SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





_____________________








FORM
10-Q





(Mark
      One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended December 31, 2008oro
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934





For
      the transition period from
               to








Commission
File Number:  0-24635








HYPERTENSION
DIAGNOSTICS, INC.


(Exact
name of small business issuer as specified in its charter)








MINNESOTA
              (State
      of incorporation)
            
            41-1618036
              (I.R.S.
      Employer Identification No.)








2915
WATERS ROAD, SUITE 108


EAGAN,
MINNESOTA 55121-3528


(651)
687-9999


(Address
of issuer’s principal executive offices and telephone number)








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




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




Large
      accelerated filer 
            
            Accelerated
      filer Non-accelerated
      filer 
            
            Smaller
      reporting company x




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


YES
       NO x




The
number of shares of Common Stock outstanding as of February 13, 2008 was
40,963,088.





HYPERTENSION
DIAGNOSTICS, INC.





INDEX TO
FORM 10-Q





Page NoPART
      I.
            FINANCIAL
      INFORMATION:Item
      1.
            Financial
      StatementsBalance
      Sheets – December 31, 2008 (unaudited) and June 30, 2008
            4Statements
      of Operations (unaudited) – Three Months and Six Months Ended December 31,
      2008 and 2007
            5Statements
      of Cash Flows (unaudited) – Six Months Ended December 31, 2008 and
      2007
            6Notes
      to Financial Statements
            7Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            8Item
      4T.
            Controls
      and Procedures
            16PART
      II.
            OTHER
      INFORMATION:Item
      6.
            Exhibits
            16SIGNATURES
            17CERTIFICATIONS
            18





Forward-Looking
Statements





This report contains forward-looking
statements that are based on the current beliefs of our management as well as
assumptions made by and information currently available to
management.  In addition, we may make forward-looking statements
orally in the future by or on behalf of the Company.  When used, the
words “believe,” “expect,” “will,” “can,” “estimate,” “anticipate” and similar
expressions are intended to identify forward-looking statements.  We
caution readers not to place undue reliance on any forward-looking statements
and to recognize that the statements are not predictions of actual future
results.  Actual results could differ materially from those
anticipated in the forward-looking statements due to the risks and uncertainties
set forth in our 2008 Annual Report on Form 10-KSB under the caption “Risk
Factors,” as well as others not now anticipated.  These risks and
uncertainties include, without limitation: our ability to develop a business
model to timely generate acceptable levels of revenues; negative effect on our
stock price resulting from available securities for sale; our need for
additional capital; our dependence on our CVProfilor® DO-2020; the availability
of third-party reimbursement for the use of our products; increased market
acceptance of our products; our marketing strategy potentially resulting in
lower revenues; the illiquidity of our securities on the OTC Bulletin Board and
the related restrictions on our securities relating to “penny stocks”; potential
violations by us of federal and state securities laws; the availability of
integral components for our products; our ability to develop distribution
channels; increased competition; changes in government regulation; health care
reforms; exposure to potential product liability; our ability to protect our
proprietary technology; regulatory restrictions pertaining to data privacy
issues in utilizing our Central Data Management Facility; and the ability to
manufacture our products on a commercial scale and in compliance with regulatory
requirements.  We undertake no responsibility to update any
forward-looking statement. These forward-looking statements are only made as of
the date of this report.  In addition to the risks we have articulated
above, changes in market conditions, changes in our business and other factors
may result in different or increased risks to our business in the future that
are not foreseeable at this time.





PART
I.  FINANCIAL INFORMATION


Item 1.  Financial
Statements


Hypertension
Diagnostics, Inc.


Balance
Sheets








December
      31,
              
              June
      30,2008
              
              2008Assets
              
              
              (Unaudited)Current
      Assets:Cash
      and cash equivalents
              
              
              $914,741
              
              $1,081,868Accounts
      receivable
              
              
              718
              
              26,000Inventory
              
              
              283,334
              
              291,485Prepaids
      and other current assets
              
              
              2,647
              
              9,026Total
      Current Assets
              
              
              1,201,440
              
              1,408,379Property
      and Equipment:Leasehold
      improvements
              
              
              17,202
              
              17,202Furniture
      and equipment
              
              
              1,109,875
              
              1,109,875Less
      accumulated depreciation and amortization
              
              
              (1,119,345)
              
              (1,114,200)7,732
              
              12,877Other
      Assets
              
              
              6,530
              
              6,530Total
      Assets
              
              
              $1,215,702
              
              $1,427,786Liabilities
      and Shareholders' EquityCurrent
      Liabilities:Accounts
      payable
              
              
              $4,630
              
              $19,997Accrued
      payroll and payroll taxes
              
              
              326,073
              
              527,611Deferred
      revenue
              
              
              52,772
              
              30,598Deposits
      from Customers
              
              
              1,220
              
              970Other
      accrued expenses
              
              
              9,462
              
              6,104Total
      Current Liabilities
              
              
              394,157
              
              585,280Deferred
      Revenue, less current portion
              
              
              28,374
              
              25,525Shareholders'
      Equity:Series
      A Convertible Preferred Stock, $.01 par value:Authorized
      shares--5,000,000Issued
      and outstanding shares--758,475 and 843,559 at December31,
      2008 and June 30, 2008, respectively; each share ofpreferred
      stock convertible into 12 shares of common stockat
      the option of the holder (aggregate liquidation preference$3,292,897
      and $3,375,835 at December 31, 2008 andJune
      30, 2008, respectively)
              
              
              7,585
              
              8,436Common
      Stock, $.01 par value:Authorized
      shares--150,000,000Issued
      and outstanding shares--40,795,820 and 39,774,812at
      December 31, 2008 and June 30, 2008, respectively
              
              
              407,958
              
              397,748Additional
      paid-in capital
              
              
              27,633,355
              
              27,596,964Accumulated
      deficit
              
              
              (27,255,727)
              
              (27,186,167)Total
      Shareholders' Equity
              
              
              793,171
              
              816,981Total
      Liabilities and Shareholders' Equity
              
              
              $1,215,702
              
              $1,427,786See
      accompanying notes.








Hypertension
      Diagnostics, Inc.


Statements
of Operations


(Unaudited)






Three
      Months Ended
                                                Six
      Months EndedDecember
      31
                                                
                                                December
      312008
                                                
                                                2007
                                                
                                                2008
                                                
                                                2007Revenue:Equipment
      sales
                                                $    96,837
                                                
                                                $       91,705
                                                
                                                $    178,837
                                                
                                                $   183,635Equipment
      rental
                                                24,119
                                                
                                                35,558
                                                
                                                49,816
                                                
                                                81,785Service/contract
      income
                                                16,251
                                                
                                                18,399
                                                
                                                45,066
                                                
                                                26,594137,207
                                                
                                                145,662
                                                
                                                273,719
                                                
                                                292,014Cost
      of Sales
                                                2,976
                                                
                                                12,113
                                                
                                                7,507
                                                
                                                14,441Gross
      Profit
                                                134,231
                                                
                                                133,549
                                                
                                                266,212
                                                
                                                277,573Selling,
      general and administrative expenses
                                                328,759
                                                
                                                (17,963)
                                                
                                                345,619
                                                
                                                597,022Operating
      Income (Loss)
                                                (194,528)
                                                
                                                151,512
                                                
                                                (79,407)
                                                
                                                (319,449)Interest
      income
                                                3,363
                                                
                                                13,936
                                                
                                                9,847
                                                
                                                28,689Net
      Income (Loss)
                                                $
      (191,165)
                                                
                                                $      165,448
                                                
                                                $    (69,560)
                                                
                                                $  (290,760)Basic
      and Diluted Net Loss per Share
                                                $          .00
                                                
                                                $          .00
                                                
                                                $         .00
                                                
                                                $         (.01)Weighted
      Average Shares Outstanding - Basic
                                                40,795,820
                                                
                                                39,666,835
                                                
                                                40,579,411
                                                
                                                39,658,077Weighted
      Average Shares Outstanding - Diluted
                                                40,795,820
                                                
                                                39,666,835
                                                
                                                40,579,411
                                                
                                                39,658,077See
      accompanying notes.








Hypertension
Diagnostics, Inc.


Statements
of Cash Flows


(Unaudited)











Six
      Months EndedDecember
      312008
                  
                  
                  2007Operating
      Activities:Net
      loss
                  
                  $
                  (69,560
                  )
                  
                  $
                  (290,760
                  )Adjustments
      to reconcile net loss to netcash
      used in operating activities:CEO
      stock based compensation
                  
                  
                  (162,750
                  )
                  
                  
                  -Depreciation
                  
                  
                  5,145
                  
                  
                  
                  14,384Stock
      options expense
                  
                  
                  45,750
                  
                  
                  
                  48,925Change
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  25,282
                  
                  
                  
                  271,982Inventory
                  
                  
                  8,151
                  
                  
                  
                  (14,980
                  )Prepaids
      and other current assets
                  
                  
                  6,379
                  
                  
                  
                  (3,120
                  )Accounts
      payable
                  
                  
                  (15,367
                  )
                  
                  
                  3,219Accrued
      payroll and payroll taxes
                  
                  
                  (38,788
                  )
                  
                  
                  (52,058
                  )Deferred
      revenue
                  
                  
                  25,023
                  
                  
                  
                  11,751Other
      accrued expenses
                  
                  
                  3,608
                  
                  
                  
                  (50,194
                  )Net
      cash used provided by operating activities
                  
                  
                  (167,127
                  )
                  
                  
                  (60,851
                  )Net
      increase/(decrease) in cash and cash equivalents
                  
                  
                  (167,127
                  )
                  
                  
                  (60,851
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  1,081,868
                  
                  
                  
                  1,376,632Cash
      and cash equivalents at end of period
                  
                  $
                  914,741
                  
                  
                  $
                  1,315,781See
      accompanying notes.








Hypertension
Diagnostics, Inc.


Notes to
Financial Statements


December
31, 2008





1.
            Interim
      Financial Information





The
accompanying unaudited financial statements of Hypertension Diagnostics, Inc.
(the “Company” or “HDI”) have been prepared in accordance with the instructions
to Form 10-Q and do not include all the information and notes required by
generally accepted accounting principles for complete financial
statements.  In the opinion of management, these unaudited financial
statements reflect all adjustments, consisting only of normal and recurring
adjustments necessary for a fair presentation of the financial
statements.  The results of operations for the three months and six
months ended December 31, 2008 are not necessarily indicative of the results
that may be expected for the full year ending June 30, 2009.  The June
30, 2008 balance sheet was derived from audited financial
statements.  For further information, refer to the financial
statements and notes included in the Company’s Annual Report on Form 10-KSB for
the fiscal year ended June 30, 2008.  The policies described in that
report are used for preparing quarterly reports.





2.
            Litigation





The
Company is involved in various legal actions in the ordinary course of its
business.  Although the outcome of any such legal actions cannot be
predicted, management believes that there are no pending legal proceedings
against or involving the Company for which the outcome is likely to have a
material adverse effect upon the Company’s financial position or results of
operations.





3.
            Stock
      Options





The
Company regularly grants stock options to individuals under various plans as
described in Note 4 of the Company’s Annual Report on Form 10-KSB for the year
ended June 30, 2008.  FASB Statement No. 123 (revised 2004), Share-Based Payment (“FAS
123(R)”), requires that the compensation cost relating to share-based payment
transactions, including grants of employee stock options, be recognized in
financial statements.  That cost will be measured based on the fair
value of the equity or liability instrument issued.  FAS 123(R) covers
a wide range of share-based compensation arrangements including stock options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans.  The effect of the Statement is to
require entities to measure the cost of employee services received in exchange
for stock options based on the grant-date fair value of the award, and to
recognize the cost over the period the employee is required to provide services
for the award.  FAS 123(R) permits entities to use any option-pricing
model that meets the fair value objective in the Statement.  The
Company implemented FAS 123(R) on July 1, 2006, using the modified prospective
transition method.





During the three and six months ended
December 31, 2008, no stock options were granted.  The Company granted
15,000 stock options during the three and six months ended December 31,
2007.  The Company recognized compensation expense of $22,875 and
$45,750 for the three months and six months ending December 31, 2008, and
compensation expense of $24,525 and $48,925 for the three months and six months
ending December 31, 2007, related to the options granted
previously.  The Company estimates the expense for the remainder of
fiscal year 2009 to be approximately $45,750 based on the value of options
outstanding on December 31, 2008 that will vest during the remainder of fiscal
year 2009.  Estimated expenses for the fiscal year ended June 30, 2010
are $45,750.  These estimates do not include any expense for options
that may be granted and vest in the future.





As of
December 31, 2008,there was $91,500 of
total unrecognized compensation costs related to the outstanding stock options,
which is expected to be recognized over a weighted average period of one
year.





4.
            Stock
      Based Compensation





The
Company has entered into a Deferred Equity Compensation Agreement with its CEO,
Mark N. Schwartz (the “Agreement”), whereby the Company will grant 175,000
phantom shares of its common stock to its CEO for every month of employment for
the period January 1, 2006 through December 31, 2008.  A cash payment
will be made to the CEO equal to the price per share of the Company’s common
stock times the number of phantom shares accrued at the earliest of certain
Event Dates (as defined in the Agreement).  Accordingly, the Company
has accrued a compensation liability of $283,500 at December 31, 2008, which is
the fair market value of 6,300,000 phantom shares granted as of December 31,
2008 pursuant to the Agreement.  Due to phantom shares granted and the
changes in the price of the Company’s common stock, the Company recorded $66,938
in compensation expense and $162,750 in compensation benefit for the three
months and six months ended December 31, 2008, compared to compensation benefit
of $283,500 and $0 for the three months and six months ended December 31, 2007,
respectively.  An increase in the Company’s common stock price would
cause an








Hypertension
Diagnostics, Inc.


Notes to
Financial Statements


December
31, 2008





4.
            Stock
      Based Compensation (continued)





increase
in the compensation cost for Stock Based Compensation, while a decrease in the
Company’s stock price would cause a decrease in the compensation
cost.  On the last trading day of the period ending June 30, 2008, the
Company’s stock price was $0.085 per share, and on the last trading day of the
period ending December 31, 2008, the Company’s stock price was $0.045 per
share.





5.
            Net
      Loss Per Share





Basic net
income (loss) per share is computed using the weighted average number of common
shares outstanding during each period.  Diluted net income (loss) per
share would normally include the dilutive effect of common shares potentially
issuable upon the exercise of stock options, warrants, or the conversion of
preferred stock.  However, since the Company reported losses for
periods presented or the exercise price for options outstanding at the end of
the period is higher than the average stock price for the period, all potential
common shares have been excluded from the calculation of diluted net loss per
share, as the effect would have been anti-dilutive.





6.
            Exercise
      Dates of Warrants





On
December 23, 2008, the Company agreed to extend from December 31, 2008 to June
30, 2009, the expiration date of its outstanding remaining 50% Warrant B
warrants to purchase shares of its common stock, $0.01 par value per share, and
Series A Convertible Preferred Stock, $0.01 par value per share, which initially
expired on or before June 23, 2006 and were granted in connection with the
Company’s private offering which closed on August 28, 2003.





The
Company also agreed to extend the expiration date of the exercise of its Warrant
B warrants to purchase shares of its common stock, $0.01 par value per share,
and Series A Convertible Preferred Stock, $0.01 par value per share, which were
granted in connection with the Company’s private offering which closed on
February 9, 2004 (collectively, the “2004 B Warrants”).   The
2004 B Warrants, which would have expired on December 31, 2008 were extended to
expire on June 30, 2009.





The
Company also agreed to extend the expiration date of its Warrant C warrants to
purchase shares of its common stock, $0.01 par value per share, and Series A
Convertible Preferred Stock, $0.01 par value per share, which were granted in
connection with the Company’s private offering which closed on August 28, 2003
(collectively, the “2003 C Warrants”).   The 2003 C Warrants,
which would have expired on March 31, 2009, were extended to expire on June 30,
2009.





The
Company agreed to extend the expiration date of its Warrant C warrants to
purchase shares of its common stock, $0.01 par value per share, and Series A
Convertible Preferred Stock, $0.01 par value per share, which were granted in
connection with the Company’s private offering which closed on February 9, 2004
(collectively, the “2004 C Warrants”).   The 2004 C Warrants,
which would have expired on May 31, 2009, were extended to expire on June 30,
2009.





The
Company also agreed to extend the expiration date of certain warrants granted to
Bernard Weber in connection with the private offering which closed on August 28,
2003 and February 9, 2004.  Mr. Weber was granted warrants to purchase
shares of its common stock, $0.01 par value per share and Series A Convertible
Preferred Stock, $0.01 par value per share, (collectively, the “Weber
Warrants”).   The Weber Warrants, which would have expired on
March 31, 2009 were extended to expire on June 30, 2009.








Item
2.     Management’s Discussion and Analysis of
Financial Condition and Results of Operations





Overview





We are
engaged in the design, development, manufacture and marketing of proprietary
medical devices that we believe non-invasively detect subtle changes in the
elasticity of both large and small arteries.  We are currently
marketing two products: the HDI/PulseWaveTM CR-2000 Research
CardioVascular Profiling System and the CVProfilor® DO-2020
CardioVascular Profiling System.





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. Because the CR-2000 Research System bears
      the CE Mark 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 purchase or lease basis.  Some
      Systems previously marketed under a “per-patient-tested” rental basis
      remain in use although we no longer offer that option in our current
      marketing.









Critical
Accounting Policies





The
financial statements are prepared in accordance with accounting principles
generally accepted in the U.S., which requires us to make estimates and
assumptions in certain circumstances that affect amounts reported in the
accompanying financial statements and related footnotes.  In preparing
these financial statements, management has made its best estimates and judgments
of certain amounts included in the financial statements, giving due
consideration to materiality.  We do not believe there is a great
likelihood that materially different amounts would be reported related to the
accounting policies described below.  However, application of these
accounting policies involves the exercise of judgment and use of assumptions as
to future uncertainties and, as a result, actual results could differ from these
estimates.





Revenue
Recognition.  We recognize revenue in accordance with U.S. Securities
and Exchange Commission’s Staff Accounting Bulletin (SAB) No. 104, “Revenue
Recognition.”  Pursuant to SAB No. 104, the Company recognizes revenue
from the sale of equipment at the time of shipment to a customer or
distributor.  Shipment occurs only after receipt of a valid purchase
order and signed sale agreement.  Payments from customers and
distributors are either made in advance of shipment or within a short time frame
after shipment.  In the case of sales to distributors, such payment is
not contingent upon resale of the product to end users.  Shipping and
handling costs are included as cost of equipment sales.  At the time
of shipment, all of the criteria for recognition set forth in SAB No. 104 have
been met:  persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the selling price is fixed or
determinable and collectability is reasonably assured.





Equipment
rental revenue, whether from the minimum monthly fee or from the
per-patient-tested fee, is recognized when collection is probable, which is
currently upon cash receipt.   At the time of receipt of rental
revenues, all of the criteria for recognition set forth in SAB No. 104 have been
met:  persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the selling price is fixed or
determinable and collectability is reasonably assured.





In the
case of either a sale or rental of our product, there are no post-shipment
obligations which affect the timing of revenue recognition.  Once
purchased, neither customers nor distributors have a right to return or exchange
our product.  Service/Contract revenue is recognized upon shipment, as
all parts sent to customers are prepaid before the part is shipped. Warranty
repairs on all of the above are handled on a repair or replacement basis, at our
discretion.  Further, there is no installation of our product; it is
ready to use when plugged into an electrical outlet and no specialized knowledge
is required to ready it for use.  For these reasons, we have concluded
that our revenue recognition policy is appropriate and in accordance with SAB
No.104.





Allowance
for Doubtful Accounts.  Accounts receivable are reviewed to determine
the need for an allowance for amounts that may become uncollectible in the
future.  The necessity of an allowance is based on management’s review
of accounts receivable balances and historical write-offs.  As of
December 31, 2008 and June 30, 2008, there was no allowance for doubtful
accounts.





Inventories
and Related Allowance for Excess and Obsolete Inventory.  Inventories
are valued at the lower of cost or market and reviewed to determine the need for
an allowance for excess and obsolete inventories.  The need for an
allowance is based on management’s review of inventories on hand compared to
estimated future usage and sales.  As of December 31, 2008 and June
30, 2008, there was an inventory allowance of $428,290 and $454,384,
respectively.





Research
and Development.  For the three months and six months ended December
31, 2008 and 2007, we did not incur any research and development
costs.








Results
of Operations





As of
December 31, 2008, we had an accumulated deficit of $27,255,727, attributable
primarily to selling, general and administrative expenses.  Until we
are able to generate significant revenue from our activities, we expect to
continue to incur operating losses.  As of December 31, 2008, we had
cash and cash equivalents of $914,741.  We anticipate that these
funds, in conjunction with revenue anticipated to be earned from sales of our
CVProfilor® DO-2020 Systems, anticipated





sales of
our CR-2000 Research Systems, and anticipated operating costs, will allow us to
pursue our business development strategy for at least the next twelve months
following December 31, 2008.





Three
Months Ended December 31, 2008 Compared to Three Months Ended December 31,
2007





The
following is a summary of our Revenue and Cost of Sales for the three months
ended December 31, 2008 and 2007, respectively:





Three
      Months Ended December 31, 2008Equipment
                            
                            Equipment
                            
                            Service/Total
                            
                            Sales
                            
                            Rental
                            
                            ContractRevenue
                            
                            $   137,207
                            
                            $     96,837
                            
                            $   24,119
                            
                            $  16,251Cost
      of Sales
                            
                            2,976
                            
                            2,100
                            
                            523
                            
                            353Gross
      Profit
                            
                            $   134,231
                            
                            $     94,737
                            
                            $   23,596
                            
                            $  15,898Three
      Months Ended December 31, 2007Equipment
                            
                            Equipment
                            
                            Service/Total
                            
                            Sales
                            
                            Rental
                            
                            ContractRevenue
                            
                            $   145,662
                            
                            $     91,705
                            
                            $   35,558
                            
                            $  18,399Cost
      of Sales
                            
                            12,113
                            
                            8,025
                            
                            3,112
                            
                            976Gross
      Profit
                            
                            $   133,549
                            
                            $     83,680
                            
                            $   32,446
                            
                            $  17,423





Revenue.  Total
Revenue for the three months ended December 31, 2008 was $137,207, compared to
$145,662 for the three months ended December 31, 2007, a 5.8%
decrease.





Equipment
Sales Revenue for the three months ended December 31, 2008 was $96,837, compared
to $91,705 for the three months ended December 31, 2007, a 5.6%
increase.





The
Company is searching for a partner or partners with an established national
sales force or national distribution network serving the primary care market
with whom the CVProfilor product can be integrated into the partner’s existing
cardiovascular disease product platform.  The Company believes that
this is the best strategy for broadening distribution and increasing sales of
the CVProfilor.  No assurances can be given that the Company will
identify a suitable partner or partners or that the Company will consummate
mutually satisfactory arrangements with a partner or partners.





Market
acceptance of the CVProfilor® DO-2020
System by physicians has taken more time and resources than originally
anticipated due to the challenges associated with marketing new diagnostic
equipment in the primary care physician market.  We have focused our
resources on specific regional markets that we believe are more likely to
generate higher levels of acceptance of the CVProfilor® DO-2020
System by physicians.  Our current marketing strategy focuses on
marketing the CVProfilor® DO-2020
System to primary care physicians (internists and family practioners) who treat
patients with hypertension and diabetes.  We believe these physicians
have the greatest interest in, and use for, our product.  Therefore,
the most critical factor in our ability to increase revenue rests in our ability
to expand our marketing and distribution network to increase placements and
utilization of our CVProfilor® DO-2020
System.





Further,
the existence, timing and extent of reimbursement of physicians for the use of
our CVProfilor® DO-2020
System affects the market acceptance of our product.  Reimbursement
will vary by the patient’s medical necessity, by physician, by provider, by
geography and by provider coverage plans, making the process of obtaining
reimbursement for the CVProfilor® DO-2020
System by current physician customers an important component of our product’s
success.  To the extent that reimbursement is unavailable or
inadequate, physicians will be less likely to use the CVProfilor® DO-2020
System.





In
addition, for the CVProfilor® DO-2020
Systems  currently being rented on a per-patient-tested basis, we have
a delay in the cost recovery of our working assets.  Although our
per-patient-tested marketing approach reduces the risk and thereby increases the
potential rate of acceptance for physician customers willing to use the
CVProfilor® DO-2020
System as compared to a capital acquisition approach, it also delays our cash
flow recovery of product costs.  Physician payments for use of the
CVProfilor® DO-2020
System follow actual utilization by some 60-90 days; utilization in one month is
invoiced in the following month and payment is generally received within 30 to
60 days of invoicing.











For the
three months ended December 31, 2008, we recognized revenue for the
CVProfilor® DO-2020
System “per-patient-tested” rental program of $24,119, compared to $35,558 for
the three months ended December 31, 2007, a 32.2% decrease.  The
decrease is due to the customers who have decided to purchase the CVProfilor
product rather than rent it and the elimination of the per-patient-tested rental
program from our current marketing strategy.





For the
three months ended December 31, 2008, Service/Contract Income was $16,251,
compared to $18,399 for the three months ended December 31, 2007, an 11.7%
decrease.





Expenses.  Total
selling, general and administrative expenses for the three months ended December
31, 2008 were $328,759, compared to $(17,963) for the three months ended
December 31, 2007. The following is a summary of the major categories included
in selling, general and administrative expenses:





Three
      Months EndedDecember
      312008
              
              2007Wages,
      expenses, benefits before Stock Based CEO Compensation
              $78,312
              
              $63,869Stock
      Based CEO Compensation..........................................
              66,938
              
              (283,500)Patents
      and related expenses...............................................
              0
              
              450Outside
      consultants..........................................................
              3,088
              
              14,225Rent
      (building/equipment) and Utilities..................................
              22,111
              
              22,448Insurance-general
      and directors/officers liability........................
              8,471
              
              8,240Selling,
      marketing and promotion, including applicable wages........
              62,932
              
              79,929Legal
      and audit/accounting fees............................................
              28,884
              
              16,513Royalties.......................................................................
              3,614
              
              3,796Depreciation
      and amortization..............................................
              2,220
              
              2,737Stock
      option expense........................................................
              22,875
              
              24,525Other-general
      and administrative...........................................
              29,314
              
              28,805Total
      selling, general and administrative expenses.............
              $328,759
              
              $(17,963)





Wages,
related expenses and benefits before Stock Based CEO Compensation increased from
$63,869 to $78,312 for the three months ended December 31, 2007 and 2008,
respectively, a 22.6% increase.  This increase is largely due to bonuses
paid to the Manager of Finance and Accounting and the Senior Biomedical
Electronics Technician.





Accrued
Stock Based CEO Compensation, which is a non-cash charge that relates to the
estimated amount due our chief executive officer as part of his compensation for
services provided to us (see Note 4), was an expense of $66,938 for the three
months ended December 31, 2008, compared with a benefit of $283,500 for the
three months ended December 31, 2007.  The expense for the three month
period ended December 31, 2008 is a result of the increase in the Company’s
stock price.  The benefit for the three month period ended December
31, 2007 is a result of the decrease in the Company’s stock price.





Outside
consultants expense decreased from $14,225 to $3,088 for the three months ended
December 31, 2007 and 2008, respectively, a 78.3% decrease. This decrease is
largely due to a decrease in the expenses associated with our quality systems,
regulatory affairs, and engineering consultants in the three months ended
December 31, 2008.





Insurance
expense increased from $8,240 to $8,471 for the three months ended December 31,
2007 and 2008, respectively, a 2.8% increase.





Selling,
marketing and promotion expense decreased from $79,929 to $62,932 for the three
months ended December 31, 2007 and 2008, respectively, a 21.3%
decrease.  This category includes wages and commissions paid to our
sales reps, marketing expenses and travel and convention
expenses.  This decrease is due mainly to a decrease in our revenues
from equipment sales, resulting in lower commissions paid, and a decrease in our
sales force, which has declined from one sales representative at December 31,
2007 to no sales representatives at December 31, 2008 as we implemented a change
to indirect distribution.








Legal and
audit/accounting fees increased from $16,513 to $28,884 for the three months
ended December 31, 2007 and 2008, respectively, a 74.9%
increase.  This increase is mainly due to the costs associated with
the consultants we retained to assist the Company in its Sarbanes Oxley
compliance.





Royalties
expense decreased from $3,796 to $3,614 for the three months ended December 31,
2007 and 2008, respectively, a 4.8% decrease.  This expense is based
on an agreement with the University of Minnesota, which requires the Company to
pay a 3% royalty fee on total revenues each quarter.  This decrease is
due to the decline of revenues for the three month period ending December 31,
2008, compared to the three month period ending December 31, 2007.





Stock
option expense decreased from $24,525 to $22,875 for the three months ended
December 31, 2007 and 2008, respectively, a 6.7% decrease. This expense is based
on the Black-Scholes option pricing model applied to the number of shares of
common stock underlying the stock options that vested during the three months
ended December 31, 2007 and December 31, 2008.  This expense is a
result of the stock options granted to the non-management board of directors
effective January 1, 2007, which vest quarterly through December 31,
2009.  Each quarter the value, based on the Black-Scholes option
pricing model, of the shares that vested during that quarter is recognized as a
stock option expense.





Other –
general and administrative expenses increased from $28,805 to $29,314 for the
three months ended December 31, 2007 and 2008, respectively, a 1.8%
increase.





Interest
income was $3,363 and $13,936 for the three months ended December 31, 2008 and
2007, respectively a 75.9% decrease. This decrease was a result of the reduced
bank deposit rates and declining cash balances during the 2008
period.





Our net
loss was $191,165 for the three months ended December 31, 2008, compared to a
net income of $165,448 for the three months ended December 31,
2007.  For the three months ended December 31, 2008, basic and diluted
net loss per share was $.00, based on weighted average shares outstanding of
40,795,820.  For the three months ended December 31, 2007, basic and
diluted net loss per share was $.00, based on weighted average shares
outstanding of 39,666,835.





Six
Months Ended December 31, 2008 Compared to Six Months Ended December 31,
2007





The following is a summary of our
Revenue and Cost of Sales for the six months ended December 31, 2008 and 2007
respectively:





Six
      Months Ended December 31, 2008Equipment
                            
                            Equipment
                            
                            Service/Total
                            
                            Sales
                            
                            Rental
                            
                            ContractRevenue
                            
                            $   273,719
                            
                            $   178,837
                            
                            $     49,816
                            
                            $      45,066Cost
      of Sales
                            
                            7,507
                            
                            4,823
                            
                            1,375
                            
                            1,309Gross
      Profit
                            
                            $   266,212
                            
                            $   174,014
                            
                            $     48,441
                            
                            $      43,757Six
      Months Ended December 31, 2007Equipment
                            
                            Equipment
                            
                            Service/Total
                            
                            Sales
                            
                            Rental
                            
                            ContractRevenue
                            
                            $   292,014
                            
                            $   183,635
                            
                            $     81,785
                            
                            $      26,594Cost
      of Sales
                            
                            14,441
                            
                            9,226
                            
                            3,716
                            
                            1,499Gross
      Profit
                            
                            $   277,573
                            
                            $   174,409
                            
                            $     78,069
                            
                            $      25,095








Revenue.Total Revenue for the
six months ended December 31, 2008 was $273,719, compared to $292,014 for the
six months ended December 31, 2007, a 6.3% decrease.











Equipment
Sales Revenue for the six months ended December 31, 2008 was $178,837, compared
to $183,635 for the six months ended December 31, 2007, a 2.6%
decrease.  A large part of this decrease is a result of the decline in
the number of the Company’s sales representatives. As of December 31, 2007, the
Company had one direct sales representative; as of December 31, 2008, the
Company had no sales direct representatives. The Company has replaced its direct
sales force with a network of independent distributors selling multiple products
to our customers.  Revenue relating to international equipment sales
was $0 for the six months ended December 31, 2008 and $42,475 for the six months
ended December 31, 2007.








The
Company is searching for a partner or partners with an established national
sales force or national and/or international distribution network serving the
primary care market with whom the CVProfilor product can be integrated into the
partner’s existing cardiovascular disease product platform.  The
Company believes that this is the best strategy for broadening distribution and
increasing sales of the CVProfilor.  No assurances can be given that
the Company will identify a suitable partner or partners or that the Company
will consummate mutually satisfactory arrangements with a partner or
partners.





Market
acceptance of the CVProfilor® DO-2020
System by physicians has taken more time and resources than originally
anticipated due to the challenges associated with marketing new diagnostic
equipment in the primary care physician market.  We have focused our
resources on specific regional markets that we believe are more likely to
generate higher levels of acceptance of the CVProfilor® DO-2020
System by physicians.  Our current marketing strategy focuses on
marketing the CVProfilor® DO-2020
System to primary care physicians (internists and family practioners) who treat
patients with hypertension and diabetes.  We believe these physicians
have the greatest interest in, and use for, our product.  Therefore,
the most critical factor in our ability to increase revenue rests in our ability
to expand our marketing and distribution network to increase placements and
utilization of our CVProfilor® DO-2020
System.





Further,
the existence, timing and extent of reimbursement of physicians for the use of
our CVProfilor® DO-2020
System affects the market acceptance of our product.  Reimbursement
will vary by the patient’s medical necessity, by physician, by provider, by
geography and by provider coverage plans, making the process of obtaining
reimbursement for the CVProfilor® DO-2020
System by current physician customers an important component of our product’s
success.  To the extent that reimbursement is unavailable or
inadequate, physicians will be less likely to use the CVProfilor® DO-2020
System.





In
addition, for the CVProfilor® DO-2020
Systems currently being rented on a per-patient-tested basis, we have a delay in
the cost recovery of our working assets.  Although our
per-patient-tested marketing approach reduces the risk and thereby increases the
potential rate of acceptance for physician customers willing to use the
CVProfilor® DO-2020
System as compared to a capital acquisition approach, it also delays our cash
flow recovery of product costs.  Physician payments for use of the
CVProfilor® DO-2020
System follow actual utilization by some 60-90 days; utilization in one month is
invoiced in the following month and payment is generally received within 30 to
60 days of invoicing.





For the six months ended December 31,
2008, we recognized Revenue for the CVProfilor® DO-2020 “per-patient-tested”
rental program of $49,816, compared to $81,785 for the six months ended December
31, 2007, a 39.1% decrease.    The decrease is due to the
customers who have decided to purchase the CVProfilor product rather than rent
it and the elimination of the per-patient-tested rental program from our current
marketing strategy.





For
the six months ended December 31, 2008, Service/Contract Income was $45,066
compared to $26,594 for the six months ended December 31, 2007, a 69.5%
increase.  This increase is due mainly to our increase in warranty
service agreements.





At June
30, 2003, inventory which principally consists of raw materials had been written
down to estimated net realizable value to account for quantities in excess of
those expected to be sold currently.  The results of operations for
the fiscal year ended June 30, 2003 included a corresponding charge to Cost of
Sales of $850,000 related to this write-down.  As inventory is sold
relating to Equipment Sales Revenue, a portion of this Inventory Allowance is
recorded as an offset to Cost of Sales pertaining to these sales.  As
of December 31, 2008, the Inventory Allowance balance is
$428,290.  The following table shows the effect of this adjustment for
the periods indicated:





Three
      Months Ended
              Six
      Months EndedDecember
      31, 2008
              
              December
      31, 2007
              
              December
      31, 2008
              
              December
      31, 2007Cost
      of Sales ........................
              $9,585
              
              $16,750
              
              $23,477
              
              $21,683Inventory
      Reserve Adjustment ....
              (6,609)
              
              (4,637)
              
              (15,970)
              
              (7,242)Cost
      of Sales, as reported .........
              $2,976
              
              $12,113
              
              $7,507
              
              $14,441








Expenses.Total
selling, general and administrative expenses for the six months ended December
31, 2008 were $345,619, compared to $597,022 for the six months ended December
31, 2007, an 42.1% decrease.  The following is a summary of the major
categories included in selling, general and administrative
expenses:








Six
      Months EndedDecember
      312008
                
                
                2007Wages,
      expenses, benefits before Stock Based CEO Compensation
                
                $
                142,179
                
                
                $
                144,488Stock
      Based CEO Compensation
                
                
                (162,750
                )
                
                
                -Patents
      and related expenses...........................................
                
                
                -
                
                
                
                3,065Outside
      consultants...................................................
                
                
                16,720
                
                
                
                19,079Rent
      (building/equipment) and utilities..............................
                
                
                44,099
                
                
                
                45,801Insurance-general
      and directors/officers liability..................
                
                
                17,023
                
                
                
                18,438Selling,
      marketing and promotion, including applicable wages...
                
                
                125,896
                
                
                
                181,057Legal
      and audit/accounting fees.......................................
                
                
                56,874
                
                
                
                57,418Royalties..................................................................
                
                
                6,830
                
                
                
                7,933Depreciation
      and amortization.......................................
                
                
                4,481
                
                
                
                5,538Stock
      Option Expense...................................................
                
                
                45,750
                
                
                
                48,925Other-general
      and administrative....................................
                
                
                48,517
                
                
                
                65,280Total
      selling, general and administrative expenses.........
                
                $
                345,619
                
                
                $
                597,022





Wages, related expenses and benefits
before Stock Based CEO Compensation decreased from $144,488 to $142,179 for the
six months ended December 31, 2008 and 2007, respectively, a 1.6%
decrease.





Stock Based CEO Compensation, which is
a non-cash charge that relates to the estimated amount due our chief executive
officer as part of his compensation for services provided to us (see Note 4),
was a benefit of $162,750 for the six months ended December 31, 2008 compared
with $0 for the six months ended December 31, 2007.  The benefit for
the six month period ended December 31, 2008 is a result of the decrease in the
Company’s stock price.





Outside
consultants’ expense decreased from $19,079 for the six months ended December
31, 2007 to $16,720 for the six months ended December 31, 2008, a 12.4%
decrease.  This decrease is largely due to a decrease in the expenses
associated with our quality systems, regulatory affairs, and engineering
consultants in the six months ended December 31, 2008.





Insurance
expense decreased from $18,438 to $17,023 for the six months ended December 31,
2007 and 2008, respectively, a 7.7% decrease.  This decrease is due to
a decrease in the cost of the Company’s directors’ and officers’ liability
insurance as well as a decrease in property insurance premiums.





Selling, marketing and promotion
expense decreased from $181,057 for the six months ended December 31, 2007 to
$125,896 for the six months ended December 31, 2008, a 30.5%
decrease.  This category includes wages, bonuses and commissions paid
by us relating to our sales and marketing efforts as well as travel and
convention expenses.  This decrease is due mainly to a decrease in our
revenues from equipment sales, resulting in lower commissions paid and a
decrease in our sales force, which has declined from one sales representative at
December 31, 2007 to no sales representatives at December 31, 2008.





Legal and
audit/accounting fees decreased from $57,418 for the six months ended December
31, 2007 to $56,874 for the six months ended December 31, 2008, a 0.9%
decrease.





Royalties
expense decreased from $7,933 to $6,830 for the six months ended December 31,
2007 and 2008, respectively, a 13.9% decrease.  This expense is based
on an agreement with the University of Minnesota which requires the Company to
pay a 3% royalty fee on total revenues each quarter.  This decrease is
due to the decline of revenues for the six month period ending December 31, 2008
compared to the six month period ending December 31, 2007.





Stock
option expense decreased from $48,925 for the six months ended December 31, 2007
to $45,750 for the six months ended December 31, 2008, a 6.5%
decrease.  This expense is based on the Black-Scholes option pricing
model applied to the number of shares of common stock underlying the stock
options that vested during the six months ended December 31, 2007 and December
31, 2008.  This expense is a result of the stock options granted to
the non-management board of directors effective January 1, 2007, which vest
quarterly through December 31, 2009.  Each quarter the value, based on
the Black-Scholes option pricing model, of the shares that vested during that
quarter is recognized as a stock option expense.





Other
– general and administrative expenses decreased from $65,280 for the six months
ended December 31, 2007 to $48,517 for the six months ended December 31, 2008, a
25.7% decrease. This decrease is due to the decline in warehouse expenses, which
are largely expenses associated with warranty replacement parts, for the six
month period ending December 31, 2008 compared to the six month period ending
December 31, 2007.











Interest
income was $9,847 and $27,743 for the six months ended December 31, 2008 and
2007, respectively a 64.5% decrease. This decrease was a result of the reduced
bank deposit rates and declining cash balances during the 2008
period.





Net loss was $69,560 and $290,760 for
the six months ended December 31, 2008 and 2007, respectively.  For
the six months ended December 31, 2008, basic and diluted net loss per share was
$.00, based on weighted average shares outstanding of 40,579,411.  For
the six months ended December 31, 2007, basic and diluted net loss per share was
$(.01), based on weighted average shares outstanding of 39,658,077.





Off-Balance
Sheet Arrangements





During
the quarter ended December 31, 2008, we did not engage in any off-balance sheet
arrangements as defined in Item 303(c) of Regulation S-K.





Liquidity
and Capital Resources





Cash and
cash equivalents had a net decrease of $167,127 and $60,851 for the six months
ended December 31, 2008 and December 31, 2007, respectively.  The
significant elements of these changes were as follows:





Three Months Ended December
    31Net cash used in operating
      activities:
            2008
            2007—  net
      (loss), as adjusted for non-cash items
            $  (181,416)
            $(227,452)—  decrease
      in accounts receivable:
              –  (A)the
      increase in the collection of outstanding customer balances is a result of
      customers paying with credit cards, and less sales at quarter
      end.
            (A)   
       25,282
            (A)    
      271,982—  increase  (decrease)
      in accrued payroll and payroll taxes:
              –  (B)expense
      amounts that relate to the estimated amount due our chief executive
      officer and other employees as part of their compensation for services
      provided to us.
            (B) 
      (201,538)
            (B)   
       (52,058)





We have
incurred operating losses and have not generated positive cash flow from
operations.  As of December 31, 2008, we had an accumulated deficit of
$27,255,727.





As of
December 31, 2008, we had cash and cash equivalents of $914,741 and anticipate
that these funds, in conjunction with revenue anticipated to be earned from
placements and sales of our CVProfilor® DO-2020
Systems, anticipated sales of our CR-2000 Research Systems, and anticipated
operating costs, will allow us to pursue our business development strategy for
at least the next twelve months following December 31, 2008.





With a
current cash balance of approximately $914,741, the Company has sufficient cash
to meet its obligations and sustain operations for at least the next twelve
months as the Company considers its alternative strategies for the distribution
of its products.  The most critical factor in our ability to increase
revenue rests in our ability to expand our marketing and distribution network to
increase placements and utilization of our CVProfilor® DO-2020
System.  No assurances can be given that the Company will identify a
suitable partner or partners or that the Company will consummate mutually
satisfactory arrangements with a partner or partners.





Further,
the existence, timing and extent of reimbursement of physicians for the use of
our CVProfilor® DO-2020
affects the availability of our working capital.  Reimbursement will
always vary considerably by the patient’s medical necessity, by physician, by
provider, by geography and by provider coverage plans, making the process of
obtaining reimbursement for the CVProfilor® DO-2020
by current physician customers an important component of our product’s
success.  To the extent that reimbursement is unavailable or
inadequate, physicians will be less likely to use the CVProfilor®
DO-2020.





No
assurance can be given that additional working capital will be obtained in a
timely manner or on terms and conditions acceptable to us or our shareholders.
Our financing needs are based upon management estimates as to future revenue and
expense.  Our business plan and our financing needs are also subject
to change based upon, among other factors, market conditions, and our ability to
materially increase the revenue generated by our CVProfilor® DO-2020
System and other cash flow from operations.  Our efforts to raise
additional funds may be hampered by the fact that our securities are quoted on
the OTC Bulletin Board, are illiquid and are subject to the rules relating to
penny stocks.


Item 4T.
Controls and Procedures.





(a)
Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer, Mark N. Schwartz, and our Manager of Finance and
Accounting, Mark O’Neill, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as such term is defined
under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange
Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered
by this report. Based upon that review, our Chief Executive Officer and Manager
of Finance and Accounting have concluded that, as of the evaluation date, our
disclosure controls and procedures were operating effectively for gathering,
analyzing and disclosing the information that we are required to disclose in the
reports we file under the Securities Exchange Act of 1934, within the time
periods specified in the SEC’s rules and forms.





(b)
Management’s Annual Report on Internal Controls Over Financial
Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934, as amended). Our internal
control system is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
in accordance with generally accepted accounting principles.





Under the
supervision and with the participation of management, including our Chief
Executive Officer and Manager of Finance and Accounting, our management assessed
the design and operating effectiveness of internal control over financial
reporting as ofDecember 31, 2008 based
on criteria established in “Internal Control-Integrated Framework” issued by the
Committee of the Sponsoring Organizations of the Treadway Commission
(“COSO”).





Based on
this assessment, management concluded that our internal controls over financial
reporting were not effective as ofJune 30,
2008.  In the course of our annual audit, our independent registered
public accounting firm uncovered a material accounting error which was corrected
prior to the filing of the 10-KSB.  The adjustment to our financial
statements has been recorded properly.  The cause of the material
accounting error was a deficiency in a control over the accounting for the
inventory reserve allowance.  Management determined that this control
deficiency constituted a material weakness in our internal controls over
financial reporting.  As of this date, the material weakness has been
remediated and this material weakness no longer exists.





This
quarterly report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
independent registered public accounting firm pursuant to rules of the
Securities and Exchange Commission.





(c)
Changes in Internal Control Over Financial Reporting





On
September 18, 2008, we made a change to our internal control over financial
reporting such that the accounting for inventory reserve allowance is
significantly improved.  During the quarter ended June 30, 2008, we needed
to make an adjustment to our financial statements prior to filing them with the
SEC because of a material accounting error causing a deficiency over the
accounting for inventory reserve allowance.











PART
II. OTHER INFORMATION





Item
6.                 Exhibits





(a)           The
following Exhibits are furnished pursuant to Item 601 of Regulation
S-B:





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





SIGNATURES








In
accordance with the requirements of the Exchange Act, the Registrant has caused
this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized.








HYPERTENSION
      DIAGNOSTICS, INC.By
      /s/ Mark N.
  SchwartzMark
      N. SchwartzChief
      Executive Officer


Date:  February
13, 2009