued at $0.46 per share, issued in connection with notes payable on  January 25, 2006                              |       | —                |       | —      |       | 23,000          |       | —                 |       | 23,000                    |            |
| Issuance of common stock  for deferred offering costs at $0.91 per share on February 22, 2006                                                    |       | 25,000                |       | —      |       | 22,750          |       | —                 |       | 22,750                    |            |
| Original issue discount  on convertible debentures issued on February 29, 2006                                                                   |       | —                |       | —      |       | 333,334         |       | —                 |       | 333,334                   |            |
| Issuance of common stock  for services rendered at                                                                                               |       |                  |       |        |       |            |       |                   |       |                      |            |
| $0.64 per share on April  21, 2006                                                                                                               |       | 70,000                |       | 1           |       | 44,799          |       | —                 |       | 44,800                    |            |
| Warrants for 37,500  shares valued at $0.68 per share, issued in connection with notes payable on  June 1, 2006                                  |       | —                |       | —      |       | 25,500          |       | —                 |       | 25,500                    |            |
| Warrants for 3,750  shares valued at $0.54 per share, issued in connection with notes payable on  July 21, 2006                                  |       | —                |       | —      |       | 2,025           |       | —                 |       | 2,025                     |            |
| Warrants for 5,000  shares valued at $0.46 per share, issued in connection with notes payable on  August 30, 2006                                |       | —                |       | —      |       | 2,300           |       | —                 |       | 2,300                     |            |
| Issuance of common stock  for cash at $0.43 per share on September 7, 2006                                                                       |       | 116,280               |       | 1           |       | 49,999          |       | —                 |       | 50,000                    |            |
| Issuance of common stock  for services rendered at $0.63 per share on September 8, 2006                                                          |       | 14,146                |       | —      |       | 8,938           |       | —                 |       | 8,938                     |            |
| Warrants for 50,000  shares valued at $0.45 per share, issued in connection with notes payable on  November 30, 2006                             |       | —                |       | —      |       | 22,500          |       | —                 |       | 22,500                    |            |
| Warrants for 51,707  shares valued at $0.54 per share, accrued for issuance in connection witha note  payable on as of December 31, 2006         |       | —                |       | —      |       | 27,922          |       | —                 |       | 27,922                    |            |
| Net loss for the year  ended December 31, 2006                                                                                                   |       | —                |       | —      |       | —          |       | (2,959,853             | )          | (2,959,853                | )               |
| **Balance, December 31, 2006**                                                                                                                   | ** ** | **14,399,686**        | ** ** | **$**       | **144**    | ** **      | **$**      | **10,111,482**         | ** ** | **$**                     | **(13,164,798** | **)** | **$** | **(3,053,172** | **)** |

 

See accompanyingnotes to consolidated financial statements.

F-7

----

 

**ProUroCare Medical Inc.**

(A Development StageCompany)

Consolidated Statements of Cash Flows
| ** **                                                                                                                                                  | ** ** | ** **            | ** ** | ** **            | ** ** | **Cumulative**                | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                  | ** ** | ** **            | ** ** | ** **            | ** ** | **period from**          | ** ** |
| ** **                                                                                                                                                  | ** ** | ** **            | ** ** | ** **            | ** ** | **August 17,**           | ** ** |
| ** **                                                                                                                                                  | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** | **1999 (inception)**     | ** ** |
| ** **                                                                                                                                                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **to December 31,** | ** ** |
| ** **                                                                                                                                                  | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2006**                      | ** ** |
| Cash flows from  operating activities:                                                                                                                      |       |                  |       |                  |       |                          |       |
| Net loss                                                                                                                                                    |       | $                     | (2,959,853 | )                     | $          | (2,028,056                    | )          | $ | (13,164,798 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                                                                |       |                  |       |                  |       |                          |       |
| Depreciation and  amortization                                                                                                                              |       | 3,897                 |       | 4,951                 |       | 17,058                        |       |
| Gain on sale of  furniture and equipment                                                                                                                    |       | (2,200                | )          | —                |       | (2,200                        | )          |
| Stock-based  compensation                                                                                                                                   |       | 344,234               |       | 297,731               |       | 1,155,718                     |       |
| Issuance of  common stock for services rendered                                                                                                             |       | 53,738                |       | —                |       | 156,904                       |       |
| Warrants issued  for services                                                                                                                               |       | —                |       | —                |       | 468,636                       |       |
| Warrant issued  for debt guarantees                                                                                                                         |       | —                |       | —                |       | 320,974                       |       |
| Amortization of  note payable original issue discount                                                                                                       |       | 114,769               |       | 14,316                |       | 129,085                       |       |
| Amortization of  convertible debt original issue discount                                                                                                   |       | 209,983               |       | —                |       | 209,983                       |       |
| Amortization of  debt issuance and deferred offering costs                                                                                                  |       | 505,645               |       | 55,773                |       | 777,530                       |       |
| Write-off of  deferred offering cost                                                                                                                        |       | —                |       | 59,696                |       | 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                                                                                                                                                    |       | 547                   |       | 9,899                 |       | (189,554                      | )          |
| Prepaid expenses                                                                                                                                            |       | 34,336                |       | 37,978                |       | 52,978                        |       |
| Accounts payable                                                                                                                                            |       | 691                   |       | 320,482               |       | 776,975                       |       |
| Accrued expenses                                                                                                                                            |       | 34,354                |       | 495,342               |       | 780,946                       |       |
| Net cash used in  operating activities                                                                                                                      |       | (1,659,859            | )          | (731,888              | )          | (6,261,469                    | )          |
| 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                                                                                                                             |       | —                |       | 500,000               |       | 500,000                       |       |
| Payments of note  payable, bank                                                                                                                             |       | (400,000              | )          | (100,000              | )          | (500,000                      | )          |
| Proceeds of  notes payable                                                                                                                                  |       | 240,500               |       | 100,000               |       | 340,500                       |       |
| Payment of notes  payable                                                                                                                                   |       | (202,812              | )          | (90,770               | )          | (982,854                      | )          |
| Proceeds from  long-term debt                                                                                                                               |       | 2,200,000             |       | —                |       | 2,200,000                     |       |
| Payments for  debt issuance costs                                                                                                                           |       | (231,966              | )          | —                |       | (231,966                      | )          |
| Payment for  rescission of common stock                                                                                                                     |       | —                |       | —                |       | (100,000                      | )          |
| Net advances  from (payments to) Clinical Network, Inc.                                                                                                     |       | (8,943                | )          | —                |       | —                        |       |
| Proceeds from  loans from officers and directors                                                                                                            |       | 15,450                |       | —                |       | 15,450                        |       |
| Payments for  deferred offering expenses                                                                                                                    |       | —                |       | (28,827               | )          | (28,827                       | )          |
| Cost of reverse  merger                                                                                                                                     |       | —                |       | —                |       | (162,556                      | )          |
| Net proceeds  from issuance of common stock                                                                                                                 |       | 50,000                |       | 50,000                |       | 5,234,926                     |       |
| Net cash  provided by financing activities                                                                                                                  |       | 1,662,229             |       | 430,403               |       | 6,284,673                     |       |
| Net increase  (decrease) in cash                                                                                                                            |       | 2,370                 |       | (301,485              | )          | 2,407                         |       |
| Cash, beginning of the  period                                                                                                                              |       | 37                    |       | 301,522               |       | —                        |       |
| Cash, end of the period                                                                                                                                     |       | $                     | 2,407      |                  | $          | 37                            |       | $ | 2,407 |   |
| Supplemental cash flow  information:                                                                                                                        |       |                  |       |                  |       |                          |       |
| Cash paid for  interest                                                                                                                                     |       | $                     | 214,509    |                  | $          | 16,196                        |       | $ | 357,981 |   |
| Non-cash  investing and financing activities:                                                                                                               |       |                  |       |                  |       |                          |       |
| 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 |   |
| Warrants issued  pursuant to note payable                                                                                                                   |       | 103,247               |       | 108,500               |       | 211,747                       |       |
| Warrants issued  for debt issuance costs                                                                                                                    |       | —                |       | 26,500                |       | 242,612                       |       |
| Prepaid expenses  financed by note payable                                                                                                                  |       | 37,312                |       | 31,125                |       | 68,437                        |       |
| Proceeds from  sale of furniture and equipment applied to accounts payable                                                                                  |       | 2,200                 |       | —                |       | 2,200                         |       |
| Issuance of note  payable for redemption of common stock                                                                                                    |       | —                |       | —                |       | 650,000                       |       |
| Conversion of  accounts payable to note payable                                                                                                             |       | —                |       | —                |       | 241,613                       |       |
| Common stock  issued for deferred offering expenses                                                                                                         |       | 22,750                |       | 68,751                |       | 91,501                        |       |
| Common stock  issued in lieu of cash for accounts payable                                                                                                   |       | —                |       | —                |       | 101,587                       |       |
| Common stock  issued in lieu of cash for accrued expenses                                                                                                   |       | —                |       | 40,418                |       | 117,643                       |       |
| Deposits applied  to note payable and accrued interest                                                                                                      |       | —                |       | 142,696               |       | 142,696                       |       |
| Deposits applied  to accounts payable                                                                                                                       |       | —                |       | 45,782                |       | 45,782                        |       |
| Deposits applied  to accrued expenses                                                                                                                       |       | —                |       | 1,076                 |       | 1,076                         |       |
| Assumption of  liabilities in the Profile, LLC transaction                                                                                                  |       | —                |       | —                |       | 25,000                        |       |

 

See accompanyingnotes to consolidated financial statements.

F-8

----

**ProUroCare Medical Inc.**

**A Development Stage Company**

**Notesto Consolidated Financial Statements**

**December 31, 2006 and2005 and the period fromAugust 17, 1999 (inception) to December 31, 2006**

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

***(a)***                     Description of Business, DevelopmentStage Activities, and Basis of Presentation

ProUroCareMedical Inc. (“ProUroCare,” the “Company, “we” or “us”) is a development stagecompany that is developing diagnostic equipment and treatments for enlargedprostates and other male urological conditions. The Company’s developmental activities have included the acquisition ofseveral technology licenses, the development of a strategic business plan and asenior management team, product development, and fund raising activities.

TheCompany had no activities from its incorporation in August 1999 until July2001, when the Company issued 3,000,000 shares of common stock to ClinicalNetwork, Inc. (“Clinical Network”) and Clinical Network LLC (“CN LLC”), arelated party to Clinical Network. Moreover, in July 2001, the Company acquired a license to certainmicrowave technology by issuing 3,000,000 shares of common stock to CS MedicalTechnologies, LLC (“CS Medical”).  InJanuary 2002, the Company acquired a license to certain imaging technologythrough the issuance of 3,999,999 shares to Profile LLC (“Profile”).

Pursuantto a merger agreement effective April 5, 2004 among ProUroCare Inc., Global Internet Communications, Inc. (“Global”),and GIC Acquisition Corp., a wholly owned subsidiary of Global, GIC AcquisitionCorp. merged with and into ProUroCare Inc., which remained as the survivingcompany and a wholly owned operating subsidiary of Global (the “Merger”).  On April 26, 2004, Global changed its name toProUroCare Medical Inc. In connection with the Merger, Global completed aprivate placement of 2,205,000 shares of common stock (the “Private Placement”)pursuant to Rule 506 promulgated under the Securities Act of 1933, as amended.

Theaccompanying consolidated financial statements include the accounts of theCompany and its wholly owned subsidiary, ProUroCare Inc (“PUC”).  Significant inter-company accounts andtransactions have been eliminated in consolidation.

***(b)***                     Restatement of Share Data

Atthe effective time of the Merger, the legal existence of GIC Acquisition Corp.ceased, and all 3,501,001 shares of common stock of PUC that were outstandingimmediately prior to the Merger and held by PUC shareholders were cancelled,with one share of ProUroCare common stock issued to Global.  Simultaneously, the non-dissentingshareholders of PUC received an aggregate of 9,603,003 shares of common stockof Global in exchange for their aggregate of 3,201,001 shares of PUC

All share data has been restated to give effect to the Merger underwhich each PUC share was converted into three shares of Global.

F-9

----

***(c)***                      Accounting Estimates

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of expenses during the reportingperiods. The Company’s significant estimates include the determination of thefair value of its common stock and contingent liability expense. Actual resultscould differ from those estimates.

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

Basicand diluted loss per common share is computed by dividing net loss by theweighted-average number of common shares outstanding for the reportingperiod.  Dilutive common-equivalentshares have not been included in the computation of diluted net loss per sharebecause their inclusion would be antidilutive. Antidilutive common equivalent shares issuable based on future exerciseof stock options or warrants could potentially dilute basic loss per common sharein subsequent years.  All options andwarrants outstanding were antidilutive for the years ended December 31, 2006and 2005 and the period from August 17, 1999 (inception) to December 31, 2006due to the Company’s net losses.

***(e)***                      Comparative Figures

Certaincomparative figures have been reclassified to conform to the financialstatement presentation adopted in the current year.

***(f)***                        Cash

TheCompany maintains its cash in high quality financial institutions.  The balances, at times, may exceed federallyinsured limits.

***(g)***                     Equipment and Furniture

Equipmentand furniture are stated at cost and depreciated using the straight-line methodover the estimated useful lives ranging from three to seven years. Maintenance,repairs, and minor renewals are expensed as incurred.

***(h)***                     License Agreements

Thecosts associated with acquisition of licenses for technology are recognized atthe fair value of stock and cash used as consideration. Fair value of stock forsuch transactions is determined by an independent valuation firm usingforecasts of discounted cash flows provided by the Company. The annual discountrates used in these calculations reflect the high commercial risk of adevelopment stage business and are typically within the range of 40–60%.

Costsof acquiring technology which has no alternative future uses are expensedimmediately as research and development expense.

***(i)***                        Impairment of Long-lived Assets andLong-lived Assets to be Disposed Of

TheCompany reviews long-lived assets and certain identifiable intangibles forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto future undiscounted net cash flows expected to be generated by the asset. Ifsuch assets are considered to be impaired, the impairment to be recognized ismeasured by the amount by 

F-10

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whichthe carrying amount of the assets exceeds the fair value of the assets. Assets tobe disposed of are reported at the lower of the carrying amount or fair valueless costs to sell.

Duringthe years ended December 31, 2006 and 2005, and the period from August 17, 1999(inception) to December 31, 2006, the Company did not record any impairmentcharge.

***(j)***                        Stock-Based Compensation

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

Effective January 1, 2006, the Company adopted SFASNo. 123R, “Share-Based Payment” (SFAS 123R”), that focuses primarily onaccounting for transactions in which an entity obtains employee services inshare-based payment transactions.  Thisstatement replaced SFAS 123,” and supersedes Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123R requires all companies to expensethe fair value of employee stock options and similar awards, which has been theCompany’s policy to date.  Stock-basedemployee and non-employee compensation cost related to stock options was$344,234, $297,731, and $1,128,694 for the years ended December 31, 2006 and2005, and the period from August 17, 1999 (inception) to December 31, 2006,respectively.  The Company estimates theamount of future stock-based compensation expense related to currentlyoutstanding options to be approximately $185,000 and $97,000 for the yearsending December 31, 2007 and December 31, 2008, respectively.

TheBlack-Scholes option-pricing model was developed for use in estimating the fairvalue of traded options that have no vesting restrictions and are fullytransferable. In addition, option pricing models require the input of highlysubjective assumptions. Because the Company’s employee and consultant stockoptions have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, the existing models may not necessarily providea reliable single measure of the fair value of the Company’s employee stockoptions.

In determining thecompensation cost of the options granted during the years ended December 31,2006 and 2005, as specified by SFAS 123R and SFAS 123, the fair value of eachoption grant has been estimated on the date of grant using the Black Scholespricing model and the weighted average assumptions used in these calculationsare summarized as follows:

|                                   | ** ** | **For the years ended  December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                                  | ** ** | **2005** | ** ** |
| Risk-free Interest Rate           |       | 4.74                                                      | %          | 3.84 | % |
| Expected Life of  Options Granted |       | 2.9 years                                                 | (1)        | 5.8 years | (1) |
| Expected Volatility               |       | 132.7                                                     | %          | 104.1 | % |
| Expected Dividend Yield           |       | 0                                                         |       | 0 |   |

 

----

(1) Calculated as the averageof the vesting periods and the contractual term of the options.

The expected life of the options is determined usinga simplified method, computed as the average of the option vesting periods andthe contractual term of the option.  Forperformance based options that 

F-11

----

vest upon the occurrence of an event, the Companyuses an estimate of when the event will occur as the vesting period used in theBlack-Scholes calculation for each option grant.  Because of the limited trading history of theCompany’s stock, the expected volatility is based on a simple average of dailyprice data since the date of the Merger on April 5, 2004.  Based on the lack of history to calculate aforfeiture rate, the Company has not adjusted the calculated value of theoptions.  The risk-free rates for theexpected terms of the stock options and awards are based on the U.S. Treasuryyield curve in effect at the time of grants.

***(k)***                     Warrants

Inaccordance with Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting forEquity Instruments that are Issued to Other than Employees for Acquiring, or inConjunction with Selling, Goods and Services” and EITF No. 98-5, “Accountingfor Convertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios” (“EITF No. 98-5”), the Company has elected toutilize the fair-value method of accounting for warrants issued tonon-employees as consideration for goods or services received, includingwarrants issued to lenders and guarantors of Company debt (see Notes 8, 9, and10).  The weighted-average fair value ofthe warrants granted during the years ended December 31, 2006 and 2005 was$0.52 and $0.54, respectively, and such warrants are immediately vested andexercisable on the date of grant.

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

|                                      | ** ** | **For the years ended  December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                  | ** ** | **2005** | ** ** |
| Risk-free Interest Rate              |       | 4.66                                                      | %          | 4.25 | % |
| Expected Life of  Warrants Issued(1) |       | 5 years                                                   |       | 5 years |   |
| Expected Volatility                  |       | 135.33                                                    | %          | 129.8 | % |
| Expected Dividend Yield              |       | 0                                                         |       | 0 |   |

 

----

(1) The contractual term ofthe warrants.

Because of the limited trading history of theCompany’s stock, the expected volatility is based on a simple average of dailyprice data since the date of the Merger on April 5, 2004.  Based on the lack of history to calculate aforfeiture rate, the Company has not adjusted the calculated value of theoptions.  The risk-free rates for the expected terms ofthe stock warrants are based on the U.S. Treasury yield curve in effect at thetime of grants.

***(l)***                        Financial Instruments

The carrying amount for all financial instruments approximates fair value. The carrying amounts for cash, notes payable, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The carrying amounts for long-term debt, and other obligations approximates fair value as the interest rates and terms are substantially similar to rates and terms which could be obtained currently for similar instruments.

***(m)***                  Research and Development

Expendituresfor research and product development costs are expensed as incurred.

F-12

----

***(n)***                     Debt Issuance Costs

Debtissuance costs are amortized over the life of the loan as interest expenseusing the straight-line method, which approximates the interest method.

**Debt issuance costs are summarized as follows:**

|                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Debt issuance costs,  gross |       | $        | 1,025,931  |     | $          | 108,500 |   |
| Less amortization           |       | (452,918 | )          | (55,773  | )          |
|                        |       |     |       |     |       |
| Debt issuance costs, net    |       | $        | 573,013    |     | $          | 52,727 |   |

 

Amortization expense related to debt issuancecosts was $505,645, $55,773, and $777,530 for the years ended December 31, 2006and 2005 and the period from August 17, 1999 (inception) to December 31, 2006,respectively.

Future amortization of debtissuance costs for the years succeeding December 31, 2006 are as follows:

| Year  | ** ** | **Amortization** | ** ** |
|-------|------------|------------------|------------|
| 2007  |       | $                | 527,341    |   |
| 2008  |       | 45,672           |       |
| Total |       | $                | 573,013    |   |

 

***(o)***                     Deferred Offering Costs

Thecosts of the Company’s efforts to raise additional capital through secured debtfinancing in the year ended December 31, 2005 were deferred until the firstclosing on the financing in February, 2006, and are being amortized over thelife of the related promissory note as interest expense (see Note 11).  At that time, the deferred offering costswere reclassified as debt issuance costs, which are amortized over the life ofthe loan as interest expense using the straight-line method, which approximatesthe interest method.

***(p)***                     Income Taxes

TheCompany utilizes the liability method of accounting for income taxes. Underthis method, deferred tax assets and liabilities are recognized for theexpected future tax consequences attributable to temporary differences betweenthe financial statement and income tax reporting bases of assets andliabilities. Deferred tax assets are reduced by a valuation allowance to theextent that realization is not assured.

***(q)***                     Recently Issued Accounting Pronouncements

The FASB has published FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), to address the noncomparability in reporting tax assets and liabilities resulting from a lack of specific guidance in SFAS No. 109, “Accounting for Income Taxes,” on the uncertainty in income taxes recognized in an enterprise’s financial statements. Specifically, FIN 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods, 

F-13

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disclosure, and transition. FIN 48 will apply to fiscal years beginning after December 15, 2006, with earlier adoption permitted. The Company does not expect the adoption of FIN 48 to have a material effect on its consolidated financial statements.

FASB has issued SFAS No. 157,**“FairValue Measurements” (“SFAS 157”),to eliminate the diversity in practice that exists due to the differentdefinitions of fair value and the limited guidance for applying thosedefinitions in GAAP that are dispersed among the many accounting pronouncementsthat require fair value measurements. SFAS 157 retains the exchange pricenotion in earlier definitions of fair value, but clarifies that the exchangeprice is the price in an orderly transaction between market participants tosell an asset or liability in the principal or most advantageous market for theasset or liability. Moreover, SFAS 157 states that the transaction ishypothetical at the measurement date, considered from the perspective of themarket participant who holds the asset or liability. Consequently, fair valueis defined as the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date (an exit price), as opposed to the price that would bepaid to acquire the asset or received to assume the liability at themeasurement date (an entry price).

SFAS 157 also stipulates that, as a market-basedmeasurement, fair value measurement should be determined based on the assumptionsthat market participants would use in pricing the asset or liability, andestablishes a fair value hierarchy that distinguishes between (a) marketparticipant assumptions developed based on market data obtained from sourcesindependent of the reporting entity (observable inputs) and (b) the reportingentity’s own assumptions about market participant assumptions developed basedon the best information available in the circumstances (unobservable inputs).Finally, SFAS 157 expands disclosures about the use of fair value to measureassets and liabilities in interim and annual periods subsequent to initialrecognition. Entities are encouraged to combine the fair value informationdisclosed under SFAS 157 with the fair value information disclosed under otheraccounting pronouncements, including SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”*,* where practicable. The guidancein SFAS 157 applies for derivatives and other financial instruments measured atfair value under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” atinitial recognition and in all subsequent periods.

SFAS 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years, although earlier application is encouraged.Additionally, prospective application of the provisions of SFAS 157 is requiredas of the beginning of the fiscal year in which it is initially applied, exceptwhen certain circumstances require retrospective application.

The Company is currently evaluating theeffect of adopting SFAS 157 on our consolidated financial statements.

**(2)**                     Going Concern; Management’s Plan to FundWorking Capital Needs; Pending Debt Financing

TheCompany incurred net losses of $2,959,853, $2,028,056, and $13,164,798 andnegative cash flows from operating activities of $1,659,859, $731,888, and$6,261,469 for the years ended December 31, 2006 and 2005 and for thecumulative period from August 17, 1999 (inception) to December 31, 2006,respectively. From July 2001 through January 2002, the Company entered intoseveral license arrangements to develop the licensed technologies intodiagnostic equipment and treatments for enlarged prostates and other maleurological conditions. Since January 2002, the Company’s efforts to develop thelicensed technologies have been significantly delayed at times due to a lack ofsufficient capital resources.  TheCompany anticipates materially increasing its expenditures for technologydevelopment activities and building the Company’s infrastructure over the nearterm. Implementation of the Company’s business plan is dependent upon the 

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successfultransition of its product development program into a viable product with marketpenetration and profitability and obtaining sufficient capital to fund thesedevelopmental activities.

As of March 12, 2007, theCompany had cash on hand of approximately $63,000 and an equity subscriptionreceivable of $125,000.  These funds willnot be sufficient to allow the Company to complete development of its productsand gain FDA approval of them.  Inaddition, the Company has current liabilities exceeding $3.2 million.  Consequently, management has taken severalmeasures to conserve cash, including reducing executiveheadcount, substantially reducing development work on the ProUroScanTM system, reducing expenses, and deferringvendor payments and staff salaries.

The Company plans to actively raisean additional $10 million that will be used to support ongoing operations andthe retirement of existing debt and other obligations.  Of the total, approximately $6 million willbe used to bring the existing first generation system through clinicals trials,final FDA concurrence, and preparation for market launch.  These funds will be in addition to fundsavailable on a reimbursement basis to develop the ProUroScanTM system under Artann’s Small Business Innovation Research PhaseII Competitive Renewal grant from the National Cancer Institute.  The remaining $4 millionwill be used to retire existing liabilities and provide working capital.

The plan for raising this level of fundingconsists of three separate initiatives.

·      TheCompany has identified several prospective investors who are interested in theCompany and able to invest significant amounts of capital.  All of the Company’s funding to date has beenprovided or guaranteed by highly qualified, accredited individual investors.

·      TheCompany is in contact with potential medical device companies that areinterested in marketing products in the prostate cancer detection market.  Conversations are in the early stages with atleast two such companies.  In addition tofinancial support, a successful collaboration with this type of company wouldallow us to gain access to down stream marketing, manufacturing and salessupport.

·      TheCompany is in preliminary discussions with an investment banking company toinitiate a public equity offering.

If additional funds areraised by the issuance of debt or equity securities, such as through theissuance of stock, the issuance and exercise of warrants, or the issuance andconversion of convertible debentures, then existing shareholders willexperience dilution of their ownership interest.  If additional funds are raised by theissuance of debt or other equity instruments, we may become subject to certainoperational limitations, and such securities may have rights senior to those ofexisting holders of common stock.

**If adequate funds are not available through theseinitiatives on a timely basis in 2007, or not available on acceptable terms,the Company may be unable to fund expansion, to develop or enhance ourproducts.  If the Company is forced toslow its development programs, or put them on hold, it would delay regulatoryapprovals needed, and thus market entry for our products. Ultimately, if noadditional financing is obtained beyond what has been secured to date, we couldpotentially be forced to cease operations.**

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**(3)**                     Equipment and Furniture

Equipmentand furniture consisted of the following at December 31:

|                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Computer equipment             |       | $        | 11,563     |     | $          | 16,518 |   |
| Furniture                      |       | 4,279    |       | 4,279    |       |
|                           |       | 15,842   |       | 20,797   |       |
| Less accumulated  depreciation |       | (12,103  | )          | (13,161  | )          |
|                           |       | $        | 3,739      |     | $          | 7,636 |   |

Depreciation expense was$3,897, $4,951, and $17,058 for the years ended December 31, 2006 and 2005 andthe period from August 17, 1999 (inception) to December 31, 2006, respectively.

**(4)**                     Accrued Expenses

Accruedexpenses consisted of the following at December 31:

|                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Accrued compensation,  benefits, and related taxes |       | $        | 482,139    |     | $          | 347,194 |   |
| Contingent liability                               |       | —   |       | 178,924  |       |
| Directors’ fees                               |       | 45,832   |       | 40,416   |       |
| Audit fees                                         |       | 35,550   |       | 31,000   |       |
| Consulting fees                                    |       | 15,000   |       | 15,000   |       |
| Accrued interest                                   |       | 83,696   |       | 10,918   |       |
| Other                                              |       | 9        |       | 4,420    |       |
|                                               |       | $        | 662,226    |     | $          | 627,872 |   |

 

** (5)**                  License Agreements

***CS Medical***

InJuly 2001, the Company licensed certain microwave technology from CSMedical.  The worldwide, exclusivelicense is limited to the field of use of the treatment of enlarged prostates,prostatitis, prostate cancer, and other urological disorders, and terminateswith the expiration of the last to expire patents that are the subject of thelicense and requires defined royalty payments.

Asconsideration for the license, the Company exchanged 3,000,000 shares of itscommon stock valued at $475,000. This consideration was expensed as researchand development.

Underthe terms of the license agreement, royalty payments are to be made quarterlyin an amount equal to 0.5 percent of the amount that net sales of the Company’sproducts that incorporate the licensed technology exceed $500,000 in thatquarter.  In the absence of revenues, weare not obligated to make any royalty payments to CS Medical.

***Profile LLC***

InJanuary 2002, Profile granted the Company an exclusive license for prostateimaging systems in exchange for 3,230,769 shares of the Company’s common stockand the assumption of $25,000 of Profile net liabilities. The license requiresroyalties ranging from 1.05 percent to 3.05 percent of defined revenues. TheProfile license required the Company to meet certain financial covenants. Ifthese covenants were not met by 

F-16

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December31, 2002, either party had the right to terminate the license. In the event oftermination by Profile, all the Company shares issued would have been returnedto the Company. If the Company terminated the license, then only 50 percent ofthe shares issued would have been returned. On March 22, 2002, in exchange foreliminating these covenants, the Company issued Profile an additional 769,230shares of its common stock.  The field ofuse for the exclusive license is limited to the diagnosis and treatment ofenlarged prostate, prostatitis, prostate cancer, or other conditions of ordisorders of the prostate which may be diagnosed, imaged, or treated using anydiagnostic or imaging process.  Thelicense will terminate upon the later of the date of expiration of the last toexpire patent included in the licensed technology or the date that the Companypermanently ceases the sale of devices using the technology.

The3,999,999 shares of common stock were valued at $1,713,600.  The aggregated stock and cash considerationfor the Profile license was $1,738,600, which was expensed as research anddevelopment.

***RPI Agreement***

InJuly 2001, the Company entered into a license agreement with RensselaerPolytechnic Institute RPI to allow the Company to use Electrical ImpedanceTomography (“EIT”) technology developed and patented by RPI, on a worldwide,exclusive basis for the diagnosis and treatment of urological conditions. Thelicense period continues until the expiration of RPI patents, or the fifthanniversary of the agreement if the Company has failed to develop a marketableproduct or process by that point.

Considerationfor the license was $50,000, paid in two $25,000 installments, which wereexpensed as research and development in fiscal 2001.  Royalties are payable to RPI on the basis of3 percent of the net sales of the therapeutic product if the primary functionof the device is tomography or 1 percent of net sales if the primary functionof the final system is not tomography. Beginning in 2005, RPI is entitled to receive a minimum annual royaltypayment of $20,000 to maintain the license.

**On July 27, 2005, the Companygranted to Urologix Inc. a sublicense to the technology under the RPIagreement.  Under the terms of thesublicense, Urologix will have the right to exploit the licensed products underand on the same terms as the Company has under the RPI license, as amended,including, without limitation, restrictions as to field of use, exclusivity,term and other conditions. Simultaneously, ProUroCare and RPI entered into Amendment No. 1 to theRPI license whereby (i) ProUroCare received the right to sublicense thetechnology, (ii) a milestone requiring the initiation of an FDA approvalprocess on an EIT device was extended to July 13, 2008, (iii) certaintermination provisions were extended to July 13, 2009, and (iv) royalties dueto RPI under the Urologix sublicense were defined as 3 percent of the Company’snet sales of rectal sheaths and abdominal belts to Urologix, plus 1 percent ofUrologix’ sales of standalone EIT modules**

**(6)**                     Commitments and Contingencies

***(a)***                     Lease

From January through December 15, 2006, theCompany sublet office space serving as the Company’s executive offices, on amonth-to-month basis, from a company majority-owned and controlled by one ofthe Company’s directors and former CEO, Maurice Taylor. The Company believesthe monthly rent incurred was at or below market rate for such executive officespace in Minneapolis, Minnesota.

The Company’s executive offices are temporarily located within theoffices of another Company director, Mr. Nazarenko.  Our rental cost for these temporary officesis approximately $2,073 per month, which we believe is at or below market forsimilar office space in Minneapolis, Minnesota.

Rentexpense for the years ended December 31, 2006 and 2005, and the period fromAugust 17, 1999 (inception) to December 31, 2006 was $ 47,519, $47,354, and$211,858, respectively.

F-17

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***(b)***                     Employment Agreements

**On July 21, 2004, PUC entered into an employment agreementwith Richard Thon, its CFO.  The CFO’sagreement calls for an annual salary of $140,000, with the annual bonuspotential to be set each year by the Compensation Committee, and a term thatcontinues through July 21, 2007, eligibility to participate in an annual grantof options to purchase shares of common stock as determined by the Company’sBoard of Directors, and a non-competition clause applicable for the periodending one year from termination.  Theagreement also provides that, upon termination without cause (or a change ofemployment that the employee elects to treat as a termination of employment),the employee will receive as severance six months of base salary plus fourmonths of base salary for each year of prior service to the Company (up to amaximum of 24 months of base salary), plus the prorated average of any bonus orincentive compensation paid over the previous two years.  Additionally, all unvested stock options thenheld by the employee will immediately vest and be exercisable up to one-yearfrom the date of termination. In the event of a “change in control” resultingin a termination of employment, change of location, or decrease in the level ofresponsibility of the executive (any of which occurring within two years of the“change in control”), the Company shall compensate the executive as if he wereterminated without cause, as described above.**

Duringthe year ended December 31, 2006, the Company was also party to an employmentagreement with Maurice Taylor, its former CEO that terminated with hisretirement from that position effective November 1, 2006. The agreement with Mr. Taylor provided for an annual salary of $190,000and maximum bonus potential of 75 percent of his base pay. In recognition ofhis role in facilitating the orderly transition to our new CEO, Mr. Carlson,following his retirement, Mr. Taylor continued to accrue his former salary($15,833 per month) through December 31, 2006.

Alsoduring the year ended December 31, 2006, the Company was party to an employmentagreement with Michael Grossman, our former President and COO, that expired onJanuary 31, 2007.  The Company elected not to renew the employmentagreement.  Mr. Grossman’s agreementprovided for an annual salary of $175,000 with a maximum bonus potential of 50percent of his base pay.

At December 31, 2006,approximately $362,000 of our senior management’s salaries and bonuses had notbeen paid, and were recorded as an accrued expense.

***(c)******                     ******Legal proceedings***

TheCompany is involved in routine legal proceedings in the conduct of the ordinarycourse of its business.

**On April 2, 2004, a former officer and employee of PUCfiled a lawsuit against PUC and the Company relating to his separation ofemployment with PUC prior to the Merger. On March 3, 2006, the Company and PUC paid $177,000 plus $1,924 ofpayroll taxes in complete settlement of all claims and a dismissal of theformer employee’s claim.  The entireamount paid in the settlement was recorded as a reserve as of December 31,2005.**

***(d)***                     Artann Warrants

Underthe terms of our Research and Development Agreement with Artann Laboratories,Inc. (“Artann”) (see Note 14), Artann will receive additional compensation inthe form of five-year warrants to purchase up to 500,000 shares of Companycommon stock, issuable upon certain milestone events.  Warrants for the purchase of 100,000 sharesat a per-share price of $2.00 were issued upon the execution of theagreement.  Warrants for the purchase of200,000 shares at a per share price of $2.00 per share were issued in December2004 following the shipment of the ProUroScanTM systems under the Development Agreement.  The final 200,000 warrants were to be issued,contingent on the delivery 

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ofa system ready for clinical trials, in two equal 100,000-share installments onthe one-year and two-year anniversaries of the Research and DevelopmentAgreement.  To date, the Company has notissued these warrants but expects to do so contingent on the parties entering anew research and development agreement that will replace the original Researchand Development Agreement.

**(7)**                     Income Taxes

TheCompany has generated net operating loss carryforwards of approximately $3.0 millionwhich, 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 “ownership change,”as defined by the Internal Revenue Code, Section 382.  The Company 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, additional shares and warrants likely to be issuedpursuant to the Company’s current financing efforts (see Note 2) may triggersuch a change in ownership.  Based on theCompany’s estimates, the limitation would apply to approximately $1.2 millionof the $3.0 million net operating loss carryforwards.

The Company has recorded a full valuation allowance against itsdeferred tax assets and deferred tax liability due to the uncertainty ofrealizing the related benefits and costs as follows:

|                                                          | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets                                      |       |       |       |       |       |
| Net operating  loss carryforwards                        |       | $          | 1,153,000  |       | $          | 776,000 |   |
| Capitalized  start up costs                              |       | 2,100,000  |       | 1,667,000  |       |
| Expenses paid  with options and warrants                 |       | 598,000    |       | 531,000    |       |
| Capitalized  licenses                                    |       | 461,000    |       | 507,000    |       |
| Other                                                    |       | 164,000    |       | 69,000     |       |
| Deferred tax liability                                   |       |       |       |       |       |
| Beneficial  conversion feature of convertible debentures |       | (201,000   | )          | 0          |       |
| Less: valuation  allowance                               |       | (4,275,000 | )          | (3,550,000 | )          |
| Net deferred tax assets                                  |       | $          | 0          |       | $          | 0 |   |

 

The change in the valuationallowance was $725,000, $665,000, and $4,275,000 for the years ended December31, 2006 and 2005 and the period from August 17, 1999 (inception) to December31, 2006, respectively.  In September2005, the FASB approved EITF Issue 05-8. “Income Tax Consequences of IssuingConvertible Debt with a Beneficial Conversion Feature” (EITF 05-8).  EITF 05-8 provides (i) that the recognitionof a beneficial conversion feature creates a difference between book basis andtax basis of a convertible debt instrument (ii) that basis difference is a temporarydifference for which a deferred tax liability should be recorded and (iii) theeffect of recognizing the deferred tax liability should be charged to equity inaccordance with SFAS No. 109.  EITF 05-5was effective for financial statements for periods beginning after December 15,2005.  The Company applied EITF 05-8 tothe 2006 issuance of convertible debt and the remaining deferred tax liabilityat December 31, 2006 was $201,000. Pursuant to EITF 05-8 Issue Summary No. 1 dated August 29, 2005 paragraph15, the Company offset the deferred tax liability against the deferred taxvaluation allowance at December 31, 2006.

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Reconciliation between the federal statutory rate and the effective taxrates for the years ended December 31, 2006 and 2005 and the period from August17, 1999 (inception) to December 31, 2006 is as follows:

|                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **Period from  August 17,  1999   (inception) to  December 31,  2006** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|-------------------------------------------------------------------------------------------------|------------|
| Federal statutory tax  rate          |       | (34.0    | )%         | (34.0    | )%         | (34.0                                                                                           | )%         |
| State taxes, net of  federal benefit |       | (4.5     | )          | (4.5     | )          | (4.5                                                                                            | )          |
| Employee incentive  stock options    |       | 4.1      |       | 5.2      |       | 2.4                                                                                             |       |
| Capitalized license  fees            |       | —   |       | —   |       | 1.4                                                                                             |       |
| Change in valuation  allowance       |       | 34.4     |       | 33.3     |       | 34.7                                                                                            |       |
| Effective tax rate                   |       | 0.0      | %          | 0.0      | %          | 0.0                                                                                             | %          |

 

**(8)       Notes Payable – Bank**

On September 14, 2005, PUC borrowed $100,000from a financial institution and issued a secured promissory note to suchinstitution.  The promissory note wascollateralized by the assets of the business under an existing commercialsecurity agreement with the financial institution and a commercial guarantyfrom an individual investor.  Thepromissory note bore interest at an annual rate of 8.0 percent and was tomature on March 14, 2006.  Interestexpense recorded during the years ended December 31, 2006 and 2005 and theperiod from August 17, 1999 (inception) to December 31, 2006 related to thisnote was $1,079, $3,933 and $5,012 respectively.  In connection with the commercial guaranty,the Company issued two five-year warrants to the investor to acquire a total of50,000 shares of the Company’s common stock at $0.50 per share (see Note10(e)).

On October 20, 2005, PUC borrowed $300,000from a financial institution.  The loanwas evidenced by a promissory note and collateralized by two $150,000commercial guaranties provided by two accredited investors and by the assets ofthe business under an existing commercial security agreement.  The promissory note bore interest at anannual rate of 8.75 percent and was to mature on March 14, 2006.  Interest expense recorded during the yearsended December 31, 2006 and 2005 and the period from August 17, 1999(inception) to December 31, 2006 related to this note was $3,540, $10,407 and$13,947 respectively.  In connection withthe commercial guaranties, on October 19, 2005, the Company issued five-yearwarrants to the two guarantors to acquire up to 150,000 shares of the Company’scommon stock at $0.50 per share (see Note 10(e)).

**Both of these notes (plus accrued interest thereon) wererepaid on February 16, 2006 from the net proceeds of the first closing underthe Company’s senior debt financing (see Note 11).**

** (9)**                  Notes Payable

On April 19, 2005, the Company borrowed$31,125 from a commercial lender pursuant to an insurance policy financingagreement. The financing agreement called for eight monthly installmentpayments of $4,098 beginning May 1, 2005, with an imputed annual interest rateof 14 percent.  The proceeds were paiddirectly to an insurance company as a prepayment on an insurance policy.  In December 2005, the financing agreement waspaid in full.  Interest expense duringthe year ended December 31, 2005 was $2,066.

**OnSeptember 21, 2005, PUC, borrowed $100,000 from an unrelated individual lender,and in connection therewith issued to the lender a promissory note.  The promissory note bore an annual interestrate of Prime**

F-20

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**less0.5 percent and was to mature on March 20, 2006.  In connection with the promissory note, theCompany issued two five-year warrants (immediately exercisable) to the lenderto acquire a total of 50,000 shares of the Company’s common stock at $0.50 pershare.  The gross proceeds of $100,000were allocated between the promissory note and the common stock warrants basedon the relative fair values of the securities at the time of issuance.**The warrants, valuedat $26,500 using the Black Scholes pricing model (see Note 1), were recorded asoriginal issue discount as defined in EITF No. 98-5 and were expensed on astraight-line basis over the term of the promissory note, which approximatesthe interest method.  For the years endedDecember 31, 2006 and 2005, and the period from August 17, 1999 (inception) toDecember 31, 2006 the Company expensed $12,184, $14,316 and $26,500 related tothe debt issuance cost of the note as interest expense, respectively.  This promissory note was repaid on February16, 2006 from the net proceeds of the Company’s senior debt financing (see Note11).

**OnJanuary 25, 2006, PUC borrowed, solely for short-term working capital needs, atotal of $48,000 in three separate transactions:**

**1.       $12,500 fromAlexander Nazarenko, a director of the Company; in consideration, the Companyexecuted and issued to Mr. Nazarenko a $12,500 unsecured demand promissorynote, which bore interest at an annual rate of prime plus one percent;**

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

**3.       $23,000 fromAdron Holdings, LLC (“Adron”), a Minnesota limited liability company, pursuantto a loan agreement between the Company, Adron, Maurice Taylor, a director andour former CEO, and David Koenig, a director of the Company (the “LoanAgreement”).  In consideration for such$23,000 loan, the Company issued to Adron a $23,000 unsecured promissory note(the “Adron Note”).  Mr. Taylor and Mr.Koenig each personally guaranteed one-half of the Company’s obligations underthe Adron Note and received no compensation for the guarantee.  The Adron Note was due on March 14, 2006, onwhich date the Company was obligated to pay an administrative fee of $4,000;such fee was reduced on a pro rata basis due to early repayment (see below).Under the terms of this loan agreement, the Company issued a five-year warrantto Adron to acquire 50,000 shares of Company common stock at $0.50 per share(see Note 10(e)).**

**Allof the above notes (plus accrued interest thereon) were repaid on February 16,2006 from the net proceeds of the first two closings under the Company’songoing senior debt financing (see Note 11).**

On April 12, 2006, the Company borrowed$37,313 from a commercial lender pursuant to an insurance policy financingagreement. The financing agreement called for eight monthly installment paymentsof $4,942 beginning May 1, 2006, with an imputed annual interest rate of 15.6percent.  The proceeds were paid directlyto an insurance company as a prepayment on an insurance policy.  In December 2006, the financing agreement waspaid in full.  Interest expense duringthe year ended December 31, 2006 was $2,221.

On June 1, 2006, PUCborrowed $75,000 from an investor, and in connection therewith issued to suchinvestor a promissory note to mature on August 30, 2006.  On August 24, 2006, thepromissory note was amended to mature on the first of the Company’s closing ofan aggregate of $1 million of net proceeds under its financing efforts (see Note 2) or October 29,2006.  On January 22, 2007, the Company repaid $25,000 of thepromissory note.  On March 20, 2007, thepromissory note was amended for a second time to extend the due date of theremaining balance until the Company closes on an aggregate of $750,000 or moreof additional financing following the date of the amendment.  The promissory note and amendments theretobears an interest at the prime rate.  Interestexpense recorded during the year ended December 31, 2006 related to this notewas $3,678.  In connection with the promissory note, theCompany issued a five-year warrant (immediately exercisable) to the investor toacquire a total of 37,500 shares of the Company’s common stock at $0.50 pershare.  In connection with theamendments, following repayment of the 

F-21

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promissorynote, the Company will issue a five-year warrant to the investor to acquire 417shares of the Company’s common stock at $0.50 per share for each day thepromissory note is outstanding after August 30, 2006 (see Note 10(e)).  The warrants so issued will be exempt fromregistration under Section 4(2) of the Securities Act of 1934, as amended, asthey will be issued in a non-public offering to an accredited investor.

***OnJuly 21, 2006, the Company borrowed $7,500 from an investor and in connectiontherewith issued to such lender a promissory note to mature on October 19,2006.  The promissory note bore interestat 9.0 percent per annum.  Interestexpense recorded during the year ended December 31, 2006 related to this notewas $486.  The note was repaid on December6, 2006.  In connection with thepromissory note, the Company issued a five-year warrant (immediatelyexercisable) to the investor to acquire a total of 3,750 shares of theCompany’s common stock at $0.50 per share (see Note 10(e)).***

***On August30, 2006, the Company borrowed $10,000 from an individual, and in connectiontherewith issued to such lender a promissory note to mature on November 28,2006.  The promissory note bore interestat 9.0% per annum.  Interest expenserecorded during the year ended December 31, 2006 related to this note was$530.  The note was repaid on November30, 2006.  In connection with thepromissory note, the Company issued a five-year warrant (immediatelyexercisable) to the individual to acquire a total of 5,000 shares of theCompany’s common stock at $0.50 per share (see Note 10(e)).***

On November 30, 2006, theCompany borrowed $100,000 from Adron.  Inconnection therewith, the Company issued to Adron an unsecured promissory notethat bears interest of $5,000 per month and was set to mature on January 2,2007.  Under the terms of the promissorynote, the Company issued a five-year warrant to Adron’s partners to acquire50,000 shares of Company common stock at $0.50 per share, and additionalfive-year warrants to acquire 50,000 shares at $0.50 per share when the loanwas not repaid on January 2, 2007 (see Note 10(e)).  On March 20, 2007, theCompany amended the promissory note to extend its due date until the first of (1) the Companycloses on an aggregate of $750,000 or more of additional financing followingthe date of the amendment, or (2) April 30, 2007.  In connection with the amendment, theCompany issued to Adron’s partners five-year warrants dated February 1, 2007 toacquire a total 50,000 shares of Company common stock at $0.50 per share, andfollowing repayment of the promissory note, the Company will issue additionalfive-year warrant to Adron’s partners to acquire 1,667 shares of the Company’scommon stock for each day the promissory note is outstanding on and after March1, 2007, at $0.50 per share.  The warrantsso issued will be exempt from registration under Section 4(2) of the SecuritiesAct of 1934, as amended, as they will be issued in a non-public offering to anaccredited investor.

**Atvarious times during the year ended December 31, 2006, the Company receivedshort-term loans from certain officers and directors solely for short-termworking capital needs.  These loans weremade without any interest or other consideration accruing to the officers anddirectors, and had no defined terms.  Asof December 31, 2006, the Company had borrowed a total of $15,450 from fourofficers and directors.**

**Notes payable, net oforiginal issue discount are summarized as follows:**

|                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Notes payable, gross                          |       | $        | 190,450    |     | $          | 100,000 |   |
| Less: original issue  discount                |       | (16,112  | )          | (12,184  | )          |
| Notes payable, net of original issue discount |       | $        | 174,338    |     | $          | 87,816 |   |

 

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**(10)     Shareholders’ Equity**

***(a)****                    **Common Stock and Warrants issuedrelated to 2002 Private Placement*

·                  The Company issued 3,000,000 shares toClinical Network and CN LLC in July 2001. In connection with the Company’slicense agreements with CS Medical and Profile, the Company issued 3,000,000and 3,999,999 shares of common stock in 2001 and 2002, respectively.

·                  In connection with a private placement toaccredited investors, the Company issued 453,345 shares of common stock in2002.  In addition, the Company issuedwarrants to purchase 45,348 shares of common stock to three individuals relatedto services rendered in connection with the private placement.  These warrants expired unexercised. 

***(b)***                     CommonStock and Warrants issued related to Merger and 2004 Private Placement

MergerAgreement

Pursuant to an Agreementand Plan of Merger and Reorganization dated as of April 2, 2004 (the “MergerAgreement”), by and among PUC, Global Internet Communications Inc. (“Global”),and GIC Acquisition Corp., a Minnesota corporation and wholly owned subsidiaryof Global (“Acquisition Co.”), Acquisition Co. merged with and into the PUC,with PUC remaining as the surviving company and a wholly owned operatingsubsidiary of Global (such transaction is hereinafter referred to as the “Merger”).  The Merger was effective as of April 5, 2004,when articles of merger were filed with the Minnesota Secretary of State.

Prior to the Merger, onePUC shareholder, Profile, L.L.C. (“Profile”) had dissented from the Mergerproposal as the registered holder of securities beneficially owned by certainshareholders holding, in the aggregate, 308,465 (pre-merger) shares of PUC’scommon stock.  As described below,Profile and PUC entered into an agreement relative to these dissentingshareholders.  

Concurrent with theconsummation of the Merger, PUC delivered definitive documents related, amongother things, to the purchase of 300,000 (pre-conversion) shares of PUC commonstock from the dissenting shareholders for $750,000; and shareholdersbeneficially holding the remaining 8,465 (pre-conversion) shares of ProUroCarecommon stock withdrew their dissents from the Merger.  These redemption transactions had the resultof decreasing the aggregate number of shares of PUC common stock outstandingimmediately prior to the Merger, and thereby reduced the anticipated totalnumber of shares of common stock of Global issued and outstanding immediatelyafter the Merger.

At the effective time ofthe Merger, the legal existence of Acquisition Co. ceased, and all 3,501,001(pre-conversion) shares of common stock of PUC that were outstandingimmediately prior to the Merger and held by ProUroCare shareholders werecancelled, with one share of PUC common stock issued to Global.  Simultaneously, the former shareholders of PUCcommon stock received an aggregate of 9,603,003 shares of common stock ofGlobal, representing approximately 82.1 percent of Global’s common stockoutstanding immediately after the Merger. At the same time, Global purchased 300,000 of the 308,465 (pre-conversion)shares with respect to which dissenters’ rights were exercised, for anaggregate purchase price of $750,000.

Global was anon-operating public shell company at the time of the Merger.  Accordingly, the Merger transaction wasrecorded as a recapitalization rather than a business combination.  The assets and liabilities resulting from thereverse acquisition were the former PUC assets and liabilities (at historicalcost) plus a $13,500 accrued Global liability (assumed at historicalcost).  There were no other assets orliabilities on Global’s books at the time of the Merger.  

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The Company recordedcosts associated with the Merger totaling $162,556 during 2004.

Settlementof Dispute with Profile L.L.C.

On July 31, 2003, theCompany received a notice from Profile, the licensor under a license agreement(the “Profile License Agreement”) pursuant to which Profile licenses to theCompany certain essential intellectual property needed to develop, manufactureand sell its ProUroScanTMproduct, that it believedthe Company had breached material provisions of the license agreement.  The Company believed that it was incompliance with the Profile License Agreement. The closing of the Private Placement was contingent upon the Company’sresolving such dispute with Profile, and the closing of the Private Placementwas a condition to the closing of the Merger.

On March 23, 2004, theCompany and Profile entered into a Letter of Understanding pursuant to which,effective upon April 5, 2004, among other things, Profile withdrew its defaultletters and waived any existing defaults under the Profile License Agreement,the Company agreed to purchase 300,000 of the 308,465 (pre-conversion) shareswith respect to which dissenters’ rights were exercised, for an aggregate purchaseof $750,000.  Of that amount, $100,000was paid upon the initial closing of the Private Placement and the balance of$650,000 was paid pursuant to the delivery of a promissory note, which was paidin full in October 2004.  The remaining8,465 (pre-conversion) shares with respect to which dissenters’ rights wereoriginally exercised withdrew their dissents and participated in the Merger.

PrivatePlacement of the Global’s Common Stock.

In connection with theMerger Agreement, Global completed a private placement offering of 2,205,000shares of common stock pursuant to Rule 506 promulgated under the SecuritiesAct of 1933, as amended (the “Securities Act”). The initial closing occurred onApril 5, 2004, at which time Global issued 1,980,000 shares at $2.00 per share,aggregating to gross proceeds of $3.96 million. Subsequent to April 5, Global issued an additional 225,000 shares at$2.00 per share, aggregating to gross proceeds of $450,000.  Costs associated with the private placement(including the subsequent registration costs) were $139,493.

As part of the PrivatePlacement, a consultant was engaged by Global to provide financial-advisoryservices.  Under terms of thearrangement, the consultant was paid $27,000 and was issued a warrant for300,000 shares of common stock upon the first closing of the privateplacement.  The warrant has a three-yearterm and is exercisable at $2.00 per share.

***(c)***                      Privatesales of Common Stock

·                  On June 15, 2005 the Company sold 65,790 shares of itscommon stock to one accredited investor in a non-public offering under Section4(2) of the Securities Act.  Net proceedsreceived from this placement were $50,000.

·                  On September 7, 2006, the Company sold 58,140 sharesof its common stock to Mr. Scott Smith, a director of the Company, and 58,140shares of our common stock to an investor. The per share selling price of $0.43 was based on the last selling priceprior to this sale as reported on the Over-the-Counter Bulletin Board.  Net proceeds received from these investmentswere $50,000. No underwriter was used, and no commissions were paid on thetransaction. The shares were sold in transactions exempt from registrationunder Section 4(2) of the Securities Act as such transactions were non-publicofferings to a limited number of subscribers.

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·                  On February 12, 2007, the Company sold 17,073 sharesof its common stock to Mr. Scott Smith, a director of the Company.  The per share selling price of $0.41 wasbased on the last selling price prior to this sale as reported on the Over-the-CounterBulletin Board.  The subscription pricewas paid by the conversion of a $7,000 loan to the Company from Mr. Smith. Nounderwriter was used, and no commissions were paid on the transaction. Theshares were sold in transactions exempt from registration under Section 4(2) ofthe Securities Act as such transactions were non-public offerings to a limitednumber of subscribers (see Note 14).

·                  OnJanuary 18, 2007, the Company sold a total of 937,500 of the Company’sInvestment Units, and on February 2, 2007 sold and additional 312,500 Units,all at a price of $0.40 each.  EachInvestment Unit consists of one share of the Company’s common stock and a3-year warrant to acquire 0.5 shares of the Company’s common stock for $0.25($0.50 per whole share), exercisable at the discretion of the investor duringthe term of the warrant.  The issuancewas made in reliance on exemption from registration provided under Section 4(2)of the Securities Act, for issuance by an issuer not involving a publicoffering.

***(d)***                     CommonStock and Warrants issued for services and liabilities

·                  In March 2002, the Company granted awarrant to purchase 30,000 shares of common stock to a director, that wasexercisable at $1.13 per share. This warrant vested ratably over a 24-monthperiod ending April 2004 until the resignation of the director on February 9,2004, and expired on February 9, 2005. An aggregate of $12,075 of stock-based compensation related to thiswarrant was recognized in the period from August 17, 1999 (inception) to December31, 2006, respectively.

·                  In November 2002, the Company granted awarrant to purchase 1,500 shares of common stock to a consultant, for servicesrendered.  This warrant is exercisablethrough November 2007 at $2.33 per share. An aggregate of $490 of stock-based compensation related to this warrantwas recognized in the year ended December 31, 2002.

·                  In February 2003, the Company issued 5,445 commonshares to a consultant, in lieu of $12,705 cash for accounts payable.

·                  In June 2003, under the terms of anagreement with a supplier, the Company issued a warrant to purchase 92,148shares of common stock.  This warrant isexercisable through June 2007 at $0.33 per share.  The value of $187,060 related to this warrantwas recognized in the year ended December 31, 2003.

·                  In May 2004, a vendor was issued 38,613 shares of theCompany’s common stock as payment for product development work valued at$77,225.

·                  In October 2004, another vendor was issued 44,441shares of ProUroCare common stock in lieu of $88,882 cash for accounts payable.

·                  Under the terms of our Research and DevelopmentAgreement with Artann (see Note 14), Artann will receive additionalcompensation in the form of five-year warrants to purchase up to 500,000 sharesof Company common stock, issuable upon certain milestone events.  Warrants for the purchase of 100,000 sharesat a per-share price of $2.00 were issued upon the execution of the agreement.The value of these warrants computed using the Black-Scholes pricing model was$114,914, and was recorded as research expense. Warrants for the purchase of 200,000 shares at a per share price of$2.00 per share were issued in December 2004 following the shipment of theProUroScanTM systems under the DevelopmentAgreement.  The value of these warrantscomputed using the Black-Scholes pricing model was $166,172, and was alsorecorded as research and

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developmentexpense.  The final 200,000 warrants wereto be issued, contingent on the delivery of a system ready for clinical trials,in two equal 100,000-share installments on the one-year and two-yearanniversaries of the Research and Development Agreement. To date, we have notissued these warrants but expect to do so contingent on the parties entering anew research and development agreement that will replace the original researchand development agreement.

·                  On April 11, 2005, the Company entered into aPlacement Agency Agreement with a placement agent to raise working capital forthe Company.  Under the terms of theagreement, the placement agent was granted the exclusive right to identifyprospective purchasers of the Company’s debt or equity securities, on a bestefforts basis, with no stated minimum or maximum amount to be raised.  Pursuant to the agreement, the Company paid$5,000 and on May 13, 2005 issued 50,000 shares of the Company’s common stockto the placement agent.  The 50,000shares were valued at $51,000 using the stock price on the date of grant.Subsequently, the placement agent was unable to raise capital on terms thatwere acceptable to the Company and the agreement was terminated.  Costs incurred in this financing totaling$59,696, including the value of the common stock issued to the placement agent,were expensed in the year ended December 31, 2005.

·                  Effective September 1, 2005, the Company engaged Venture Law Resources,PLLC (“VLR”) to represent the Company as its General Counsel and to assist withthe introduction of strategic investors to the Company from time to time,including success based compensation arising from any services as a finder tothe Company. Under this agreement, the Company issued 25,000 shares of commonstock to VLR as a retainer in connection with VLR’s engagement.  The shares issued to VLR were valued at$17,750 using the fair market value of the Company’s stock price on the date ofgrant and along with a $2,500 retainer paid, was capitalized as deferredoffering expense during 2005.  OnFebruary 22, 2006, an additional 25,000 common shares, valued at $22,750 usingthe fair market value of the Company’s stock price on the date of grant, wereissued to VLR pursuant to their engagement. Upon the closing of the Company’s credit facility on February 16, 2006,the $43,000 aggregate value of the shares and initial retainer werereclassified as debt issuance cost and are being amortized over the term of thedebt guaranteed by investors introduced to the Company by VLR.

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

·                  On September 8, 2006, the Company issued 14,146 sharesof its common stock to a vendor, as payment for product development work valuedat $8,938.

***(e)***                      Warrantsissued for Loans and Loan Guarantees

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

·                  In March 2003, the Company issuedwarrants to purchase 192,861 shares of common stock to four individuals inexchange for their guaranteeing a bank line of credit.  At the same time, the Company issued awarrant to purchase 21,429 shares of common stock to a director in exchange forguaranteeing the bank line of credit. These warrants were exercisable through February 2008 at

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$2.33 per share. An aggregate of $64,287 of debt issuance cost related to these warrantswas recorded in the year ended December 31, 2003.

·                  In August 2003, the Company issuedwarrants to purchase 225,006 shares of common stock to five individuals inexchange for their guaranteeing a new bank line of credit.  At the same time, the Company issued awarrant to purchase 21,429 shares of common stock to a director in exchange forguaranteeing the bank line of credit. These warrants were exercisable through August 2008 at $2.33 per share.  An aggregate of $88,717 of debt issuance costrelated to these warrants was recorded in the year ended December 31, 2003.

·                  In September and December 2003, theCompany issued additional warrants to purchase 64,287 and 117,858 shares ofcommon stock, respectively, to three individuals in exchange for theirguaranteeing additional amounts under the existing bank line of credit. Thesewarrants were exercisable through September and December 2008, respectively, at$2.33 per share.  An aggregate of $63,108of debt issuance cost related to these warrants was recorded in the year endedDecember 31, 2003.

In total, warrants to purchase 642,870 shares ofcommon stock at $2.33 per share were issued in relation to the bank line ofcredit guarantees in 2003, and an aggregate of $216,112 of debt issuance costrelated to these warrants was recorded in the year ended December 31, 2003,which was amortized over the life of the bank line of credit ($72,594 and$143,518 during the years end December 31, 2004 and 2003, respectively). Uponthe closing of the Company’s Private Placement and Merger on April 5, 2004,certain exercise price protections and anti-dilution provisions of thesewarrants became effective.  Under theterms of these provisions, the holders of these warrants became eligible topurchase a total of 1,017,882 shares at $1.67 per share.  The additional warrants and revaluation ofthe existing warrants were valued at $320,974 using the Black Scholes pricingmodel, and were recorded as interest expense at the time of issuance.

·                  On September 14,2005, PUC borrowed $100,000 from Venture Bank collateralized by a commercialguaranty from an individual investor (see Note 8).  The loan was repaid on February 16,2006.  In connection with the commercialguaranty, the Company issued two five-year warrants (immediately exercisable)to the investor to acquire a total of 50,000 shares of the Company’s commonstock at $0.50 per share.  The warrants,valued at $29,000 using the Black-Scholes pricing model, were recorded as debtissuance costs and expensed over the term of the loan as interest expense.  The Company recorded $12,977, $16,023 and$29,000 of expense related to the value of the warrants during the years endedDecember 31, 2006 and 2005, and the period from August 17, 1999 (inception) toDecember 31, 2006, respectively.

**·**                  On September 21, 2005, PUC, borrowed $100,000 from anindividual lender, and in connection therewith issued to such lender apromissory note that was repaid on February 16, 2006 (see Note 9).  In connection with the promissory note, theCompany issued two five-year warrants (immediately exercisable) to the lenderto acquire a total of 50,000 shares of the Company’s common stock at $0.50 pershare.  The gross proceeds of $100,000were allocated between the promissory note and the common stock warrants basedon the relative fair values of the securities at the time of issuance. Thewarrants, valued at $26,500 using the Black-Scholes pricing model, wererecorded as original issue discount as defined in EITF No. 98-5 and expensed ona straight-line basis over the term of the promissory note as interestexpense.  The Company recorded $12,187,$14,313, and $26,500 of expense related to the value of the warrants during theyears ended December 31, 2006 and 2005, and the period from August 17, 1999(inception) to December 31, 2006, respectively.

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**·**                  OnOctober 20, 2005, PUC borrowed $300,000 from a financial institution,collateralized by commercial guaranties from two individual investors (see Note8).  The loan was repaid on February 16,2006.  In connection with the commercialguaranties, on October 19, 2005, the Company issued five-year warrants(immediately exercisable) to each of the two guarantors to acquire up to 75,000shares (150,000 shares in total) of the Company’s common stock at $0.50 pershare.  The warrants, valued at $79,500using the Black-Scholes pricing model, were recorded as debt issuance costs andexpensed over the term of the loan as interest expense.  The Company recorded $39,750, $39,750, and$79,500 of expense related to the value of the warrants during the years endedDecember 31, 2006 and 2005, and the period from August 17, 1999 (inception) toDecember 31, 2006, respectively.

**·**                  OnJanuary 25, 2006, PUC borrowed $23,000 from a lender (see Note 9).  Under the terms of the loan agreement, theCompany issued a five-year warrant (immediately exercisable) to the lender toacquire 50,000 shares of Company common stock at $0.50 per share.  The loan was repaid on February 16, 2006.  The gross proceeds of $23,000 were allocatedbetween the promissory note and the common stock warrant based on the relativefair values of the securities at the time of issuance.  The fair value of the warrant estimated atgrant date using the Black-Scholes pricing model exceeded the amount of theloan.  Accordingly, the warrant wasvalued at $23,000 and recorded as original issue discount as defined in EITFNo. 98-5.  The Company recorded $23,000of expense related to the value of the warrants during the year ended December31, 2006.

***·***                  On June 1, 2006, PUC borrowed $75,000from an investor, and in connection therewith issued to such investor apromissory note to mature on August 30, 2006 (see Note 9).  On August 24, 2006 the promissory note wasamended to mature on the first of the Company’s closing of an aggregate of $1million of net proceeds under its ongoing financing efforts (see Note 2) orOctober 29, 2006.  On January 22, 2007,the Company repaid $25,000 of the promissory note.  On March 20, 2007, the promissory note wasamended for a second time to extend the due date of the remaining balance untilthe Company closes on an aggregate of $750,000 or more of additional financingfollowing the date of the amendment. Under the terms of the original loan agreement, the Company issued afive-year warrant (immediately exercisable)to the investor to acquire 37,500 shares of Company commonstock at $0.50 per share.  The fair valueof the warrant at the grant date was estimated using the Black-Scholes pricingmodel to be $25,500 and was recorded as original issue discount as defined inEITF No. 98-5 and subsequently expensed as interest expense over the 90-dayterm of the loan.  In connection with theamendments to the promissory note, following repayment thereof, the Company wasto issue a five-year warrant (immediately exercisable) to the investor toacquire 417 shares of the Company’s common stock at $0.50 per share for eachday the promissory note is outstanding after August 30, 2006.  As of December 31, 2006 the Company hadaccrued for issuance 51,708 warrants related to this amendment.  The fair value of the warrant on theamendment date was estimated using the Black-Scholes pricing model to be $0.54per share, and is expensed as interest expense as they are earned.  The total interest expense recorded for theoriginal warrant and the related amendment warrant was $53,422 during the yearended December 31, 2006.

**·**                  OnJuly 21, 2006, the Company borrowed $7,500 from an investor, and in connectiontherewith issued to such lender a promissory note to mature on October 19, 2006(see Note 9).  Under the terms of theloan agreement, the Company issued a five-year warrant (immediatelyexercisable)**to the investor to acquire 3,750 sharesof Company common stock at $0.50 per share. The gross proceeds of $7,500 were allocated between the promissory noteand the common stock warrant based on the relative fair values of thesecurities at the time of issuance.  Thewarrant, valued at $2,025 using the Black-Scholes pricing model, was recordedas original issue discount as defined in EITF No. 98-5 and was expensed asinterest expense during the year ended December 31, 2006.  The promissory note was repaid in December,2006.

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***·***                  On August 30, 2006, the Company borrowed$10,000 from an individual, and in connection therewith issued to such lender apromissory note to mature on November 28, 2006 (see Note 9).  Under the terms of the loan agreement, theCompany issued a five-year warrant (immediately exercisable)to the investor to acquire 5,000 shares of Company commonstock at $0.50 per share. The gross proceeds of $10,000 were allocated betweenthe promissory note and the common stock warrant based on the relative fairvalues of the securities at the time of issuance.  The warrant, valued at $2,300 using theBlack-Scholes pricing model, was recorded as original issue discount as definedin EITF No. 98-5 and was expensed as interest expense during the year endedDecember 31, 2006.  The promissory notewas repaid in November, 2006.

·                  On November 30, 2006, ProUroCare borrowed $100,000from Adron, and in connection therewith issued to Adron a promissory note tomature on January 2, 2007 (see Note 9). Pursuant to the terms of the promissory note, the Company issuedfive-year warrants (immediately exercisable) to Adron’s partners to acquire 50,000shares of Company common stock at $0.50 per share.  In addition, pursuant to the terms of thepromissory note, the Company issued an additional five-year warrant(immediately exercisable) to Adron’s partners to acquire 50,000 shares ofCompany common stock at $0.50 per share, when the loan was not repaid onJanuary 2, 2007.  The first warrant,valued at $22,500 using the Black-Scholes pricing model, was recorded asoriginal issue discount as defined in EITF No. 98-5 and is being expensed asinterest expense over the term of the promissory note.  The Company recorded $21,383 of interestexpense related to the value of these warrants during the year ended December31, 2006.  The second warrant, alsovalued at $22,500, was expensed immediately in January 2007.  On March 20, 2007, the Company amended thepromissory note to extend its due date until the first of (1) the Companycloses on an aggregate of $750,000 or more of additional financing followingthe date of the amendment, or (2) April 30, 2007.  In connection with the amendment, the Companyissued to Adron a five-year warrant dated February 1, 2007 to acquire 50,000shares of Company common stock at $0.50 per share, and following repayment ofthe Adron Note, the Company will issue additional five-year warrant to Adron toacquire 1,667 shares of the Company’s common stock for each day the Adron Noteis outstanding on and after March 1, 2007, at $0.50 per share.  The warrants issued in connection to theamendment, valued at $0.36 per share, will be expensed as interest expense asthey are earned (see Note 14).

***(f)***                        Warrantssummary

Warrant activityis as follows for the years ended December 31:
|                           | ** ** | **Warrants** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|---------------------------|------------|--------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **2006**     | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Outstanding,  January 1   |       | 2,006,878    |       | 1,781,877                                 |       | $ | 1.58 |   | $ | 1.72 |   |
| Granted                   |       | 197,958      |       | 250,000                                   |       | 0.50 |   | 0.50 |   |
| Exercised                 |       | —       |       | —                                    |       | — |   | — |   |
| Expired                   |       | (45,348      | )          | (24,999                                   | )          | 2.33 |   | 1.13 |   |
| Outstanding, December  31 |       | 2,159,488    |       | 2,006,878                                 |       | $ | 1.46 |   | $ | 1.58 |   |

 

The fair value of stockwarrants is the estimated present value at grant date using the Black-Scholespricing model (see Note 1(k)).   Theweighted-average fair value of the warrants granted during the years endedDecember 31, 2006 and 2005 was $0.52 and $0.54, respectively. The expenserelated to warrants issued to lenders and debt guarantors was $103,247,$135,000, and $454,359 for the years ended December 31 2006 and 2005, and theperiod from August 17, 1999 (inception) to December 31, 2006,respectively.  Stock-based compensationcost related to warrants issued to the Company’s

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consultants and supplierswas $0, $0, and $468,636 for the years ended December 31, 2006 and 2005, andthe period from August 17, 1999 (inception) to December 31, 2006,respectively.  Stock-based compensationcost related to warrants issued to directors (in lieu of stock options) was $0,$0, and $12,075 for the years ended December 31, 2006 and 2005, and the periodfrom August 17, 1999 (inception) to December 31, 2006, respectively

***(g)***                     StockOptions

*StockOption Plans*

In April 2002, theCompany’s Board of Directors passed a resolution adopting the ProUroCareMedical Inc. 2002 Stock Plan (the “2002 Plan”), reserving 1,500,000 shares ofthe Company’s common stock for issuance. 

In July 2004, the Company’sBoard of Directors passed a resolution adopting the ProUroCare Medical Inc.2004 Stock Option Plan (the “2004 Plan”), which was approved by the Company’sshareholders in July 2005.  The Companyhas reserved 1,500,000 shares of common stock for issuance under the 2004 Plan.

The plans permit theCompany to grant incentive and nonqualified options, stock appreciation rights,stock awards, restricted stock awards, performance shares, and cash awards toCompany employees and independent contractors. The exercise price for all options granted under the plans shall bedetermined by the Board of Directors. The term of each stock option and periodof exercisability will also be set by the Board of Directors, but will notexceed a period of ten years and one day from grant date. The agreements alsoinclude provisions for anti-dilution of options.

*StockOption Grants*

**Each of the options granted below were valued using theBlack-Scholes pricing model (see Note 1(j)) and are being expensed over thevesting period as general and administrative expense.**

·                  InMarch 2002, the Company granted an aggregate of 900,000 employee stock optionsto officers and directors that were exercisable at $1.13 per share.  The officers’ options vested ratably over a36-month period through December 2004, while the directors’ options vestedratably over a 24-month period through April 2004.  In October 2003, an officer resigned from theCompany and 150,000 of his unvested options were forfeited and in October 2004his remaining 210,000 options expired. In February 2004, a director resigned from the Board of Directors, and3,750 of his unvested options were forfeited, and in October 2005 his remaining26,250 options expired.  An aggregate$340,435 of stock-based compensation related to these options was recognized inthe period from August 17, 1999 (inception) to December 31, 2006.

·                  InApril, 2002, the Company issued a nonqualified stock option to a consultant toacquire 30,000 shares of common stock at $1.13 per share. This option vestedover a 6-month period ended October 2002. At the same time, the Company alsoissued a nonqualified stock option to a consultant, to acquire 30,000 shares ofcommon stock at $1.13 per share. This option vested ratably over a two-yearperiod through April 2004.  An aggregateof $25,300 of stock-based compensation related to these options was recognizedin the period from August 17, 1999 (inception) to December 31, 2006.  In February 2005, the consultant’s engagementwith the Company ended and, under the terms of the option agreement, all of theoptions expired in February, 2006.

·                  In February, 2004, the Company issued 450,000 employeestock options to Michael Grossman, our President and COO.  These options were valued at $0.67 per share,vest ratably over a three year period, and are exercisable at $2.00 per sharethrough February 2014.  The Companyexpensed $101,008, 101,008, and $286,189 related to these options during theyears ended December 31,

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2006and 2005 and the period from August 17, 1999 (inception) to December 31, 2006, respectively.

·                  In February, 2004, the Company issued 30,000nonqualified stock options to a consultant in consideration of servicesrendered.  The options were valued at$0.67 per share, and vested as to 15,000 shares upon issuance and as to theremaining 15,000 shares on January 1, 2005. These options are exercisable at $2.00 per share through February2014.  The Company expensed $0, $10,100and $20,200 related to these options during the years ended December 31, 2006and 2005 and the period from August 17, 1999 (inception) to December 31, 2006,respectively.

·                  In July 2004, the Company issued 200,000 employeestock options to Richard Thon, our CFO, in connection with his employmentagreement.  These options were valued at$1.50 per share, vest ratably over a three-year period, and are exercisable at$2.50 per share through July 2014.  TheCompany expensed $100,008, $100,008, and $241,686 related to these optionsduring the years ended December 31, 2006 and 2005 and the period from August17, 1999 (inception) to December 31, 2006, respectively.

**·**                  In January 2005, the Company issued150,000 stock options to Richard Carlson, our CEO and at the time our VicePresident of Marketing and Sales.  Theoptions were valued at $1.62 per share, vest ratably over a three-year period,and are exercisable at $2.35 per share through January 2015.  The Company expensed $81,006, $74,256, and$155,262 related to these options during the years ended December 31, 2006 and2005 and the period from August 17, 1999 (inception) to December 31, 2006,respectively.

**·**                  In September 2005, the Companyissued 150,000 stock options to Alan Haggerty, our former Vice President ofEngineering.  The options were valued at$0.53 per share, vest ratably over a three-year period, and are exercisable at$0.60 per share through September 2015. The Company expensed $8,834, $6,626 and $15,460 related to these optionsduring the years ended December 31, 2006 and 2005 and the period from August17, 1999 (inception) to December 31, 2006, respectively.

**·**                  OnMarch 1, 2006, the Company issued to five of its employees stock options toacquire a total of up to 200,000 shares of common stock at $0.75 pershare.  The five-year options, which vestupon the Company securing FDA approval of its ProUroScanTM system, were valued at $0.56 per share and arebeing expensed over the vesting period (estimated by the Company as twenty-ninemonths) as general and administrative expense. The Company expensed $48,215 related to these options during the yearended December 31, 2006.

·                  On May 30, 2006, the Company issued 30,000nonqualified stock options to Scott Smith, a director, upon his appointment tothe Board of Directors.  The options werevalued at $0.59 per share, and vest ratably over a 24-month period through May2008.  These options are exercisable at$0.70 per share through May 2013.  TheCompany expensed $5,163 related to these options during the year ended December31, 2006.

·                  OnFebruary 1, 2007, the Company granted to Richard Carlson, our CEO a seven-yearoption to acquire up to 200,000 shares of the Company’s common stock at a priceof $0.50 per share.  The options werevalued at $0.34 per share and will be expensed over the vesting period asgeneral and administrative expense (see Note 14).

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***(h)***                     Stockoptions summary

Stock option activity was as follows for the yearsended December 31:
|                           | ** ** | **Options** | ** ** | **Weighted-Average Exercise  Price** | ** ** |
|---------------------------|------------|-------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **2006**    | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Outstanding,  January 1   |       | 1,550,000   |       | 1,276,250                                 |       | $ | 1.64 |   | $ | 1.67 |   |
| Granted                   |       | 230,000     |       | 300,000                                   |       | 0.74 |   | 1.48 |   |
| Exercised                 |       | —      |       | —                                    |       | — |   | — |   |
| Forfeited                 |       | (145,831    | )          | (26,250                                   | )          | 0.63 |   | 1.13 |   |
| Expired                   |       | (30,000     | )          | —                                    |       | 1.13 |   | — |   |
| Outstanding,  December 31 |       | 1,604,169   |       | 1,550,000                                 |       | $ | 1.62 |   | $ | 1.64 |   |
|                      |       |        |       |                                      |       |   |   |   |   |
| Exercisable, December  31 |       | 1,289,918   |       | 1,027,812                                 |       | $ | 1.68 |   | $ | 1.56 |   |

 

The followingtable summarizes information about stock options outstanding as of December 31,2006:
|                                         | ** ** | **Options Outstanding** | ** ** | **Options exercisable**           | ** ** |
|-----------------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| **Range of  Exercise prices** | ** ** | **Number of  Options**  | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  life** | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.60-0.75                              |       | 234,169                      |       | $                                      | 0.72       |   | 4.5 |   | 37,919 |   | $ | 0.62 |   |
| $1.13                                   |       | 540,000                      |       | $                                      | 1.13       |   | 5.3 |   | 540,000 |   | $ | 1.13 |   |
| $2.00-2.50                              |       | 830,000                      |       | $                                      | 2.18       |   | 7.4 |   | 711,999 |   | $ | 2.16 |   |
|                                    |       | 1,604,169                    |       | $                                      | 1.62       |   | 6.3 |   | 1,289,918 |   | $ | 1.68 |   |

 

The aggregate intrinsicvalue of the options outstanding and exercisable at December 31, 2006 was$0.  The average fair value of eachoption granted during the years ended December 31, 2006 and 2005, and theperiod from August 17, 1999 (inception) to December 31, 2006, as determinedusing the Black-Scholes pricing model (see Note 1(j)) was $0.56, $1.08, and$0.70, respectively.  The stock-basedemployee and non-employee compensation cost related to stock options was $344,234,$297,731, and $1,128,694 for the years ended December 31 2006 and 2005, and theperiod from August 17, 1999 (inception) to December 31, 2006,respectively.  Stock-based compensationcost related to warrants issued to directors (in lieu of stock options) was $0,$0, and $12,075 for the years ended December 31, 2006 and 2005, and the periodfrom August 17, 1999 (inception) to December 31, 2006, respectively

**(11)     Long term debt**

***Promissory Notes***

In February 2006, the Company completed two closings of a senior debtfinancing.  Pursuant to the two closings,on February 16, 2006, the Company issued a promissory note to Crown Bank in theamount of $1,200,000 at an interest rate of the prime rate plus one percent(9.25 percent at December 31, 2006). This promissory note matures on January 11, 2008.  On February 28, 2006, the Company issued asecond promissory note to Crown Bank in the amount of $1,000,000, also at aninterest rate of the prime rate plus one percent.  This promissory note matures on February 29,2008.  As of December 31, 2006, theCompany had drawn down all of the $2.2 million senior debt financing.  The average interest rate of the notes was9.1

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percent for the year ended December 31, 2006.

The promissory notes are secured by a pledge of all Company assets,including two technology licenses that were assigned to Crown Bank, andguaranteed by four accredited individual investors.  In consideration for their guarantees, theCompany issued 10 percent unsecured convertible subordinated debentures totaling$733,334 to the four guarantors (see below).

***Convertible debentures***

As consideration to the guarantors to provide their guarantees for theabove promissory notes, the Company issued $733,334 of unsecured convertible 10percent debentures.  All of the debenturesmature three years from the date of issue (coincident with the closing dates ofthe promissory notes as noted above) and are convertible into Company commonstock at a price of $0.50 per share.  Ifthe guarantees of the underlying bank indebtedness are not released by August31, 2007 (or subsequently October 31, 2007) the conversion price becomes $0.40per share (and subsequently $0.30 per share), respectively.  The cost of the debentures was recorded as debtissuance cost, and is being amortized as interest expense over the term of theunderlying bank note payable.  The valueof the beneficial conversion feature was computed as the difference between thefair market value of the shares at the transaction dates and the lowestpossible conversion price during the debenture term ($0.30 per share),multiplied by the number of conversion shares that would be issued at thatconversion price (2,444,444 shares).  Thevalue so computed was in excess of the face value of the convertible debenturesissued, and was therefore limited to the face value of the debentures issued($733,334).  The beneficial conversionfeature was recorded as an original issue discount as defined in EITF No. 98-5against the convertible debt liability and is being amortized as interestexpense over the term of the convertible debentures.  See Note 7 for the deferred income taxeffects of the beneficial conversion feature.

Future maturities of long-term promissory notes andconvertible debentures for the years succeeding December 31, 2006 are asfollows:
| Year                              | ** ** | **Paid in Cash** | ** ** | **Original Issue  Discount** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-----------------------------------|------------|-----------|------------|
| 2007                              |       | $                          | —     |                              | $          | (244,444  | )          | $ | (244,444 | ) |
| 2008                              |       | 2,200,000                  |       | (245,114                          | )          | 1,954,886 |       |
| 2009                              |       | 733,334                    |       | (33,793                           | )          | 699,541   |       |
| Total                             |       | $                          | 2,933,334  |                              | $          | (523,351  | )          | $ | 2,409,983 |   |
| Of which,                         |       |                       |       |                              |       |      |       |
| Long-term bank debt               |       | 2,200,000                  |       | —                            |       | 2,200,000 |       |
| Long-term  convertible debentures |       | 733,334                    |       | (523,351                          | )          | 209,983   |       |

 

**(12)**              RelatedParties

**On January 25, 2006, PUC borrowed, for short-term workingcapital needs, $12,500 from each of Alexander Nazarenko and David F. Koenig,Company directors. In consideration, the Company executed and issued to each ofMr. Nazarenko and Mr. Koenig a $12,500 unsecured demand promissory note bearinginterest at an annual rate of prime plus one percent.  These notes were satisfied on February 16,2006.**

At various times duringthe year ended December 31, 2006, the Company received short-term loans fromcertain officers and directors solely for short-term working capitalneeds.  These loans were made without anyinterest or other consideration accruing to the officers and directors, and hadno defined terms.  As of December 31,2006, the Company had borrowed a total of $15,450 from four officers anddirectors.

From January through December 15, 2006, the Company sublet office spaceserving as the Company’s executive offices, on a month-to-month basis, from acompany majority-owned and controlled by one of the

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Company’s directors, Mr. Taylor. The Company believes the monthly rentincurred was at or below market rate for such executive office space inMinneapolis, Minnesota.

The Company’s executive offices are temporarily located within theoffices of another Company director, Mr. Nazarenko.  Our rental cost for these temporary officesis approximately $2,073 per month, which we believe is at or below market forsimilar office space in Minneapolis, Minnesota.

On January 30, 2007, theCompany repaid a $4,100 loan from a director in cash.

On February 12, 2007, theCompany sold 17,073 shares of its common stock to Scott Smith, a director, thesubscription price being paid by the conversion of a $7,000 loan from Mr.Smith.  The per share selling price of$0.41 was based on the last selling price prior to this sale as reported on theOver-the-Counter Bulletin Board.

** (13)**        DevelopmentAgreements

***DevelopmentAgreement***

In July 2004, the Companyentered into a Development Agreement with Artann and Armen Sarvazyan underwhich Artann and Dr. Sarvazyan developed two working, pre-clinical ProUroScanTM systems.  Thesesystems were delivered to us in late November 2004.  We paid Artann $180,000 for this developmentwork, which was expensed as research and development cost during the year endedDecember 31, 2004.  The DevelopmentAgreement also provides that Artann will provide, at no charge, consulting andadvisory services in the development of these systems for use in clinicaltrials.

***Researchand Development Agreement***

In July 2004, the Companyentered into a Research and Development Agreement with Artann for the furtherdevelopment of the ProUroScanTM and otherto-be-determined technologies in the urologic field.  Under this agreement, Artann is to be aresearch and development partner to the Company, supporting the furtherdevelopment of the ProUroScanTM and otherto-be-determined technologies in the urologic field.  Any intellectual property and know-howresulting from the advancement of the ProUroScanTM under this agreement will be assigned to ProUroCare.  For its role, Artann will receive a total of$250,000 (plus incentives as explained below) payable upon certain milestoneevents.  A payment of $50,000 was made toArtann upon the execution of the agreement. In December 2004, the Company paid Artann $110,000 following theshipment of the ProUroScanTM prototypesin accordance with the Development Agreement (including a $10,000 bonus fordelivery of the systems ahead of schedule). All of these payments to Artann were expensed as research anddevelopment cost during the year ended December 31, 2004.  On May 6 and June 6, 2005, Artann filedadditional patent applications relating to a new probe positioning technology,for which the Company will pay Artann $50,000, with the final $50,000 to bepaid upon issuance of the patent(s) to ProUroCare.  Artann will also receive additionalcompensation in the form of five-year warrants to purchase up to 500,000 sharesof Company common stock, similarly issuable upon certain milestone events.  Fully vested warrants for the purchase of100,000 shares at a per-share price of $2.00 were issued upon the execution ofthe agreement.  The value of thesewarrants computed using the Black-Scholes pricing model was $114,914, and wasrecorded as research and development cost in the year ended December 31, 2004.  Fully vested warrants for the purchase of200,000 shares at a per share price of $2.00 were issued in December 2004following the shipment of the ProUroScanTM systems under the Development Agreement.  The value of these warrants computed usingthe Black-Scholes pricing model was $166,172, and was also recorded as researchand development expense in the year ended December 31, 2004.  The final 200,000 warrants were to be issued,contingent on the delivery of a system ready for clinical trials, in two equal100,000-share installments on the one-year and two-year anniversaries of theResearch and Development Agreement. To date, we have not issued these warrantsor paid the $50,000 fee related to the patent

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applications, but expectto do so contingent on the parties entering a new research and developmentagreement that will replace the original research and development agreement.

***Joint Development Agreement***

On July 27, 2005, the Company entered into a Memorandum ofUnderstanding with Urologix, Inc. (“Urologix”) pursuant to which the partieswill co-develop new products utilizing ProUroCare’s electrical impedancetomography (“EIT”) technology. The EIT technology is expected to be assembledinto modules that will be compatible with and incorporated into Urologix’existing thermal therapy systems.  Themodules will include a low-frequency power supply, electrodes, a rectal probe,monitor and software containing the proprietary algorithms.  It is intended that thermal therapy systemsupgraded with the modules will enable urologists to observe the real-timemigration of heat through the prostate during treatment and adjust the amountof energy applied in order to protect the urethral tissue and adjacentorgans.  The upgraded systems willcontinue to utilize transurethral microwave catheters to generate the heatnecessary to cause necrosis.

The parties expect the project to require several phases of research,testing and development, the first three phases of which are projected to costapproximately $550,000.  The Company andUrologix have agreed to equally share in the development costs of thesephases.  After completing Phase I inSeptember, 2006, it was determined that an assessment of certain key factorsaffecting the compatibility of our EIT technology with Urologix’ equipment willbe required before proceeding with the second development phase.  On March 20, 2007, the Company executed anamendment to the Urologix Memorandum of Understanding. Under the terms of theamendment, Urologix agreed to postpone any decision regarding the continuanceof the remaining phases of work, while the Company agreed that the assessmentsdescribed above will be done and funded solely by the Company. In addition,Urologix has the right to abandon the project for any reason with 5 days’notice to the Company, and the Company has the right to abandon the project forany reason by providing 5 days’ notice to Urologix.

***(14)     SubsequentEvents***

On January 18, 2007, the Company sold a total of 937,500 of the Company’sInvestment Units, and on February 2, 2007 sold an additional 312,500 Units, allat a price of $0.40 each.  EachInvestment Unit consists of one share of the Company’s common stock and athree-year warrant (immediately exercisable)****toacquire 0.5 shares of the Company’s common stock for $0.25 ($0.50 per wholeshare), exercisable at the discretion of the investor during the term of thewarrant.  The issuance was made inreliance on exemption from registration provided under Section 4(2) of theSecurities Act, for issuance by an issuer not involving a public offering (seeNote 10(c)).

On January 30, 2007, theCompany repaid a $4,100 loan from a director in cash

On February 1, 2007, theCompany granted to Mr. Carlson, its CEO, a seven-year option to acquire up to200,000 shares of the Company’s common stock at a price of $0.50 pershare.  The options were valued at $0.34per share using the Black-Scholes pricing model and will be expensed over thevesting period as general and administrative expense. ** **The option will vest according tothe following schedule if the enumerated conditions are satisfied:

(a)                      50,000shares vest immediately;

(b)                     50,000 sharesvest upon the Company’s closing on new equity financing arrangementsaggregating to $3,000,000 or more after February 1, 2007 and prior to December31, 2007.  Such new equity financingshall include, in the event of a corporate partnership, the value of servicessupplied to the Company by the partner entity to develop the Company’s productsor obtain regulatory approval of them;

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

(d)                     50,000 sharesvest on December 31, 2008.

On February 12, 2007, theCompany sold 17,073 shares of its common stock to Scott Smith, a director, thesubscription price being paid by the conversion of a $7,000 loan from Mr.Smith.  The per share selling price of$0.41 was based on the last selling price prior to this sale as reported on theOver-the-Counter Bulletin Board.

On March 14, 2007, uponthe termination of employment of an employee, and in consideration for agreeingto defer payment of accrued salaries until the Company is able to make suchpayments (on the same basis as the payment of deferred salaries of continuingemployees), the Company agreed to extend by three years the expiration date of300,000 warrants beneficially held by the employee.

On June 1, 2006, PUCborrowed $75,000 from an investor, and in connection therewith issued to suchinvestor a promissory note to mature on August 30, 2006.  On August 24, 2006 the promissory note wasamended to mature on the first of the Company’s closing of an aggregate of $1million of net proceeds under its financing efforts (see Note 2) or October 29,2006.  On January 22, 2007, the Companyrepaid $25,000 of the promissory note. On March 20, 2007, the promissory note was amended for a second time toextend the due date of the remaining balance until the Company closes on anaggregate of $750,000 or more of additional financing following the date of theamendment.  In connection with the amendments,following repayment of the promissory note, the Company will issue a five-yearwarrant to the investor to acquire 417 shares of the Company’s common stock foreach day the promissory note is outstanding, at $0.50 per share.  The promissory note and amendments theretobears an interest at the prime rate. Interest expense recorded during the year ended December 31, 2006related to this note was $3,678.  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.  In connection with the amendments, followingrepayment of the promissory note, the Company will issue a five-year warrant tothe investor to acquire 417 shares of the Company’s common stock at $0.50 pershare for each day the promissory note is outstanding after August 30,2006.  The warrants so issued will beexempt from registration under Section 4(2) of the Securities Act of 1934, as amended,as they will be issued in a non-public offering to an accredited investor (seeNote9 and 10e).

**OnNovember 30, 2006, ProUroCare Medical Inc. (the “Company”) borrowed $100,000from Adron, and in connection therewith issued to such lender a promissory noteto mature on January 2, 2007.  Pursuantto the terms of the promissory note, the Company issued five-year warrants(immediately exercisable) to Adron’s partners to acquire 50,000 shares ofCompany common stock at $0.50 per share. In addition, pursuant to the terms of the promissory note, the Companyissued additional five-year warrant (immediately exercisable) to Adron’spartners to acquire 50,000 shares of Company common stock at $0.50 per share,when the loan was not repaid on January 2, 2007.  On March 20, 2007, the Company amended thepromissory note to extend its due date until the first of (1) the Companycloses on an aggregate of $750,000 or more of additional financing followingthe date of the amendment, or (2) April 30, 2007.  In connection with the amendment, the Companyissued to Adron a five-year warrant dated February 1, 2007 to acquire 50,000shares of Company common stock, and following repayment of the promissory note,the Company will issue additional five-year warrant to Adron to acquire 1,667 sharesof the Company’s common stock for each day the promissory note is outstandingon and after March 1, 2007, 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. (see Notes 9 and 10(e)).**

On March 21, 2007, the Company executed an amendment to the Memorandumof Understanding between ProUroCare Inc. and Urologix, Inc. dated July 27, 2005(the “MOU”).  Under the terms of the MOU,the

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parties were to co-develop new products utilizing ProUroCare’sElectrical Impedance Tomography (“EIT”) technology. The EIT technology wasexpected to be assembled into modules that would be compatible with andincorporated into Urologix’ existing thermal therapy systems.  The project was designed into multiple phasesof research, testing and development. The first three phases were projected to cost approximately $550,000over the following 18 to 24 months. ProUroCare and Urologix had agreed to equally share in the developmentcosts of these phases.  After completingPhase I in September 2006, it was determined that an assessment of two keyproject factors will be required before proceeding with the second development phase.  As both of these issues were outside of theMOU’s original Phase I development definition, the Company plans to conductresearch on both issues at its own expense before a decision is made to move toPhase II of the program.  Under the termsof the MOU amendment, Urologix agreed to postpone any decision regarding thecontinuance of the remaining phases contemplated under the MOU, while theCompany agreed that the assessments described above will be done and fundedsolely by the Company. In addition, Urologix has the right to abandon theproject for any reason with 5 days’ notice to the Company, and the Company hasthe right to abandon the project for any reason by providing 5 days’ notice toUrologix.

On March 21, 2007, theCompany amended its 10% Unsecured Convertible Subordinated Debenturesoriginally issued in February 2006 to guarantors of its senior debt facility(see Note 11).  Under the terms of therevised debentures, each debenture holder agreed to accept as payment forinterest due on the debenture the following:

·                  Cash paid for interest from inception through May 31,2006;

·                  Investment Units, consisting of one share of stock anda three year warrant to acquire 0.5 shares of Company common stock at $0.50 pershare, for interest accrued from June 1, 2006 through January 31, 2007, suchaccrued interest to be converted into Investment Units at a price of $0.40 perUnit; and

·                  Cash or Company common stock (converted on the basisof $0.50 per share), at the option of the Company, for interest accrued fromFebruary 1, 2007 through settlement of the debenture.

Other terms of thedebentures were not changed.

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**ITEM 8:**             CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 8A:****         ****CONTROLS AND PROCEDURES**

We maintain disclosure controls and procedures designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the rules and forms of the Securities and ExchangeCommission. As of December 31, 2006, the end of the period covered by this AnnualReport on Form 10-KSB, we carried out an evaluation, under the supervision andwith the participation of management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures are effective.During the periods covered by this Annual Report on Form 10-KSB, there was nochange in our internal control over financial reporting (as defined in Rule13a-15(f) under the Exchange Act) that materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

**ITEM 8B:****         ****OTHER INFORMATION**

None.

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**PART III**
| **ITEM 9:** | ** ** | **DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,  CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF  THE EXCHANGE ACT** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|

 

**Directors and Executive Officers**

The following information sets forth the names of our executiveofficers and directors, their ages and their present positions with the Companyas of March 27, 2007.  The directorsserve for a term of one year or until the next annual meeting of the shareholders.  Each officer serves at the discretion of theBoard of Directors.
| Name                  | ** ** | **Age** | ** ** | **Position**                         |
|-----------------------|------------|---------|------------|--------------------------------------|
| Richard C. Carlson    |       | 55      |       | Chief Executive Officer and Director |
| Richard B. Thon       |       | 51      |       | Chief Financial Officer              |
| Maurice R. Taylor, II |       | 61      |       | Chairman                             |
| David F. Koenig       |       | 66      |       | Director                             |
| Alexander Nazarenko   |       | 62      |       | Director                             |
| Scott E. Smith        |       | 51      |       | Director                             |

 

**Richard C. Carlson**, was hired as our Vice President ofMarketing and Sales in January 2005, and was promoted to Chief ExecutiveOfficer in November 2006.  Mr. Carlsonwas elected to our Board of Directors in December 2006.  Prior to joining ProUroCare, Mr. Carlson heldseveral positions with SurModics, Inc. from 1998 to 2004, including VicePresident of Marketing and Sales and Vice President of Strategic Planning.  From 1996 to 1998, Mr. Carlson was theEuropean Marketing manager with Boston Scientific, where he developed strategicproduct plans and identified new market opportunities for the EuropeanDivision.  Mr. Carlson has also heldsenior level management positions with C.R. Bard, Advanced SurgicalIntervention, Vicon Systems, Medtronic and American Medical Systems.  Mr. Carlson has a BA in Business Economicsand an MBA in Marketing from the University of Minnesota.

**Richard B. Thon** became our Chief Financial Officer in July 2004 afterserving in this role in an interim capacity on a consulting basis since2001.  From 2002 to 2004, Mr. Thon wasthe Chief Financial Officer of CHdiagnostics, LLC, a medical products company.  He served as the Chief Financial Officer andVice President of Finance for MEDgenesis, a medical products company, from 2000to 2001.  Mr. Thon began his career as anauditor with KPMG LLP, and since that time has held financial managementpositions with both public and privately held firms.  Mr. Thon has a B.B.A. in Accounting from theUniversity of Michigan and an M.B.A. in Finance from the University ofWisconsin.

**Maurice R. Taylor** has served as the Chairman of the Board of PUC since its inception in1999 and as its Chief Executive Officer until February 2004. In April 2004, PUCmerged with an acquisition subsidiary of the Company and became the Company’ssole operating business.  Upon thatMerger, Mr. Taylor was appointed to serve as the Company’s Chairman of theBoard.  In March, 2005, he was againappointed Chief Executive Officer and served until his retirement from thatposition effective October 31, 2006.  Mr.Taylor is also Chairman of CNI, Clinical Network Management Corp., andCHdiagnostics, LLC.  He serves as adirector and is the former Chairman of the Scripps Whittier Institute forDiabetes.  Mr. Taylor was the founder ofChronimed Inc., and has been involved in several health care and medicaltechnology companies.

**David F. Koenig** has served as a director of PUC since 1999, andbecame a director of the Company upon the Merger.  From 1996 to 2005, Mr. Koenig was theExecutive Vice President and Chief Operating Officer of Solar Plastics, Inc., amanufacturer of custom rotationally molded plastic parts.  Solar Plastics has four manufacturingfacilities and services customers in both domestic and internationalmarkets.  Mr. Koenig served as ChiefFinancial

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 Officer and director of Quadion Corporationfrom 1977 to 1987, a manufacturer of precision-made rubber and plasticcomponents and assemblies for industrial uses. In this role, he had full responsibility for strategic planning,acquisitions, information services, real estate and legal services, and helpedcreate the plans and implement the programs that took this company from salesof $22 million from three domestic plants to sales exceeding $100 million fromsix domestic and three foreign plants. Prior to this time, Mr. Koenig spent 11 years growing and developing hisown consulting business focusing on providing services to small to medium-sizedcompanies in the areas of strategic planning and implementation, acquisitions,financing and organizational restructuring. Earlier, Mr. Koenig was employed by Dain Rauscher as an investmentbanker, and by General Mills, Inc. and Kroger Co. with responsibilities instrategic planning, acquisitions and finance. Mr. Koenig received his undergraduate degree in business administrationfrom Indiana University and his M.B.A. from Harvard Graduate School ofBusiness. Mr. Koenig is Chairman of the Nominating and Governance Committee,and is a member of the Audit and Compensation Committees.

**Mr. Nazarenko**served as a director of PUC from 2001 until the Merger in April 2004 and becamea director of the Company upon the Merger. Since 1992, Mr. Nazarenko has been a co-owner, officer and director ofAmerican Phoenix, Inc. of Eau Claire, Wisconsin, a company engaged in thebusiness of rubber processing for the major tire companies.  Since 1996, he has also been co-owner,officer and director of 2N Company, L.L.C., of Minneapolis, Minnesota, aprivate investment and management company with investments in a broad range ofindustries and the sole owner of C.S. Medical Technologies, LLC.  Since 1998, Mr. Nazarenko has also beensole owner and President of Kase Energy, LLC, a company that provides high-techservices to oil field operators.  Mr.Nazarenko is Chairman of the Compensation Committee and a member of theNominating and Governance Committee.

**Scott E. Smith**hasbeen a director of the Company since May 18, 2006. He is employed by F-2Intelligence Group (“F-2”), a company engaged in providing critical insights tomultinational corporations and private equity clients on a broad range ofstrategic issues.  From 2002 to 2005, Mr.Smith served as F2’s Director of Corporate Accounts, and is currently F2’sRegional Director for Private Equity. From 1991 to 2001, Mr. Smith was an AuditPartner for Arthur Andersen, serving management and the audit committees ofboth publicly and privately held companies. In addition to consultation on financial and accounting issues, Mr.Smith advised his clients on a broad range of issues including acquisitions andstrategic planning.  He was the leadpartner on numerous IPO’s and served several public companies as the advisorypartner.  Mr. Smith is a Certified PublicAccountant and a Certified Management Accountant.  Mr. Smith is Chairman of the Audit Committee.

There are no familyrelationships among our executive officers or directors.

**Audit Committee**

Our Board of Directors has established a two-memberAudit Committee that currently consists of Messrs. Smith and Koenig.  The Board of Directors has adopted a writtencharter for the Audit Committee.  TheAudit Committee was formed after the effectiveness of the Merger, and prior tothe Merger, the Company had no such Audit Committee.

The board of directors has determined that bothmembers of the audit committee, Mr. Smith and Mr. Koenig, are “audit committeefinancial experts” as that term is defined in Item 407(d)(5) of Regulation S-Bpromulgated under the Exchange Act.  Mr. Smithwas an Audit Partner for Arthur Andersen and is a Certified PublicAccountant and a Certified Management Accountant.  Mr. Koenig’s relevant experience includes hisservice as the Chief Financial Officer and director of Quadion Corporation, andhis past consulting experience, which involved his oversight and supervision ofthe performance of business enterprises respecting the preparation, audit andevaluation of financial statements.  Bothmembers of the audit committee currently qualify as “independent directors,” assuch term is defined in Section 4200(a)(15) of the NASDAQ listingstandards.  Moreover, the board ofdirectors has determined that each of the Audit Committee members is able toread and understand fundamental financial statements and has past employmentexperience in finance or accounting.

----

**Code of Ethics DisclosureCompliance**

On February 15, 2005, our Board of Directors adopted a Code of Ethicsfor Financial Executives, which includes our Company’s principal executiveofficer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions, as required by Sections406 and 407 of the Sarbanes-Oxley Act of 2002. Our Code of Ethics is filed as an exhibit to this Annual Report on Form10-KSB.

**Section 16(a) Beneficial Ownership Reporting Compliance**

Therules of the Securities and Exchange Commission require our directors,executive officers and holders of more than 10 percent of our common stock tofile reports of stock ownership and changes in ownership with the Securitiesand Exchange Commission. Based on the Section 16 reports filed by our directorsand executive officers and written representations of our directors andexecutive officers we believe there were no late or inaccurate filings fortransactions occurring during fiscal 2006, except as follows:
| Name                 | ** ** | **Number of Late  Reports** | ** ** | **Number of  Transactions Reported  Late** |
|----------------------|------------|-----------------------------|------------|--------------------------------------------|
| Michael P.  Grossman |       | 2                           |       | 1                                          |
| Richard B. Thon      |       | 2                           |       | 1                                          |
| Richard C.  Carlson  |       | 2                           |       | 1                                          |
| Maurice R.  Taylor   |       | 1                           |       | 0                                          |
| Alan Haggerty        |       | 1                           |       | 0                                          |
| Profile, LLC         |       | 1                           |       | 0                                          |
| CS Medical           |       | 1                           |       | 0                                          |
| David F. Koenig      |       | 1                           |       | 0                                          |
| Alexander  Nazarenko |       | 1                           |       | 0                                          |
| Scott Smith          |       | 1                           |       | 0                                          |

 

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**ITEM 10:  EXECUTIVE COMPENSATION**

**SummaryCompensation Table**

The following table setsforth the compensation earned for services rendered in all capacities by ourChief Executive Officer and the other highest-paid executive officers servingas such at the end of fiscal year 2006 whose compensation for that fiscal yearwas in excess of $100,000.  Theindividuals named in the table will be hereinafter referred to as the “NamedExecutive Officers.”

**SummaryCompensation Table**
| Name and Position                                                        | ** ** | **Year** | ** ** | **Salary  ($)**(4) | ** ** | **Bonus  ($)**(4) | ** ** | **Option Awards  ($)**(5) | ** ** | **All Other Compensation  ($)**(6) | ** ** | **Total  $** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|--------------------|------------|-------------------|------------|--------------------------------|------------|----------------------------------------------|------------|--------------|------------|
|                                                                               |       |     |       |               |       |              |       |                           |       |                                         |       |         |       |
| Richard C. Carlson(1)  Chief Executive Officer and Director                        |       | 2006     |       | $                  | 125,000    |              | $          | —                         |       | $                                            | 28,000     |         | $          | — |   | $ | 153,000 |   |
|                                                                                    |       |     |       |               |       |              |       |                           |       |                                         |       |         |       |
| Maurice R. Taylor, II(2)  Former Chief Executive Officer and Chairman of the Board |       | 2006     |       | $                  | 190,000    |              | $          | —                         |       | $                                            | —     |         | $          | 1,838 |   | $ | 191,838 |   |
|                                                                                    |       |     |       |               |       |              |       |                           |       |                                         |       |         |       |
| Michael P. Grossman(3)  President, Chief Operating Officer, and former Director    |       | 2006     |       | $                  | 175,000    |              | $          | —                         |       | $                                            | 28,000     |         | $          | 1,080 |   | $ | 204,080 |   |
|                                                                                    |       |     |       |               |       |              |       |                           |       |                                         |       |         |       |
| Richard B. Thon  Chief Financial Officer                                           |       | 2006     |       | $                  | 140,000    |              | $          | 18,900                         |       | $                                            | 28,000     |         | $          | 1,200 |   | $ | 188,100 |   |

 

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|        | (1)    | Mr. Carlson joined the Company on January 3, 2005 as  Vice President of Marketing and Sales. He was promoted to the position of  Chief Executive Officer on November 1, 2006.                                                                                                                                                                                              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
|   | (2)    | Mr. Taylor was Chief Executive Officer of the  Company until his retirement from that position on October 31, 2006. Mr.  Taylor continues to serve as the Chairman of the Company. All compensation  Mr. Taylor earned related to his duties as Chief Executive Officer.                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
|   | (3)    | Mr. Grossman served as a director of the Company  until his resignation from the Board in December 2006. The contract term of  Mr. Grossman’s employment agreement ended effective January 31, 2007. The  Company elected not to renew Mr. Grossman’s employment agreement, and  effective February 1, 2007, Mr. Grossman is no longer employed by the  Company. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
|   | (4)    | Due to funding limitations, all salaries and bonuses  earned between June 15, 2006 and December 31, 2006 have been accrued but not  paid as of December 31, 2006.                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
|   | (5)    | Options awarded during the fiscal year are valued in  accordance with FAS 123R. See Notes 1(j) and 10(g) to our Consolidated  Financial Statements for the material terms of stock option grants.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                       |
|   | (6)    | Other compensation represents insurance premiums  paid by the Company with respect to term life insurance policies for the  benefit of the named executives. There is no cash surrender value associated  with any of the policies.                                                                                                                                        |

 

**EmploymentAgreements**

**The Company (including the Company’s wholly ownedsubsidiary PUC) is a party to an employment agreement with Mr. Thon, itsCFO.  The Company is working to finalizean employment agreement with Mr. Carlson, its CEO, which it expects will becompleted and executed in April 2007.**

On July 21, 2004, PUC entered into an employmentagreement with Mr. Thon.  Mr. Thon’sagreement calls for an annual salary of $140,000, with the annual bonuspotential to be set each year by the Compensation Committee, and a term thatcontinues through July 21, 2007, eligibility to participatein an annual grant of options to purchase

----

sharesof common stock as determined by the Company’s Board of Directors, and a non-competition clause applicablefor the period ending one year from termination.  The agreement also provides that, upontermination without cause (or a change of employment that Mr. Thon elects totreat as a termination of employment), Mr. Thon will receive as severance sixmonths of base salary plus four months of base salary for each year of priorservice to the Company (up to a maximum of 24 months of base salary), plus theprorated average of any bonus or incentive compensation paid over the previoustwo years.  Additionally, all unvestedstock options then held by Mr. Thon will immediately vest and be exercisable upto one-year from the date of termination. In the event of a “change in control”resulting in a termination of employment, change of location, or decrease inthe level of responsibility of the executive (any of which occurring within twoyears of the “change in control”), the Company shall compensate the executiveas if he were terminated without cause, as described above.

During the year endedDecember 31, 2006, the Company was also party to an employment agreement withMr. Taylor, its former CEO, that terminated with his retirement from thatposition effective November 1, 2006.  The agreementwith Mr. Taylor provided for an annual salary of $190,000 and maximum bonuspotential of 75 percent of his base pay. In recognition of his role in facilitating the orderly transition to ournew CEO following his retirement, Mr. Taylor continued to accrue his formersalary ($15,833 per month) through December 31, 2006.  The Company is working with Mr. Taylor toaddress further transition activities and payment of accrued salary, andexpects to complete and execute an agreement in this regard in April 2007.

Also during the year endedDecember 31, 2006, the Company was party to an employment agreement with Mr.Grossman, its former President and COO, that expired on January 31, 2007. The Company elected not to renew the employment agreement.  Mr. Grossman’s agreement provided for anannual salary of $175,000 with a maximum bonus potential of 50 percent of hisbase pay.  The Company is working withMr. Grossman to address payment of his accrued salary, and expects to completeand execute an agreement in this regard in April 2007.

At December 31, 2006, approximately $362,000 of oursenior management’s salaries and bonuses had not been paid, and were recordedas an accrued liability.

----

**Outstanding Equity Awardsat Fiscal Year-End**

No stock options orstock-appreciation rights were exercised during fiscal year 2006, and nostock-appreciation rights were outstanding at the end of such fiscal year.  The table below sets forth outstanding butunexercised options of the Named Executive Officers as of December 31, 2006.
| Name                  | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Equity  Incentive Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Option  Exercise Price** | ** ** | **Expiration Date** | ** **       |
|-----------------------|------------|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|--------------------------|------------------|
| Richard C. Carlson    |       | 95,841                                                                                 |       | 54,159(1)                                                                                |       | —                                                                                                                    |       | $                               | 2.35       |                     | January 3, 2015  |   |
|                       |       | —                                                                                 |       | —                                                                                   |       | 50,000(4)                                                                                                                 |       | $                               | 0.75       |                     | March 1, 2011    |   |
|                  |       |                                                                                   |       |                                                                                     |       |                                                                                                                      |       |                            |       |                     |             |
| Maurice R. Taylor, II |       | 186,000                                                                                |       | —                                                                                   |       | —                                                                                                                    |       | $                               | 1.13       |                     | April 18, 2012   |   |
|                  |       |                                                                                   |       |                                                                                     |       |                                                                                                                      |       |                            |       |                     |             |
| Michael P. Grossman   |       | 355,034                                                                                |       | 24,966(3)                                                                                |       | —                                                                                                                    |       | $                               | 2.00       |                     | February 1, 2014 |   |
|                       |       | —                                                                                 |       | —                                                                                   |       | 50,000(4)                                                                                                                 |       | $                               | 0.75       |                     | March 1, 2011    |   |
|                  |       |                                                                                   |       |                                                                                     |       |                                                                                                                      |       |                            |       |                     |             |
| Richard B. Thon       |       | 30,000                                                                                 |       | —                                                                                   |       | —                                                                                                                    |       | $                               | 1.13       |                     | April 18, 2012   |   |
|                       |       | 161,124                                                                                |       | 38,876(2)                                                                                |       | —                                                                                                                    |       | $                               | 2.50       |                     | July 21, 2014    |   |
|                       |       | —                                                                                 |       | —                                                                                   |       | 50,000(4)                                                                                                                 |       | $                               | 0.75       |                     | March 1, 2011    |   |

 

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|        | (1) | Options vest in monthly installments, ratably  through January 3, 2008                                                                                                                                         |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2) | Options vest ratably monthly installments, through  July 21, 2007.                                                                                                                                             |
|   | (3) | Options vest ratably monthly installments, through  January 31, 2007.                                                                                                                                          |
|   | (4) | Equity Incentive Plan Awards vest upon the Company  securing FDA approval of its ProUroScanTM system. See Note 10(g) to our Consolidated  Financial Statements for material terms of stock option grants. |

 

**Compensation of Directors**

Our Board of Directorshas established a policy that each of our non-employee directors receives an annualcash payment of $5,000 for annual services to the Company, and that ourchairpersons of our compensation, audit, and governance and nominatingcommittees receive an additional annual payment of $2,500.  In addition, we have also agreed to grant toall non-employee directors a one-time non-qualified stock option upon electionor appointment to the board of directors to purchase 30,000 shares of ourcommon stock at fair market value.  Thesedirector options vest ratably over two years of service and have a ten-yearterm.  All directors shall be reimbursedfor travel and other out-of-pocket expenses incurred in connection withattendance at meetings of the board of directors and its committees.

**Director Compensation**

| Name                    | ** ** | **Fees Earned or Paid  in Cash  ($)** | ** ** | **Option Awards**(4)  ($) | ** ** | **Total  ($)** | ** ** |
|-------------------------|------------|-----------------------------------------------------------|------------|--------------------------------|------------|----------------|------------|
| Alexander  Nazarenko(1) |       | $                                                         | 7,500      |                           | —     |           | $          | 7,500 |   |
| David Koenig(2)         |       | $                                                         | 8,542      |                           | —     |           | $          | 8,542 |   |
| Scott Smith(3)          |       | $                                                         | 4,375      |                           | $          | 17,700         |       | $ | 22,075 |   |
|                         |            |                                                           |            |                                |            |                |            |  |  |  |

 

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|        | (1) | Chairman of the Compensation Committee.                                                                                                                           |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2) | Chairman of the Nominating and Governance Committee,  and was Chairman of the Audit Committee through May 30, 2006.                                               |
|   | (3) | Elected to the Board of Directors and named Chairman  of the Audit Committee on May 30, 2006. Options vest in monthly installments,  ratably through May 30, 2008 |
|   | (4) | Outside directors held options to acquire a total of  90,000 shares at December 31, 2006.                                                                         |

----

** **
| **ITEM 11:** | ** ** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|------------|-----------------------------------------------------------------------------------------------------|

 

**Security Ownership of CertainBeneficial Owners and Management Table**

The following table sets forth certain informationregarding beneficial ownership of our common stock as of March 21, 2007, by (i)each person known by us to be the beneficial owner of more than five percent ofthe outstanding common stock, (ii) each director, (iii) each executive officer,and (iv) all executive officers and directors as a group.  The number of shares beneficially owned isdetermined under rules promulgated by the SEC, and the information is notnecessarily indicative of beneficial ownership for any other purpose.  Under those rules, beneficial ownershipincludes any shares as to which the individual has sole or shared voting poweror investment power and also any shares which the individual has the right toacquire within 60 days of the date hereof, through the exercise or conversionof any stock option, convertible security, warrant or other right.  Including those shares in the tables doesnot, however, constitute an admission that the named stockholder is a direct orindirect beneficial owner of those shares. Unless otherwise indicated, each person or entity named in the table hassole voting power and investment power (or shares that power with that person’sspouse) with respect to all shares of capital stock listed as owned by thatperson or entity.  (Unless otherwiseindicated, the address of each of the following persons is 5500 WayzataBoulevard, Suite 310, Golden Valley, MN 55416). 
| Name                                                                                          | ** ** | **Shares  Beneficially Owned** | ** ** | **Percent of Class** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------|------------|
| Richard C. Carlson(1)                                                                         |       | 133,344                        |       | *                    |       |
| Michael P. Grossman (2)                                                                       |       | 380,000                        |       | 2.4                  |       |
| David Koenig(3)                                                                               |       | 565,219                        |       | 3.6                  |       |
| Alex Nazarenko(4)                                                                             |       | 3,683,926                      |       | 22.0                 |       |
| Scott Smith(5)                                                                                |       | 157,753                        |       | 1.0                  |       |
| Maurice R. Taylor II (6)                                                                      |       | 1,700,588                      |       | 10.7                 |       |
| Richard Thon (7)                                                                              |       | 213,348                        |       | 1.3                  |       |
| All directors and officers as a group (7 total)**(8)**                                        | ** ** | **6,549,674**                  | ** ** | **36.9**             | ** ** |
| Clement Nelson(9)  5644 Heather Ridge Court  Shoreview, MN 55126                              |       | 2,127,498                      |       | 13.6                 |       |
| CS Medical Technologies, LLC(10)  2277 West Highway 36, Suite 254  Roseville, Minnesota 55113 |       | 1,947,498                      |       | 12.4                 |       |
| Profile, L.L.C. (11)  2700 Corporate Drive, Suite 120  Birmingham, Alabama 35242              |       | 1,415,048                      |       | 9.0                  |       |

 

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*Less than one percent (1%).
|        | (1)    | Includes options to purchase up to 133,334 shares of  common stock which are currently exercisable or exercisable within 60 days.  Of Mr. Carlson’s options, 116,676 are exercisable at $2.35 per share, and  16,668 are exercisable at $0.50 per share.                                                                                                                                                                                                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | (2)    | Includes options to purchase up to 380,000 shares of  common stock which are currently exercisable at $2.00 per share.                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | (3)    | Includes 18,750 shares held by Clinical Network,  LLC, and 265,714 shares held by Clinical Network, Inc., with respect to each  of which Mr. Koenig is an officer and minority owner. Also includes 182,895  shares of common stock held directly, options to purchase up to 30,000 shares  of common stock which are currently exercisable or exercisable within 60 days  at $1.13 per share, and immediately exercisable warrants to purchase 67,860  shares at $1.67 per share. |

 

----

 
|        | (4)    | Includes 1,947,498 shares held by CS Medical  Technologies, LLC, of which Mr. Nazarenko is a managing officer and member.  Also includes 483,928 shares of common stock held directly, options to  purchase up to 30,000 shares of common stock which are currently exercisable  or exercisable within 60 days at $1.13 per share, and options to purchase  1,335,000 shares from Profile, L.L.C. that are currently exercisable or  exercisable within 60 days at $0.55 per share.                                                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | (5)    | Includes 145,213 shares held directly and options to  purchase up to 12,500 shares of common stock which are currently exercisable  or exercisable within 60 days at $0.70 per share.                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | (6)    | Includes 18,750 shares of common stock held by  Clinical Network, LLC, and 265,714 shares held by Clinical Network, Inc.,  with respect to each of which Mr. Taylor is a managing officer and majority  owner. Also includes 1,227,624 shares of common stock held directly, 2,500  shares held by his spouse, and options to purchase 186,000 shares of common  stock which are currently exercisable at $1.13 per share. Of Mr. Taylor’s  directly held shares, 576,482 shares are pledged as security on a bank loan.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | (7)    | Includes options to purchase up to 213,348 shares of  common stock which are currently exercisable or exercisable within 60 days.  Of Mr. Thon’s options, 30,000 are exercisable at $1.13 per share, and 183,348  are exercisable at $2.50 per share.                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | (8)    | Includes Messrs. Carlson, Grossman, Koenig,  Nazarenko, Smith, Taylor, and Thon.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | (9)    | Includes 1,947,498 shares held by CS Medical  Technologies, LLC, of which Mr. Nelson is a managing officer and member, and  180,000 shares held directly.                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | (10)   | The beneficial owners of CS Medical Technologies,  LLC are Clement Nelson and Alex Nazarenko (a director of the Company).                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | (11)   | The managers of Profile, LLC are T. Forcht Dagi and  Stanley L. Graves, who share voting and investment power over the securities  held by Profile, LLC. Cordova Technology Partners, L.P., a private investment  fund, by virtue of its 44.34% ownership interest in Profile, LLC, indirectly  has a pecuniary interest in 627,415 shares of the Company’s common stock. The  management committee of Cordova Technologies, LLC, of which T. Forcht Dagi is  a member, exercises voting and investment power over the securities held by  Cordova Technology Partners, L.P. |

**Securities Authorized for Issuance under EquityCompensation Plans as of Last Fiscal Year (December 31, 2006)**
| ** **                                                  | ** ** | **Number of Securities to  be Issued Upon Exercise  of Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining Available  for Issuance Under  Equity Compensation  Plans (excluding  securities reflected in  column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                                                                              | ** ** | **(b)**                                                                                                     | ** ** | **(c)**                                                                                                                                                                                          | ** ** |
| Equity compensation plans approved by stockholders  (1)     |       | 1,604,169                                                                                                                                            |       | $                                                                                                           | 1.62       |                                                                                                                                                                                             | 1,395,831  |   |
| Equity compensation plans not approved by  stockholders (2) |       | 2,159,488                                                                                                                                            |       | $                                                                                                           | 1.46       |                                                                                                                                                                                             | —     |   |
| Total                                                       |       | 3,763,637                                                                                                                                            |       | $                                                                                                           | 1.53       |                                                                                                                                                                                             | 1,395,831  |   |

 

----

(1)                      Includes shares of our common stockissuable under options issued under our 2002 and 2004 Plans (as defined below).

(2)                      Consists of warrants issued to vendors,consultants, and loan guarantors.

**Option Plans**

The Board of Directors adopted the 2002 and 2004 Plansto provide a means by which our employees, directors, officers and consultantsmay be given an opportunity to purchase our stock, to assist in retaining theservices of such persons, to secure and retain the services of persons capableof filling such positions and to provide incentives

----

for such persons to exertmaximum efforts for our success.  Theofficers’ options vest ratably over a 36-month period from the date of issuanceand the directors’ options vest ratably over a 24-month period from the date ofissuance, while the vesting of consultants’ options are determined on acase-by-case basis.  In accordance withSFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 123R, “Share-BasedPayment” we have elected to utilize the fair-value method of accounting forthese options.  An aggregate of $344,234,$297,732, and $1,143,644 of stock-based compensation related to these optionswas recognized in the years ended December 31, 2006, 2005 and the period fromAugust 17, 1999 to December 31, 2006, respectively.

***2002Plan.***

In April 2002, PUC adopted the ProUroCare Inc. 2002Stock Plan (the “2002 Plan”), pursuant to which PUC granted options toofficers, directors, employees and independent contractors.  The Company adopted the 2002 Plan as part ofthe Merger, and on February 15, 2005 our board of directors approved anamendment to the 2002 Stock Plan that provides for the cashless exercise ofoptions granted under the plan, at the discretion of a committee of independentdirectors.

Under the 2002 Plan, we are able to grant incentiveand nonqualified options, stock appreciation rights, stock awards, restrictedstock awards, performance shares, and cash awards.  As of December 31, 2006 there were options topurchase 1,195,000 shares of our common stock outstanding under the 2002 Planthat are exercisable at prices ranging from $0.75 to $2.00.  All of these options are held by Companyofficers, consultants and directors.

***2004Plan.***

On July 12, 2005, our stockholders approved a resolutionadopting the ProUroCare Medical Inc. 2004 Stock Option Plan (the “2004 Plan”).  The 2004 Plan provides for the grant of bothincentive and non-statutory stock options. Incentive stock options granted under the 2004 Plan are intended toqualify as “incentive stock options” within the meaning of Section 422 of theInternal Revenue Code of 1986, as amended (the “Code”).  Non-statutory stock options granted under the2004 Plan will not qualify as incentive stock options under the Code.  We have reserved 1,500,000 shares of commonstock for issuance under the 2004 Plan. As of December 31, 2006, there were options to purchase 409,169 sharesof our common stock outstanding under the 2004 Plan that are exercisable atprices ranging from $0.60 to $2.50 per share. All of these options have beenissued to Company officers and directors.

**ITEM 12:****                          ****CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

**Company History**

PUC was initially founded by shareholders of ClinicalNetwork in August 1999.  Clinical Networkwas originally established in 1990 for the purpose of pursuing treatments forstress urinary incontinence in women.  InJuly 2001, Clinical Network began collaborating with CS Medical, a developer ofmicrowave treatment technology for prostate and cardiology treatments, for thedevelopment of products for the male urology market.  At that time, PUC acquired from ClinicalNetwork and CS Medical all assets and rights associated with the minimally invasivemicrowave therapy in exchange for an aggregate of 3,000,000 shares of PUCcommon stock.  Alex Nazarenko, a Companydirector (and former director of PUC), is a principal shareholder andcontrolling person of CS Medical. Currently, CS Medical owns 1,947,498 shares of our common stock.  In addition, Maurice R. Taylor, the Company’sChairman (and Chairman of PUC), and David Koenig, a Company director (and aformer director of PUC), are principal shareholders and controlling persons ofClinical Network and Clinical Network, L.L.C. (a limited liability companyaffiliated with Clinical Network), which together beneficially own 284,464shares of our common stock.  Prior to thetransactions with Clinical Network and CS Medical, neither of such companies(nor the individual directors named above) were related parties or otherwiseaffiliated with PUC.  Accordingly, thesetransactions were negotiated at arms-length. The Company believes that the terms of the above described transactionswere fair to the Company.

----

**LoanTransactions**

From October 2001 through May 2002, Clinical Networkloaned a total of $123,616 to the Company. The Company accrued interest on this debt at an annual rate of 5percent.  The Company repaid this loan ininstallments of $12,950, $77,419, $24,301 and $8,943 in 2002, 2003, 2004 and2006, respectively.  At the time of theloans, Maurice R. Taylor, II, then the Company’s Chief Executive Officer andChairman, was also a director of Clinical Network.

**DirectorIndependence**

Our independent directors, as determined by the Board of Directorsunder rules and guidelines of NASDAQ, are David F. Koenig, Alexander Nazarenko,and Scott Smith.

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**ITEM 13: EXHIBITS**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                          |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1         |       | Agreement of Merger and Reorganization by and among  Global Internet Communications, Inc., GIC Acquisition Co., and ProUroCare  Inc. dated April 5, 2004 (incorporated by reference to Exhibit 2.1 to our  Current Report on Form 8-K filed April 20, 2004).                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 3.1         |       | Articles of Merger relating to the merger of GIC  Acquisition Co., then a wholly owned subsidiary of the registrant with and  into ProUroCare Inc., as filed with the Minnesota Secretary of State on April  5, 2004 (incorporated by reference to Exhibit 2.2 to our Current Report on  Form 8-K filed April 20, 2004). |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 3.2         |       | Amended and Restated Bylaws of ProUroCare Medical  Inc. (incorporated by reference to Exhibit 3.2 to Annual Report on Form 10KSB  filed March 31, 2005).                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.1         |       | Warrant to acquire 300,000 shares of common stock of  ProUroCare Medical Inc., issued in favor of BINA Enterprises on April 5, 2004  (incorporated by reference to Exhibit 4.2 to Registration Statement on Form  SB-2 filed August 3, 2004).                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.2         |       | Form of warrants issued to ProUroCare Inc.  guarantors of lines of credit, issued between March 1 and December 22, 2003  (incorporated by reference to Exhibit 4.5 to Registration Statement on Form  SB-2 filed August 3, 2004).                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.3         |       | Warrant to acquire 90,000 shares of common stock of  ProUroCare Medical Inc., issued in favor of Artann Laboratories, Inc.  effective as of July 19, 2004 (incorporated by reference to Exhibit 4.6 to  Registration Statement on Form SB-2/A filed October 1, 2004).                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.4         |       | Warrant to acquire 10,000 shares of common stock of  ProUroCare Medical Inc., issued in favor of Vladimir Drits effective as of  July 19, 2004 (incorporated by reference to Exhibit 4.7 to Registration  Statement on Form SB-2/A filed October 1, 2004).                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.5         |       | Warrant to acquire 180,000 shares of common stock of  ProUroCare Medical Inc., in favor of Artann Laboratories, Inc. effective as  of December 2, 2004 (incorporated by reference to Exhibit 4.8 to Registration  Statement on Form SB-2 filed December 17, 2004).                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.6         |       | Warrant to acquire 20,000 shares of common stock of  ProUroCare Medical Inc., in favor of Vladimir Drits effective as of December  2, 2004 (incorporated by reference to Exhibit 4.9 to Registration Statement  on Form SB-2 filed December 17, 2004).                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.7         |       | Form of warrants issued to promissory note  guarantors and a lender between September 14 and October 19, 2005 (incorporated  by reference to Exhibit 4.9 to Annual Report on Form 10-KSB filed March 31,  2006).                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.8         |       | Convertible Subordinated Debenture dated February  17, 2006 issued in favor of William Reiling (incorporated by reference to  Exhibit 4.6 to Current Report on Form 8-K filed February 23, 2006).                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.9         |       | Convertible Subordinated Debenture dated February  17, 2006 issued in favor of James Davis (incorporated by reference to Exhibit  4.7 to Current Report on Form 8-K filed February 23, 2006).                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.10        |       | Convertible Subordinated Debenture dated February  28, 2006 issued in favor of Phillips Smith Family Trust (incorporated by  reference to Exhibit 4.7 to Current Report on Form 8-K filed March 3, 2006).                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.11        |       | Convertible Subordinated Debenture dated February  28, 2006 issued in favor of Bruce Culver (incorporated by reference to  Exhibit 4.8 to Current Report on Form 8-K filed March 3, 2006).                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                     |
| 4.12        |       | Warrant to acquire 25,000 shares of common stock of  ProUroCare Medical, Inc. issued in favor of Adron Holdings, LLC, dated  January 25, 2006 (incorporated by reference to Exhibit 10.7 to Current Report  on Form 8-K filed January 31, 2006).                                                                         |

 

----

 
| 4.13   |   | Security Agreement between Crown Bank and  ProUroCare, Inc., dated January 11, 2006 and executed February 16, 2006  (incorporated by reference to Exhibit 4.8 to Current Report on Form 8-K filed  February 23, 2006).                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                     |
| 4.14   |   | Security Agreement between Crown Bank and  ProUroCare, Inc., dated February 28, 2006 (incorporated by reference to  Exhibit 4.9 to Current Report on Form 8-K filed March 3, 2006).                                                                                      |
|   |   |                                                                                                                                                                                                                                                                     |
| 4.15   |   | Security Agreement between Crown Bank and ProUroCare  Medical, Inc., dated February 28, 2006 (incorporated by reference to Exhibit  4.10 to Current Report on Form 8-K filed March 3, 2006).                                                                             |
|   |   |                                                                                                                                                                                                                                                                     |
| 4.16   |   | Warrant to acquire 37,500 shares of common stock of  ProUroCare Medical, Inc. issued in favor of Roman Pauly and Maryjo Pauly,  dated June 1, 2006 (incorporated by reference to Exhibit 10.7 to Current  Report on Form 8-K filed June 6, 2006).                        |
|   |   |                                                                                                                                                                                                                                                                     |
| 4.17   |   | Form of warrant to acquire shares of common stock of  ProUroCare Medical, Inc. issued to lenders in connection with a $100,000  promissory note, dated November 29, 2006 and January 3, 2007 (filed  herewith).                                                          |
|   |   |                                                                                                                                                                                                                                                                     |
| 4.18   |   | Form of warrants to acquire shares of common stock  of ProUroCare Medical Inc. issued in favor of subscribers of the Company’s  $500,000 Investment Unit offering dated January 18 and January 23, 2007  (filed herewith)                                           |
|   |   |                                                                                                                                                                                                                                                                     |
| 4.19   |   | Convertible Subordinated Debenture dated February  17, 2006 issued in favor of William Reiling (incorporated by reference to  Exhibit 4.6 to Current Report on Form 8-K filed February 23, 2006).                                                                        |
|   |   |                                                                                                                                                                                                                                                                     |
| 4.20   |   | Convertible Subordinated Debenture dated February  17, 2006 issued in favor of James Davis (incorporated by reference to Exhibit  4.7 to Current Report on Form 8-K filed February 23, 2006).                                                                            |
|   |   |                                                                                                                                                                                                                                                                     |
| 4.21   |   | Convertible Subordinated Debenture dated February  28, 2006 issued in favor of Phillips W. Smith Family Trust (incorporated by  reference to Exhibit 4.7 to Current Report on Form 8-K filed March 3, 2006).                                                             |
|   |   |                                                                                                                                                                                                                                                                     |
| 4.22   |   | Convertible Subordinated Debenture dated February  28, 2006 issued in favor of Bruce Culver (incorporated by reference to  Exhibit 4.8 to Current Report on Form 8-K filed March 3, 2006).                                                                               |
|   |   |                                                                                                                                                                                                                                                                     |
| 4.23   |   | Form of revised Convertible Subordinated Debenture  issued to William Reiling, James Davis, Bruce Culver, and the Phillips W.  Smith Family Trust in replacement of Convertible Subordinated Debentures  dated February 17, 2006 and February 28, 2006 (filed herewith). |
|   |   |                                                                                                                                                                                                                                                                     |
| 10.1   |   | License Agreement by and between CS Medical  Technologies, LLC and ProUroCare Inc., dated July 6, 2001 (incorporated by  reference to Exhibit 10.10 to Registration Statement on Form SB-2/A filed  October 1, 2004).                                                    |
|   |   |                                                                                                                                                                                                                                                                     |
| 10.2   |   | License Agreement by and between Rensselaer Polytechnic  Institute and ProUroCare Inc., dated July 13, 2001 (incorporated by reference  to Exhibit 10.11 to Registration Statement on Form SB-2/A filed October 1,  2004).                                               |
|   |   |                                                                                                                                                                                                                                                                     |
| 10.3   |   | License Agreement by and between Profile, LLC and  ProUroCare Inc., dated January 14, 2002, as amended on March 22, 2002  (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K  filed April 20, 2004).                                               |
|   |   |                                                                                                                                                                                                                                                                     |
| 10.4   |   | Letter of Understanding by and between Profile LLC  and ProUroCare Inc., dated March 23, 2004 (incorporated by reference to  Exhibit 10.4 to Registration Statement on Form SB-2 filed August 3, 2004).                                                                  |
|   |   |                                                                                                                                                                                                                                                                     |
| 10.5   |   | Research and Development Agreement by and among  ProUroCare Medical Inc., Artann Laboratories, Inc. and Armen Sarvazyan, dated  July 15, 2004 (incorporated by reference to Exhibit 10.1 to Quarterly Report  on Form 10-QSB filed August 3, 2004).                      |

 

----

 
| 10.6    |   | Development Agreement by and among ProUroCare  Medical Inc., Artann Laboratories, Inc. and Armen Sarvazyan, dated July 15,  2004 (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form  10-QSB filed August 3, 2004).            |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                              |
| 10.7 *  |   | Employment Agreement by and between ProUroCare  Medical Inc. and Maurice R. Taylor, II, dated January 1, 2005 (incorporated  by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 9,  2005).                                    |
|    |   |                                                                                                                                                                                                                                              |
| 10.8 *  |   | Employment Agreement by and between ProUroCare  Medical Inc. and Michael P. Grossman ,dated March 4, 2005 (incorporated by  reference to Exhibit 10.2 to Current Report on Form 8-K filed March 9, 2005).                                         |
|    |   |                                                                                                                                                                                                                                              |
| 10.9 *  |   | ProUroCare Medical Inc. 2002 Stock Option Plan, as  amended (incorporated by reference to Exhibit 10.8 to Annual Report on Form  10-KSB filed March 31, 2005).                                                                                    |
|    |   |                                                                                                                                                                                                                                              |
| 10.10 * |   | ProUroCare Medical Inc. 2004 Stock Option Plan, as  amended (incorporated by reference to Exhibit 10.9 to Annual Report on Form  10-KSB filed March 31, 2005).                                                                                    |
|    |   |                                                                                                                                                                                                                                              |
| 10.11 * |   | Employment Agreement by and between ProUroCare Inc.  and Richard B. Thon, dated July 21, 2004 (incorporated by reference to  Exhibit 10.9 to Registration Statement on Form SB-2 filed August 3, 2004).                                           |
|    |   |                                                                                                                                                                                                                                              |
| 10.12   |   | Promissory Note between Venture Bank and ProUroCare  Inc., dated March 31, 2005 (incorporated by reference to Exhibit 10.18 to  Registration Statement on Form SB-2/A filed April 4, 2005).                                                       |
|    |   |                                                                                                                                                                                                                                              |
| 10.13   |   | Commercial Security Agreement between Venture Bank  and ProUroCare Inc. dated March 31, 2005 (incorporated by reference to  Exhibit 10.19 to Registration Statement on Form SB-2/A filed April 4, 2005).                                          |
|    |   |                                                                                                                                                                                                                                              |
| 10.14   |   | Placement Agency Agreement between Stonegate  Securities, Inc. and ProUroCare Medical Inc., dated April 11, 2005  (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10QSB  filed August 22, 2005).                           |
|    |   |                                                                                                                                                                                                                                              |
| 10.15   |   | Change in Terms Agreement between Venture Bank and  ProUroCare Inc., dated July 2, 2005 (incorporated by reference to Exhibit  10.4 to Quarterly Report on Form 10QSB filed August 22, 2005).                                                     |
|    |   |                                                                                                                                                                                                                                              |
| 10.16   |   | Memorandum of Understanding between ProUroCare Inc.  and Urologix, Inc., dated July 27, 2005 (incorporated by reference to Exhibit  10.1 to Current Report on Form 8-K filed August 2, 2005).                                                     |
|    |   |                                                                                                                                                                                                                                              |
| 10.17   |   | Sublicense agreement between ProUroCare Inc. and  Urologix, Inc., dated July 27, 2005 (incorporated by reference to Exhibit  10.2 to Current Report on Form 8-K filed August 2, 2005).                                                            |
|    |   |                                                                                                                                                                                                                                              |
| 10.18   |   | Amendment #1 to License Agreement by and between  ProUroCare Inc. and Rensselaer Polytechnic Institute Dated July 13, 2001,  dated July 27, 2005 (incorporated by reference to Exhibit 10.3 to Current  Report on Form 8-K filed August 2, 2005). |
|    |   |                                                                                                                                                                                                                                              |
| 10.19 * |   | Final Settlement Agreement and Unconditional Release  between Todd E. Leonard and ProUroCare, Inc., dated August 1, 2005  (incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K  filed August 2, 2005).                        |
|    |   |                                                                                                                                                                                                                                              |
| 10.20 * |   | Employment Offer Agreement by and between ProUroCare  Medical Inc. and Alan L. Haggerty, dated September 6, 2005 (incorporated by  reference to Exhibit 10.26 to Annual Report on Form 10-KSB filed March 31,  2006).                             |
|    |   |                                                                                                                                                                                                                                              |
| 10.21   |   | Promissory Note in the amount of $100,000 issued by  ProUroCare Inc. in favor of Venture Bank, dated September 14, 2005  (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K  filed September 20, 2005).                     |

 

----

 
| 10.22  |   | Promissory Note in the amount of $100,000 issued by ProUroCare  Inc. in favor of Roman Pauly and Maryjo Pauly, dated September 21, 2005  (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K  filed September 27, 2005).                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                          |
| 10.23  |   | Promissory Note in the amount of $300,000 issued by  ProUroCare Inc. in favor of Venture Bank, dated October 20, 2005  (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K  filed October 25, 2005).                                     |
|   |   |                                                                                                                                                                                                                                                          |
| 10.24  |   | Demand Promissory Note issued in favor of Alexander  Nazarenko, dated January 25, 2006 (incorporated by reference to Exhibit 10.1  to Current Report on Form 8-K filed January 31, 2006).                                                                     |
|   |   |                                                                                                                                                                                                                                                          |
| 10.25  |   | Demand Promissory Note issued in favor of David  Koenig, dated January 25, 2006 (incorporated by reference to Exhibit 10.2 to  Current Report on Form 8-K filed January 31, 2006).                                                                            |
|   |   |                                                                                                                                                                                                                                                          |
| 10.26  |   | Loan Agreement by and among Adron Holdings, LLC,  ProUroCare Inc., Maurice Taylor II and David Koenig, dated January 25, 2006  (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K  filed January 31, 2006).                             |
|   |   |                                                                                                                                                                                                                                                          |
| 10.27  |   | Promissory Note issued in favor of Adron Holdings,  LLC, dated January 25, 2006 (incorporated by reference to Exhibit 10.4 to  Current Report on Form 8-K filed January 31, 2006).                                                                            |
|   |   |                                                                                                                                                                                                                                                          |
| 10.28  |   | Promissory Note issued in favor of Crown Bank, executed  February 16, 2006 and effective January 11, 2006 (incorporated by reference  to Exhibit 4.1 to Current Report on Form 8-K filed February 23, 2006).                                                  |
|   |   |                                                                                                                                                                                                                                                          |
| 10.29  |   | Guaranty provided to Crown Bank on behalf of  ProUroCare Medical Inc. dated January 10, 2006 (incorporated by reference to  Exhibit 4.4 to Current Report on Form 8-K filed February 23, 2006).                                                               |
|   |   |                                                                                                                                                                                                                                                          |
| 10.30  |   | Guaranty provided to Crown Bank on behalf of  ProUroCare Medical Inc. dated February 28, 2006 (incorporated by reference to  Exhibit 4.5 to Current Report on Form 8-K filed March 3, 2006).                                                                  |
|   |   |                                                                                                                                                                                                                                                          |
| 10.31  |   | Assignment of CS Medical Technologies LLC License  Agreement between ProUroCare Inc. and Crown Bank, dated January 11, 2006 and  executed February 16, 2006 (incorporated by reference to Exhibit 4.3 to Current  Report on Form 8-K filed February 23, 2006) |
|   |   |                                                                                                                                                                                                                                                          |
| 10.32  |   | Assignment of Profile LLC License Agreement between  ProUroCare Inc. and Crown Bank, dated January 11, 2006 and executed February  16, 2006 (incorporated by reference to Exhibit 4.2 to Current Report on Form  8-K filed February 23, 2006).                |
|   |   |                                                                                                                                                                                                                                                          |
| 10.33  |   | Promissory Note issued in favor of Crown Bank, dated  February 28, 2006 (incorporated by reference to Exhibit 4.1 to Current Report  on Form 8-K filed March 3, 2006).                                                                                        |
|   |   |                                                                                                                                                                                                                                                          |
| 10.34  |   | Final Settlement Agreement and Unconditional Release  between Todd E. Leonard, and ProUroCare, Inc., dated March 3, 2006  (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K  filed March 3, 2006).                                     |
|   |   |                                                                                                                                                                                                                                                          |
| 10.35  |   | Promissory Note issued in favor of Roman Pauly,  dated June 1, 2006 (incorporated by reference to Exhibit 10.1 to Current  Report on Form 8-K filed June 6, 2006).                                                                                            |
|   |   |                                                                                                                                                                                                                                                          |
| 10.36  |   | Amendment #1 to Promissory Note dated June 1, 2006  issued in favor of Roman Pauly, dated August 24, 2006 (incorporated by  reference to Exhibit 10.3 to Quarterly Report on Form 10-QSB filed September  18, 2006).                                          |
|   |   |                                                                                                                                                                                                                                                          |
| 10.37  |   | Promissory Note issued in favor of Adron Holdings,  LLC, dated November 29, 2006, as amended March 21, 2007 (filed herewith).                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                          |
| 10.38  |   | Amendment #2 to Promissory Note dated June 1, 2006  issued in favor of Roman Pauly, dated March 21, 2007 (filed herewith).                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                          |
| 10.39  |   | Amendment to MOU between ProUroCare Inc. and  Urologix Inc., dated March 21, 2007 (filed herewith).                                                                                                                                                           |

 

----

 
| 14.1   |   | Code of Ethics (incorporated by reference to Exhibit  14.1 to Annual Report on Form 10KSB filed March 31, 2005).                                                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                          |
| 21.1   |   | List of Subsidiaries of ProUroCare Medical Inc.  (incorporated by reference to Exhibit 21.1 to Registration Statement on Form  SB-2 filed August 3, 2004).                                                    |
|   |   |                                                                                                                                                                                                          |
| 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 and Chief  Financial Officer pursuant to pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |

 

----

* Management contract or compensatory plan.

----

**ITEM 14: PRINCIPAL ACCOUNTANT FEESAND SERVICES**

**PrincipalAccountant Fees and Services**

The following is a summary of the fees billed to the Company by VirchowKrause for professional services rendered for the calendar years ended December31, 2006 and 2005, respectively: 
| Fee Category   | ** ** | **Fiscal 2006 Fees** | ** ** | **Fiscal 2005 Fees** | ** ** |
|---------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Audit Fees          |       | $                              | 59,700     |                           | $          | 46,100 |   |
| Audit-related  Fees |       | —                         |       | 3,335                          |       |
| Tax Fees            |       | 890                            |       | 2,740                          |       |
| All Other Fees      |       | —                         |       | —                         |       |
| Total Fees          | ** ** | **$**                          | **60,590** | ** **                     | **$**      | **52,175** | ** ** |

 

*Audit Fees.* These consist of fees billed by our auditors for professionalservices rendered for the audit of our consolidated financial statements andreview of the interim consolidated financial statements included in quarterlyreports.

*Audit-related Fees.* These consist of feesbilled by our auditors forprofessional services rendered for the review of the Form SB-2 filing and SEC comment letters

*Tax Fees*. These consist of fees billed by our auditors for professional services for taxcompliance, tax advice and tax planning.

*AllOther Fees.* There were no other fees paid.

**Preapproval Policies**

The policy of our audit committee is toreview and preapprove both audit and non-audit services to be provided by theindependent auditors (other than with de minimis exceptions permitted by theSarbanes-Oxley Act of 2002).  This dutymay be delegated to one or more designated members of the Audit Committee withany such approval reported to the committee at its next regularly scheduledmeeting.  Approval of non-audit servicesshall be disclosed to investors in periodic reports required by Section 13(a)of the Securities Exchange Act of 1934. 100 percent of the fees paid to Virchow Krause were pre-approved as aforesaid.

No services in connection with appraisal orvaluation services, fairness opinions or contribution-in-kind reports wererendered by Virchow Krause.  Furthermore,no work of Virchow Krause with respect to its services rendered to the Companywas performed by anyone other than Virchow Krause.

----

**SIGNATURES**

Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ProUroCare Medical, Inc. |
|--------------------------|
|                     |
|                     |
| By:                      | /s/ Richard C. Carlson |   |
|                     | Richard C.  Carlson |
|                     | Chief Executive  Officer |
|                     | Date: March 30,  2007 |

 

Pursuant to therequirements of the Securities Act of 1934, this Annual Report has been signedas of the 30th day of March, 2007, by the following persons in the capacitiesindicated.
| Name                       | ** ** | **Title** |
|----------------------------|------------|-----------|
|                       |       |      |
| /s/ Richard C.  Carlson    |       |      | Chief Executive Officer (Principal Executive  Officer) |
| Richard C. Carlson         |       |      |   |
|                       |       |      |   |
| /s/ Richard Thon           |       |      | Chief Financial Officer (Principal Financial and |
| Richard Thon               |       |      | Accounting Officer) |
|                       |       |      |   |
| /s/ Maurice R.  Taylor, II |       |      | Chairman |
| Maurice R.  Taylor, II     |       |      |   |
|                       |       |      |   |
| /s/ David Koenig           |       |      | Director |
| David Koenig               |       |      |   |
|                       |       |      |   |
| /s/ Alex Nazarenko         |       |      | Director |
| Alex Nazarenko             |       |      |   |
|                       |       |      |   |
| /s/ Scott E.  Smith        |       |      | Director |
| Scott E. Smith             |       |      |   |

7

----