##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-QSB
 (Mark
One)
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from  to .
 Commission File number 0-935
 
 CYTOCORE, INC.
 (Exact Name of Small Business Issuer as Specified in Its Charter)
 Delaware
    
    36-4296006(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 Chicago, IL 60610  (Address of Principal Executive Offices)
 (312) 222-9550  (Issuers
Telephone Number, including Area Code)
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 þ o
 o þ
  291,515,236
 o þ




---



##### 



CYTOCORE, INC.
(Formerly Molecular Diagnostics, Inc.)
 QUARTERLY REPORT ON FORM 10-QSB
 TABLE OF CONTENTS
 PagePART I.  FINANCIAL INFORMATIONItem 1. Financial Statementsa) Consolidated Balance Sheets  September 30, 2006 (unaudited)
and December 31, 2005
    
    
    3b) Consolidated Statements of Operations  Three and nine months ended September
30, 2006 and September 30, 2005 (unaudited)
    
    
    4c) Consolidated Statements of Cash Flows  Nine months ended September 30, 2006
and September 30, 2005 (unaudited)
    
    
    5d) Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    18Item 3. Controls and Procedures
    
    
    23PART II.  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3. Defaults upon Senior Securities
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27Item 5. Other Information
    
    
    27Item 6. Exhibits
    
    
    27SIGNATURES
    
    
    28EXHIBIT INDEX
    
    
    29Consulting AgreementForm of Warrant AgreementSection 302 CertificationSection 302 CertificationSection 906 CertificationSection 906 Certification
  2




---



##### Table of Contents



PART I.  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CYTOCORE, INC.
(Formerly Molecular Diagnostics, Inc.)
 
 CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    873
    
    
    $
    Accounts receivables, net of allowance for doubtful accounts of $0 at September 30,
2006 and December 31, 2005
    
    
    28
    
    
    
    38Inventories
    
    
    
    
    
    
    26Prepaid expenses and other current assets
    
    
    226
    
    
    
    73Total current assets
    
    
    1,127
    
    
    
    137Fixed Assets, net
    
    
    54
    
    
    
    233Licenses, patents and technology, net of amortization
    
    
    20
    
    
    
    20Other assets
    
    
    
    
    
    
    16Total assets
    
    $
    1,217
    
    
    $
    390Liabilities and Stockholders DeficitCurrent Liabilities:Checks issued in excess of amounts on deposit
    
    $
    
    
    
    $
    5Accounts payable
    
    
    1,461
    
    
    
    3,714Accrued payroll costs
    
    
    354
    
    
    
    643Accrued expenses
    
    
    1,838
    
    
    
    2,292Deferred revenue
    
    
    25
    
    
    
    25Due to stockholder
    
    
    37
    
    
    
    37Lease obligation
    
    
    
    
    
    
    96Notes payablerelated party
    
    
    
    
    
    
    70Notes payable
    
    
    1,586
    
    
    
    3,557Total current liabilities
    
    
    5,301
    
    
    
    10,439Stockholders Deficit:Preferred stock, $0.001 par value; 10,000,000 shares authorized; 578,653 and
1,102,192 shares issued and outstanding at September 30, 2006 and December
31, 2005, respectively (Liquidation value of all
classes of preferred stock $5,038 at September 30, 2006)
    
    
    3,008
    
    
    
    7,716Common stock, $0.001 par value; 375,000,000 shares authorized; 288,342,264 and 154,665,084
shares
issued and 288,150,176 and 154,472,995 shares outstanding at September 30, 2006 and December
31, 2005, respectively
    
    
    288
    
    
    
    155Additional paid-in-capital
    
    
    68,611
    
    
    
    52,386Treasury stock: 192,088 shares at September 30, 2006 and December 31, 2005
    
    
    (327
    )
    
    
    (327
    )Accumulated deficit
    
    
    (75,589
    )
    
    
    (69,911
    )Accumulated comprehensive lossCumulative translation adjustment
    
    
    (75
    )
    
    
    (68
    )Total stockholders deficit
    
    
    (4,084
    )
    
    
    (10,049
    )Total liabilities and stockholders deficit
    
    $
    1,217
    
    
    $
    390
  3




---



##### Table of Contents



CYTOCORE, INC
(Formerly Molecular Diagnostics, Inc.)
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
 For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)Net revenues
    
    $
    21
    
    
    $
    24
    
    
    $
    70
    
    
    $
    93Operating expensesCost of revenues (includes impairment charge of property assets of $169 for the
nine months ended September 30, 2006, net of settlement of trade debt of $81 and
$177 for three and nine
months ended September 30, 2006, respectively)
    
    
    (81
    )
    
    
    
    
    
    
    19
    
    
    
    Research and development (net of settlement of trade debt of $141 and $279 for
the three and nine months ended September 30,
2006, respectively)
    
    
    193
    
    
    
    31
    
    
    
    486
    
    
    
    128Selling, general, and administrative (net of settlement of trade debt, lease
obligation and note payable of $386 and $1,045 for the three and nine months
ended September 30, 2006, respectively, and $80 and $853 for the three and nine
months ended
September 30, 2005, respectively)
    
    
    1,193
    
    
    
    (55
    )
    
    
    2,906
    
    
    
    1,047Total operating expenses
    
    
    1,305
    
    
    
    (24
    )
    
    
    3,411
    
    
    
    1,175Operating income (loss)
    
    
    (1,284
    )
    
    
    48
    
    
    
    (3,341
    )
    
    
    (1,082
    )Other income (expense):Interest expense related party
    
    
    
    
    
    
    (2
    )
    
    
    (14
    )
    
    
    (7
    )Interest expense (net of interest settlement of $11 and $69 for
the three and nine months ended September 30, 2006,
respectively)
    
    
    (51
    )
    
    
    (124
    )
    
    
    (1,686
    )
    
    
    (932
    )Interest income
    
    
    11
    
    
    
    
    
    
    
    12
    
    
    
    Total other income (expense)
    
    
    (40
    )
    
    
    (126
    )
    
    
    (1,688
    )
    
    
    (939
    )Net loss
    
    $
    (1,324
    )
    
    $
    (78
    )
    
    $
    (5,029
    )
    
    $
    (2,021
    )Preferred stock dividend
    
    
    
    
    
    
    (230
    )
    
    
    (648
    )
    
    
    (683
    )Net loss applicable to common stockholders
    
    $
    (1,324
    )
    
    $
    (308
    )
    
    $
    (5,677
    )
    
    $
    (2,704
    )Basic and diluted net loss per common share
    
    $
    (0.00
    )
    
    $
    (0.00
    )
    
    $
    (0.03
    )
    
    $
    (0.02
    )Basic and diluted weighed average number of
common shares outstanding
    
    
    275,509,600
    
    
    
    118,669,134
    
    
    
    224,293,002
    
    
    
    111,137,400
  4




---



##### Table of Contents



CYTOCORE, INC.
(Formerly Molecular Diagnostics, Inc.)
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005(Unaudited)Operating Activities:Net loss
    
    $
    (5,029
    )
    
    $
    (2,021
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of debt discount
    
    
    173
    
    
    
    575Depreciation and amortization
    
    
    31
    
    
    
    92Amortization of prepaid consulting fees
    
    
    
    
    
    
    79Impairment charge of property asset
    
    
    169
    
    
    
    Interest charge on note conversion settled in stock
    
    
    1,321
    
    
    
    Loss on sale of fixed assets
    
    
    
    
    
    
    3Gain on settlements of trade indebtedness
    
    
    (1,569
    )
    
    
    Notes issued in payment of an expense
    
    
    48
    
    
    
    82Warrant related expenses issued in settlement of debt
    
    
    166
    
    
    
    421Stock, warrants and options issued to non-employees for services
    
    
    857
    
    
    
    Non-cash compensation expense
    
    
    1,099
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    10
    
    
    
    14Inventories
    
    
    26
    
    
    
    Due from stockholder
    
    
    
    
    
    
    (1
    )Prepaid expenses and other current assets
    
    
    (169
    )
    
    
    (107
    )Accounts payable
    
    
    (699
    )
    
    
    (229
    )Accrued expenses
    
    
    (454
    )
    
    
    (135
    )Net cash used in operating activities
    
    
    (4,020
    )
    
    
    (1,227
    )Investing activities:Purchases of fixed assets
    
    
    (20
    )
    
    
    (27
    )Net cash used in investing activities
    
    
    (20
    )
    
    
    (27
    )Financing activities:Net proceeds from issuance of common stock
    
    
    5,040
    
    
    
    1,378Proceeds from exercise of warrants
    
    
    44
    
    
    
    Lease obligation
    
    
    (96
    )
    
    
    Payment of notes payable
    
    
    (75
    )
    
    
    (5
    )Net cash provided by financing activities
    
    
    4,913
    
    
    
    1,373Net increase in cash and cash equivalents
    
    
    873
    
    
    
    119Cash and cash equivalents at the beginning of period
    
    
    
    
    
    
    11Cash and cash equivalents at end of period
    
    
    873
    
    
    
    130Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    28Financing costs
    
    
    
    
    
    
    58Non-cash transactions during the period for:Financing costs
    
    $
    239
    
    
    $
    93Convertible promissory notes and accrued interest converted into common stock
    
    $
    3,557
    
    
    $
    6,884Preferred stock and cumulative dividends converted into common stock
    
    $
    4,217
    
    
    $
    71
  5




---



##### Table of Contents



CYTOCORE, INC.
(Formerly Molecular Diagnostics, Inc.)
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1. Organization
       6




---



##### Table of Contents



Note 2. Basis of Presentation
   Note 3. Summary of Significant Accounting Principles
  Principles of Consolidation.
 Use of Estimates.
 Revenue Recognition
  Research and Development Costs.
 Net Loss Per Share.
 7




---



##### Table of Contents



Recently issued accounting pronouncements
 Share-Based Payment.
 Effect of Contingently Convertible Instruments on Diluted Earnings per Share
 Accounting Changes and Error Corrections.
 Accounting for Uncertainty in Income Taxes.
 Fair Value Measurements.
 Note 4. Licenses, Patents and Technology
   8




---



##### Table of Contents



September 30,
    
    
    December 31,2006
    
    
    2005Licenses
    
    $
    20
    
    
    $
    20Patent costs
    
    
    133
    
    
    
    133LabCorp. Technology agreement
    
    
    260
    
    
    
    260Subtotal
    
    
    413
    
    
    
    413Less accumulated amortization
    
    
    (393
    )
    
    
    (393
    )Total
    
    $
    20
    
    
    $
    20
 Note 5. Accrued Expenses
  September 30,
    
    
    December 31,2006
    
    
    2005Accrued interest
    
    $
    800
    
    
    $
    898Accrued interestrelated party
    
    
    
    
    
    
    34Accrued settlement costs for legal fees
    
    
    438
    
    
    
    438Accrued franchise and other taxes
    
    
    589
    
    
    
    589Other accrued expenses
    
    
    11
    
    
    
    333Total
    
    $
    1,838
    
    
    $
    2,292
 Note 6. Notes PayableRelated Parties
  September 30,
    
    
    December 31,2006
    
    
    2005Northlea Partners, Ltd., an affiliate of a board member, $25,000 Promissory
Note issued August 6, 2001; interest rate 15% per annum
    
    $
    
    
    
    $
    25Northlea Partners, Ltd., $15,000 Promissory Note issued September 20, 2001;
interest rate 9% per annum
    
    
    
    
    
    
    15Northlea Partners, Ltd., $15,000 Bridge II Convertible Promissory Note issued
May 1, 2003; interest rate 12% per annum
    
    
    
    
    
    
    15Northlea Partners, Ltd. $25,000 Bridge III Convertible Promissory Note issued
May 21, 2004; interest rate 10% per annum
    
    
    
    
    
    
    15$
    
    
    
    $
    70
  Peter Gombrich Amounts Due.
 9




---



##### Table of Contents



Note 7. Notes Payable
  September 30,
    
    
    December 31,2006
    
    
    2005Bridge I Convertible Promissory Notes; due December 31, 2002; interest
rate 7% per annum; convertible into common stock at 75% of the market price
on date of conversion; beneficial conversion feature valued at $1,042,000 at
June 30, 2002; warrants at an exercise price of $0.20 per share; additional
warrants at an exercise price equal to 150% of note conversion price
    
    $
    75
    
    
    $
    500Bridge II Convertible Promissory Notes; due July 31, 2004; interest rate
12% or 15% per annum; convertible into common stock at $0.10 or $0.15 per share;
beneficial conversion feature valued at $1,777,000 and $330,000 at
December 31, 2003 and December 31, 2002, respectively;
warrants at an exercise price of $0.15 or $0.20 per share
    
    
    1,151
    
    
    
    1,285Bridge III Convertible Promissory Notes; due December 31, 2008; interest rate 10%
per annum; convertible into common stock at $0.10 per share; beneficial
conversion feature valued at $1,604,000 at June 30, 2004; warrants at an
exercise price of $0.15 per share
    
    
    
    
    
    
    130Monsun, AS $500,000 Promissory Note issued November 1, 2000; due July 31, 2002;
interest rate 20% per annum, compounded into principal amount; beneficial
conversion feature valued at $125,000 at November 1, 2000
    
    
    
    
    
    
    953MonoGen, Inc. $305,000 Promissory Note issued October 14, 2004; interest rate 14%
per annum; first installment of $25,000 due November 1, 2004 with monthly
principal and interest installments of $10,000 thereafter; due January 1, 2007
    
    
    305
    
    
    
    305Ungaretti & Harris LLP $211,368 Secured Promissory Note issued May 8, 2003; interest
rate 12% per annum; due September 30, 2003
    
    
    
    
    
    
    51Ernst & Young LLP $30,800 Promissory Note issued July 17, 2003; interest rate 12%
per annum commencing January 1, 2003; due December 31, 2003
    
    
    
    
    
    
    31Ventana Medical Systems, Inc. $62,946 Promissory Note issued November 30, 2003;
due December 31, 2003; interest rate 8% per annum payable after December 31, 2003
    
    
    21
    
    
    
    21Xillix Technologies Corporation $361,000 Promissory Note issued June 26, 1998; interest
rate Canadian Prime plus 6% per annum; represents a debt of AccuMed
    
    
    34
    
    
    
    34Western Economic Diversification $221,000 Promissory Note issued June 1989; no
interest; represented a debt of Oncometrics
    
    
    
    
    
    
    247$
    1,586
    
    
    $
    3,557
 Bridge I.
  10




---



##### Table of Contents



Bridge II.
    Bathgate Capital Partners, LLC  Bridge III
  11




---



##### Table of Contents



Monsun.
  MonoGen, Inc.
 Ungaretti & Harris LLP.
 Ernst & Young LLP.
 12




---



##### Table of Contents



Western Economic Diversification.
 Defaults.
 Carrying Amounts.
 Note 8. Stockholders Equity
  September 30,
    
    
    December 31,2006
    
    
    2005Shares Issued &
    
    
    Shares Issued &Offering
    
    Outstanding
    
    
    OutstandingSeries A convertible
    
    
    82,655
    
    
    
    82,655Series B convertible, 10% cumulative dividend
    
    
    225,736
    
    
    
    365,106Series C convertible, 10% cumulative dividend
    
    
    38,333
    
    
    
    245,833Series D convertible, 10% cumulative dividend
    
    
    175,000
    
    
    
    175,000Series E convertible, 10% cumulative dividend
    
    
    56,929
    
    
    
    233,598Total Preferred Stock
    
    
    578,653
    
    
    
    1,102,192
 Summary of Preferred Stock Terms
 Series A Convertible Preferred Stock
 Liquidation Value:
    
    $4.50 per shareConversion Price:
    
    $10.3034 per shareConversion Rate:
    
    0.4367Liquidation Value divided by Conversion Price ($4.50/$10.3034)Voting Rights:
    
    NoneDividends:
    
    NoneConversion Period:
    
    Any time
 Series B Convertible Preferred Stock
 Liquidation Value:
    
    $4.00 per shareConversion Price:
    
    $1.00 per shareConversion Rate:
    
    4.00Liquidation Value divided by Conversion Price ($4.00/$1.00)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing March 31, 2001Conversion Period:
    
    Any time
  Series C Convertible Preferred Stock
 Liquidation Value:
    
    $3.00 per shareConversion Price:
    
    $0.60 per shareConversion Rate:
    
    5.00Liquidation Value divided by Conversion Price ($3.00/$0.60)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing March 31, 2002Conversion Period:
    
    Any time
 13




---



##### Table of Contents



Series D Convertible Preferred Stock
 Liquidation Value:
    
    $10.00 per shareConversion Price:
    
    $1.00 per shareConversion Rate:
    
    10.00Liquidation Value divided by Conversion Price ($10.00/$1.00)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing April 30, 2002Conversion Period:
    
    Any time
  Series E Convertible Preferred Stock
 Liquidation Value:
    
    $22.00 per shareConversion Price:
    
    $0.80 per shareConversion Rate:
    
    27.50Liquidation Value divided by Conversion Price ($22.00/$0.80)Voting Rights:
    
    Equal in all respects to holders of common sharesDividends:
    
    10%QuarterlyCommencing May 31, 2002Conversion Period:
    
    Any time
  Issuance of Common Shares for Cash
    Issuance of Warrants as a Settlement
    14




---



##### Table of Contents



Issuance of Stock as Payment for Services and Settlement
    Conversion of Certain Convertible Promissory Notes for Common Shares
    Conversion of Certain Preferred Shares for Common Shares
  Issuance of Warrants as Payment for employee compensation
  Application of Black-Scholes Valuation Model
  15




---



##### Table of Contents



Note 9. Equity Incentive Plan and Employee Stock Purchase Plan and other Share-Based employee
payments
   Note 10. Legal Proceedings
  Lawsuit s
 Ungaretti & Harris LLP.
 Hill & Barlow LLP.
 16




---



##### Table of Contents



Medical College of Georgia Research Institute, Inc.
 Account Resource
 Peter Gombrich.
 Other claims
  Dennis Bergquist.
 Leslie Bergquist.
 Stephen Wasko.
 17




---



##### Table of Contents



Other Creditors.
   Note 11. Impairment of Long-Lived Assets
  
 Item 2. Managements Discussion and Analysis or Plan of Operation
 Forward-Looking Statements
    18




---



##### Table of Contents



Overview of CytoCore, Inc.
     2
 19




---



##### Table of Contents



Critical Accounting Policies and Changes to Accounting Policies
   Results of Operations
  Three Months Ended September 30, 2006 as compared to Three Months Ended September 30, 2005
 Revenue
  Costs and Expenses
 Cost of Revenues
  Research and Development
   Selling, General and Administrative
  20




---



##### Table of Contents



Interest Expense
  Net Loss
  Nine Months Ended September 30, 2006 as compared to Nine Months Ended September 30, 2005
 Revenues
  Costs and Expenses
 Cost of Goods Revenues
  Research and Development
  21




---



##### Table of Contents



Selling, General and Administrative
  Other Income and Expense
 Interest Expense
  Net Loss
  Liquidity and Capital Resources
   22




---



##### Table of Contents



Off-Balance Sheet Arrangements
  
 Item 3. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 Part II. Other Information
 
 Item 1. Legal Proceedings
  Ungaretti & Harris LLP.
 23




---



##### Table of Contents



Hill & Barlow LLP.
 Medical College of Georgia Research Institute, Inc.
 Account Resource
 Peter Gombrich.
 Other claims
  Dennis Bergquist.
 Leslie Bergquist.
 24




---



##### Table of Contents



Stephen Wasko.
 Other Creditors.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Unregistered Sales of Equity Securities
 Common Stock.
   Issuance of Warrants as a Settlement
   25




---



##### Table of Contents



Issuance of Stock as Payment for Services and Settlement
    Conversion of Certain Convertible Promissory Notes for Common Shares.
   Conversion
of Certain Preferred Shares for Common Shares
  Issuance
of Warrants as Payment for employee compensation
    Company Repurchases of Securities
  26




---



##### Table of Contents



Item 3. Defaults upon Senior Securities
  
    
    $75,000 in Bridge I convertible promissory notes;
    
    $1,151,000 in Bridge II convertible promissory notes;
    
    $305,000 MonoGen, Inc. promissory note: and
    
    $21,000 Ventana Medical Systems, Inc. promissory note.
  
 Item 4. Submission of Matters to Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  27




---



##### Table of Contents



SIGNATURES
  CytoCore, Inc.
f/k/a Molecular Diagnostics, Inc./s/
    
    David Weissberg, M.D.David Weissberg, M.D.Chairman and Chief Executive Officer /s/
    
    Robert F. McCullough, Jr.Robert F. McCullough, Jr.Chief Financial Officer  28




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    
    Consulting
Agreement, dated January 27, 2006 and effective March 1,
2006, by and between the Company and GSG Enterprises LLC10.2
    
    
    Form of Warrant agreement with officers and directors31.1
    
    
    Section 302 certification by principal executive officer.31.2
    
    
    Section 302 certification by principal financial officer.32.1
    
    
    Section 906 certification by principal executive officer.32.2
    
    
    Section 906 certification by principal financial officer.
 29