GUIDED THERAPEUTICS INC - Quarter Report: 2009 June (Form 10-Q)

gti10q63009.htm

UNITED STATES SECURITIES AND

EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

For the quarterly period ended June 30, 2009

Commission File No. 0-22179

GUIDED THERAPEUTICS, INC.

((Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or other jurisdiction of incorporation or organization)

58-2029543

(I.R.S. Employer Identification No.)

4955 Avalon Ridge Parkway, Suite 300

Norcross, Georgia 30071

(Address of principal executive offices) (Zip Code)

(770) 242-8723

(Registrant’s telephone number, including area code)

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 [ ] No [X]

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-12 of the Exchange Act (Check one):

Large Accelerated filer _____ Accelerated filer ____ Non-accelerated filer_____ Smaller Reporting Company X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]

As of August 14, 2009, the registrant had outstanding 16,852,823 shares of Common Stock.

GUIDED THERAPEUTICS, INC. AND SUBSIDIARIES

INDEX

Part I. Financial Information	3

Item 1. Financial Statements	3

Consolidated Balance Sheets -
December 31, 2008 (Audited) and June 30, 2009 (Unaudited)	3

Unaudited Consolidated Statements of Operations -
Six months ended June 30, 2008 and 2009	4

Unaudited Consolidated Statements of Cash Flows -
Six months ended June 30, 2008 and 2009	5

Notes to Financial Statements (Unaudited)	6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3. Quantitative and Qualitative Disclosures About Market Risk	22

Item 4T. Controls and Procedures	22

Part II. Other Information	23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 5. Other Information	23

Item 6. Exhibits	23

Signatures	24

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GUIDED THERAPEUTICS, INC. (FORMERLY SPECTRX, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
	AS OF
	(In Thousands Except Per Share Data)

ASSETS	December 31,			June 30,
	2008			2009
CURRENT ASSETS:	(Audited)			(Unaudited)

Cash and cash equivalents	$	68		$	20
Accounts receivable, net of allowance for doubtful accounts of $25 at December 31, 2008 and June 30, 2009		164			387
Other current assets		46			20
Total current assets		278			427

Property and equipment, net		11			7
Deferred debt issuance costs, net		512			341
Capitalized cost of internally developed software		23			44
Other assets		51			51
Total noncurrent assets		597			443

TOTAL ASSETS	$	875		$	870

LIABILITIES AND CAPITAL DEFICIT

CURRENT LIABILITIES:
Short term notes payable		75			201
Notes payable – past due		581			635
Accounts payable		1,337			1,361
Accrued liabilities		794			905
Deferred revenue		167			625
Dividends payable – Series A		1,600			1,720
Advances payable – Roche		381			381
Total current liabilities		4,935			5,828

OTHER LIABILITIES:
3rd Party Investment in Subsidiary		-			104

Convertible notes payable, including accrued interest and net of debt discount and unfunded subscriptions of $4.6 million and $3.6 million, at December 31, 2008 and June 30, 2009 respectively, to debt holders and related parties		3,583			4,934
TOTAL LIABILITIES	$	8,518		$	10,866

COMMITMENTS & CONTINGENCIES (Note 6)

CAPITAL DEFICIT:
Series A convertible preferred stock, $.001 par value; 5,000 shares authorized, 336 shares issued and outstanding as of December 31, 2008 and June 30, 2009 (liquidation preference $7,755 as of December 31, 2008 and June 30, 2009)		3,069			2,725
Common stock, $.001 par value; 100,000 shares authorized, 15,623 and 16,852 shares issued and outstanding as of December 31, 2008 and June 30, 2009.		16			17
Additional paid-in capital		58,784			59,451
Treasury stock, at cost		(104	)		(104	)
Accumulated deficit		(69,408	)		(72,085	)
TOTAL CAPITAL DEFICIT		(7,643	)		(9,996	)

TOTAL LIABILITIES AND CAPITAL DEFICIT	$	875		$	870



The accompanying notes are an integral part of these consolidated statements.

GUIDED THERAPEUTICS INC. (FORMERLY SPECTRX, INC.) AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	FOR THE THREE MONTHS ENDED						FOR THE SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	(In Thousands Except Per Share Data)						(In Thousands Except Per Share Data)

	2008			2009			2008			2009
REVENUE:
Service revenue	$	449		$	242		$	774		$	423
COSTS AND EXPENSES:
Research and development		606			339			1,076			643
Sales and Marketing		6			14			16			28
General and administrative		574			411			1,011			875
Total		1,186			764			2,103			1,546

Operating loss		(737	)		(522	)		(1,329	)		(1,123	)

OTHER INCOME / INTEREST EXPENSE, net		(467	)		(864	)		(658	)		(1,576	)

LOSS INCOME FROM CONTINUING OPERATIONS		(1,204	)		(1,386	)		(1,987	)		(2,699	)

PROVISION FOR INCOME TAXES		-			-			-			-


NET LOSS		(1,204	)		(1,386	)		(1,987	)		(2,699	)

PREFERRED STOCK DIVIDENDS		(70	)		(57	)		(148	)		(120	)

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(1,274	)	$	(1,443	)	$	(2,135	)	$	(2,819	)

BASIC AND DILUTED NET (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS, FROM CONTINUING OPERATIONS
	$	(0.09	)	$	(0.09	)	$	(0.16	)	$	(0.18	)

WEIGHTED-AVERAGE SHARES BASIC AND DILUTTED		13,354			16,362			13,575			16,033

The accompanying notes are an integral part of these consolidated statements.

GUIDED THERAPEUTICS INC. (FORMERLY SPECTRX, INC.) AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	FOR THE SIX MONTHS ENDED
	JUNE 30,
	2008			2009
	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,987	)	$	(2,699	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4			4
Amortization and accretion of deferred financing costs, notes and warrants		276			1,141
Stock based compensation		24			203
Changes in operating assets and liabilities:
Accounts receivable		25			(223	)
Other current assets		(5	)		26
Accounts payable		264			24
Deferred Revenue		133			458
Accrued liabilities		602			746
Total adjustments		1,323			2,379

Net cash used in operations		(664	)		(320	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capitalized software costs		-			(21	)

Net cash used investing activities		-			(21	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes payable to debt holders and related parties		831			126
Proceeds from 3rd party investment in subsidiary		-			104
Proceeds from subscription receivable		-			63

Net cash provided by financing activities		831			293

NET CHANGE IN CASH AND CASH EQUIVALENTS		167			(48	)

CASH AND CASH EQUIVALENTS, beginning of year		3			68

CASH AND CASH EQUIVALENTS, end of period	$	170		$	20


SUPPLEMENTAL SCHEDULE OF:

NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of preferred stock into common stock	$	456		$	343
Notes payable and accrued interest converted into common stock	$	-		$	242
Dividends in the form of preferred stock and redeemable convertible preferred Stock	$	14		$	120
Interest	$	420		$	623

The accompanying notes are an integral part of these consolidated statements.

GUIDED THERAPEUTICS, INC. (FORMERLY SPECTRX, INC.) AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The unaudited interim financial statements included herein have been prepared by Guided Therapeutics, Inc. (formerly SpectRx, Inc.), collectively with its wholly owned subsidiaries Interscan, Inc., (“Interscan”) (formerly Guided Therapeutics, Inc.) and Sterling Medivations, Inc. d/b/a SimpleChoice (“Sterling”), collectively referred to herein as the “Company.” These statements reflect adjustments, all of which are of a normal, recurring nature, and which are, in the opinion of management, necessary to present fairly the Company’s financial position as of December 31, 2008 and June 30, 2009, results of operations for the three and six months ended June 30, 2008 and 2009, and cash flows for the six months ended June 30, 2008 and 2009. The results of operations for the six months ended June 30, 2009 are not necessarily indicative of the results for a full fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Preparing financial statements requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K/A, as amended, for the year ended December 31, 2008.

The Company's prospects must be considered in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device industry. This industry is characterized by an increasing number of participants, intense competition and a high failure rate. The Company has experienced net losses since its inception and, as of June 30, 2009, it had an accumulated deficit of approximately $72.1 million. Through June 30, 2009, the Company has devoted substantial resources to research and development efforts. The Company first generated revenue from product sales in 1998, but does not have significant experience in manufacturing, marketing or selling its products. The Company's development efforts may not result in commercially viable products and it may not be successful in introducing its products. Moreover, required regulatory clearances or approvals may not be obtained. The Company's products may not ever gain market acceptance and the Company may not ever achieve levels of revenue to sustain further development costs and support ongoing operations or achieve profitability. The development and commercialization of the Company's products will require substantial development, regulatory, sales and marketing, manufacturing and other expenditures. The Company expects operating losses to continue through the foreseeable future as it continues to expend substantial resources to complete development of its products, obtain regulatory clearances or approvals and conduct further research and development.

Going Concern

The Company's financial statements have been prepared and presented on a basis assuming it will continue as a going concern. At June 30, 2009, the Company’s current liabilities exceeded current assets by approximately $5.4 million and it had a capital deficit due principally to its recurring losses from operations. As of June 30, 2009, the Company was past due on payments due under its Convertible Notes payable in the amount of approximately $635,000 and under a 90-day 17% convertible, unsecured note payable in the amount of $50,000. In December 2008, the Company issued $2.3 million in 2008 Convertible Notes (see Note 8). Of this amount, $1.3 million represents existing loans that were converted into 2008 Convertible Notes. During 2009 the Company has issued additional short term notes to fund operations.

If sufficient capital cannot be raised at some point in the third quarter of 2009, the Company might be required to enter into unfavorable agreements or, if that is not possible, be unable to continue operations, and to the extent practicable, liquidate and/or file for bankruptcy protection. As of the date hereof, this effort is on-going. These factors raise substantial doubts about the Company’s ability to continue as a going concern. Additional debt or equity financing will be required for the Company to continue its business activities. The consolidated financial statements do not include any adjustments that might be required from the outcome of this uncertainty. If additional funds do not become available, the Company has plans to curtail operations by reducing discretionary spending and staffing levels. If funds are not obtained, the Company will have to curtail its operations and attempt to operate by only pursuing activities for which it has external financial support, such as under the Konica Minolta Optical, Inc. (“KMOT”) development agreement (described below) and additional National Cancer Institute (“NCI”) or other grant funding. However, there can be no assurance that such external financial support will be sufficient to maintain even limited operations or that the Company will be able to raise additional funds on acceptable terms, or at all.

The Company has been seeking a new strategic partner and on April 30, 2009, signed a one-year exclusive negotiation and development agreement of optimization of its microporation system for manufacturing, regulatory approval, commercialization and clinical utility with KMOT. The exclusive negotiation agreement will expire on April 29, 2010; however, it can be renewed for an additional year by consent between KMOT and the Company. We were paid a fee in this regard of $500,000, with the balance of $250,000 payable by November 1, 2009. This agreement resulted in significant revenue for the Company a portion of which is deferred over the life of the contract. Currently, we are working on extending the agreement for an additional year and considering a long-term agreement with KMOT.

2. SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies were set forth in the audited financial statements and notes thereto for the year ended December 31, 2008 included in our annual report on Form 10-K/A, as amended, filed with the Securities and Exchange Commission (“SEC”).

Effective January 1, 2007, we adopted the provision of the Financial Accounting Standard Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainties in income taxes recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 109 and prescribes a recognition threshold and measurement attributable for financial disclosure of tax provisions taken or expected to be taken on a tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 did not impact our financial position, results of operations or cash flows for the six months ended June 30, 2009.

SUBSEQUENT EVENTS

The Company has performed a review of events subsequent to the balance sheet date through August 18, 2009, the date the financial statements were issued.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2009, the FASB issued three Final Staff Positions (“FSP”) on Financial Accounting Standards (“FAS”) to provide additional guidance and disclosures regarding fair value measurements and impairments of securities. These three FSPs are effective for interim and annual periods ending after June 15, 2009.

FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. FSP FAS 157-4 did not have a material impact on the Company’s consolidated financial statements.

FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in financial statements. FSP FAS 115-2 and FAS 124-2 did not have a material impact on the Company’s consolidated financial statements.

FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosure about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The Company reviewed the requirements of FSP FAS 107-1 and complies with its requirements.

On January 12, 2009, the FASB issued FSP 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20.” FASB FSP 99-20-1 amends the impairment guidance in EITF No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets.” The intent of the FSP is to reduce complexity and achieve more consistent determinations as to whether other-than-temporary impairments of available for sale or held to maturity debt securities have occurred. The FSP is effective for interim and annual reporting periods ending after December 15, 2008. The adoption of this FSP did not have an impact on the Company’s consolidated financial statements.

Employers’ Disclosures about Postretirement Benefit Plan Assets

In December 2008, the FASB issued FSP FAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” This FSP amends FASB Statement No. 132(R) (“SFAS No. 132(R)”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP FAS No. 132(R)-1 also includes a technical amendment to SFAS No. 132(R) that requires a nonpublic entity to disclose net periodic benefit cost for each annual period for which a statement of income is presented. The required disclosures about plan assets are effective for fiscal years ending after December 15, 2009. The technical amendment was effective upon issuance of FSP FAS No. 132(R)-1. The adoption of the technical amendment of FSP FAS No. 132(R)-1 had no impact on its consolidated financial position and results of operations.

Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities

In December 2008, the FASB issued FSP FAS No. 140-4, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” This FSP amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to require public entities to provide additional disclosures about transfers of financials assets. FSP FAS No. 140-4 also amends FIN No. 46(R)-8, “Consolidation of Variable Interest Entities,” to require public enterprises, including sponsors that have a variable interest entity, to provide additional disclosures about their involvement with a variable interest entity. FSP FAS No. 140-4 also requires certain additional disclosures, in regards to variable interest entities, to provide greater transparency to financial statement users. FSP FAS No. 140-4 is effective for the first reporting period (interim or annual) ending after December 15, 2008, with early application encouraged. The adoption of FSP FAS No. 140-4 had no impact on its consolidated financial position and results of operations.

Determination of the Useful Life of Intangible Assets

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under FASB 142 “Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No.142 and the period of the expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007) “Business Combinations” and other U.S. generally accepted accounting principles. FSP FAS No. 142-3 is effective for the first reporting period (interim or annual) ending after December 15, 2008, with early application encouraged. The adoption of FSP FAS No. 142-3 had no impact on its consolidated financial position and results of operations.

Disclosure about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative Instruments and Hedging Activities,” an amendment of FASB Statement No. 133, (SFAS No. 161). This statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The Company was required to adopt SFAS No. 161 on January 1, 2009. The adoption of SFAS No. 161 had no impact on the Company’s consolidated financial statements.

Delay in Effective Date

In February 2008, the FASB issued FSP FAS No. 157-2, “Effective Date of FASB Statement No. 157.” This FSP delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material to the Company’s consolidated financial condition or results of operations.

3. INVENTORIES BY TYPE

Inventories are stated at the lower of cost or market using the first-in, first-out method. At December 31, 2008 and June 30, 2009, the Company had no inventory.

4. STOCK-BASED COMPENSATION

Prior to December 31, 2005, the Company used the intrinsic value method for valuing its employee/director awards of stock options and recording the related compensation expense, if any, in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee or director compensation cost for stock options is reflected in the Company’s net loss, as all options granted have exercise prices equal to the market value of the underlying common stock on the date of grant. The Company records compensation expense related to options granted to non-employees based on the fair value of the award.

Effective January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), "Share Based Payment," which requires public companies to measure the cost of employee, officer and director services received in exchange for stock-based awards at the fair value of the award on the date of grant. SFAS No. 123R supersedes the Company's previous accounting under SFAS No. 123, "Accounting for Stock-Based Compensation," which permitted the Company to account for such compensation under APB Opinion No. 25, "Accounting for Stock Issued to Employees.” In accordance with APB No. 25 and related interpretations, no compensation cost had been recognized in connection with the issuance of stock options, as all options granted under the Company's stock option plan had an exercise price equal to or greater than the market value of the underlying common stock on the date of the grant.

The Company applied the modified prospective transition method upon adoption of SFAS No. 123R. Under the modified prospective transition method, compensation cost is required to be recorded as earned for all unvested stock options outstanding at the beginning of the first year of adoption of SFAS No.123R based upon the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and for compensation cost for all share-based payments granted or modified subsequently based on fair value estimated, in accordance with the provisions of SFAS No. 123R. The Company's financial statements, as of and for the year ended December 31, 2008, reflect the impact of SFAS No. 123R but, in accordance with the modified prospective transition method, the Company's financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R.

For the quarter ended June 30, 2009, share-based compensation for options attributable to employees and officers was approximately $88,000 and has been included in the Company's second quarter 2009 statement of operations. Compensation costs for stock options, which vest over time, are recognized over the vesting period. As of June 30, 2009, the Company had approximately $529,000 of unrecognized compensation cost related to granted stock options, to be recognized over the remaining vesting period of approximately four years.

The Company has a 1995 stock option plan (the “Plan”) approved by its stockholders for officers, directors and key employees of the Company and consultants to the Company. Participants are eligible to receive incentive and/or nonqualified stock options. The aggregate number of shares that may be granted under the Plan is 6,455,219 shares. The Plan is administered by the compensation committee of the board of directors. The selection of participants, grant of options, determination of price and other conditions relating to the exercise of options are determined by the compensation committee of the board of directors and administered in accordance with the Plan.

Both incentive stock options and non-qualified options granted to employees, officers and directors under the Plan are exercisable for a period of up to 10 years from the date of grant, at an exercise price that is not less than the fair market value of the common stock on the date of the grant. The options typically vest in installments of 1/48 of the options outstanding every month.

A summary of the Company’s activity under the Plan as of June 30, 2009 and changes during the six months then ended is as follows:

	Shares			Weighted average exercise price		Weighted average remaining contractural (years)		Aggregate intrinsic value (thousands)

Outstanding, January 1, 2009		4,306,500		$	0.47
Granted		1,000,000		$	0.38
Granted		125,000		$	0.00
Cancelled		(10,000	)	$	6.25
Outstanding, June 30, 2009		5,421,500		$	0.36		5.43	$	104

Vested and exercisable, June 30, 2009		3,509,769		$	0.49		6.39	$	0

In connection with the adoption of SFAS No. 123R, the Company reassessed its valuation technique and related assumptions. The Company estimates the fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of SFAS No. 123R, SEC Staff Accounting Bulletin No. 107 and our prior period pro forma disclosures of net earnings, including the fair value of stock-based compensation. Key input assumptions used to estimate the fair value of stock options include the expected term until exercise of the option, expected volatility of our stock, the risk free interest rate, option forfeiture rates and dividends, if any. The expected term of the options is based on a historical weighted average of exercised options. The expected volatility is derived from the historical volatility of our stock on the Over the Counter Bulletin Board for a period that matches the expected life of the option. The risk-free interest rate is the yield from a Treasury Bond or note corresponding to the expected term of the option. Option forfeiture rates are based on our historical forfeiture rates.

On January 15, 2009, the Company issued options to purchase 1,000,000 shares of common stock to Mark Faupel, its Chief Executive Officer, at an exercise price of $0.38. The vesting period of the options is identical to the vesting periods of the options issued to all employees in 2008.

On May 21, 2009, the Company issued options to purchase 20,000 shares of common stock each, to all of its five directors, in lieu of their 2009 board-member compensation for the calendar year 2009. On the same day, Director James was issued 25,000 options to purchase additional shares for his service on other board committees. The total share value of the directors’ fees of $48,750 will be expensed during current year 2009.

5. LITIGATION

None

6. STOCKHOLDERS' EQUITY

Common Stock

On October 25, 2007, the Company’s stockholders approved an increase in the number of authorized shares of common stock from 50,000,000 to a total of 100,000,000 shares and a reverse stock split in a ratio ranging from one-for-two to one-for-ten of all issued and outstanding shares of common stock, the final ratio to be determined within the sole discretion of the Board of Directors. As of the filing date of this report, no reverse stock split had taken place.

Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock with a $.001 par value. The board of directors has the authority to issue these shares and to set dividends, voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions.

Redeemable Convertible Preferred Stock

The board of directors designated 525,000 shares of the preferred stock as redeemable convertible preferred stock, none of which remain outstanding.

Series A Convertible Preferred Stock

At June 30, 2009, the Company had outstanding 306,434 shares of series A convertible preferred stock, having a stated value of $15.00 per share. The original conversion price of the series A convertible preferred was $1.50. As a result of the restructuring of certain notes payable in March 2007, the conversion price of the series A preferred stock was reduced from $1.50 to $0.65 and the warrant exercise price was reduced from $2.25 to $0.81. The re-pricing of the series A convertible preferred stock and the associated warrants triggered a deemed dividend of approximately $3.8 million in total. The deemed dividend has no effect on total capital deficit.

The holders of the series A convertible preferred stock are entitled to receive dividends per share at the per annum rate of 5% per share. Under the terms of the series A convertible preferred stock, the dividend is accrued from the original issue date and payable beginning March 26, 2006 and is thereafter payable quarterly in cash or stock, at the end of each calendar quarter, out of funds legally available therefor. The Company has experienced net losses since its inception, and, as of June 30, 2009, it had an accumulated deficit of approximately $72.1 million. The Company believes that no funds are legally available at this time and no dividend can be paid in stock or in cash. The series A convertible preferred stockholders have the right to vote on an as-converted basis.

Each share of series A convertible preferred stock is convertible into the number of shares of common stock equal to the quotient obtained by dividing the sum of (i) $15.00 (as adjusted for changes in the series A convertible preferred stock by stock split, stock dividend, and the like) referred to as the invested amount, plus (ii) all declared or accrued but unpaid dividends on such shares of series A convertible preferred stock, by the conversion price per share. The per share conversion price was $1.50, but was reset to $0.65 in March 2007 (see Note 8). The conversion price is subject to adjustment under certain circumstances to protect the holders of series A convertible preferred stock from dilution relative to certain issuances of common stock, or securities convertible into or exercisable for common stock. Subject to certain exceptions, if the Company issues common stock, or such other securities, at a price per share less than the then effective conversion price, the conversion price will be adjusted to equal such lower per share consideration.

Stock Options

Under the Company’s 1995 Stock Plan (the “Plan”), a total of 1,033,719 shares remained available at June 30, 2009 and 5,421,500 shares were subject to stock options outstanding as of that date, bringing the total number of shares subject to stock options outstanding and those remaining available for issue to 6,455,219 shares of common stock as of June 30, 2009. The Plan allows the issuance of incentive stock options, nonqualified stock options, and stock purchase rights. The exercise price of options is determined by the Company’s board of directors, but incentive stock options must be granted at an exercise price equal to the fair market value of the Company’s common stock as of the grant date. Options historically granted have generally become exercisable over four years and expire ten years from the date of grant.

In January 2002, the Company assumed the Sterling Medivations 2000 Stock Option Plan, which authorizes the issuance of up to 93,765 shares of the Company’s common stock. No options have been exercised under this plan. At June 30, 2009, options exercisable for 6,090 shares were outstanding under this plan.

The following table sets forth or the range of exercise prices, number of shares issuable upon exercise, weighted average exercise price, and remaining contractual lives by groups of similar price as of June 30, 2009:

	Options Outstanding			Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Exercise Price	Weighted Average Contractual Life (years)	Number of Shares	Weighted Average Price
$ 0.00 - $ 0.26	1,701,500	$ 0.16	7.90	1,282,095	$ 0.14
$ 0.30 - $ 0.33	2,506,000	$ 0.20	6.19	1,610,896	$ 0.21
$ 0.34 - $ 0.70	1,039,000	$ 0.01	0.20	441,778	$ 0.03
$ 1.10 - $ 4.46	33,000	$ 1.65	3.58	33,000	$ 1.65
$ 5.00 - $ 9.00	97,000	$ 6.43	1.55	97,000	$ 6.43
$ 10.13 - $ 16.50	45,000	$ 11.25	0.90	45,000	$ 11.25
Total	5,421,500	$ 0.36	5.43	3,509,769	$ 0.49

In December 2001, as a result of the acquisition of Sterling, the Company granted options to purchase 22,024 shares of common stock at an exercise price of $7.29 per share in exchange for all the outstanding options, vested and unvested, of Sterling. As of June 30, 2009, 6,090 of these shares have not been exercised.

Warrants

The Company has the following shares reserved for the warrants outstanding as of June 30, 2009:

Warrants		Exercise Price	Expiration Date
189,000	(1)	0.65	08/30/2013
400,000	(2)	0.65	02/05/2014
68,000	(3)	0.65	11/20/2013
100,000	(4)	2.00	07/07/2009
7,485,061	(5)	0.78	02/23/2012
15,000	(6)	0.78	03/01/2012
400,000	(7)	0.65	04/02/2013
240,385	(8)	0.78	07/04/2014
11,558,878	(9)	0.65	12/01/2014
20,456,324

(1)

Consists of amended and restated warrants to purchase common stock at a purchase price of $1.50 per share, associated with the settlement of a dispute in August of 2005, the warrant modification required adding five years to the warrant terms. These warrants are exercisable either in cash or in stock, if the fair market value is greater than the exercise price, and are subject to repricing on the same terms as the series A convertible preferred stock. As of March 2007, the exercise price was adjusted from $1.50 to $0.65 per share. At March 31, 2007, approximately $6,000 was charged to expense, based on the repricing.

(2)

Consists of amended and restated warrants to purchase common stock at a purchase price of $1.50 per share, associated with the settlement of a dispute in August 2005, which settlement resulted in adding five years to the warrant terms. These warrants are exercisable either in cash or in stock, if the fair market value is greater than the exercise price, and are subject to repricing on the same terms as the series A convertible preferred stock. As of March 2007, the exercise price was adjusted from $1.50 to $0.65 per share. At March 31, 2007, approximately $11,000 was charged to expense, based on the repricing.

(3)

Consists of amended and restated warrants to purchase common stock at a purchase price of $1.50 per share, associated with the settlement of a dispute in August 2005, which settlement resulted in adding five years to the warrant terms. These warrants are exercisable either in cash or in stock, if the fair market value is greater than the exercise price, and are subject to repricing on the same terms as the series A convertible preferred stock. As of March 2007, the exercise price was adjusted from $1.50 to $0.65 per share. At March 31, 2007, approximately $2,000 was charged to expense, based on the repricing.

(4)	Consists of warrants to purchase common stock at a purchase price of $2.00 per share issued as part of the extension of a bridge loan financing in February 2004. These warrants are exercisable in cash and not subject to any repricing.

(5)

Consists of warrants to purchase common stock at a purchase price of $0.78 per share issued in conjunction with an amended and restated loan agreement, executed in March 2007. On March 12, 2007, the relative fair value of the warrants was approximately $2.3 million (including $.3 million attributed to 661,000 warrants for placement agent fees treated as debt issuance cost), and the relative fair value of the beneficial conversion feature was approximately $1.5 million. The debt discount, consisting of the beneficial conversion feature and warrants, will accrete over the 36-month term of the convertible notes payable under the agreement using the effective interest method. In addition, debt issuance costs totaling approximately $811,000 ($520,000 cash costs and $291,000 warrant value for 661,000 warrants issued to the placement agents and others) will also be amortized over thirty-six months, using the effective interest method.

(6)

Consists of warrants to purchase common stock at a purchase price of $0.78 per share, issued in conjunction with an amended and restated loan agreement, executed in March 2007. These warrants are exercisable either in cash or in stock, if the fair market value is greater than the exercise price. The fair value of these warrants was approximately $6,000 at March 31, 2007. This amount has been expensed in the Company’s statement of operations for the nine months ended September 30, 2007.

(7)

Consists of warrants to purchase common stock at a purchase price of $0.65 per share, issued in conjunction with a short term loan agreement, executed on April 2, 2008. These warrants are subject to reset to the same prices as the Company's Series A preferred stock and /or Senior notes that are currently outstanding and can be exercisable either in cash or in stock, if the fair market value is greater than the exercise price.

(8)

Consists of warrants to purchase common stock at a purchase price of $0.78 per share issued in conjunction with the July 14, 2008, Subordinated Convertible Notes. These warrants are subject to reset to the same prices the Company's Series A preferred stock and /or Senior notes that are currently outstanding and can be exercisable either in cash or in stock, if the fair market value is greater than the exercise price.

(9)

Consists of warrants to purchase common stock at a purchase price of $0.65 per share issued in conjunction with the December 1, 2008, Subordinated Convertible Notes. These warrants are subject to reset to the same prices the Company's Series A preferred stock and/or Senior notes that are currently outstanding and can be exercisable either in cash or in stock, if the fair market value is greater than the exercise price.

In connection with certain financing, which became due and payable as of January 30, 2004, and under an agreement dated February 6, 2004, the Company agreed to cause its subsidiary, InterScan, to issue to the lenders party to the agreement, InterScan warrants exercisable for the number of shares of common stock of InterScan equal to 5% of all shares of common stock of InterScan as of and after the issuance of InterScan securities in an InterScan financing, as defined in the agreement. The exercise price per share of common stock of InterScan will equal 5% of the per share purchase price paid by the purchasers in such InterScan financing. As of June 30, 2009, no such InterScan financing had occurred.

7. (LOSS) INCOME PER COMMON SHARE

(Loss) income per common share is computed using SFAS No. 128, “Earnings per Share.” SFAS No. 128 established standards for the computation, presentation and disclosure of earnings per share.

Basic net (loss) or income per share attributable to common stockholders amounts are computed by dividing the net (loss) or income plus preferred stock dividends and deemed dividends by the weighted average number of shares outstanding during the period.

8. NOTES PAYABLE

On April 13, 2009, the Company issued a 15% note to John E. Imhoff, as part of the 2009 Convertible Notes, in the amount of $535,660 to replace the notes purchased by Dr. Imhoff that were previously owned by the Selling Investors, in the amounts of $154,403, $102,470, $158,787 and $150,000, respectively, under the same terms and conditions. With the re-purchase of the 2008 Convertible Notes by John E. Imhoff, 2,464,360 warrants, previously issued to the Selling Investors, were cancelled and issued to John E. Imhoff. Thereafter, three of the four Selling Investors kept 150,000, 102,400 and 150,000 warrants, respectively, under the same terms and conditions.

On April 15, 2009, the Company issued a 17% unsecured note to John E. Imhoff, as part of the 2009 bridge loans, in the amount of $35,000 to replace the notes purchased by Dr. Imhoff that were previously issued to Dolores Maloof on April 3, 2009 and William Zachary on March 26, 2009, in the amounts of $25,000 and $10,000, respectively, under the same terms and conditions.

The Company issued 17% unsecured notes to the following related parties on the dates indicated (see Note 9):

Noteholder	Original Loan Amount	Original Loan Date(s)	Loan Maturity Date	Loan Status
Ronald W. Hart	$10,000	04/10/09	10/09/09	Current
John E. Imhoff	$35,000	04/15/09	10/14/09	Current
Dolores Maloof	$25,000	04/17/09	05/27/09	Past Due
Ronald W. Hart	$6,000	04/23/09	10/22/09	Current

On June 19, 2009, the Company issued a 15% unsecured note in the amount of $10,000 to a new investor.

In March and April 2008, the Company issued four short-term unsecured promissory notes (the “Director Notes”) to its Company directors in the amounts of $10,000 each. This financing was to provide working capital for the Company. The notes were non-interest bearing, matured sixty days from funding and were considered past due. However, subsequent to the third quarter of 2008, these notes were surrendered in exchange for 2008 Convertible Notes.

On April 10, 2008, the Company issued a new short-term unsecured promissory note to Dolores Maloof in the amount of $400,000. The note matured on July 10, 2008, with an interest rate of 13%, and contained an obligation to issue a total of 400,000 warrants to purchase shares of the Company’s common stock at $0.65 per share. Under the agreement governing the note, the note was past due; however, subsequent to the third quarter of 2008, these notes were surrendered in exchange for 2008 Convertible Notes.

Between May 23 and July 7, 2008, the Company received a total of $625,000, as part of a new note purchase agreement, effective July 7, 2008. The notes carried 30% warrant coverage at 78 cents. However, subsequent to the third quarter of 2008, these notes were surrendered in exchange for 2008 Convertible Notes (see Note 10).

Between August 6 and December 1, 2008, the Company received a total of $610,000, as well as subscription agreements totaling ($440,000) pursuant to the 2008 Loan Agreement (see Note 9). The 2008 Convertible Notes issued pursuant to the 2008 Loan Agreements are due and payable on December 1, 2011, carry a 15% interest rate, contain an option to convert into the Company’s common stock or into other financing, and were issued along with Warrants for five shares of the Company’s common stock per dollar invested at an exercise price of $0.65 per share.

On December 1, 2008, the Company entered into a Note Purchase Agreement (the "2008 Loan Agreement ") with 29 existing and new lenders (the "Lenders"), pursuant to which the Company issued approximately $2.3 million in aggregate principal amount of 15% subordinated secured convertible notes due December 1, 2011 (the “2008 Convertible Notes”) and warrants exercisable for 11,558,878 shares of the Company’s common stock (the “2008 Warrants”).

The 2008 Convertible Notes are subordinated to the existing senior secured obligations of the Company, which are secured by (a) a first in priority lien on all of the Company’s assets; (b) a guaranty by the Company's wholly owned subsidiary, InterScan; (c) a lien on all of InterScan's assets; and (d) a pledge on all issued and outstanding stock of the Company and InterScan. No payments will be due under the 2008 Convertible Notes until they mature on December 1, 2011 (the "Maturity Date"). The 2008 Convertible Notes bear interest at 15% per year, payable on the Maturity Date, absent an event of default, in which case the interest rate increases to 20%.

The 2008 Convertible Notes are convertible into approximately 3,556,580 shares of the Company’s common stock, at a conversion rate of $0.65 per share subject to certain adjustments. The 2008 Warrants are immediately exercisable for 11,558,878 shares at an exercise price of $0.65 per share, subject to certain adjustments. The 2008 Loan Agreement also provides certain registration rights to the Lenders with respect to the shares of the Company’s common stock underlying the 2008 Notes and Warrants. On December 1, 2008, the relative fair value of the warrants was approximately $1.7 million. The debt discount will accrete over the 36-month term of the 2008 Convertible Notes payable using the effective interest method.

Approximately $1.3 million of the proceeds from the 2008 Loan Agreement was used to convert existing debt into 2008 Convertible Notes as described below. The remaining funds were used in product development, working capital and other corporate purposes. At June 30, 2009, one Lender has a subscription agreement totaling $85,000 outstanding, relating to the December 1, 2008 financing.

The unsecured note issued to Dolores Maloof on April 10, 2008 in the aggregate principal amount of $400,000, plus interest, was converted into the 2008 Convertible Note, as were notes issued under the note purchase agreement, dated July 7, 2008, in aggregate principal amount of $625,000, plus interest, held by John E. Imhoff and eleven other designated investors.

On February 3, 2006, InterScan obtained a $1.5 million loan, evidenced by promissory notes in favor of each of the investors. Proceeds of the loan were used by InterScan to fund its product development work and its general working capital needs, and to reimburse the Company for certain expenses incurred or to be incurred by it on behalf of InterScan. The interest rate on the notes was 10% per annum and the notes matured on August 2, 2006. Subsequently, these promissory notes, plus interest, totaling approximately $1.6 million, were converted into the 2007 Convertible Notes.

On March 12, 2007, the Company completed a restructuring of its then-existing indebtedness by entering into an Amended and Restated Loan Agreement (“Amended Loan”) with existing and new creditors. Pursuant to the Amended Loan, the Company’s then-existing indebtedness was restructured and consolidated into new 13% senior secured convertible notes (the “2007 Convertible Notes”). The aggregate principal amount of the Amended Loan is approximately $4.8 million due on March 1, 2010. No interest is due until maturity, absent an event of default under the Amended Loan. If an event of default occurs and is continuing, the interest rate on the Amended Loan becomes 18%. The 2007 Convertible Notes are convertible into of the Company’s common stock at $0.65 per share, or 7,285,061 shares of common stock, and were issued with approximately 7.2 million warrants, exercisable immediately at $0.78 per share for the Company’s common stock. Additionally, accrued interest on the Convertible Notes is convertible into shares of common stock of the Company on the same terms. In addition, 661,000 warrants at an exercise price of $0.78 were also issued to the placement agent and others in conjunction with this financing, as well as a warrant to purchase 15,000 shares of the Company’s common stock at $0.78, as part of interest expense to a non-converting bridge note holder, as interest on the notes payable. The fair value of the warrant to purchase 15,000 shares of the Company’s common stock was approximately $6,000 at December 31, 2007. This amount was expensed in the Company’s statement of operations for the period then ended. The conversion price and the exercise price of the warrants are subject to adjustments for anti-dilution.

On March 12, 2007, the relative fair value of the warrants was approximately $3.3 million (including $.3 million attributed to 661,000 warrants for placement agent fees treated as debt issuance cost), and the relative fair value of the beneficial conversion feature was approximately $1.3 million. The debt discount, consisting of the beneficial conversion feature and warrants, will accrete over the 36-month term of the Convertible Notes payable using the effective interest method. In addition, debt issuance costs totaling approximately $811,000 ($520,000 cash costs and $291,000 warrant value for 661,000 warrants issued to the placement agents and others will also be amortized over 36 months, using the effective interest method. At June 30, 2009, approximately $3.5 million of debt discount remained unamortized.

The Amended Loan is a senior secured obligation of the Company’s and is secured by (a) a first in priority lien on all of the Company’s assets; (b) a guaranty by Sterling; (c) a lien on all of Sterling's assets; and (d) a pledge on all issued and outstanding stock of Sterling and InterScan, except for the sale of the Company’s SimpleChoice business unit and related intellectual property.

The Amended Loan also provides certain registration rights with respect to the shares of the Company’s common stock underlying the 2007 Convertible Notes and warrants to the lenders. In addition, the 2007 Convertible Notes will automatically convert into convertible preferred stock of the Company, upon any completion of a convertible preferred financing of $5 million or more. The penalty for the late registration of the underlying common stock, as outlined in the Amended Loan, is calculated as 1/90th of 1% for each late day. This calculation resulted in a penalty accrual of approximately $91,000 for the year ended December 31, 2007, as the Company currently expects that the registration statement will not be filed.

Of the proceeds from the Amended Loan, approximately $1.9 million was used to convert debt from the previous loans into debt from the Amended Loan, and approximately $1.2 million was used to retire debt from the previous loans.

The issuance of the 2007 Convertible Notes and the warrants changed the conversion price of the Company's series A convertible preferred stock from $1.50 to $0.65, the exercise price of certain of the Company's warrants from $2.25 to $0.81 and the exercise price of certain of the Company’s warrants issued in August 2005 from $1.50 to $0.65, as described above under Note 6 (Stockholders’ Equity). The re-pricing of the series A convertible preferred stock and the associated warrants triggered a deemed dividend of approximately $3.8 million in total. The deemed dividend has no net effect on stockholders’ equity.

Subject to customary adjustments (which include full ratchet anti-dilution provisions), the 2007 Convertible Notes associated with the Amended Loan are convertible into approximately 7,285,061 common shares and the warrants are exercisable for approximately 7,946,061 shares of common stock, including warrants issued to placement agent. The warrants are currently exercisable. The 2007 Convertible Notes are convertible into the Company’s common stock at a price of $0.65 per share and the warrants permit the holders to purchase shares of the Company’s common stock at a price of $0.78 per share; both are subject to certain adjustments. The Amended Loan also provides certain registration rights with respect to the shares of the Company’s common stock underlying the 2007 Convertible Notes and warrants to the Amended Loan lenders. The 2007 Convertible Notes will automatically convert into convertible preferred stock, upon the completion of a convertible preferred financing of $5 million or more.

The issuance of the 2007 Convertible Notes and warrants was exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The facts relied upon to make the section 4(2) exemption available were: (i) no underwriters were involved in the issuance and sale of the convertible notes and warrants; (ii) the Amended Loan lenders were accredited, were experienced with transactions of this nature and had the ability to fend for themselves; (iii) the 2007 Convertible Notes and warrants were acquired by the Amended Loan lenders for investment only and not with a view to or for sale in connection with any distribution thereof, (iv) appropriate restrictive legends were affixed to the 2007 Convertible Notes and warrants, and (vi) the sales of the 2007 Convertible Notes and warrants were made without general solicitation or advertising.

Furthermore, InterScan, our wholly owned subsidiary entered into an agreement with a third party investor who paid $104,000 in certain Intellectual Property (IP) royalty payment on behalf of InterScan. InterScan has the option of paying the third party back in common shares to be issued or allowed the Investor to own 49% of InterScan.

9. RELATED PARTY TRANSACTIONS

On April 13, 2009, the Company issued a 15% note to John E. Imhoff, as part of the 2009 Convertible Notes, in the amount of $535,660 to replace the notes purchased by Dr. Imhoff that were previously owned by four investors (the “Selling Investors”), in the amounts of $154,403, $102,470, $158,787 and $150,000, under the same terms and conditions. With the re-purchase of the 2008 Convertible Notes by John E. Imhoff, 2,464,360 warrants, previously issued to the Selling Investors, were cancelled and issued to John E. Imhoff. Thereafter, three of the four Selling Investors kept 150,000, 102,400 and 150,000 warrants, respectively, under the same terms and conditions.

The Company issued 17% unsecured notes to the following persons on the dates indicated:

Noteholder	Original Loan Amount	Original Loan Date(s)	Loan Maturity Date	Loan Status
Ronald W. Hart	$10,000	04/10/09	10/09/09	Current
John E. Imhoff	$35,000	04/15/09	10/14/09	Current
Dolores Maloof	$25,000	04/17/09	05/27/09	Past Due
Ronald W. Hart	$6,000	04/23/09	10/22/09	Current
John E. Imhoff	$65,000	07/07/09	01/06/10	Current

On December 1, 2008, the Company entered into the 2008 Loan Agreement. Among the Lenders were John E. Imhoff, William Zachary, Jr., Michael C. James, Dr. Ronald W. Hart and Ronald W. Allen, all directors of the Company.

In March and April 2008, the Company issued four Director Notes to its Company directors in the amounts of $10,000 each.

10. SUBSEQUENT EVENTS

The Company issued 17% unsecured note to the following related party on the date indicated (see Note 8 & 9):

Noteholder	Original Loan Amount	Original Loan Date(s)	Loan Maturity Date	Loan Status
John E. Imhoff	$65,000	07/07/09	01/06/10	Current

On July 15, 2009, the Company issued a 15% unsecured note in the amount of $100,000 to a new investor.

On July 23, 2009 and July 30, 2009, the Company was paid for and issued a Subscription Agreement to Guided Medical Solutions, Inc., in the amounts of $500,000 and $175,000, respectively, in connection with its 2009 financing, slated to close in the third quarter of 2009.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements in this report which express "belief," "anticipation" or "expectation," as well as other statements which are not historical facts, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth under "Risk Factors" below and elsewhere in this report. Examples of these uncertainties and risks include, but are not limited to:

access to sufficient debt or equity capital to meet our operating and financial needs;

the effectiveness and ultimate market acceptance of our products;

whether our products in development will prove safe, feasible and effective;

whether and when we or any potential strategic partners will obtain approval from the U.S FDA and corresponding foreign agencies;

our need to achieve manufacturing scale-up in a timely manner, and our need to provide for the efficient manufacturing of sufficient quantities of our products;

the lack of immediate alternate sources of supply for some critical components of our products;

our patent and intellectual property position;

the need to fully develop the marketing, distribution, customer service and technical support and other functions critical to the success of our product lines; and

the dependence on potential strategic partners or outside investors for funding, development assistance, clinical trials, distribution and marketing of some of our products.

The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this report.

OVERVIEW

We were incorporated on October 27, 1992 under the name of SpectRx, Inc. The company name was changed to Guided Therapeutics, Inc. in December 2007. Since the company’s inception, we have raised capital through the sale of preferred stock, issuance of debt securities, public and private sales of common stock, funding from collaborative arrangements and sales of assets. Following our initial funding in early 1993, we immediately began research and development activities with the objective of commercializing less invasive diagnostic, screening and monitoring products. We commercialized the BiliChek in 1998, which we later sold to Respironics, Inc. in 2003. We attempted to commercialize a diabetes screening instrument with Roche, and a glucose monitoring product with Abbott. We also conducted a joint venture with Welch Allyn, Inc. related to our cervical cancer detection technology from 1999 to 2002.

In December 2001, we acquired 100% of the common stock of Sterling Medivations, Inc. d/b/a SimpleChoice, a company formed for the purpose of developing and marketing insulin-delivery products, which we sold in May of 2007.

We have a limited operating history upon which our prospects can be evaluated. Our prospects must be considered in light of the substantial risks, expenses and difficulties encountered by entrants into the medical device industry. This industry is characterized by an increasing number of participants, intense competition and a high failure rate. We have experienced operating losses since our inception and, as of June 30, 2009, we have an accumulated deficit of about $72.1 million. To date, we have engaged primarily in research and development efforts. We first generated revenues from product sales in 1998, but do not have significant experience in manufacturing, marketing or selling our products. Our development efforts may not result in commercially viable products and we may not be successful in introducing our products. Moreover, required regulatory clearances or approvals may not be obtained in a timely manner, or at all. Our products may not ever gain market acceptance and we may not ever generate significant revenues or achieve profitability. The development and commercialization of our products will require substantial development, regulatory, sales and marketing, manufacturing and other expenditures. We expect our operating losses to continue through at least the end of 2009 as we continue to expend substantial resources to introduce our cervical cancer detection product, further the development of our other products, obtain regulatory clearances or approvals, build our marketing, sales, manufacturing and finance organizations and conduct further research and development.

Our product revenues to date have been limited. For 2008 and 2009, a majority of our revenues came from our KMOT and LifeScan contract revenue. We expect that the majority of our revenue in 2009 will be derived from research contract revenue. Our other products for cervical cancer detection are still in development.

CRITICAL ACCOUNTING POLICIES

The accounting policies that we believe are the most critical to an investor's understanding of our financial results and conditions are discussed below. Because we are still early in our enterprise development, the number of these policies requiring explanation is limited. As we begin to generate increased revenue from different sources, we expect that the number of applicable policies and complexity of the judgments required will increase.

Currently, those policies that could require critical management judgment are in the areas of revenue recognition, reserves for accounts receivable and inventory valuation.

Revenue Recognition: We recognize revenue from sales of products or services upon shipment of products or when services are rendered. We also recognize milestone revenue from collaborative partners when a milestone has been accomplished or when we, and our partner, agree that a milestone has been reached. If collectibility of accounts receivable for milestones or services is doubtful, revenues and gains are recognized on the basis of cash received. We have relied upon SEC Staff Accounting Bulletin, or SAB, 101 and SAB 104 for guidance in recognizing revenue and related costs.

Service Revenues: Service revenues are considered to have been earned when we have substantially accomplished what we must do to be entitled to the benefits represented by the service revenues. Accordingly, we record revenue from service contracts where the service is completed and the customer is invoiced in accordance with the terms of a written, duly executed service contract or purchase order.

Allowance for Accounts Receivable: We estimate losses from the inability of our customers to make required payments and periodically review the payment history of each of our customers, as well as their financial condition, and revise our reserves as a result.

Inventory Valuation: Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories, if necessary.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008

Net loss attributable to common stockholders was $1.4 million during the three months ended June 30, 2009, as compared to net loss attributable to common stockholders of $1.3 million during the three months ended June 30, 2008.

Net loss was approximately $1.4 million during the three months ended June 30, 2009, versus a net loss of $1.2 million for the three months ended June 30, 2008.

Operating loss was approximately $522,000 for the three months ended June 30, 2009, compared to an operating loss of approximately $737,000, for the same period in 2008.

Revenue: Net revenue decreased to $242,000 for the three months ended June 30, 2009, from $449,000 for the same period in 2008. Net revenue was lower for the three months ended June 30, 2009 than the comparable period in 2008, due to the decrease in revenue from contracts relating to our ISF technology.

Research and Development Expenses: Research and development expenses decreased to approximately $339,000 for the three months ended June 30, 2009, compared to $606,000 for the same period in 2008. The decrease, of approximately $267,000, was primarily due to a decrease in research and development for the cervical cancer detection products and glucose monitoring expenses, as clinical trials associated with these programs were substantially completed.

General and Administrative Expenses: General and administrative expenses decreased to $411,000 during the three months ended June 30, 2009, compared to $574,000 for the same period in 2008. The decrease is primarily related to a significant reduction in operating activities during the three months ended June 30, 2009

Other Income and Interest Expense: Other income interest expense, net increased to approximately $864,000 for the three months ended June 30, 2009, as compared to expense of approximately $467,000 for the same period in 2008. The increase is primarily due to increase in amortization of loan discount, as well as an increase in interest expense on higher loan balance for the three months ended June 30, 2009.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

Net loss attributable to common stockholders was approximately $2.8 million during the six months ended June 30, 2009, as compared to net loss attributable to common stockholders of $2.1 million during the six months ended June 30, 2008. Net loss was approximately $2.7 million during the six months ended June 30, 2009, as compared to net loss of $2.0 million during the six months ended June 30, 2008.

Revenue: Net revenue decreased to approximately $423,000 for the six months ended June 30, 2009 from $774,000 for the same period in 2008. Net revenue decrease was primarily due to the decrease in revenue from contracts relating to our ISF technology.

Research and Development Expenses: Research and development expenses decreased to approximately $643,000 for the six months ended June 30, 2009, compared to $1.1 million for the same period in 2008. The decrease of approximately $457,000 was primarily due to a decrease in research and development for the cervical cancer detection products and glucose monitoring expenses, as clinical trials associated with these programs were substantially completed.

General and Administrative Expenses: General and administrative expenses decreased to $875,000 during the six months ended June 30, 2009, compared to $1.0 million for the same period in 2008. The slight decrease is primarily related to a reduction in operating activities during the six months ended June 30, 2009.

Other Income and Interest Expense: Other income and interest expense, net increased to approximately $1.6 million for the six months ended June 30, 2009, as compared to expenses of approximately $658,000 for the same period in 2008. The increase is primarily due to increase in amortization of loan discount, as well as an increase in interest expense on higher loan balance for the six months ended June 30, 2009.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations since inception primarily through private sales of debt and private and public sales of our equity securities. At June 30, 2009, we had approximately $20,000 in cash and negative working capital of approximately $5.4 million.

Our major cash flows in the quarter ended June 30, 2009, consisted of cash out-flows of approximately $320,000 from operations (including approximately $2.7 million of net loss), offset in part by cash used in investing activities of $21,000 due to a capitalization of software costs, as well as, cash provided by financing activities of $293,000 due to proceeds received from issuance of new notes payable.

We have historically also received funds from milestone payments and reimbursements from our collaborative partners. We are currently seeking a collaborative partner for our glucose monitoring technology. Until we reach an agreement with a new partner, we expect minimal or no such milestones or reimbursements.

As previously disclosed, on December 1, 2008, the Company entered into the 2008 Loan Agreement with 28 existing and new lenders (the "Lenders"), pursuant to which we issued approximately $2.3 million in aggregate principal amount of the 2008 Convertible Notes, due December 1, 2011, and the 2008 Warrants exercisable for 11,558,878 shares of our common stock.

The 2008 Convertible Notes are subordinate to our existing senior secured obligations, which are secured by (a) a first in priority lien on all of our assets; (b) a guaranty by our wholly owned subsidiary, InterScan; (c) a lien on all of InterScan's assets; and (d) a pledge on all the issued and outstanding stock of GT and InterScan. No payments will be due under the 2008 Convertible Notes until they mature on December 1, 2011. The 2008 Convertible Notes bear interest at 15% per year, payable on the Maturity Date, absent an event of default, in which case, the interest rate increases to 20%.

The 2008 Convertible Notes are convertible into approximately 3,556,580 shares of our common stock, at a conversion rate of $0.65 per share, subject to certain adjustments. The 2008 Warrants are immediately exercisable for 11,558,878 shares at an exercise price of $0.65 per share, subject to certain adjustments. The 2008 Loan Agreement also provides certain registration rights to the Lenders with respect to the shares of our common stock underlying the 2008 Notes and Warrants.

On December 1, 2008, the relative fair value of the warrants was approximately $1.7 million. The debt discount will accrete over the 36-month term of the 2008 Convertible Notes payable using the effective interest method.

Approximately $1.3 million of the proceeds from the 2008 Loan Agreement was used to convert existing debt into 2008 Convertible Notes as described below. The remaining funds, less fees and expenses, were used in product development, working capital and other corporate purposes.

On March 12, 2007, we completed a restructuring of our then-existing indebtedness by entering into an Amended and Restated Loan Agreement (“Amended Loan”) with existing and new creditors. Pursuant to the Amended Loan, the existing loans under the then-existing indebtedness were restructured and consolidated into new 13% Senior Secured Convertible Notes (the “2007 Convertible Notes”). The aggregate principal amount of the Amended Loan is approximately $4.8 million due on March 1, 2010. No interest is due until maturity, absent an event of default under the Amended Loan. If an event of default occurs and is continuing, the interest rate on the Amended Loan becomes 18%. The 2007 Convertible Notes are convertible into our common stock at $0.65 per share, or 7,285,061 shares of common stock, and were issued with approximately 7.2 million warrants, exercisable immediately at $0.78 per share for our common stock. Additionally, accrued interest on the 2007 Convertible Notes is convertible into shares of our common stock, on the same terms. In addition, 661,000 warrants at an exercise price of $0.78 were also issued to the placement agent and others in conjunction with this financing, as well as a warrant to purchase 15,000 shares of our common stock at $0.78, as part of interest expense to a non-converting bridge note holder, as interest on the notes payable. The conversion price and the exercise price of the warrants are subject to adjustments for anti-dilution.

On March 12, 2007, the relative fair value of the warrants was approximately $2.3 million (including $.3 million attributed to 661,000 warrants for placement agent treated as debt issuance cost), and the relative fair value of the beneficial conversion feature was approximately $1.3 million. The debt discount, consisting of the beneficial conversion feature and warrants, will accrete over the 36-month term of the 2007 Convertible Notes payable using the effective interest method. In addition, debt issuance costs totaling approximately $811,000 ($520,000 cash costs and $291,000 warrant value for 661,000 warrants given to placement agent and others) will also be amortized over 36 months, using the effective interest method.

The Amended Loan is our senior secured obligation and is secured by (a) a first in priority lien on all of our assets; (b) a guaranty by Sterling; (c) a lien on all of Sterling's assets (except the SimpleChoice business); and (d) a pledge on all issued and outstanding stock of Sterling and InterScan.

We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements in addition to these sources. We believe our existing and available capital resources will be sufficient to satisfy our funding requirements through the third quarter of 2009, excluding any amounts due on redeemable convertible preferred stock, although we need to secure a collaborative partner to move forward with our continuous glucose program and will need additional funding to complete our pivotal trials for our cervical cancer detection product in a timely fashion. We are evaluating various options to further reduce our cash requirements to operate at a reduced rate, as well as options to raise additional funds, including loans using certain assets as collateral.

Substantial capital will be required to develop our products, including completing product testing and clinical trials, obtaining all required United States and foreign regulatory approvals and clearances, and commencing and scaling up manufacturing and marketing our products. Any failure to obtain capital would have a material adverse effect on our business, financial condition and results of operations.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, no special purpose entities, and no activities that include non-exchange-traded contracts accounted for at fair value.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported, within the time periods specified by the Securities and Exchange Commission (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will uncover or detect failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Under the supervision of, and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report, and, based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures were ineffective as of June 30, 2009, due to the existence of previously disclosed material weaknesses in our internal control over financial reporting primarily related to inadequate resources in our accounting and financial reporting group, that we have yet to fully remediate.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

EXHIBIT INDEX

EXHIBITS

Exhibit Number	Exhibit Description
31	Rule 13a-14(a)/15d-14(a) Certification
32	Section 1350 Certification

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GUIDED THERAPEUTICS, INC.
/s/ MARK L. FAUPEL
By:	Mark L. Faupel
	President, Chief Executive Officer and
	Acting Chief Financial Officer
Date:	August 18, 2009