##### Table of Contents



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 March 31, 2006
 Commission File Number: 0-24635
 HYPERTENSION DIAGNOSTICS, INC.
  MINNESOTA
(State of incorporation)
    
    41-1618036
(I.R.S. Employer Identification No.)
 
  Yesþ
    
    No o
  Yeso
    
    No þ
   Yeso
    
    No þ




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Page No.PART I. FINANCIAL INFORMATION:Item 1.
    
    Financial StatementsBalance Sheets  March 31, 2006 (Unaudited) and June 30, 2005
    
    
    3Unaudited Statements of Operations  Three Months and Nine Months Ended March 31, 2006 and 2005, respectively
    
    
    4Unaudited Statements of Cash Flows  Nine Months Ended March 31, 2006 and 2005, respectively
    
    
    5Notes to Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Controls and Procedures
    
    
    21PART II. OTHER INFORMATION:Item 1.
    
    Legal Proceedings
    
    
    23Item 2.
    
    Changes in Securities
    
    
    23Item 6.
    
    Exhibits
    
    
    23SIGNATURES
    
    
    25CERTIFICATIONS
    
    
    26Certification of Chief Executive OfficerCertification of Chief Financial OfficerCertification Pursuant to 18 U.S.C. Section 1350
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##### Table of Contents



Item 1. Financial Statements
  
  March 31,
    
    
    June 30,2006
    
    
    2005(Unaudited)
    
    
    (Audited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    1,815,308
    
    
    $
    1,525,865Accounts receivable
    
    
    150,330
    
    
    
    92,592Inventory
    
    
    316,027
    
    
    
    322,278Prepaids and other current assets
    
    
    40,292
    
    
    
    22,012Total Current Assets
    
    
    2,321,957
    
    
    
    1,962,747Property and Equipment:Leasehold improvements
    
    
    17,202
    
    
    
    17,202Furniture and equipment
    
    
    1,202,541
    
    
    
    1,272,763Less accumulated depreciation and amortization
    
    
    (1,114,801
    )
    
    
    (1,065,376
    )104,942
    
    
    
    224,589Other Assets
    
    
    6,530
    
    
    
    6,530Total Assets
    
    $
    2,433,429
    
    
    $
    2,193,866Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    99,877
    
    
    $
    85,958Accrued payroll and payroll taxes
    
    
    244,010
    
    
    
    459,431Deferred revenue
    
    
    8,070
    
    
    
    5,255Other accrued expenses
    
    
    39,586
    
    
    
    24,027Total Current Liabilities
    
    
    391,543
    
    
    
    574,671Deferred Revenue, less current portion
    
    
    10,105
    
    
    
    15,658Shareholders Equity:Series A Convertible Preferred Stock, $.01 par value:Authorized shares5,000,000Issued and outstanding shares897,590 and 915,411
at March 31, 2006 and June 30, 2005, respectively
    
    
    8,976
    
    
    
    9,154Common Stock, $.01 par value:Authorized shares150,000,000Issued and outstanding shares39,003,438 and 32,743,083
at March 31, 2006 and June 30, 2005, respectively
    
    
    390,034
    
    
    
    327,431Additional paid-in capital
    
    
    27,235,523
    
    
    
    25,972,529Accumulated deficit
    
    
    (25,602,752
    )
    
    
    (24,705,577
    )Total Shareholders Equity
    
    
    2,031,781
    
    
    
    1,603,537Total Liabilities and Shareholders Equity
    
    $
    2,433,429
    
    
    $
    2,193,866
 See accompanying notes.
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Three Months Ended
    
    
    Nine Months EndedMarch 31
    
    
    March 312006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Equipment sales
    
    $
    457,328
    
    
    $
    25,145
    
    
    $
    1,142,986
    
    
    $
    157,865Equipment rental
    
    
    107,066
    
    
    
    185,382
    
    
    
    334,210
    
    
    
    430,739Service/contract income
    
    
    7,594
    
    
    
    4,707
    
    
    
    16,814
    
    
    
    172,066571,988
    
    
    
    215,234
    
    
    
    1,494,010
    
    
    
    760,670Cost of Sales
    
    
    26,471
    
    
    
    27,772
    
    
    
    88,964
    
    
    
    127,060Gross Profit
    
    
    545,517
    
    
    
    187,462
    
    
    
    1,405,046
    
    
    
    633,610Expenses:Selling, general and administrative
    
    
    831,318
    
    
    
    553,541
    
    
    
    2,332,666
    
    
    
    1,886,431Total Expenses
    
    
    831,318
    
    
    
    553,541
    
    
    
    2,332,666
    
    
    
    1,886,431Operating Loss
    
    
    (285,801
    )
    
    
    (366,079
    )
    
    
    (927,620
    )
    
    
    (1,252,821
    )Other Income (Expense):Interest income
    
    
    9,770
    
    
    
    9,625
    
    
    
    30,445
    
    
    
    22,120Net Loss
    
    $
    (276,031
    )
    
    $
    (356,454
    )
    
    $
    (897,175
    )
    
    $
    (1,230,701
    )Basic and Diluted Net Loss per Share
    
    $
    (.01
    )
    
    $
    (.01
    )
    
    $
    (.03
    )
    
    $
    (.05
    )Weighted Average Shares Outstanding
    
    
    35,012,499
    
    
    
    27,778,459
    
    
    
    33,726,604
    
    
    
    27,287,367
 See accompanying notes.
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Nine Months EndedMarch 312006
    
    
    2005Operating Activities:Net loss
    
    $
    (897,175
    )
    
    $
    (1,230,701
    )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
    
    
    
    
    
    
    21,278Depreciation
    
    
    100,856
    
    
    
    124,812Net book value of sale of property and equipment
    
    
    19,844
    
    
    
    Accelerated vesting  stock options
    
    
    24,025
    
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    (57,738
    )
    
    
    206,950Interest receivable
    
    
    
    
    
    
    8,920Inventory
    
    
    6,251
    
    
    
    (129,052
    )Prepaids and other current assets
    
    
    (18,280
    )
    
    
    14,922Accounts payable
    
    
    13,919
    
    
    
    (1,352
    )Accrued payroll and payroll taxes
    
    
    296,198
    
    
    
    247,420Deferred revenue
    
    
    (2,738
    )
    
    
    5,313Other accrued expenses
    
    
    15,559
    
    
    
    1,714Net cash used in operating activities
    
    
    (499,279
    )
    
    
    (729,776
    )Investing Activities:Purchase of property and equipment
    
    
    (1,053
    )
    
    
    (33,692
    )Net cash used in investing activities
    
    
    (1,053
    )
    
    
    (33,692
    )Financing Activities:Issuance of Preferred Stock and Common Stock
    
    
    789,775
    
    
    
    930,101Net cash provided by financing activities
    
    
    789,775
    
    
    
    930,101Net increase in cash and cash equivalents
    
    
    289,443
    
    
    
    166,633Cash and cash equivalents at beginning of period
    
    
    1,525,865
    
    
    
    1,378,293Cash and cash equivalents at end of period
    
    $
    1,815,308
    
    
    $
    1,544,926Supplemental Schedule of Noncash Investing and Financing Activities:Common Stock issued in satisfaction of accrued payroll liability
    
    $
    511,619
    
    
    $
    400,000
 See accompanying notes.
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6




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Accounting for Stock-Based Compensation.
    7




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Three Months Ended March 31
    
    
    Nine Months Ended March 312006
    
    
    2005
    
    
    2006
    
    
    2005Net Loss:As Reported
    
    $
    (276,031
    )
    
    $
    (356,454
    )
    
    $
    (897,175
    )
    
    $
    (1,230,701
    )Fair value compensation expense
    
    
    
    
    
    
    (60,422
    )
    
    
    (285,245
    )
    
    
    (291,216
    )Pro Forma
    
    $
    (276,031
    )
    
    $
    (416,876
    )
    
    $
    (1,182,420
    )
    
    $
    (1,521,917
    )Basic and Diluted Net Loss per Share:As Reported
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.05
    )Fair value compensation expense
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )Pro Forma
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.06
    )Stock Based Compensation:As Reported
    
    $
    
    
    
    $
    
    
    
    $
    24,025
    
    
    $
    Fair value compensation expense
    
    
    
    
    
    
    (60,422
    )
    
    
    (309,270
    )
    
    
    (291,216
    )Pro Forma
    
    $
    
    
    
    $
    (60,422
    )
    
    $
    (285,245
    )
    
    $
    (291,216
    )
  ExpectedRisk-Free
    
    
    Dividend
    
    
    Expected
    
    
    ExpectedInterest Rate
    
    
    Yield
    
    
    Life
    
    
    VolatilityThree Months EndedMarch 31, 2006
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMarch 31, 2005
    
    
    3.6%-3.75
    %
    
    None
    
    5 years
    
    
    1.060 -1.120Nine Months EndedMarch 31, 2006
    
    
    4.25
    %
    
    None
    
    5 years
    
    
    1.120March 31, 2005
    
    
    3.6%-3.75
    %
    
    None
    
    5 years
    
    
    1.060 -1.120
  8




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9




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Warrant B ($.22 exercise price)Original
    
    
    Extended
    
    
    RevisedExpiration
    
    
    Expiration
    
    
    ExtensionDate
    
    
    Date
    
    
    DateAugust Offering
    
    
    2/28/05
    
    
    
    4/28/06
    
    
    
    5/19/06
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11




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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
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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 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
     13




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Results of Operations
 ®
 Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
  Three Months Ended March 31, 2006Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    571,988
    
    
    $
    457,328
    
    
    $
    107,066
    
    
    $
    7,594Cost of Sales
    
    
    26,471
    
    
    
    4,532
    
    
    
    21,629
    
    
    
    310Gross Profit
    
    $
    545,517
    
    
    $
    452,796
    
    
    $
    85,437
    
    
    $
    7,284
 Three Months Ended March 31, 2005Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    215,234
    
    
    $
    25,145
    
    
    $
    185,382
    
    
    $
    4,707Cost of Sales
    
    
    27,772
    
    
    
    974
    
    
    
    26,784
    
    
    
    14Gross Profit
    
    $
    187,462
    
    
    $
    24,171
    
    
    $
    158,598
    
    
    $
    4,693
  14




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® ®
 ® ® ® ®
 ® ® ®
 ® ® ®
 ®
   15




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Three Months EndedMarch 31, 2006
    
    
    March 31, 2005Cost of Sales
    
    $
    42,403
    
    
    $
    3,248Inventory Reserve Adjustment
    
    
    (37,871
    )
    
    
    (2,274
    )Cost of Sales, as reported
    
    $
    4,532
    
    
    $
    974
  Three Months EndedMarch 312006
    
    
    2005Wages, related expenses and benefits
    
    $
    352,850
    
    
    $
    161,159Patents and related expenses
    
    
    2,129
    
    
    
    5,020Outside consultants
    
    
    41,189
    
    
    
    66,056Rent (building/equipment) and utilities
    
    
    25,647
    
    
    
    25,149Insurance-general and directors/officers liability
    
    
    14,275
    
    
    
    18,369Selling, marketing and promotion, including applicable wages
    
    
    277,197
    
    
    
    204,478Legal and audit/accounting fees
    
    
    45,746
    
    
    
    16,680Royalties
    
    
    16,932
    
    
    
    6,316Depreciation and amortization
    
    
    9,531
    
    
    
    13,989Other-general and administrative
    
    
    45,822
    
    
    
    36,325Total selling, general and administrative expenses
    
    $
    831,318
    
    
    $
    553,541
    16




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Nine Months Ended March 31, 2006 Compared to Nine Months Ended March 31, 2005
  Nine Months Ended March 31, 2006Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    1,494,010
    
    
    $
    1,142,986
    
    
    $
    334,210
    
    
    $
    16,814Cost of Sales
    
    
    88,964
    
    
    
    18,684
    
    
    
    69,809
    
    
    
    471Gross Profit
    
    $
    1,405,046
    
    
    $
    1,124,302
    
    
    $
    264,401
    
    
    $
    16,343
 Nine Months Ended March 31, 2005Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    760,670
    
    
    $
    157,865
    
    
    $
    430,739
    
    
    $
    172,066Cost of Sales
    
    
    127,060
    
    
    
    25,137
    
    
    
    79,855
    
    
    
    22,068Gross Profit
    
    $
    633,610
    
    
    $
    132,728
    
    
    $
    350,884
    
    
    $
    149,998
  ® ®
 ®
  17




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Nine Months EndedMarch 31, 2006
    
    
    March 31, 2005Cost of Sales
    
    $
    114,831
    
    
    $
    35,005Inventory Reserve Adjustment
    
    
    (96,147
    )
    
    
    (9,868
    )Cost of Sales, as reported
    
    $
    18,684
    
    
    $
    25,137
  Nine Months EndedMarch 312006
    
    
    2005Wages, related expenses and benefits
    
    $
    773,551
    
    
    $
    581,684Patents and related expenses
    
    
    3,177
    
    
    
    6,057Outside consultants
    
    
    193,065
    
    
    
    293,385Rent (building/equipment) and utilities
    
    
    75,885
    
    
    
    73,189Insurance-general and directors/officers liability
    
    
    46,690
    
    
    
    57,808Selling, marketing and promotion, including applicable wages
    
    
    852,870
    
    
    
    541,556Legal and audit/accounting fees
    
    
    138,978
    
    
    
    170,778Royalties
    
    
    44,316
    
    
    
    17,658Depreciation and amortization
    
    
    31,046
    
    
    
    44,956Compensation expense, accelerated stock option vesting
    
    
    24,025
    
    
    
    Other-general and administrative
    
    
    149,063
    
    
    
    99,360Total selling, general and administrative expenses
    
    $
    2,332,666
    
    
    $
    1,886,431
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Off-Balance Sheet Arrangements
  Liquidity and Capital Resources
  Nine Months Ended March 312006
    
    
    2005Net cash used in operating activities: net loss, as adjusted for non-cash items
    
    $
    (752,450
    )
    
    $
    (1,084,611
    ) (increase) decrease in accounts receivable:
    

    
    (57,738
    )
    
    
    (A) 206,950
    (A)
    
    $100,710 accounts receivable
balances re: four (4) CR-2000
unit sales in June, 2004 were
received in the quarter ended
September 30, 2004. (increase) decrease in inventory:
    

    
    6,251
    
    
    
    (B) (129,052)
    (B)
    
    In September 2004, we purchased
certain inventory parts from a
single vendor amounting to $161,192.
 19




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Nine Months Ended March 312006
    
    
    2005Net cash provided by financing activities: issuance of Preferred and Common Stock:
    
    
    (C) 789,775
    
    
    
    (D) 930,101
    (C)
    
    In January through March 2006,
we issued 2,330,357 shares of
common stock and 125,155 shares
of Series A Convertible Preferred
Stock to holders of warrants to
purchase common stock and Series A
Convertible Preferred Stock,
resulting
in gross proceeds of $789,775. The
exercise prices of the common stock
were a combination of $.17 per
share
and $.22 per share. The exercise
price
of the Series A Convertible
Preferred
Stock was $2.64 per share.
    (D)
    
    $914,021 of this amount pertains to
the issuance of 192,688 shares of
Series A Convertible Preferred
Stock
and 3,064,341 shares of common
stock to holders who exercised
certain stock purchase warrants.
  ®
 ® ®
 ® ® ®
 ®
 20




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Item 3. Controls and Procedures
       21




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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 Act
 31.2
    
    Certification of Chief Financial Officer pursuant to 13a-14 and 15d-14 of the Exchange Act
 32
    
    Certificate pursuant to 18 U.S.C. § 1350
 22




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SIGNATURES
  HYPERTENSION DIAGNOSTICS, INC.By
    
    /s/ James S. MurphyJames S. MurphySenior Vice President, Finance and Administration and Chief Financial Officer(principal financial officer)
  23