Hypertension Diagnostics, Inc.

Forward-Looking Statements

This report may contain “forward-looking” statements, as such term is defined by the Securities and Exchange Commission’sCommission in its rules, regulations and releases, which represent the current beliefs of our management as well as assumptions made by and information currently available to management, including but not limited to, statements concerning the registrant’s operations, economic performance, financial condition, growth and acquisition strategies, investments, and future operational plans.  For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “expect,” “believe,” “expect,” “can,” “estimate,” “anticipate,” “intend,” “could,” “might,” “plan,” “predict” or “continue” or the negative or other variations thereof or comparable terminology 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.  

These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company’s control, and actual results may differ materially depending on a variety of important factors, including our ability to generate acceptable levels of revenues; negative effect on our stock price resulting from available securities for sale; our need for additional capital; significant business risks associated with the start-upre start of the Company’s HDI Plastics, Inc. subsidiary business; the illiquidity of our securities on the OTCQBOTC Bulletin Board and the related restrictions on our securities relating to “penny stocks”; and potential violations by us of federal and state securities laws; uncertainty related to acquisitions; governmental regulation; commercial viability of required raw materials, and any other factors discussed in this and other filings of the Company with the Securities and Exchange commission. We undertake no responsibility to update any forward-looking statement. These forward-looking statements are only made as of the date of this report.  The following should be read in conjunction with the information presented in our Annual Report on Form 10-K for the year ended June 30, 2011, filed with the SEC on September 16, 2011, including but not limited to the “Risk Factors” listed in such report.2012, as amended.  

Hypertension Diagnostics, Inc.

Consolidated Balance Sheet

December 31, 2011(Unaudited)

PART I.  FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

See accompanying notes.

Hypertension Diagnostics, Inc.

Consolidated StatementStatements of OperationsOperation

December 31, 2011(Unaudited)

Hypertension Diagnostics, Inc.

Consolidated StatementStatements of Cash FlowsFlow

December 31, 2011

(Unaudited)

Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

December 31, 2011

Note 1.   Basis of Presentation

The accompanying unaudited consolidated financial statements of Hypertension Diagnostics, Inc. (the “Company,”“Company” or “HDI” “we” or “us”) have been prepared in accordance with the Instructionsinstructions to Form 10-Q and Regulation S-X, 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 and six months ended December 31, 2011September 30, 2012 are not necessarily indicative of the results that may be expected for the full year ending June 30, 2012.  The June 30, 2011 balance sheet was derived from audited financial statements and was adjusted to reflect unaudited adjustments to reclassify discontinued operations, as described in Notes 2 and 3 below.2013.  For further information, refer to the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed with the SEC on September 16, 2011.2012, as amended.  The policies described in that report are used for preparing quarterly reports.

On July 14, 2011, the Company formed HDI Plastics, Inc. (“HDIP” or “Plastics”), as a wholly-owned subsidiary of the Company. HDIP commenced plastic processing operations in October 2011.  HDIP is the principal operating business of the Company.  HDIP is engaged in the processing of recycled plastic material including re-processing into pellet-form for sale to manufacturing customers. (See Note 12.)

Note 2. NatureGoing Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of BusinessAmerica, assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the quarter ended September 30, 2012, we incurred losses from continuing operations of $447,957. At September 30, 2012, we had an accumulated deficit of $30,011,138 and negative working capital of $227,525. Our ability to continue as a going concern is dependent on our ability to raise the required additional capital or debt financing to meet short-term needs to relocate our plastics processing facility to a new site and then restart the facility which would include hiring production works. The Company is currently seeking to raise an additional $750,000 through an issuance of 14.5% Series II Subordinated Notes in order to meet the cash flow needs to restart our plastics business. As of this filing, we have raised $210,000 related to these notes.  If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our current shareholders could be reduced, and such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to adequately restart our plastics business, which could significantly and materially restrict our operations.

Note 3.  Summary of Significant Accounting Policies:

HDI formerly was in the business of designing, developing, and manufacturing non-invasive medical devices. Commencing October 2011, HDI, through HDIP, is now in the business of collecting, processing, and recycling plastics into usable form for sale to manufacturing customers.  HDIP also acts as a “broker” in arranging and facilitating delivery of recyclable material directly to manufacturing customers.

Discontinued Operations-OnOperations- On August 26, 2011 (the “Effective Date”), the Company entered into and closed a definitive Asset Purchase Agreement (the “Agreement”) providing for the sale of selected assets from our medical device businessHypertension Diagnostics Business to Cohn Prevention Center, LLC (“CPC”), a Minnesota limited liability company, (“CPC”), controlled by a Jay Cohn, a director and stockholder of HDI as of the Effective Date. TheSee additional terms of the Agreement provided for the sale of selected operating assets of the Company’s medical device business (including inventory but excluding cash, accounts receivable, and intellectual property).  The Agreement does not limit the ability of CPC to sell the purchased inventory to any customer orthis agreement in any market where they can be legally sold.  Additionally, CPC assumed all warranty and on-going product support required by regulatory agencies related to such inventory.Note 4. As a result of this agreement, and with the sale of selected assets to CPC,of our medical device business, we have reclassified our previously reported financial results to exclude those operations affected by the sale. These results are presented on aan historical basis as a separate line in our income statements of operations and balance sheets entitled “Discontinued Operations.”  HDI has retained rights to its intellectual property including the rights to royalty payments from CPC.  HDI expects to pursue additional royalty opportunities although there is no assurance it will be successful.  Ongoing royalty income derived from the Company’s intellectual property is reflected as continuing operations.  All of the information in the financial statements and notes to the financial statements has been revised to reflect only the results of our continuing operations from our new recycled plastics process business.

Principles of Consolidation

The Company filesaccompanying consolidated financial statements that include the accounts of the Company and its wholly-owned subsidiary HDIP. All material(HDI Plastics, Inc.), after elimination of all intercompany accounts, transactions, and transactions have been eliminated in consolidation.profits.

Recent Accounting Pronouncements

7

NOTES TO FINANCIAL STATEMENTS

There were no new accounting standards issued or effective during the three monthsquarter ended December 31, 2011September 30, 2012 that had, or are expected to have a material impact on the Company’s results of operations, financial condition or cash flows.

Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

December 31, 2011

Note 3.4.   Discontinued Operations

On August 26, 2011, (the “Effective Date”), the Company entered into and closed a definitive Asset Purchase Agreement (the “Agreement”) providing for the sale of selected assets of  our medical device business to Cohn Prevention Center, LLC, a Minnesota limited liability company (“CPC”), controlled by a Jay Cohn, a director and stockholder of HDI as of the Effective Date. The terms of the Agreement provided for the sale of selected operating assets of the Company’s medical device business (including inventory but excluding cash, accounts receivable, and intellectual property).  The Agreement does not limit the ability of CPC to sell the purchased inventory to any customer or in any market where they can be legally sold.  Additionally, CPC assumed all warranty and on-going product support required by regulatory agencies related to such inventory.

In connection with the Agreement, CPC paid the Company on the Effective Date a cash payment of $125,000 and issued a secured promissory note (non-interest bearing) to the Company in the amount of either $150,000 due in 12 months or $200,000 due in 18 months at the discretion of CPC (See Note 4)5). We received a letter on July 27, 2012 from CPC indicating they will be paying $200,000 due February 26, 2013. Nearly all of the proceeds received on the Effective Date have beenwere allocated to cover severance and other costs related to the transactions contemplated by the Agreement. Severance costs includeincluded an agreement by the Company to pay to Greg Guettler, its former Chief Operating Officer, sixnine months’ salary and health benefits totaling approximately $100,000.benefits. The Company paid Mr. Guettler has been paid $20,000 as of December 31, 2011 as part of this agreement.$119,463 to fulfill the agreement on March 1, 2012. Pursuant to the Agreement, CPC agreed to pay to the Company a cash payment of $1,200 upon the sale of each of the first 50 units of inventory sold by CPC within 30 days of receipt of cash from such sale. The Company has agreed to pay Mr. Guettler 10% of the royalty proceeds received by the Company less applicable transaction expenses related to such sales.  The Company has earned royalty income of $1,200 and $13,200$2,400 less 10% due to Greg Guettler for the three months ended September 30, 2011 and December 31, 2011, respectively. The Company has accrued $1,320 in connection with the amount due Greg Guettler related to this revenue.2012

The Company and CPC also entered into a Sublicense Agreement on the Effective Date (the “Sublicense Agreement”), pursuant to which the Company granted to CPC a limited license to use the Company’s intellectual property, technology, and technical know-how related to the Company’s arterial elasticity measurement technology exclusively in CPC clinics and research related exclusively to CPC clinics.  All other applications of the Company’s intellectual property, technology and technical know-how will behave been retained by the Company for the benefit of the Company.  The Sublicense Agreement also provides that any development of a next generation arterial measurement device, however, would be limited exclusively to use and sale within the CPC network of clinics and to research exclusively related to CPC clinics.

CPC and the Company also entered into a Sublease Agreement as of the Effective Date, which permits CPC to lease the Waters II Suite 108, Eagan, Minnesota facility of the Company during the remaining term of the Company’s lease, which expires October 31, 2014, on the same economic terms as the underlying lease with HDI which remains as an obligation of the Company.

Upon the closing of this transaction, the Company hadhas limited remaining operations (collection of royalties under the license agreement) related to its medical device business and currently is seeking additional opportunities to license its proprietary technology, intellectual property, technical know-how and other core assets, although there is no assurance these efforts will be successful.

The Company recorded a loss onIn connection with the sale transaction, the Company recorded the following loss which is reported as “Loss on sale of discontinued operations” in the amountConsolidated Statements of $123,702 inOperations for the quarterthree months ended September 30, 2011.

Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

December 31,

Schedule of Loss on Sale of Discontinued Operations
Cash received upon sale	$ 125,000
Note receivable (present value)	127,500
Total  sales price	252,500
Net assets and liabilities sold:
Inventories, net	370,984
Property and equipment, net	16,059
Accrued royalties over accrued as of June 30, 2011	(10,841)
Net assets sold	376,202
Loss on sale of discontinued operation, before income tax benefit	(123,702)
Income tax benefit	-
Loss on sale of discontinued operations, net of tax	$ (123,702)

We haveThe Company has not included the results of operations of ourthe former medical device business in the results from continuing operations.  We expect to receive continuing royalties from our licensed technology and arefrom continuing efforts to license and market our intellectual property. Revenue and expenses related to the ongoing licensing activities are reflected as continuing operations. The income (loss) from discontinued operations for the threequarter ended September 30, 2012, and six months ended December 31, 2011 and 2010 consists of the following:

Hypertension Diagnostics, Inc.(1)

NotesDeferred compensation valuation change relating to the Consolidated Financial Statementsformer CEO (Mark Schwartz), who resigned after the medical device assets were sold.

December 31, 2011

The major classesCompany does not have any existing assets of assets anddiscontinued operations at September 30, 2012. The only remaining liabilities of discontinued operations as of December 31, 2011 and JuneSeptember 30, 2011 were as follows:

2012 pertain to the deferred compensation of the former CEO. (See Note 9).

Note 4.5.   Notes Receivable – Related Parties

On May 3, 2011, the Company entered into a promissory note agreement with Minot 123, LLC, a North Dakota limited liability company (“Minot”)  , pursuant to which HDI loaned Minot $125,000 toward the purchase of an office building (“M Building”) located in Minot, North Dakota.  At the time the agreement was entered into, Kenneth W. Brimmer, a director of the Company, was one of the three principals of Minot. On July 13, 2011, the Company exercised its option to receive repayment of the Note and subsequently, in accordance with the repayment terms of the Note, Minot paid to the Company $20,000. The remaining balance on the Note became payable in six monthly payments of $12,500 beginning on August 15, 2011, with the final payment due and payable February 15, 2012, which includes accrued and unpaid interest and reimbursement of the Company’s legal fees expended in connection with the agreement. The Company will not record as income the interest and legal fees until they are actually collected.

Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

December 31, 2011

Minot’s obligation to repay the Note is secured by a second mortgage on M Building. As of July 13, 2011, Mr. Brimmer was no longer affiliated with Minot. The balance outstanding at December 31, 2011 is $42,500.related party

In connection with the Asset Purchase Agreement between HDI and Cohn Prevention Centers, LLC, (See Note 3), Cohn paid HDI on the Effective Date a cash payment of $125,000 and issued a non-interest bearing secured promissory note due to HDI in the amount of either $150,000 in 12 months or $200,000 in 18 months, at the discretion of CPC. The promissory note is reflected at an imputed discount rate of 15% based upon the amount due 12 months following the Effective Date, and is reflectedwas originally recorded as a net note receivable of $127,500.  The balance of the Note at December 31, 2011September 30, 2012 is $135,810 after including $8,310 of accreted accrued interest.$150,000. The Company received a letter from CPC on July 27, 2012 indicating CPC’s intent to pay the $200,000 due February 26, 2013. The Company has elected to not recognize the additional income forthcoming on this Note until the cash is collected in the future.

Note 5.6.  Property and Equipment

Property and Equipment areis as follows:

Depreciation expense was $35,176 and $0 for the three months ended September 30, 2012 and 2011, respectively.

The Company placed these assets for the recycled plastics processing business into service asrecognized a loss of October 1, 2011; as a result, depreciation for$80,598 in the three months ended September 30, 2012 for the abandonment of leasehold improvements related to the property at 5330 Fleming Court, Austin, TX due to the termination of lease and six months ended December 31, 2011 was $29,257.the surrender of the property.

Note 6.7. Litigation and Contingencies

The Company is involved in various legal actions in the ordinary course of its business.  In addition,

On March 28, 2012, HDIP received a Notice of Violation related to its sole processing facility located at 5330 Fleming Court, Austin, Texas, from the City of Austin Code Compliance Department.  The Notice of Violation alleges violations of Austin’s City Code and failures to obtain required permits and a Certificate of Occupancy based upon the current use of the processing facility. The violation primarily relates to the electrical design and capacity of the building. The Notice of Violation required HDIP to vacate the processing facility until such alleged violations are cured.  HDIP unsuccessfully attempted to negotiate temporary permits allowing it to continue operations while it addresses the alleged violations identified in the Notice of Violation.  On March 29, 2012, HDIP ceased processing operations at the processing facility.  On April 2, 2012, HDIP notified approximately 70 of its employees working at the facility of their termination and they were paid their outstanding vacation pay, however, no severance was paid. The violations have not been satisfied and the Company has begun the process of moving their operations to a new location in Taylor, TX. There is no guarantee when or if the moving of the operations of the Company will be complete. At this time, the Company has not been citedassessed any fines or penalties by the City of Austin, Building Department Code Enforcement Divisionbut no assurances can be made that they will not do so in the future. At the time of this filing, the Company is still not operating a processing facility and only has a few small brokered sales.

Because the City of Austin required HDIP to vacate the property at 5330 Fleming Court, the landlord, Flemtex Properties denied access to the premises; therefore, the Company did not pay rent and utilities for April and May 2012. On May 30, 2012, the Company received a Notice of Termination of Lease from Flemtex, for failure to obtainpay rent and reimbursable costs. The letter stated that the Lease was terminated effective May 31, 2012, and that HDI was to quit and surrender the Leased Premises to the Landlord in accordance with the requirements of the Lease on May 31, 2012, and to remove all of the Tenant’s personal property from the Leased Premises. The Company is in the process of negotiating a building permitfinal Termination Agreement related to its Austin lease. The Company has been informed that the landlord is withholding a final release of all obligations of the Company related to the lease until all of the discharge water is removed from the property, which was completed as of October 31, 2012. The Company has accrued as of September 30, 2012, the utility and rent payments due for April and May 2012 totaling $139,493.

On July 12, 2012, a Certificaterepresentative of Occupancy at its facility. Although the outcomeTravis County, (Texas) Attorney Office, Texas Parks and Wildlife, and the Texas Commission on Environmental Quality (TEEQ) searched the Company’s Austin offices pursuant to an affidavit signed by a representative of Texas Parks and Wildlife seeking evidence that the Company committed the offense of intentional or knowing unauthorized discharge of a pollutant under Section 7.145 of the Texas Water Code. No charge of illegal discharge has been made against the Company. The Company has not been contacted further relative to alleged discharge and strongly denies any such legal actions cannot be predicted, management believes that there are no pending legal proceedings against or involvingdischarge occurred. As of October 31, 2012 the Company for whichremoval and disposal of the outcome is likely to have a material adverse effect uponwastewater at the Company’s financial position or results of operations.former facility was completed.

Note 7.8.  Stock Options

The Company regularly grants stock options to individuals under various plans as described in Note 7 to the Financial Statements set forth in13 of the Company’s Annual Report on Form 10-K for the year ended June 30, 2011, filed with the SEC on September 16, 2011.2012, as amended.  The Company recognizes share-based payments, as compensation costs for transactions, including grants of employee stock options, to be recognized in the financial statements.  Stock-based compensation expense is measured based on the fair value of the equity or liability instrument issued.  Share-based compensation arrangements may include: stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.  The Company measures the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and expenses the cost over the period in which the employee is required to provide services for the award.  The Company uses the Black-Scholes option-pricing model that meets the fair value objective.

10

NOTES TO FINANCIAL STATEMENTS

During the three and six months ended December 31, 2011andSeptember 30, 2012 and the three and six months ended December 31, 2010,September 30, 2011, there were no stock options granted. The Company recognized compensation expense of $22,500, and $87,125$0 for the three and six months ended December 31, 2011,September 30, 2012, and $31,370 and $61,620$64,625 for the three and six months ended December 31, 2010,September 30, 2011, which were related to options previously granted.

Note 8.9.

Deferred Compensation Liability

The Company is a party to a Deferred Equity Compensation Agreement with its former CEO, Mark N. Schwartz (the “Agreement”), whereby the Company granted 225,000 phantom shares of its common stock to Mr. Schwartz for every

Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

December 31, 2011

month of employment for the period January 1, 2010 through September 30, 2011. Mr. Schwartz resigned as the Company’s CEO effective September 22, 2011 and as a result, agreed as of October 1, 2011 that no additional phantom shares will be granted him under the Agreement. Under the agreement,Agreement, a cash payment will be made equal to the price per share of the Company’s common stock times the number of phantom shares accrued at the earliest of certain events.events to occur.

The Company has accrued a total deferred compensation liability of $1,181,250$552,631 at December 31, 2011,September 30, 2012, which is the fair market value of 13,125,000 phantom shares grantedoutstanding as of December 31, 2011.September 30, 2012 ($525,000) plus $27,631 of accrued payroll taxes related to the agreement.  Due to the changesincrease in the price of the Company’s common stock from the beginning ofduring the quarter to the end of the quarter (decreaseended September 30, 2012 (increase from $0.10$0.02 to $ 0.09)0.04), the Company recorded a net compensation (benefit) expense of ($131,250) and $558,750$271,988 for the three and six month periodsquarter ended December 31, 2011, respectively.September 30, 2012. For the three and six month periodsquarter ended December 31, 2010,September 30, 2011, the Company recorded a net compensation (benefit) expense of $116,250 and ($261,750), respectively.$622,500.  An increase in the Company’s common stock price would cause an increase in the deferred compensation, while a decrease in the Company’s stock price would cause a decrease in the deferred compensation liability. Expenses related to the Deferred Compensation arrangement with its former CEO are accounted for as part of Discontinued Operations.

Under the original terms of Mr. Schwartz’s original employmentdeferred equity compensation agreement, payment of the deferred compensation benefit would occur upon one of the following events: i) execution of a definitive agreement resulting in a change of control of the Company’s common stock; ii) termination of employment; iii) death of the CEO; or iv) no later than January 1, 2012. Upon one of these events, a cash payment over 24 months was to be made to the CEO equal to the trading price per share of the Company’s common stock times the number of phantom stock shares accrued to date.  Mr. Schwartz and the Company modified the original Agreement on December 31, 2011, whereby Mr. Schwartz agreed to eliminate the requirement for a cash payment as of a date certain pursuant to the Agreement. This deferred compensation is classified as a long-term liability with no definitive payout date specified. The Company and Mr. Schwartz are continuing to negotiate some sort ofnegotiating a permanent settlement to satisfy both parties.

Note 9.10.  Factoring Line of Credit - Charter Capital

On October 10, 2011, HDI Plastics, Inc. entered into an Accounts Receivable Discount line facility with Charter Capital Holdings, L.P.  (“Charter”). Under the terms of the full-recourse financing agreement, which is guaranteed by HDI, Charter advances to HDIP and amount equal to 80% of eligible pledged receivables up to a total advance of $1 million. Charter retains a priority and perfected security interest in all accounts receivable and inventory of HDI Plastics, Inc.  The financing cost under the agreement is 0.59% for each 10-day period or an approximate annualized interest cost of approximately 21.25%. The Company began borrowing under this facility in November 2011.  For the quarter ended December 31, 2011, aggregate advances under the facility were $957,999 based upon $1,197,499 in receivables. The outstanding balance as of December 31, 2011September 30, 2012 is $433,057 plus accrued interest$5,288 and $0 as of $7,583.June 30, 2012.

Note 10.11.   Note Payable - Subordinated Debt

In December 2011, the Company commenced a private placement offering of 14.5% Five Year Subordinated Notes with Warrants to its existing preferred shareholders, directors of the Company and certain other accredited investors. The notes are issued by HDIP and are guaranteed by the Company.  Interest is payable monthly in cash. The offering was completed February 10, 2012 and resulted in the issuance of $833,600 in notes and five-year warrants to purchase an aggregate of 11,908,572 shares of the Company’s common stock with an exercise price of $.07 per share. The notes are duefive years from the closing date at 105% of face value. The total estimated value of the warrants using the Black-Scholes Option Pricing Model, with a volatility rate of 153%, had an estimated fair value of $0.03 per warrant. After calculating the relative fair value of the debt and warrants, $252,393 was recorded as a debt discount to the notes for the warrants. The discount is being amortized over the term of the debt using the effective interest method.

11

NOTES TO FINANCIAL STATEMENTS

The Notes may be prepaid by the Company in accordance with the following schedule below at the redemption prices (expressed in percentages of principal amount to be repaid), plus unpaid accrued interest to the date of payment:

In August 2012, the Company initiated a second private placement of Subordinated Notes due October 31, 2014 (Series II Subordinated Notes) with terms otherwise similar to the offering in December 2011. Terms for the Series II Subordinated Notes also include the issuance of five-year warrants to purchase shares of the Company’s common stock with an exercise price of $.035 per share. As of September 30, 2012, the Company had issued to directors of the Company $180,000 in Series II Subordinated Notes which included warrants to purchase 5,142,858 shares of Company stock. The notes are duetwo years from the closing date at 105% of face value. The total estimated value of the warrants using the Black-Scholes Option Pricing Model, with a volatility rate of 178%, had an estimated fair value of $0.05 per warrant. After calculating the relative fair value of the debt and warrants, $108,765 and was recorded as a debt discount to the notes for the warrants. The discount is being amortized over the term of the debt using the effective interest method.

The following table summarizes the entire subordinated debt balance at September 30, 2012:

Note 12.   Net Income (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.  

The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share at December 31, 2011September 30, 2012 and 2010.

Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

December 31, 2011

Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

December 31, 2011

Note 11.

 Outstanding Share Purchase Warrants

In February 2010, the Company modified the exercise price on all of the Preferred Stock Warrant B from $2.64 to $1.68 and on all of the Common Stock Warrant B from $0.22 to $0.14.  In July 2010, the Company agreed to extend the modification to December 31, 2011, to encourage exercising of these warrants in order for the Company to receive additional funding.  No additional expense was recorded for this extension due to the warrants being originally connected to a capital raise.  On July 22, 2011, HDI agreed to extend the warrant expiration to December 31, 2012.  No additional expense was recorded for this warrant extension.  During the six months ended December 31, 2010, the Company received $30,000 in cash proceeds for the exercise of these common and preferred stock warrants of 122,127 and 7,680 shares, respectively. There were no warrants exercised during the six months ended December 31, 2011.

Note 12.  Acquisition of Assets

HDI Plastics, Inc.

On September 22, 2011, HDIP entered into a lease agreement with Flemtex Properties Corp., a Delaware corporation, for space totaling 104,291 square feet at Suite 100, 5330 Fleming Court, Austin, Texas (the “Lease”). The leased space includes 89,452 square feet of warehouse/manufacturing space and 14,839 square feet of office space. Under the terms of the Lease, HDIP pays rent and CAM charges of approximately $33,650 per month. The lease payments over the 64 months of the initial term of the Lease total $2,154,000. The lease payments are guaranteed by HDI.

On September 26, 2011, the Company entered into a definitive Tri-Party Sales Agreement (“Agreement”) providing for the purchase of selected manufacturing assets from Compass Bank (the “Bank”), and the purchase of certain manufacturing assets and inventory from Cycled Plastics, LTD., a limited partnership (“CP”). In connection with the purchase of the assets, HDI agreed to pay the Bank a cash payment of $250,000. Additionally, HDI agreed to pay $25,000 at closing to CP and to make future payments of $130,000 to CP for equipment. The total purchase price of the selected assets was $405,000. In September 2011, the Company paid CP approximately $29,000 for initial inventory. The $250,000 was paid to Compass Bank on October 7, 2011. No payments have been made on the $155,000 due CP as of December 31, 2011.

Note 13.    Other Related Party Transactions

The HDI Corporate office sub-leases space from STEN Corporation for $500 per month. Kenneth Brimmer, the Company’s Chief Executive Officer and a director of the Company, is the Chief Executive Officer and director of STEN Corporation. STEN Corporation’s lease ends in March, 2011. It is anticipated the current rent will continue on a month-to-month rent upon expiration of the lease with an agreement that the landlord will provide a 90-day notice to vacate the premises. If necessary, HDI will then lease office space in another location.

HDIP sells processed recycled materials in the form of pelletized resin to various manufacturing companies. In December 2011, HDIP sold 16,300 pounds of processed polymer to Stencor Company, LLC, a contract molding manufacturing company 85% owned by Kenneth Brimmer, for a purchase price of $8,492. The purchase price for the resin represented a price similar to sales of similar material to unrelated parties. HDIP expects to continue sales to Stencor from time-to-time.

Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

December 31, 2011

Hypertension Diagnostics, Inc.

Notes to the Consolidated Financial Statements

December 31, 2011

Note 14.13.   Subsequent Events

Subordinated Debt Offering

In December 2011,Subsequent to September 30, 2012 the Company commencedhad issued a private placement offeringtotal of 14.5% Five Year$30,000 in Series II Subordinated Notes with Warrants to its existing preferred shareholders, directors of the Company and certain other accredited investors. The notes are issued by HDIP and are guaranteed by the Company.  Interest is payable monthly in cash.  A preliminary closing of the offering was completed February 10, 2012 and resulted in the issuance of $773,600 in notes and five-yearwhich included warrants to purchase an aggregateaggregated of 11,051,429857,142 shares of the Company’sCompany common stock with an exercise price of $.07 per share. The notes are duefive years from the closing date at 105% of face value. The Notes may be prepaid by the Company in accordance with the following schedule below at the redemption prices (expressed in percentages of principal amount to be repaid), plus unpaid accrued interest to the date of payment:

Common Share Issuance to CEO

Effective February 10, 2012, the Company agreed to issue 9,062,907 common shares to Kenneth W. Brimmer its CEO and director.  The shares were issued for services rendered in connection with the initial acquisition of the plant and equipment, lease negotiations, and employee recruitment related to development of HDIP. The shares are restricted from sale for a three year period following issuance, except with respect to 500,000 shares that may be transferred to Marilee Douda, the Company’s controller, as a gift. The fair value of the shares totaling $215,697 (calculated by taking the Company’s common stock trading price on February 9, 2011 of $0.028, less a marketability discount of 15%) will be recorded as an expense during the quarter ended March 31, 2012.(See Note 11).