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 March 31, 2009oro
              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 
  The
number of shares of Common Stock outstanding as of May 6, 2009 was
40,963,088.
  
  HYPERTENSION
DIAGNOSTICS, INC.
 
 INDEX TO
FORM 10-Q
 
 Page NoPART
      I.
              FINANCIAL
      INFORMATION:Item
      1.
              Financial
      StatementsBalance
      Sheets – March 31, 2009 (unaudited) and June 30, 2008
              4Statements
      of Operations (unaudited) – Three Months and Nine Months Ended March 31,
      2009 and 2008
              5Statements
      of Cash Flows (unaudited) – Nine Months Ended March 31, 2009 and
      2008
              6Notes
      to Financial Statements
              7Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              8Item
      4T.
              Controls
      and Procedures
              15PART
      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
 
 
 March
      31,
                
                June
      30,2009
                
                2008Assets
                
                
                (Unaudited)Current
      Assets:Cash
      and cash equivalents
                
                
                $803,785
                
                $1,081,868Accounts
      receivable
                
                
                0
                
                26,000Inventory
                
                
                283,491
                
                291,485Prepaids
      and other current assets
                
                
                6,824
                
                9,026Total
      Current Assets
                
                
                1,094,100
                
                1,408,379Property
      and Equipment:Leasehold
      improvements
                
                
                17,202
                
                17,202Furniture
      and equipment
                
                
                1,087,443
                
                1,109,875Less
      accumulated depreciation and amortization
                
                
                (1,098,914)
                
                (1,114,200)5,731
                
                12,877Other
      Assets
                
                
                6,530
                
                6,530Total
      Assets
                
                
                $1,106,361
                
                $1,427,786Liabilities
      and Shareholders' EquityCurrent
      Liabilities:Accounts
      payable
                
                
                $7,831
                
                $19,997Accrued
      payroll and payroll taxes
                
                
                184,851
                
                527,611Deferred
      revenue
                
                
                48,495
                
                30,598Deposits
      from customers
                
                
                32,270
                
                970Other
      accrued expenses
                
                
                6,799
                
                6,104Total
      Current Liabilities
                
                
                280,246
                
                585,280Deferred
      Revenue, less current portion
                
                
                29,058
                
                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 March31,
      2009 and June 30, 2008, respectively; each share ofpreferred
      stock convertible into 12 shares of common stockat
      the option of the holder (aggregate liquidation preference$3,447,466
      and $3,375,835 at March 31, 2009 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
      March 31, 2009 and June 30, 2008, respectively
                
                
                407,958
                
                397,748Additional
      paid-in capital
                
                
                27,656,230
                
                27,596,964Accumulated
      deficit
                
                
                (27,274,716)
                
                (27,186,167)Total
      Shareholders' Equity
                
                
                797,057
                
                816,981Total
      Liabilities and Shareholders' Equity
                
                
                $1,106,361
                
                $1,427,786See
      accompanying notes.
 
  
 Hypertension
Diagnostics, Inc.
 Statements
of Operations
 (Unaudited)
   
 Three
      Months Ended
                  March
      31
                
                Nine
      Months Ended
                  March
      312009
                
                2008
                
                2009
                
                2008Revenue:Equipment
      sales
                $28,000
                
                $46,191
                
                $206,837
                
                $229,826Equipment
      rental
                17,627
                
                32,029
                
                67,443
                
                113,814Service/contract
      income
                19,138
                
                25,044
                
                64,204
                
                51,63864,765
                
                103,264
                
                338,484
                
                395,278Cost
      of Sales
                200
                
                19,772
                
                7,707
                
                34,213Gross
      Profit
                64,565
                
                83,492
                
                330,777
                
                361,065Selling,
      general and administrative expenses
                85,500
                
                442,372
                
                431,119
                
                1,039,394Operating
      Loss
                (20,935)
                
                (358,880)
                
                (100,342)
                
                (678,329)Interest
      income
                1,946
                
                10,055
                
                11,793
                
                38,744Net
      Loss
                $(18,989)
                
                $(348,825)
                
                $(88,549)
                
                $(639,585)Basic
      and Diluted Net Loss per Share
                $         .00
                
                $            (.01)
                
                $         .00
                
                $       (.02)Weighted
      Average Shares Outstanding - Basic
                40,795,820
                
                39,674,348
                
                40,650,494
                
                39,663,461Weighted
      Average Shares Outstanding - Diluted
                40,795,820
                
                39,674,348
                
                40,650,494
                
                39,663,461See
      accompanying notes.
  
  Hypertension
Diagnostics, Inc.
 Statements
of Cash Flows
 (Unaudited)
 
 
 
 Nine
      Months EndedMarch
      312009
                
                2008Operating
      Activities:Net
      loss
                
                $(88,549)
                
                $(639,585)Adjustments
      to reconcile net loss to netcash
      used in operating activities:CEO
      stock based compensation
                
                (309,750)
                
                118,125Depreciation
                
                7,146
                
                20,168Stock
      options expense
                
                68,625
                
                71,800Change
      in operating assets and liabilities:Accounts
      receivable
                
                26,000
                
                269,747Inventory
                
                7,994
                
                (6,610)Prepaids
      and other current assets
                
                2,202
                
                (3,509)Accounts
      payable
                
                (12,166)
                
                (4,254)Accrued
      payroll and payroll taxes
                
                (33,010)
                
                (14,895)Deferred
      revenue
                
                21,430
                
                19,136Other
      accrued expenses
                
                31,995
                
                (50,967)Net
      cash used provided by operating activities
                (278,083)
                
                (220,844)Net
      increase/(decrease) in cash and cash equivalents
                (278,083)
                
                (220,844)Cash
      and cash equivalents at beginning of period
                1,081,868
                
                1,376,632Cash
      and cash equivalents at end of period
                
                $803,785
                
                $1,155,788See
      accompanying notes.
 
  
  Hypertension
Diagnostics, Inc.
 Notes to
Financial Statements
 March 31,
2009
 
 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 nine
months ended March 31, 2009 are not necessarily indicative of the results that
may be expected for the full year ending June 30, 2009.  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 nine months ended
March 31, 2009, no stock options were granted.  The Company granted 0
and 15,000 stock options during the three and nine months ended March 31, 2008,
respectively.  The Company recognized compensation expense of $22,875
and $68,625 for the three months and nine months ended March 31, 2009,
respectively, and compensation expense of $22,875 and $71,800 for the three
months and nine months ended March 31, 2008, respectively, related to the
options granted previously.  The Company estimates the expense for the
remainder of fiscal year 2009 to be approximately $22,875 based on the value of
options outstanding on March 31, 2009 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
March 31, 2009,there was $68,625 of
total unrecognized compensation costs related to the outstanding stock options,
which is expected to be recognized over a weighted average period of three
fourths 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, 2009.  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 $136,500 at March 31, 2009, which is the
fair market value of 6,825,000 phantom shares granted as of March 31, 2009
pursuant to the Agreement.  Due to phantom shares granted and the
changes in the price of the Company’s common stock, the Company recorded
$147,000 and $309,750 in compensation benefit for the three months and nine
months ended March 31, 2009, respectively, compared to compensation expense of
$118,125 for the three months and nine months ended March 31,
2008.  An increase in the Company’s common stock price would cause an
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 March 31, 2009, the Company’s stock price was $0.02 per
share.
 
 
 Hypertension
Diagnostics, Inc.
 Notes to
Financial Statements
 March 31,
2009
 
 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 the exercise 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 the exercise 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.  In the
case of a sale, 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
March 31, 2009 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 March 31, 2009 and June 30,
2008, there was an inventory allowance of $424,819 and $454,384,
respectively.
 
 Research
and Development.  For the three months and nine months ended March 31,
2009 and 2008, we did not incur any research and development costs.
 
 
 Results
of Operations
 
 As of
March 31, 2009, we had an accumulated deficit of $27,274,716, 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 March 31, 2009, we had cash
and cash equivalents of $803,785.  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 March 31,
2009.
 
 Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008
 The
following is a summary of our Revenue and Cost of Sales for the three months
ended March 31, 2009 and 2008, respectively:
 
 
 
 Three
      Months Ended March 31, 2008Equipment
                
                Equipment
                
                Service/Total
                
                Sales
                
                Rental
                
                ContractRevenue
                
                $64,765
                
                $28,000
                
                $17,627
                
                $19,138Cost
      of Sales
                
                200
                
                94
                
                0
                
                106Gross
      Profit
                
                $64,565
                
                $27,906
                
                $17,627
                
                $19,032Three
      Months Ended March 31, 2008Equipment
                
                Equipment
                
                Service/Total
                
                Sales
                
                Rental
                
                ContractRevenue
                
                $103,264
                
                $46,191
                
                $32,029
                
                $25,044Cost
      of Sales
                
                19,772
                
                13,716
                
                3,078
                
                2,978Gross
      Profit
                
                $83,492
                
                $32,475
                
                $28,951
                
                $22,066
 
 
 Revenue.  Total
Revenue for the three months ended March 31, 2009 was $64,765, compared to
$103,264 for the three months ended March 31, 2008, a 37.3%
decrease.
 
 Equipment
Sales Revenue for the three months ended March 31, 2009 was $28,000, compared to
$46,191 for the three months ended March 31, 2008, a 39.3%
decrease.
 
 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 practitioners) 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 March 31, 2009, we recognized revenue for the CVProfilor® DO-2020
System “per-patient-tested” rental program of $17,627, compared to $32,029 for
the three months ended March 31, 2008, a 45.0% 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 March 31, 2009, Service/Contract Income was $19,138, compared
to $25,044 for the three months ended March 31, 2008, a 23.6%
decrease.
 
 
 Expenses.  Total
selling, general and administrative expenses for the three months ended March
31, 2009 were $85,500, compared to $442,372 for the three months ended March 31,
2008. The following is a summary of the major categories included in selling,
general and administrative expenses:
 
 Three
      Months Ended March 312009
                
                2008Wages,
      expenses, benefits before Stock Based CEO Compensation
                $72,264
                
                $124,560Stock
      Based CEO Compensation..........................................
                (147,000)
                
                118,125Patents
      and related expenses...............................................
                0
                
                0Outside
      consultants..........................................................
                2,739
                
                20,587Rent
      (building/equipment) and Utilities..................................
                23,398
                
                25,483Insurance-general
      and directors/officers liability........................
                4,841
                
                8,611Selling,
      marketing and promotion, including applicable wages........
                69,284
                
                71,845Legal
      and audit/accounting fees............................................
                13,102
                
                12,192Royalties.......................................................................
                1,354
                
                2,326Depreciation
      and amortization..............................................
                2,002
                
                2,706Stock
      option expense........................................................
                22,875
                
                22,875Other-general
      and administrative...........................................
                20,641
                
                33,062Total
      selling, general and administrative expenses.............
                $85,500
                
                $442,372
 
 Wages,
related expenses and benefits before Stock Based CEO Compensation decreased from
$124,560 to $72,264 for the three months ended March 31, 2008 and 2009,
respectively, a 42.1% decrease.
 
 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 a benefit of $147,000 for the three
months ended March 31, 2009, compared with an expense of $118,125 for the three
months ended March 31, 2008.  The benefit for the three month period
ended March 31, 2009 is a result of the decrease in the Company’s stock
price.  The expense for the three month period ended March 31, 2008 is
a result of the Phantom shares issued and an increase in the Company’s stock
price.
 
 Outside
consultant’s expense decreased from $20,587 to $2,739 for the three months ended
March 31, 2008 and 2009, respectively, an 86.7% 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 March
31, 2009.
 
 Insurance
expense decreased from $8,611 to $4,841 for the three months ended March 31,
2008 and 2009, respectively, a 43.8% 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 $71,845 to $69,284 for the three
months ended March 31, 2008 and 2009, respectively, a 3.6%
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.
 
 Legal and
audit/accounting fees increased from $12,192 to $13,102 for the three months
ended March 31, 2008 and 2009, respectively, a 7.5% increase.  This
increase is mainly due to higher costs for audit and accounting
fees.
 
 Royalties
expense decreased from $2,326 to $1,354 for the three months ended March 31,
2008 and 2009, respectively, a 41.8% 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 March 31, 2009,
compared to the three month period ending March 31, 2008.
 
 Stock
option expense was $22,875 for the three months ended March 31, 2008 and 2009,
respectively.  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 March 31, 2008 and March
31, 2009.  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 $33,062 to $20,641 for the
three months ended March 31, 2008 and 2009, respectively, a 37.6%
decrease.
 
 
 Interest
income was $1,946 and $10,055 for the three months ended March 31, 2009 and
2008, respectively a 80.6% decrease. This decrease was a result of the reduced
bank deposit rates and declining cash balances during the period.
 
 Our net
loss, including a $147,000 benefit for Stock Based CEO Compensation, was $18,989
for the three months ended March 31, 2009, compared to a net loss, including a
$118,125 expense for Stock Based CEO Compensation, of $348,825 for the three
months ended March 31, 2008.  For the three months ended March 31,
2009, basic and diluted net loss per share was $.00, based on weighted average
shares outstanding of 40,795,820.  For the three months ended March
31, 2008, basic and diluted net loss per share was $(.01), based on weighted
average shares outstanding of 39,674,348.
 
 Nine
Months Ended March 31, 2009 Compared to Nine Months Ended March 31,
2008
 
 The following is a summary of our
Revenue and Cost of Sales for the nine months ended March 31, 2009 and 2008
respectively:
 Nine
      Months Ended March 31, 2009Equipment
                
                Equipment
                
                Service/Total
                
                Sales
                
                Rental
                
                ContractRevenue
                
                $338,484
                
                $206,837
                
                $67,443
                
                $64,204Cost
      of Sales
                
                7,707
                
                6,556
                
                0
                
                1,151Gross
      Profit
                
                $330,777
                
                $200,281
                
                $67,443
                
                $63,053Nine
      Months Ended March 31, 2008Equipment
                
                Equipment
                
                Service/Total
                
                Sales
                
                Rental
                
                ContractRevenue
                
                $395,278
                
                $229,826
                
                $113,814
                
                $51,638Cost
      of Sales
                
                34,213
                
                22,942
                
                6,794
                
                4,477Gross
      Profit
                
                $361,065
                
                $206,884
                
                $107,020
                
                $47,161
 
 
 Revenue.Total Revenue for the
nine months ended March 31, 2009 was $338,484, compared to $395,278 for the nine
months ended March 31, 2008, a 14.4% decrease.
 
 Equipment
Sales Revenue for the nine months ended March 31, 2009 was $206,837, compared to
$229,826 for the nine months ended March 31, 2008, a 10.0%
decrease.  The Company has replaced its direct sales force with a
network of independent distributors selling multiple products to our
customers.
 
 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 practitioners) 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 nine months ended March 31,
2009, we recognized Revenue for the CVProfilor® DO-2020 “per-patient-tested”
rental program of $67,443, compared to $113,814 for the nine months ended March
31, 2008, a 40.7% 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 nine months ended March 31, 2009, Service/Contract Income was $64,204
compared to $51,638 for the nine months ended March 31, 2008, a 24.3%
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 March 31, 2009, the Inventory Allowance balance is $424,819.  The
following table shows the effect of this adjustment for the periods
indicated:
 
 Three
      Months Ended
                
                Nine
      Months EndedMarch
      31, 2009
                
                March
      31, 2008
                
                March
      31, 2009
                
                March
      31, 2008Cost
      of Sales ........................
                $666
                
                $18,169
                
                $24,143
                
                $39,852Inventory
      Reserve Adjustment....
                (466)
                
                1,603
                
                (16,436)
                
                (5,639)Cost
      of Sales, as reported .........
                $200
                
                $19,772
                
                $7,707
                
                $34,213
 
 Expenses.Total
selling, general and administrative expenses for the nine months ended March 31,
2009 were $431,119, compared to $1,039,394 for the nine months ended March 31,
2008, a 58.5% decrease.  The following is a summary of the major
categories included in selling, general and administrative
expenses:
 Nine
      Months Ended March 312009
                
                2008Wages,
      expenses, benefits before Stock Based CEO Compensation
                $214,443
                
                $269,048Stock
      Based CEO Compensation
                (309,750)
                
                118,125Patents
      and related expenses...........................................
                0
                
                3,065Outside
      consultants...................................................
                19,459
                
                39,666Rent
      (building/equipment) and utilities..............................
                67,497
                
                71,284Insurance-general
      and directors/officers liability..................
                21,864
                
                27,049Selling,
      marketing and promotion, including applicable wages...
                195,180
                
                252,902Legal
      and audit/accounting fees.......................................
                69,976
                
                69,610Royalties..................................................................
                8,184
                
                10,259Depreciation
      and amortization.......................................
                6,483
                
                8,244Stock
      Option Expense...................................................
                68,625
                
                71,800Other-general
      and administrative....................................
                69,158
                
                98,342Total
      selling, general and administrative expenses.........
                $431,119
                
                $1,039,394
 
 Wages,
related expenses and benefits before Stock Based CEO Compensation decreased from
$269,048 to $214,443 for the nine months ended March 31, 2008 and 2009,
respectively, a 20.3% 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 $309,750 for the nine months ended March 31, 2009 compared with
an expense of $118,125 for the nine months ended March 31, 2008.  The
benefit for the nine month period ended March 31, 2009 is a result of the
decrease in the Company’s stock price.
 
 Outside
consultants’ expense decreased from $39,666 for the nine months ended March 31,
2008 to $19,549 for the nine months ended March 31, 2009, a 50.7%
decrease.  This decrease is largely due to a decrease in the expenses
associated with our quality systems, regulatory affairs, and engineering
consultants in the nine months ended March 31, 2009.
 
 
 Insurance
expense decreased from $27,049 to $21,864 for the nine months ended March 31,
2008 and 2009, respectively, a 19.2% 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 $252,902 for the nine months ended March 31, 2008 to
$195,180 for the nine months ended March 31, 2009, a 22.8%
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.
 
 Legal and
audit/accounting fees increased from $69,610 for the nine months ended March 31,
2008 to $69,976 for the nine months ended March 31, 2009, a 0.5%
increase.
 
 Royalties
expense decreased from $10,259 to $8,184 for the nine months ended March 31,
2008 and 2009, respectively, a 20.2% 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 nine month period ending March 31, 2009
compared to the nine month period ending March 31, 2008.
 
 Stock
option expense decreased from $71,800 for the nine months ended March 31, 2008
to $68,625 for the nine months ended March 31, 2009, a 4.4%
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 nine months ended March 31, 2008 and March 31,
2009.  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 $98,342 for the nine months
ended March 31, 2008 to $69,158 for the nine months ended March 31, 2009, a
29.7% decrease. This decrease is due to the decline in warehouse expenses, which
are largely expenses associated with warranty replacement parts, for the nine
month period ending March 31, 2009 compared to the nine month period ending
March 31, 2008.
 
 Interest
income was $11,793 and $38,744 for the nine months ended March 31, 2009 and
2008, respectively a 69.6% decrease. This decrease was a result of the reduced
bank deposit rates and declining cash balances during the period.
 
 Net loss was $88,549 and $639,585 for
the nine months ended March 31, 2009 and 2008, respectively.  For the
nine months ended March 31, 2009, basic and diluted net loss per share was $.00,
based on weighted average shares outstanding of 40,650,494.  For the
nine months ended March 31, 2008, basic and diluted net loss per share was
$(.02), based on weighted average shares outstanding of 39,663,461.
 
 Off-Balance
Sheet Arrangements
 
 During
the quarter ended March 31, 2009, 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 $278,083 and $220,844 for the nine months
ended March 31, 2009 and March 31, 2008, respectively.  The
significant elements of these changes were as follows:
 
 Three Months Ended March
  31Net cash used in operating
      activities:
              2009
              2008—  net
      (loss), as adjusted for non-cash items
              $(322,528)
              $(429,493)—  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)   
       26,000
              (A)    269,747—  increase  (decrease)
      in accrued payroll and payroll taxes:
                –  (B)expense
      amounts that relate to the estimated amount due our chief executive
      officer as part of his compensation for services provided to
      us.
              (B) 
      (342,760)
              (B)   
      103,231
 
 We have
incurred operating losses and have not generated positive cash flow from
operations.  As of March 31, 2009, we had an accumulated deficit of
$27,274,716.
 
 
 As of
March 31, 2009, we had cash and cash equivalents of $803,785 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 March 31, 2009.
 
 With a
current cash balance of approximately $803,785, 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 ofMarch 31, 2009 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
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:  May
6, 2009