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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-QSB
 QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 FOR THE QUARTERLY PERIOD ENDED December 31, 2006
 Commission
File Number: 0-24635
 HYPERTENSION DIAGNOSTICS, INC.
  MINNESOTA
(State of incorporation)
    
    41-1618036
(I.R.S. Employer Identification No.)
 
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Page No.PART I. FINANCIAL INFORMATION:Item 1. Financial Statements
Balance Sheets  December 31, 2006 (unaudited) and June 30, 2006
    
    
    3Statements of Operations (unaudited)  Three Months and Six Months Ended December 31, 2006 and 2005
    
    
    4Statements of Cash Flows (unaudited)  Six Months Ended December 31, 2006 and 2005
    
    
    5Notes to Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Controls and Procedures
    
    
    19PART II. OTHER INFORMATION:Item 1. Legal Proceedings
    
    
    20Item 6. Exhibits
    
    
    20SIGNATURES
    
    
    21CERTIFICATIONSCertification of Chief Executive OfficerCertification of Chief Financial OfficerSection 1350 Certification
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Item 1. Financial Statements
  
  December 31,
    
    
    June 30,2006
    
    
    2006(Unaudited)
    
    
    (Audited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    1,441,378
    
    
    $
    1,722,913Accounts receivable
    
    
    182,518
    
    
    
    177,660Inventory
    
    
    296,800
    
    
    
    334,963Prepaids and other current assets
    
    
    14,533
    
    
    
    21,854Total Current Assets
    
    
    1,935,229
    
    
    
    2,257,390Property and Equipment:Leasehold improvements
    
    
    17,202
    
    
    
    17,202Furniture and equipment
    
    
    1,153,851
    
    
    
    1,193,807Less accumulated depreciation and amortization
    
    
    (1,113,376
    )
    
    
    (1,128,980
    )57,677
    
    
    
    82,029Other Assets
    
    
    6,530
    
    
    
    6,530Total Assets
    
    $
    1,999,436
    
    
    $
    2,345,949Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    30,685
    
    
    $
    58,895Accrued payroll and payroll taxes
    
    
    434,076
    
    
    
    398,101Deferred revenue
    
    
    10,629
    
    
    
    12,454Other accrued expenses
    
    
    46,650
    
    
    
    19,631Total Current Liabilities
    
    
    522,040
    
    
    
    489,081Deferred Revenue, less current portion
    
    
    11,952
    
    
    
    16,454Shareholders Equity:Series A Convertible Preferred Stock, $.01 par value:Authorized shares5,000,000Issued and outstanding shares871,225 at December
31, 2006 and June 30, 2006, respectively; each share of preferred stock convertible into 12 shares of common stock
at the option of the holder (aggregate liquidation preference
$3,443,354 and $2,391,218 at December 31, 2006
and June 30, 2006, respectively)
    
    
    8,712
    
    
    
    8,712Common Stock, $.01 par value:Authorized shares150,000,000Issued and outstanding shares39,442,820 and 40,157,106
at December 31, 2006 and June 30, 2006, respectively
    
    
    394,428
    
    
    
    401,571Additional paid-in capital
    
    
    27,454,108
    
    
    
    27,408,450Accumulated deficit
    
    
    (26,391,804
    )
    
    
    (25,978,319
    )Total Shareholders Equity
    
    
    1,465,444
    
    
    
    1,840,414Total Liabilities and Shareholders Equity
    
    $
    1,999,436
    
    
    $
    2,345,949
 See accompanying notes.
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Three Months Ended
    
    
    Six Months EndedDecember 31
    
    
    December 312006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Equipment sales
    
    $
    476,505
    
    
    $
    433,736
    
    
    $
    809,806
    
    
    $
    685,658Equipment rental
    
    
    65,407
    
    
    
    105,614
    
    
    
    140,585
    
    
    
    227,144Service/contract income
    
    
    6,811
    
    
    
    1,756
    
    
    
    20,817
    
    
    
    9,220548,723
    
    
    
    541,106
    
    
    
    971,208
    
    
    
    922,022Cost of Sales
    
    
    13,330
    
    
    
    29,993
    
    
    
    33,575
    
    
    
    62,493Gross Profit
    
    
    535,393
    
    
    
    511,113
    
    
    
    937,633
    
    
    
    859,529Selling, general and administrative expenses
    
    
    774,954
    
    
    
    804,239
    
    
    
    1,386,960
    
    
    
    1,501,348Operating Loss
    
    
    (239,561
    )
    
    
    (293,126
    )
    
    
    (449,327
    )
    
    
    (641,819
    )Other Income:Interest income
    
    
    14,157
    
    
    
    9,199
    
    
    
    27,743
    
    
    
    20,675Gain on sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    8,099
    
    
    
    Total Other Income
    
    
    14,157
    
    
    
    9,199
    
    
    
    35,842
    
    
    
    20,675Net Loss
    
    $
    (225,404
    )
    
    $
    (283,927
    )
    
    $
    (413,485
    )
    
    $
    (621,144
    )Basic and Diluted Net Loss per Share
    
    $
    (.01
    )
    
    $
    (.01
    )
    
    $
    (.01
    )
    
    $
    (.02
    )Weighted Average Shares Outstanding
    
    
    39,846,547
    
    
    
    33,264,362
    
    
    
    40,001,826
    
    
    
    33,097,633
 See accompanying notes.
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Six Months EndedDecember 312006
    
    
    2005Operating Activities:Net loss
    
    $
    (413,485
    )
    
    $
    (621,144
    )Adjustments to reconcile net loss to net
cash used in operating activities:Stock based compensation
    
    
    84,515
    
    
    
    24,025CEO Stock based compensation expense
    
    
    5,250
    
    
    
    210,000Depreciation
    
    
    26,853
    
    
    
    69,695Net book value of disposed rental assets
    
    
    2,785
    
    
    
    13,771Gain on sale of property and equipment
    
    
    (8,099
    )
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    (4,858
    )
    
    
    37,882Inventory
    
    
    38,163
    
    
    
    20,911Prepaids and other current assets
    
    
    7,321
    
    
    
    (34,136
    )Accounts payable
    
    
    (28,210
    )
    
    
    6,472Accrued payroll and payroll taxes
    
    
    30,725
    
    
    
    (56,355
    )Deferred revenue
    
    
    (6,327
    )
    
    
    (4,013
    )Other accrued expenses
    
    
    27,019
    
    
    
    18,744Net cash used in operating activities
    
    
    (238,348
    )
    
    
    (314,148
    )Investing Activities:Purchase of property and equipment
    
    
    (5,286
    )
    
    
    Proceeds from disposal of property and equipment
    
    
    8,099
    
    
    
    Net cash provided by investing activities
    
    
    2,813
    
    
    
    Financing Activities:Redemption of Common Stock
    
    
    (46,000
    )
    
    
    Net cash used in financing activities
    
    
    (46,000
    )
    
    
    Net (decrease) in cash and cash equivalents
    
    
    (281,535
    )
    
    
    (314,148
    )Cash and cash equivalents at beginning of period
    
    
    1,722,913
    
    
    
    1,525,865Cash and cash equivalents at end of period
    
    $
    1,441,378
    
    
    $
    1,211,717
 See accompanying notes.
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6




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Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
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Three Months
    
    
    Six MonthsEnded
    
    
    EndedDecember 31
    
    
    December 312005
    
    
    2005Net Loss:As Reported
    
    $
    (283,927
    )
    
    $
    (621,144
    )Fair value compensation expense
    
    
    (231,748
    )
    
    
    (285,245
    )Pro Forma
    
    $
    (515,675
    )
    
    $
    (906,389
    )Basic and Diluted Net Loss per Share:As Reported
    
    $
    (0.01
    )
    
    $
    (0.02
    )Fair value compensation expense
    
    
    (0.01
    )
    
    
    (0.01
    )Pro Forma
    
    $
    (0.02
    )
    
    $
    (0.03
    )Stock Based Compensation:As Reported
    
    $
    24,025
    
    
    $
    24,025Fair value compensation expense
    
    
    (255,773
    )
    
    
    (309,270
    )Pro Forma
    
    $
    (231,748
    )
    
    $
    (285,245
    )
  Expected
    
    Expected
    
    ExpectedInterest Rate
    
    Dividend Yield
    
    Life
    
    VolatilityThree Months EndedDecember 31, 2006
    
    
    4.50
    %
    
    None
    
    5 years
    
    
    151.94%December 31, 2005
    
    
    4.25
    %
    
    None
    
    5 years
    
    
    112.00%Six Months EndedDecember 31, 2006
    
    
    4.50
    %
    
    None
    
    2 - 5 years
    
    
    138.07-151.94%December 31, 2005
    
    
    4.25
    %
    
    None
    
    5 years
    
    
        112.00%
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9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Forward-Looking Statements
 ®
 Overview
 PulseWave ® ®
 
    
    The CR-2000 Research System is being marketed worldwide for research
purposes only to clinical research investigators for the purpose of collecting
data in cardiovascular studies. Because the CR-2000 Research System bears the
CE Mark (CE0123 ) and meets the European Union Medical Device
Directive, physicians may
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use the CR-2000 Research System with patients in a
clinical setting in the European Union.
    
    In the U.S., the CVProfilor® DO-2020 System is being marketed to
primary care physicians and other health care professionals on a
per-patient-tested rental basis. It can also be purchased or leased.
Utilizing our Central Data Management Facility, we are able to track
utilization of the CVProfilor® DO-2020 System in each physicians
office and medical clinic and to invoice our physician customers on the number
of CardioVascular Profile Reports (CVProfile Reports) which they generate each
month. In the fourth quarter of fiscal year 2005, we implemented a new
rent-to-own program that allows rental customers to credit a portion of their
payments toward the purchase of their CVProfilor® DO-2020 System.
Acquisition options were enhanced with the assistance of a third-party leasing
company, which the physicians can use to acquire their CVProfilor®
DO-2020 System.
    
    The CVProfilor® MD-3000 System is being marketed through
distributors to physicians outside the United States. These distributors
purchase the product from us and then re-sell it to end-user physicians in
their territory. The CVProfilor® MD-3000 System has a CE Mark that
allows it to be marketed within European Union countries. The
CVProfilor® MD-3000 may require certain regulatory approval for it
to be marketed in other countries throughout the world.
 Critical Accounting Policies
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Results of Operations
 ®
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Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005
  Three Months Ended December 31, 2006Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    548,723
    
    
    $
    476,505
    
    
    $
    65,407
    
    
    $
    6,811Cost of Sales
    
    
    13,330
    
    
    
    4,631
    
    
    
    8,197
    
    
    
    502Gross Profit
    
    $
    535,393
    
    
    $
    471,874
    
    
    $
    57,210
    
    
    $
    6,309
 Three Months Ended December 31, 2005Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    541,106
    
    
    $
    433,736
    
    
    $
    105,614
    
    
    $
    1,756Cost of Sales
    
    
    29,993
    
    
    
    6,590
    
    
    
    23,383
    
    
    
    20Gross Profit
    
    $
    511,113
    
    
    $
    427,146
    
    
    $
    82,231
    
    
    $
    1,736
 Revenue.
  ® ® ® ® ® ® ®
 ® ® ®
 ® ®
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®
 ®
  Expenses.
 Three Months EndedDecember 312006
    
    
    2005Wages, related expenses and benefits
    
    $
    252,226
    
    
    $
    192,381Patents and related expenses
    
    
    1,866
    
    
    
    Outside consultants
    
    
    55,928
    
    
    
    63,015Rent (building/equipment) and utilities
    
    
    23,458
    
    
    
    25,192Insurance-general and directors/officers liability
    
    
    13,080
    
    
    
    15,229Selling, marketing and promotion, including applicable wages
    
    
    300,908
    
    
    
    360,159Legal and audit/accounting fees
    
    
    35,097
    
    
    
    39,240Royalties
    
    
    19,140
    
    
    
    16,181Depreciation and amortization
    
    
    3,342
    
    
    
    9,953Research and development
    
    
    353
    
    
    
    Compensation expense, accelerated stock option vesting
    
    
    
    
    
    
    24,025Stock option expense
    
    
    13,283
    
    
    
    Other-general and administrative
    
    
    56,273
    
    
    
    58,864Total selling, general and administrative expenses
    
    $
    774,954
    
    
    $
    804,239
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Six Months Ended December 31, 2006 Compared to Six Months Ended December 31, 2005
  Six Months Ended December 31, 2006Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    971,208
    
    
    $
    809,806
    
    
    $
    140,585
    
    
    $
    20,817Cost of Sales
    
    
    33,575
    
    
    
    11,793
    
    
    
    20,103
    
    
    
    1,679Gross Profit
    
    $
    937,633
    
    
    $
    798,013
    
    
    $
    120,482
    
    
    $
    19,138
 Six Months Ended December 31, 2005Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    922,022
    
    
    $
    685,658
    
    
    $
    227,144
    
    
    $
    9,220Cost of Sales
    
    
    62,493
    
    
    
    14,152
    
    
    
    48,180
    
    
    
    161Gross Profit
    
    $
    859,529
    
    
    $
    671,506
    
    
    $
    178,964
    
    
    $
    9,059
 Revenue.
 ® ®
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®
   Three Months Ended
    
    
    Six Months EndedDecember 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2006
    
    
    December 31, 2005Cost of Sales
    
    $
    25,306
    
    
    $
    70,669
    
    
    $
    65,010
    
    
    $
    121,144Inventory Reserve Adjustment
    
    
    (11,976
    )
    
    
    (40,676
    )
    
    
    (31,435
    )
    
    
    (58,651
    )Cost of Sales, as reported
    
    $
    13,330
    
    
    $
    29,993
    
    
    $
    33,575
    
    
    $
    62,493
 Expenses.
 Six Months EndedDecember 312006
    
    
    2005Wages, related expenses and benefits
    
    $
    241,285
    
    
    $
    420,701Patents and related expenses
    
    
    1,866
    
    
    
    1,048Outside consultants
    
    
    85,781
    
    
    
    151,876Rent (building/equipment) and utilities
    
    
    48,868
    
    
    
    50,238Insurance-general and directors/officers liability
    
    
    27,936
    
    
    
    32,415Selling, marketing and promotion, including applicable wages
    
    
    592,148
    
    
    
    575,673Legal and audit/accounting fees
    
    
    109,329
    
    
    
    93,232Royalties
    
    
    27,389
    
    
    
    27,384Depreciation and amortization
    
    
    6,750
    
    
    
    21,515Research and development
    
    
    31,858
    
    
    
    Compensation expense, accelerated stock option vesting
    
    
    
    
    
    
    24,025Stock Option Expense
    
    
    84,515
    
    
    
    Other-general and administrative
    
    
    129,235
    
    
    
    103,241Total selling, general and administrative expenses
    
    $
    1,386,960
    
    
    $
    1,501,348
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Off-Balance Sheet Arrangements
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Liquidity and Capital Resources
  Six Months Ended December 312006
    
    2005Net cash used in operating activities:
    
    net (loss), as adjusted for non-cash items
    
    $(294,082)
    
    $(303,653)
    
    increase in CEO Stock based compensation
    
    (A) 5,250
    
    (A) 210,000
 
 
    
    (A) expense: amounts that relate to
the estimated amount due our chief
executive officer as part of his
compensation for services
provided to us.  ®
 ® ®
 ® ® ®
 ®
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Item 3. Controls and Procedures
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
     
 Item 6. Exhibits
  31.1
    
    Certification of Chief Executive Officer pursuant to
13a-14 and 15d-14 of the Exchange Act31.2
    
    Certification of Chief Financial Officer pursuant to
13a-14 and 15d-14 of the Exchange Act32
    
    Certificate pursuant to 18 U.S.C. § 1350
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SIGNATURES
  HYPERTENSION
DIAGNOSTICS, INC.By
    
    /s/ Mark N. SchwartzMark N. SchwartzChief Executive Officer
  21