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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-QSB
 QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2005
 Commission File Number: 0-24635
 HYPERTENSION DIAGNOSTICS, INC.
  MINNESOTA
(State of incorporation)
    
    41-1618036
(I.R.S. Employer Identification No.)
 
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  o þ
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Page No.PART I. FINANCIAL INFORMATION:Item 1. Financial StatementsBalance Sheets  September 30, 2005 and June 30, 2005
    
    3Statements of Operations  Three Months Ended
September 30, 2005 and 2004, respectively
    
    4Statements of Cash Flows  Three Months Ended
September 30, 2005 and 2004, respectively
    
    5Notes to Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    10Item 3. Controls and Procedures
    
    17PART II. OTHER INFORMATION:Item 1. Legal Proceedings
    
    18Item 2. Changes in Securities
    
    18Item 6. Exhibits
    
    18SIGNATURES
    
    19CERTIFICATIONS
    
    20Certification of CEO Pursuant to 13a-14/15d-14Certification of CFO Pursuant to 13a-14/15d-14Certificate Pursuant to 18 U.S.C.
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Item 1. Financial Statements
  
  September 30,
    
    
    June 30,2005
    
    
    2005AssetsCurrent Assets:Cash and cash equivalents
    
    $
    1,169,653
    
    
    $
    1,525,865Accounts receivable
    
    
    145,528
    
    
    
    92,592Inventory
    
    
    311,932
    
    
    
    322,278Prepaids and other current assets
    
    
    29,807
    
    
    
    22,012Total Current Assets
    
    
    1,656,920
    
    
    
    1,962,747Property and Equipment:Leasehold improvements
    
    
    17,202
    
    
    
    17,202Furniture and equipment
    
    
    1,254,500
    
    
    
    1,272,763Less accumulated depreciation and amortization
    
    
    (1,090,370
    )
    
    
    (1,065,376
    )181,333
    
    
    
    224,589Other Assets
    
    
    6,530
    
    
    
    6,530Total Assets
    
    $
    1,844,783
    
    
    $
    2,193,866Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    102,718
    
    
    $
    85,958Accrued payroll and payroll taxes
    
    
    431,598
    
    
    
    459,431Deferred revenue
    
    
    4,631
    
    
    
    5,255Other accrued expenses
    
    
    25,709
    
    
    
    24,027Total Current Liabilities
    
    
    564,656
    
    
    
    574,671Deferred Revenue, less current portion
    
    
    13,807
    
    
    
    15,658Shareholders Equity:Series A Convertible Preferred Stock, $.01 par value:Authorized shares5,000,000Issued and outstanding shares896,211 and 915,411
at September 30, 2005 and June 30, 2005, respectively
    
    
    8,962
    
    
    
    9,154Common Stock, $.01 par value:Authorized shares150,000,000Issued and outstanding shares32,973,483 and 32,743,083
at September 30, 2005 and June 30, 2005, respectively
    
    
    329,735
    
    
    
    327,431Additional paid-in capital
    
    
    25,970,417
    
    
    
    25,972,529Accumulated deficit
    
    
    (25,042,794
    )
    
    
    (24,705,577
    )Total Shareholders Equity
    
    
    1,266,320
    
    
    
    1,603,537Total Liabilities and Shareholders Equity
    
    $
    1,844,783
    
    
    $
    2,193,866
 See accompanying notes.
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Three Months EndedSeptember 302005
    
    
    2004Revenue:Equipment sales
    
    $
    251,922
    
    
    $
    35,850Equipment rental
    
    
    121,530
    
    
    
    118,148Service/contract income
    
    
    7,464
    
    
    
    99,423380,916
    
    
    
    253,421Cost of Sales
    
    
    32,500
    
    
    
    47,202Gross Profit
    
    
    348,416
    
    
    
    206,219Expenses:Selling, general and administrative
    
    
    697,109
    
    
    
    647,642Total Expenses
    
    
    697,109
    
    
    
    647,642Operating Loss
    
    
    (348,693
    )
    
    
    (441,423
    )Other Income (Expense):Interest income
    
    
    11,476
    
    
    
    6,944Net Loss
    
    $
    (337,217
    )
    
    $
    (434,479
    )Basic and Diluted Net Loss per Share
    
    $
    (.01
    )
    
    $
    (.02
    )Weighted Average Shares Outstanding
    
    
    32,930,909
    
    
    
    27,001,928
 See accompanying notes.
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Three Months EndedSeptember 302005
    
    
    2004Operating Activities:Net loss
    
    $
    (337,217
    )
    
    $
    (434,479
    )Adjustments to reconcile net loss to net
cash used in operating activities:Value of stock options, Common Stock and warrants
issued in lieu of cash
    
    
    
    
    
    
    10,013Depreciation
    
    
    36,359
    
    
    
    42,327Net book value of sale of property and equipment
    
    
    6,897
    
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    (52,936
    )
    
    
    84,500Interest receivable
    
    
    
    
    
    
    8,920Inventory
    
    
    10,346
    
    
    
    (144,394
    )Prepaids and other current assets
    
    
    (7,795
    )
    
    
    467Accounts payable
    
    
    16,760
    
    
    
    62,604Accrued payroll and payroll taxes
    
    
    (27,833
    )
    
    
    9,089Deferred revenue
    
    
    (2,475
    )
    
    
    4,375Other accrued expenses
    
    
    1,682
    
    
    
    (5,221
    )Net cash used in operating activities
    
    
    (356,212
    )
    
    
    (361,799
    )Investing Activities:Purchase of property and equipment
    
    
    
    
    
    
    (33,692
    )Net cash used in investing activities
    
    
    
    
    
    
    (33,692
    )Financing Activities:Issuance of Preferred Stock and Common Stock
    
    
    
    
    
    
    191,794Net cash provided by financing activities
    
    
    
    
    
    
    191,794Net (decrease) in cash and cash equivalents
    
    
    (356,212
    )
    
    
    (203,697
    )Cash and cash equivalents at beginning of period
    
    
    1,525,865
    
    
    
    1,378,293Cash and cash equivalents at end of period
    
    $
    1,169,653
    
    
    $
    1,174,596
 See accompanying notes.
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Accounting for Stock-Based Compensation.
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Three Months Ended September 302005
    
    
    2004Net Loss:As Reported
    
    $
    (337,217
    )
    
    $
    (434,479
    )Fair value compensation expense
    
    
    (53,497
    )
    
    
    (50,623
    )Pro forma
    
    $
    (390,714
    )
    
    $
    (485,102
    )Basic and Diluted Net Loss per Share:As Reported
    
    $
    (0.01
    )
    
    $
    (0.02
    )Fair value compensation expense
    
    
    
    
    
    
    Pro forma
    
    $
    (0.01
    )
    
    $
    (0.02
    )Stock Based Compensation:As Reported
    
    $
    
    
    
    $
    Fair value compensation expense
    
    
    (53,497
    )
    
    
    (50,623
    )Pro forma
    
    $
    (53,497
    )
    
    $
    (50,623
    )
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ExpectedRisk-Free
    
    Dividend
    
    Expected
    
    ExpectedThree Months Ended
    
    Interest Rate
    
    Yield
    
    Life
    
    VolatilitySeptember 30, 2005
    
    
    4.25
    %
    
    None
    
    5 years
    
    
    1.120September 30, 2004
    
    
    3.60
    %
    
    None
    
    5 years
    
    
    1.060
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Warrant A ($.17 exercise price)
    
    Warrant B ($.22 exercise price)Original
    
    Extended
    
    Revised
    
    Original
    
    Extended
    
    RevisedExpiration
    
    Expiration
    
    Extension
    
    Expiration
    
    Expiration
    
    ExtensionDate
    
    Date
    
    Date
    
    Date
    
    Date
    
    DateAugust Offering
    
    N/A
    
    N/A
    
    N/A
    
    2/28/05
    
    10/31/05
    
    02/28/06
   Warrant A ($.17 exercise price)
    
    Warrant B ($.22 exercise price)Original
    
    Extended
    
    Revised
    
    Original
    
    Extended
    
    RevisedExpiration
    
    Expiration
    
    Extension
    
    Expiration
    
    Expiration
    
    ExtensionDate
    
    Date
    
    Date
    
    Date
    
    Date
    
    DateFebruary Offering
    
    11/09/04
    
    12/02/05
    
    01/20/06
    
    08/09/05
    
    02/09/06
    
    08/09/06
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Forward-Looking Statements
  Overview
 PulseWave ® ®
 
    
    The CR-2000 Research System is being marketed worldwide for research
purposes only to clinical research investigators for the purpose of collecting
data in cardiovascular studies. Further, because the CR-2000 Research System
bears the CE Mark (CE0123 ) and meets the European Union Medical
Device Directive, physicians may use the CR-2000 Research System with patients
in a clinical setting in the European Union.
 
    
    In the U.S., the CVProfilor® DO-2020 System is being marketed to
primary care physicians and other health care professionals on a
per-patient-tested rental basis. It can also be purchased or leased.
Utilizing our Central Data Management Facility (the CDMF), we are able to
track utilization of the CVProfilor® DO-2020 System in each
physicians office and medical clinic and to invoice our physician customers on
the number of CardioVascular Profile Reports (CVProfile Reports) which they
generate each month. We anticipate that marketing the CVProfilor®
DO-2020 System under a per-patient-tested rental program will allow us to
accelerate the
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rate of product acceptance in the medical marketplace In the fourth quarter of
fiscal year 2005, we implemented a new rent-to-own program that allows rental
customers to credit a portion of their payments toward the purchase of their
CVProfilor® DO-2020 System. Acquisition options were enhanced with
the assistance of a third-party leasing company, which the physicians can use to
acquire their CVProfilor.
 
    
    The CVProfilor® MD-3000 System is being marketed through
distributors to physicians outside the United States. These distributors
purchase the product from us and then re-sell it to end-user physicians in
their territory. The CVProfilor® MD-3000 System has a CE Mark that
allows it to be marketed within European Union countries. The
CVProfilor® MD-3000 may require certain regulatory approval for it
to be marketed in other countries throughout the world.
 Critical Accounting Policies
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Results of Operations
  Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
  Three Months Ended September 30, 2005Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    380,916
    
    
    $
    251,922
    
    
    $
    121,530
    
    
    $
    7,464Cost of Sales
    
    
    32,500
    
    
    
    7,562
    
    
    
    24,797
    
    
    
    141Gross Profit
    
    $
    348,416
    
    
    $
    244,360
    
    
    $
    96,733
    
    
    $
    7,323
 Three Months Ended September 30, 2004Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    253,421
    
    
    $
    35,850
    
    
    $
    118,148
    
    
    $
    99,423Cost of Sales
    
    
    47,202
    
    
    
    5,181
    
    
    
    26,287
    
    
    
    15,734Gross Profit
    
    $
    206,219
    
    
    $
    30,669
    
    
    $
    91,861
    
    
    $
    83,689
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® ® ® ® ® ® ® ® ®
 ® ® ®
 ® ® ®
 ®
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Three Months EndedSeptember 302005
    
    
    2004Wages, related expenses and benefits
    
    $
    228,320
    
    
    $
    121,233Patents and related expenses
    
    
    1,048
    
    
    
    Outside consultants
    
    
    88,861
    
    
    
    123,885Rent (building/equipment) and utilities
    
    
    25,046
    
    
    
    23,651Insurance-general and directors/officers liability
    
    
    17,186
    
    
    
    20,203Selling, marketing and promotion, including applicable wages
    
    
    215,514
    
    
    
    170,011Legal and audit/accounting fees
    
    
    53,992
    
    
    
    124,171Royalties
    
    
    11,203
    
    
    
    4,620Depreciation and amortization
    
    
    11,562
    
    
    
    16,039Other-general and administrative
    
    
    44,377
    
    
    
    43,829Total selling, general and administrative expenses
    
    $
    697,109
    
    
    $
    647,642
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Liquidity and Capital Resources
  Three Months Ended September 30Net cash used in operating activities:
    
    2005
    
    
    2004 net loss, as adjusted for non-cash items
    
    $
    293,961
    
    
    
    
    
    $
    382,139 (increase) decrease in inventory:
    
    
    10,346
    
    
    
    (A)
    
    
    (144,394
    )(A) In September 2004, we purchased
300 units of a
certain inventory
part from one vendor
amounting to
$161,192.
  ®
 ® ®
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® ®
 ® ® ®
 ®
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Item 3. Controls and Procedures.
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 2. Changes in Securities
  
 Item 6. Exhibits
  31.1
    
    
    Certification of Chief Executive Officer pursuant to
13a-14 and 15d-14 of the Exchange Act31.2
    
    
    Certification of Chief Financial Officer pursuant to
13a-14 and 15d-14 of the Exchange Act32
    
    
    Certificate pursuant to 18 U.S.C. § 1350
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SIGNATURES
  HYPERTENSION DIAGNOSTICS, INC.By
    
    /s/ James S. MurphyJames S. Murphy
Senior Vice President, Finance and
Administration and Chief Financial Officer
(principal financial officer)Date: November 14, 2005
 19