UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________

FORM 10-Q

_______________

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

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

For the transition period from ______to______.

PROTECTUS MEDICAL DEVICES, INC.

(Exact name of registrant as specified in its Charter)

Delaware		000-53100		98-0541881
(State or other jurisdiction of incorporation or organization)		(Commission File No.)		(IRS Employer Identification No.)

110 First Avenue NE, Suite #1006

Minneapolis, MN 55413

(Address of Principal Executive Offices)

_______________

612-379-3975

(Registrant's Telephone number)

_______________

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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 the definitions of “large accelerated filer”, “accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer o

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 o No x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of November 19, 2010: 48,386,731 shares of Common Stock.

PROTECTUS MEDICAL DEVICES, INC.

FORM 10-Q

September 30, 2010

INDEX

PART I-- FINANCIAL INFORMATION

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33

PART II-- OTHER INFORMATION

Item 1	Legal Proceedings	34
Item 1A	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Removed and Reserved	34
Item 5.	Other Information	34
Item 6.	Exhibits	34

SIGNATURE

Item 1. Financial Information

PROTECTUS MEDICAL DEVICES, INC.

(A DEVELOPMENT STAGE COMPANY)

FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

AND FROM SEPTEMBER 21, 1999 (INCEPTION)

TO SEPTEMBER 30, 2010

(UNAUDITED)

	Page(s)

Condensed Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009 (Audited)	2

Condensed Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2010 and 2009, and from September 21, 1999 (inception) to September 30, 2010 (Unaudited)	3

Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2010 and 2009, and from September 21, 1999 (inception) to September 30, 2010 (Unaudited)	4

Notes to the Condensed Consolidated Financial Statements	5-28

Protectus Medical Devices, Inc. and Subsidiary

(A development stage company)

Condensed Consolidated Balance Sheets

	September 30, 2010			December 31, 2009
	(Unaudited)			(Audited)
Assets
Current Assets:
Cash	$	14,491		$	2,163
Prepaid Expenses		24,682			-
Total Current Assets		39,173			2,163

Total Assets	$	39,173		$	2,163

Liabilities and Stockholders’ Deficit

Current Liabilities:
Accounts payable and accrued expenses	$	1,632,351		$	1,154,458
Notes payable - net of discounts		1,279,796			1,038,796
Notes payable - related party		270,000			270,000
Accrued interest payable		424,338			301,651
Derivative liabilities		283,524			440,874
Total Current Liabilities		3,890,009			3,205,779

Long Term Liabilities:


Convertible notes payable - net of discount		253,007			132,168
Total Long Term Liabilities:		253,007			132,168

Total Liabilities		4,143,016			3,337,947




Common stock, $0.0001 par value, 150,000,000 shares authorized, 48,386,731 and 45,887,936 shares issued and outstanding		4,839			4,589
Additional paid in capital		4,005,575			3,582,914
Deficit accumulated during the development stage		(8,114,257	)		(6,923,287	)
Total Stockholders’ Deficit		(4,103,843	)		(3,335,784	)

Total Liabilities and Stockholders’ Deficit	$	39,173		$	2,163

See accompanying notes to the condensed consolidated financial statements

Protectus Medical Devices, Inc. and Subsidiary
(A development stage company)
Consolidated Statements of Operations
(Unaudited)

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended			September 21, 1999 (inception) to
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009			September 30, 2010
				(Restated)						(Restated)

Operating expenses
Research and development	$	-		$	-		$	-		$	-		$	135,069
General and administrative expenses		394,467			528,295			814,223			914,111			5,926,641
Total operating expenses		394,467			528,295			814,223			914,111			6,061,710

Loss from operations		(394,467	)		(528,295	)		(814,223	)		(914,111	)		(6,061,710	)

Other income (expense)
Interest income		-			84			4			104			6,037
Other income		-			-			-			-			40,000
Interest expense		(139,446	)		-			(494,422	)		(140,923	)		(2,060,905	)
Derivative expense		-			(598,975	)		-			(1,174,884	)		(1,181,017	)
Derivative gain/(loss)		178,623			(1,133,952	)		117,671			(1,133,952	)		1,143,337
Other income (expense) - net		39,177			(1,732,843	)		(376,747	)		(2,449,655	)		(2,052,548	)

Net loss	$	(355,290	)	$	(2,261,138	)	$	(1,190,970	)	$	(3,363,766	)	$	(8,114,258	)

Net Loss per Common Share - Basic and Diluted	$	(0.01	)	$	(0.05	)	$	(0.03	)	$	(0.07	)	$	(0.20	)

Weighted Average Number of Common Shares Outstanding		47,239,006			45,000,000			46,447,684			45,000,000			41,550,770

See accompanying notes to the condensed consolidated financial statements

Protectus Medical Devices, Inc. and Subsidiary
(A development stage company)
Consolidated Statements of Cash Flows
(Unaudited)

	Nine Months Ended			Nine Months Ended			September 21, 1999 (inception) to
	September 30, 2010			September 30, 2009			September 30, 2010
				( Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,190,970	)	$	(3,363,766	)	$	(8,114,258	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt issuance costs		-			3,750			26,750
Amortization of debt discount		245,839			98,244			1,152,577
Derivative expense		-			1,174,884			1,181,017
Derivative (gain)/loss		(117,671	)		1,133,952			(1,143,338	)
Stock based compensation - founders		-			-			7,250
Stock based compensation		135,756			221,500			526,506
Stock issued to acquire intellectual property		-			-			47,250
Warrants issued for services - related party		-			-			924,784
Warrants issued for loan extension fee		-			-			527,280
Warrants issued for services		-			-			234,158
Warrant issued in connection with notes payable		122,476			-			122,476
Changes in operating assets and liabilities:
(Increase) Decrease in:
Prepaid expenses		(24,682	)		-			(24,682	)
Increase (Decrease) in:
Accounts payable and accrued expenses		477,893			188,004			1,632,351
Accrued interest payable		122,687			(4,423	)		424,338
Net Cash Used in Operating Activities		(228,672	)		(547,855	)		(2,475,541	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable		241,000			622,485			1,284,297
Proceeds from notes payable - related party		-			-			270,000
Proceeds from issuance of convertible debt		-			-			672,485
Payment of debt issuance costs in cash		-			-			(26,750	)
Proceeds from issuance of stock		-			-			320,500
Cash paid as direct offering costs		-			-			(30,000	)
Proceeds from exercise of warrant - related party		-			-			4,000
Repayment of note		-			(4,500	)		(4,500	)
Net Cash Provided By Financing Activities		241,000			617,985			2,490,032

Net Increase (Decrease) in Cash		12,328			70,130			14,491

Cash - Beginning of Period		2,163			692			-
Cash - End of Period	$	14,491		$	70,822		$	14,491

SUPPLEMENTARY CASH FLOW INFORMATION:
Cash Paid During the Period for:
Income taxes	$	-		$	-		$	-
Interest	$	-		$	-		$	-

SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Debt discount on derivative liability	$	-		$	-		$	672,485
Beneficial conversion feature on convertible notes and related debt discount	$	-		$	-		$	731,302
Conversion of debt to equity	$	125,000		$	-		$	150,000
Reclassification of derivative liability to additional paid in capital	$	39,679		$	-		$	466,954
Warrants issued - securities	$	33,000		$	-		$	33,000

See accompanying notes to the condensed consolidated financial statements

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

Note 1 Basis of Presentation

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The unaudited condensed interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited consolidated financial statements and notes thereto, for the year ended December 31, 2009.

Certain information or footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The interim results for the period ended September 30, 2010 are not necessarily indicative of results for the full fiscal year.

Note 2 Nature of Operations

Nature of operations

Protectus Medical Devices, Inc. (the “Company) (“Protectus”) was incorporated in the State of Delaware on June 28, 2007 as E-18 Corp. (“E-18”) and is a development stage company. On June 25, 2009 the Company entered into a share exchange agreement with SquareOne Medical, Inc, incorporated in Nevada on September 21, 1999, resulting in a change of control.

Reverse Acquisition and Recapitalization and Share Purchase Agreement

On June 25, 2009, E-18, a then public shell corporation, merged with Square One Medical Inc. and Square One Medical Inc. became the surviving corporation, in a transaction treated as a reverse acquisition. E-18 did not have any operations and majority-voting control was transferred to Square One Medical Inc. The transaction required a recapitalization of Square One Medical Inc. Since Square One Medical Inc. acquired a controlling voting interest, it was deemed the accounting acquirer, while E-18 was deemed the legal acquirer. The historical financial statements of the Company are those of Square One Medical Inc., and of the consolidated entities from the date of merger and subsequent. On June 26, 2009 the shareholders also agreed to change the Company’s name to Protectus Medical Devices, Inc. Since the transaction is considered a reverse acquisition and recapitalization, accounting guidance does not apply for purposes of presenting pro-forma financial information.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

With the acquisition of SquareOne Medical, Inc. the Company changed its intended business operation from a distributor of biodiesel home processing kits to a medical device firm that designs, engineers and manufactures safety needle devices to protect healthcare workers from accidental needle stick injuries. The Company has developed and patented a safety hypodermic syringe as its lead product with other proprietary OSHA compliant medical safety devices to follow.

Note 3 Summary of Significant Accounting Policies

Use of estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Such estimates and assumptions impact, among others, the following: the fair value of warrants granted in connection with various financing transactions, share-based payments, fair value of derivative liabilities, and accrued payroll taxes and related penalties and interest.

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.

Development Stage

The Company's financial statements are presented as those of a development stage enterprise. Activities during the development stage primarily include debt funding, equity based financing, and further implementation of the business plan. The Company will look to obtain additional debt and/or equity related funding opportunities.

Risks and uncertainties

The Company operates in an industry that is subject to intense competition and change in consumer demand. The Company's operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure. See Note 4 regarding going concern uncertainty.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

Cash and cash equivalents

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents at both September 30, 2010 and December 31, 2009.

The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.

Debt Issuance Costs and Debt Discounts

The Company has paid debt issuance costs, and recorded debt discounts in connection with raising funds through the issuance of debt. These costs are amortized over the life of the debt to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts are immediately expensed.

Original Issue Discount

The Company may provide its debt holders with original issue discounts. Original issue discounts were recorded to debt discount reducing the face amount of the notes and were amortized to interest expense immediately, if the underlying terms of these debt instruments were due on demand. In cases where the notes are not due on demand, the original issue discount is amortized over the life of the debt to interest expense.

Fair value of financial instruments

The carrying amounts of the Company’s short-term financial instruments, including the Company’s current liabilities (exclusive of derivative liabilities), approximate fair value due to the relatively short period to maturity for these instruments.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

Warrants and Derivative Liabilities

The Company reviews any common stock purchase warrants and other freestanding derivative financial instruments at each balance sheet date and will classify on the balance sheet as:

Equity if they (i) require physical settlement or net-share settlement, or (ii) gives us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement), or as

Assets or liabilities if they (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).

The Company assesses classification of our common stock purchase warrants and other freestanding derivatives at each reporting date to determine whether a change in classification between assets, liabilities and equity is required.

Share Based Payments

Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights, are measured at their fair value on the awards’ grant date, and based on the estimated number of awards that are ultimately expected to vest. Prior to being a public company share-based payment awards issued to non-employees for services rendered were recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever was more readily determinable. For historic fiscal years when there was not an observable active, liquid market for the Company’s common stock, the valuation of the shares issued in a non-cash share payment transaction relies on observation of arms-length transactions where cash was received for its shares, before and after the non-cash share payment date. The expense resulting from share-based payments are recorded as a component of general and administrative expense.

Earnings per Share

Basic earnings per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

The computation of basic and diluted loss per share for the three and nine months ended September 30, 2010 and 2009 excludes the following potentially dilutive securities because their inclusion would be anti-dilutive due to the Company’s net loss during the period:

	September 30, 2010		September 30, 2009
Convertible notes		3,058,051		2,189,865
Stock options		2,077,616		2,027,616
Stock warrants		12,701,939		8,694,863
Total common stock equivalents		17,837,606		12,912,344

In connection with the 4 for 1 forward split in 2008, and the reverse merger/recapitalization in June 2009, all share and per share amounts have been retroactively restated. Additionally, in connection with the issuance of a note and warrants in April 2010, which contained an exercise price of $0.20/share for all debt and warrants, the above common stock equivalents represent the application of $0.20 to the convertible notes and warrants which are exercisable.

Recent accounting pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC 820, “Fair Value Measurements” ("ASC 820") to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance was effective for financial periods beginning after December 15, 2009, except the requirement to disclose Level 3 transactions on a gross basis, which becomes effective for financial periods beginning after December 15, 2010. ASU 2010-06 did not have a significant effect on the Company’s consolidated financial position or results of operations.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

In April 2010, FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition (“ASU 2010-17”) No. 2010-17 codifies the consensus reached in Emerging Issues Task Force Issue No. 08-9, “Milestone Method of Revenue Recognition.” ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and non-substantive milestones, and each milestone should be evaluated individually to determine if it is substantive. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its results of operations or financial condition.

Note 4 Going Concern and Liquidity

As reflected in the accompanying condensed consolidated financial statements, the Company had a net loss of $1,190,970, net cash used in operations of $228,672 for the nine months ended September 30, 2010; a working capital deficit of $3,850,836, and has a stockholders’ deficit of $4,103,843 at September 30, 2010. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The ability of the Company to continue its operations is dependent on Management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes and convertible notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company is in default on many of its term debt obligations, and has other notes that are due on demand, yet remain outstanding. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence. Since inception the Company has been in the development stage and has generated no sales to date.

The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. The Company believes that the utilization of its products may provide future positive cash flows.

In response to these issues, management has taken the following actions:

●	Raising additional capital through various debt offerings;

●	Cutting costs where possible; and

●	Focusing efforts on further development of the core product, which is dependent upon continued financing

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These condensed consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 5 Debt, Debt Discount and Debt Issue Costs

(A)	Convertible Debt

During 2001, the Company issued convertible debt totaling $50,000, due two years from the issuance date. These notes can convert at 50% of the market price for any offering occurring after March 2001. The market price on the commitment date was $0.01, based upon the fair value of shares issued to acquire intellectual property from a third party. In the event that the debt is converted, the Company would issue five year warrants having an exercise price equal to 75% of the shares issued upon conversion of the underlying debt. The exercise price would be equal to 90% of the sales price in a future offering, however, the maximum exercise price is $1.80. Principal is automatically convertible if a future equity offering of $1,000,000 occurs in a single offering transaction. The Company has determined these notes were derivative financial instruments.

The Company computed the fair value of the conversion feature only at the commitment date, since the warrants are contingent upon a debt conversion, based on the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term: conversion feature	2 years
Risk free interest rate	4.25% - 4.28%

The fair value of the embedded conversion option was $97,116. The Company recorded a related debt discount of $50,000, and a derivative expense of $47,116.

In 2003, upon the expiration of these notes, the discount was fully amortized. The Company determined that the derivative liability should be marked to market and then, the resulting amount would be reclassified to equity since the derivative ceased to exist upon the issuance of new debt instruments.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

The Company computed the fair value of the conversion feature on the maturity date totaling $97,116, based on the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term: conversion feature	None
Risk free interest rate	1.57% - 4.25%

The $97,116 was reclassified to additional paid in capital to reflect the characteristics of the instrument ceasing to be a derivative financial instrument.

The Company then issued new debt instruments under the same terms as the original notes; however, the original notes had a carrying amount of $55,000 in 2003. The Company then recorded these new debt instruments as derivative financial instruments, however, since no proceeds were received, no new debt discount was recorded.

The Company computed the fair value of the conversion feature only at the commitment date, since the warrants are contingent upon a debt conversion, based on the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term: conversion feature	2 years
Risk free interest rate	1.38% - 1.57%

The market price on the commitment date was $0.01 for $27,500, based upon the fair value of shares issued to acquire intellectual property from a third party. The Company used a market price of $1 for the other $27,500 based upon a recent cash offering price with a third party.

The fair value of the embedded conversion option was $106,733. The Company recorded a related derivative expense of $106,733. The $106,733 was reclassified to additional paid in capital since the underlying term of the debt had expired. As a result, the debt became due on demand.

(B)	Demand notes

In 2001, the Company issued notes totaling $120,000. These notes were due in 2002, and are currently in default. These notes bear interest at 10% and are unsecured.

In April 2003, the Company executed a note for $9,000. The note is non-interest bearing, unsecured and due on demand.

In June 2005, the Company executed a note for $49,796. The note bears interest at 8%, is unsecured and due on demand.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

In October 2005, the Company executed a note for $50,000. The note is non-interest bearing, unsecured and due on demand. In connection with raising these funds, the Company paid $7,500 in debt issue costs.

In June 2006, the Company executed a note for $50,000 with a member of management. The note bears interest at 8%, is unsecured and due on demand.

In December 2008, the Company executed a note for $4,500. The note was non-interest bearing, unsecured and due on demand. The note was repaid in April 2009.

(C)	Exchangeable Debt

In September 2004, the Company executed notes totaling $500,000, of which $100,000 was to a member of management. These notes bear interest at 7%, are unsecured and were due December 31, 2009. The debt holders also received an aggregate 1,689,680 warrants. The warrants were exercisable at $0.30/share. The warrants expired on December 31, 2009. The Company determined that these warrants should be valued at fair value and a related debt discount should be computed. The Company computed a fair value of $149,801 for the warrants. Fair value was based upon the following:

Expected dividends	0%
Expected volatility	286%
Expected term: conversion feature	5 years
Risk free interest rate	3.33%

The note holders were able to convert the unpaid principal and accrued interest into the purchase of the shares under warrant. The Company has not repaid these notes on the maturity date, and expects to receive a default notice from these note holders.

The note holders are also entitled to a production bonus from product sales up to $1.25 per each dollar invested. There have been no sales since inception and no accrual for the production bonus.

In connection with the sale of these debt instruments the Company was required to pay $40,000 in placement agent fees. These fees are in dispute; however, they have been accrued as a component of accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

(D)	Debt with warrants

During 2007, the Company executed notes totaling $180,000. All notes were due one year from issuance, and are in default. These notes bear interest at 10% and are unsecured. The debt holders also received an aggregate 405,523 warrants. The warrants are exercisable at $0.44/share. The warrants expire in 2012. In connection with raising these funds, the Company paid $18,000 in debt issue costs.

The Company determined that these warrants should be valued at fair value and a related debt discount should be computed. The Company computed a fair value of $179,769 for the warrants.

Fair value was based upon the following:

Expected dividends	0%
Expected volatility	286%
Expected term: conversion feature	5 years
Risk free interest rate	3.10%

(E)	Debt with original issue discounts

During 2008, the Company executed notes totaling $295,000, of which $120,000 was to related parties. These notes have a face amount of $147,500; however, the note holder was entitled to principal repayment equal to twice the investment made. The additional $147,500 was recorded as interest expense on the date of execution since there was no term for the underlying debt. All notes are due on demand. These notes are non-interest bearing, and are unsecured. In connection with raising these funds, the Company paid $1,250 in debt issue costs.

In March 2009, these debt holders also received an aggregate 996,911 warrants. The warrants are exercisable at $0.30/share. The warrants expire in 2014.

The Company determined that these warrants should be valued at fair value and a related debt discount should be computed. The Company computed a fair value of $295,000 for the warrants. The discount was amortized in 2008 since these notes were due on demand.

Fair value was based upon the following:

Expected dividends	0%
Expected volatility	286%
Expected term: conversion feature	5 years
Risk free interest rate	3.41%

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

On April 15, 2010, the Company executed an Original Issue Discount note for $172,500 and received net proceeds of $150,000. The Company recorded amortization of original issue discount of $22,500 during the nine months ended September 30, 2010. The note bore interest at 12%, is unsecured and was due on August 6, 2010 and is therefore in default.

This debt holder also received 750,000 warrants in connection with the issuance of this conventional debt, having a fair value of $122,476. The warrants have an exercise price $0.20. As a result of the issuance of these warrants on April 15, 2010, the Company’s debt holders that have anti-dilution provisions in the form of a ratchet provision, had their exercise prices adjusted to $0.20 for any convertible debt and warrants that were outstanding at the time of this issuance. The notes specifically affected were the convertible debt issued in 2009 as discussed in Note 5(F) below.

The fair value of these warrants has been recorded as interest expense. The Company has determined that under ASC 470, since the debt was not convertible, that both the note and warrants are financial instruments that would be accounted for separately.

The Company determined the fair value of these warrants, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	150%
Expected term	5 years
Risk free interest rate	1.04%

On June 29, 2010, the Company executed an Original Issue Discount note for $34,500 and received net proceeds of $30,000. The Company recorded amortization of original issue discount of $4,500 during the nine months ended September 30, 2010. The note bore interest at 12%, is unsecured and was due on September 28, 2010 and is therefore in default.

On July 1, 2010, the Company executed an Original Issue Discount note for $23,000 and received net proceeds of $20,000. The Company recorded amortization of original issue discount of $3,000 during the nine months ended September 30, 2010. The note bore interest at 12%, is unsecured and was due on September 28, 2010 and is therefore in default.

During the quarter ended September 30, 2010, two individuals provided unsecured loans of $5,500 each to the Company.

(F)	Convertible Debt and Derivative Liabilities

See Note 5(E) which discusses ratchet provision associated with warrants issued on April 15, 2010. The convertible notes issued in 2009 are all subject to the ratchet provision and the current exercise price has been adjusted to $0.20/share.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

During the period from April – June 2009, the Company issued convertible debt totaling $437,973, due three years from the issuance date. The notes bear interest at 10% and are unsecured. These notes can convert at $0.20/share. These note holders also received 2,189,865 warrants. The warrants are exercisable at $0.20/share, and expire April – June 2014. On October 14, 2009, two debt holders converted aggregate principal of $100,000 into 500,000 shares of common stock. On February 12, 2010, one debt holder converted $25,000 into 84,484 shares of common stock. On August 3, 2010, one debt holder converted $75,000 into 375,000 shares of common stock.

During the period from July – December 2009, the Company issued convertible debt totaling $234,512, due three years from the issuance date. The notes bear interest at 10% and are unsecured. These notes can convert at $0.20/share. These note holders also received 1,172,560 warrants exercisable at $0.20/share, expiring April – December 2014. On February 12, 2010, one debt holder converted aggregate principal of $25,000 into 50,000 shares of common stock.

As a result of the convertible debt issued in 2009, the following is a summary of convertible debt, net of debt discount:

Face amount – gross proceeds	$	672,485
Conversions - 2009		(100,000	)
Conversions - 2010		(125,000	)
Face amount - September 30, 2010	$	447,485
Unamortized debt discount – September 30, 2010		(194,478	)
		253,007

The Company determined under ASC 815, that the embedded conversion feature and the warrant grants (ratchet down of exercise price based upon lower exercise price in any future offerings) are not indexed to the Company’s own stock and, therefore, is an embedded derivative financial liability (the “Embedded Derivative”), which requires bifurcation and to be separately accounted for. At each reporting period, the Company marks these derivative financial instruments to fair value.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

The fair value of the conversion features and warrants are summarized as follow:

Fair value at the commitment date for convertible notes and warrants issued during 2009	$	1,699,654
Reclassification of derivative liability to additional paid in capital in connection with debt conversion		(233,113	)
Fair value mark to market adjustment at December 31, 2009		(1,025,667	)
Derivative liability balance at December 31, 2009		440,874
Fair value mark to market adjustment at September 30, 2010		(117,671	)
Reclassification of derivative liability to additional paid in capital in connection with debt conversion		(39,679	)
Derivative liability balance at September 30, 2010	$	283,524

The Company recorded the derivative liability to debt discount to the extent of the face amount of $672,485 of the notes and expensed immediately the remaining value of the derivative of $1,027,169 as it exceeded the face amount of the note. The Company has recorded a debt discount of $672,485, which is equivalent to the face amount of the convertible notes issued in 2009. The Company recorded amortization of this debt discount totaling $245,839 for the nine months ended September 30, 2010. Unamortized debt discount totaled $253,007 at September 30, 2010.

The Company measured the fair value of the conversion features and warrants using a Black-Scholes valuation model based upon the following management assumptions on the commitment date:

Expected dividends	0%
Expected volatility	150%
Expected term: conversion feature	3 years
Expected term: warrants	5 years
Risk free interest rate	2.00%

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

Mark to Market

At September 30, 2010, the Company remeasured the conversion features and recorded a fair value adjustment of $117,671. The following management assumptions were considered:


Expected dividends	0%
Expected volatility	150%
Risk fee interest rate	1.00 - 1.79%
Expected life of conversion features in years	1.50 – 2.19 years
Expected life of warrants in years	3.50 – 4.19 years

(G)

Summary

The following is a summary of all cash received from debt less payments and discounts for the period from September 21, 1999 (inception) to September 30, 2010.

	Proceeds
2001 (including $5,000 of accrued interest related to debt)	$	175,000
2003		9,000
2004		500,000
2005		99,796
2006		50,000
2007		180,000
2008 (including $147,000 original issue discount)		299,500
2009		672,485
September 30, 2010 (including $30,000 original issue discount)		241,000
Sub-total		2,226,781
2009 (repayments)		(4,500	)
2009 (conversions)		(100,000	)
2010 (conversions)		(125,000	)
Notes payable at September 30, 2010		1,997,281
Unamortized debt discounts at September 30, 2010		(194,478	)
Notes payable, net at September 30, 2010	$	1,802,803

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

The above table includes a total of $270,000 in related party notes.

The following is a summary of all debt issue costs paid for the period from September 21, 1999 (inception) to September 30, 2010.

Year ended December 31,	Payments
2005		7,500
2007		18,000
2008		1,250
Total	$	26,750

All debt issue costs have been fully amortized.

Note 6 Fair Value

The Company has categorized its assets and liabilities recorded at fair value based upon the fair value hierarchy specified by GAAP.

The levels of fair value hierarchy are as follows:

●

Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;

●

Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals; and

●

Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company categorizes such financial asset or liability based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

The following are the major categories of liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

			September 30, 2010				December 31, 2009
Derivative liabilities	Level 3		$	283,524			$	440,874

The following table reflects the change in Level 3 fair value of the Company’s derivative liabilities for the three and nine months ended September 30, 2010:

	Three months ended September 30, 2010			Nine months ended September 30, 2010
Balance – beginning of period	$	471,833		$	440,874
Fair of value of new derivative liabilities on commitment date		-			-
Reclassification to additional paid in capital for items ceasing to maintain characteristics of a derivative liability		(9,686	)		(39,679	)
Derivative (gain) loss		(178,623	)		(117,671	)
Balance – end of period	$	283,524		$	283,524

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

Note 7 Accrued Payroll Tax Liabilities

For several years prior to becoming a public company, the Company paid its employees and officers as subcontractors without proper tax withholdings. The Company has prepared payroll tax filings to correct the matter with the IRS and state taxing authorities. The Company has accrued an estimate for the payroll tax liabilities and related penalties and interest. The Company plans to file the appropriate tax filings and resolve the liabilities with the taxing authorities in the near term. The accrued payroll taxes and related penalties and interest were estimated at $591,039 and $585,391 at September 30, 2010 and December 31, 2009, respectively. This amount is included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets. To the extent this estimate is insufficient, additional accruals may be required in future periods.

Note 8 Stockholders' Deficit

(A)	Common Stock

In September 1999, the Company issued 6,300,093 shares of common stock to its founders for services rendered. The shares had a fair value of $7,250 ($0.0012/share). Fair value was based upon the services rendered. In March 2000, these shares were cancelled for no additional consideration.

In May 2000, the Company issued 41,059,224 shares of common stock to acquire intellectual property. The shares had a fair value of $47,250 ($0.0012/share). Fair value was based upon the services rendered to the Company’s founders.

In May 2003, the Company issued 1,911,752 shares of common stock for $220,000 ($0.1151/share). In connection with the sale of these shares, the Company paid direct offering costs of $30,000.

In October 2004, the Company issued 1,737,957 shares of common stock for $4,000, in connection with the conversion of warrants held by a member of management.

In March 2006, the Company issued 291,067 shares of common stock for $100,500 ($0.3453/share).

In 2009, the Company issued 550,000 shares of common stock for services rendered, having a fair value of $379,250, based upon the quoted closing trading price having an average of $0.69/share.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

In 2009, the Company issued 337,936 shares of common stock, in connection with the conversion of debt, having a fair value of $100,000 ($0.30/share). There was no gain or loss on conversion. In 2010, an additional 162,064 shares were issued under the anti-dilution provision. As a result of the additional shares being issued, the effective conversion price was $0.20 for the aggregate 500,000 shares issued.

In 2010, the Company issued 509,484 shares of common stock, in connection with the conversion of debt, having a fair value of $125,000 ($0.20 – $0.50 /share). There was no gain or loss on conversion.

On June 28, 2010, the Company issued 300,000 shares of common stock for future services, having a fair value of $33,000 ($0.11/share), based upon the quoted closing trading price. These services are being amortized over the life of the service agreement, which expires on June 28, 2011. For the nine months ended September 30, 2010, the Company amortized $8,318, and the unamortized portion of prepaid services is $24,682.

During the period from June 2010 – September 2010, the Company issued 1,527,247 shares of common stock for services rendered and to be rendered, having a total fair value of approximately $117,000 ($0.06 - $0.18/share), based upon the quoted closing trading price.

(B)	Warrants Issued for Services and Loan Extension Fee

In 1999, the Company issued 1,351,744 warrants to a member of management having a fair value of $99,832. The warrants had an exercise price of $0.003/share, and were exercised in October 2004 (see above).

The Company determined the fair value of these warrants, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term	5 years
Risk free interest rate	6.13%

In 2001, the Company issued 337,936 warrants to a member of management, and 506,904 warrants to third parties having a fair value of $778. The warrants had an exercise price of $0.24/share, and expired in 2007.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

The Company determined the fair value of these warrants, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term	6 years
Risk free interest rate	6.32%

In 2005, the Company issued 337,936 warrants to a member of management having a fair value of $24,956. The warrants have an exercise price of $0.30/share, and expire in 2010.

The Company determined the fair value of these warrants, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term	5 years
Risk free interest rate	4.56%

In 2006, the Company issued 5,069,040 warrants to members of management having a fair value of $749,996. The warrants have an exercise price of $0.44/share, and expire in 2016.

The Company determined the fair value of these warrants, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term	10 years
Risk free interest rate	5.01%

In 2006, the Company issued 199,378 warrants as a loan extension fee, having a fair value of $29,136. The terms of the loan were not changed in connection with granting these warrants. These warrants had an exercise price of $0.44/share, and expired in 2009.

The Company determined the fair value of these warrants, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term	3 years
Risk free interest rate	4.74%

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

In 2007, the Company issued 199,378 warrants as a loan extension fee, having a fair value of $29,126. The terms of the loan were not changed in connection with granting these warrants. These warrants have an exercise price of $0.44/share, and expire in 2010.

The Company determined the fair value of these warrants, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term	3 years
Risk free interest rate	3.07%

In 2008, the Company issued 199,378 warrants as a loan extension fee, having a fair value of $469,018. The terms of the loan were not changed in connection with granting these warrants. These warrants have an exercise price of $0.44/share, and expire in 2011.

The Company determined the fair value of these warrants, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term	3 years
Risk free interest rate	1.00%

In 2008, the Company issued 337,936 warrants to a member of management having a fair value of $50,000. The warrants have an exercise price of $0.44/share, and expire in 2018.

The Company determined the fair value of these warrants, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term	10 years
Risk free interest rate	3.64%

In 2009, the Company issued 1,000,000 warrants to a consultant, having a fair value of $233,380. The warrants have an exercise price of $0.35/share, and expire in 2014.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

The Company determined the fair value of these warrants, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	150%
Expected term	5 years
Risk free interest rate	2.30%

In 2010, the Company issued 750,000 warrants in connection with traditional debt financing, having a fair value of $122,476. The warrants have an exercise price of $0.20/share, and expire in 2015.

The Company determined the fair value of these warrants, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	150%
Expected term	5 years
Risk free interest rate	2.57%

(C)

Warrants

The following is a summary of the Company’s warrant activity:

	Warrants			Weighted Average Exercise Price
Balance - December 31, 2008		8,594,865		$	0.41
Granted		3,946,004		$	0.33
Exercised		-		$	-
Forfeited/Cancelled		(1,889,054	)	$	-
Outstanding – December 31, 2009		10,651,815		$	0.40
Exercisable – December 31, 2009		10,651,815		$	0.40
Granted		2,163,333		$	0.20
Exercised		-		$	-
Forfeited/Cancelled		(113,209	)	$	0.44
Outstanding – September 30, 2010		12,701,939		$	0.35
Exercisable – September 30, 2010		12,701,939		$	0.35

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

Warrants Outstanding				Warrants Exercisable
	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price	Number Exercisable
Range of exercise price
$0.20 - $0.44	12,701,939	4.40 years	$0.20 - $0.44	12,701,939

At December 31, 2009, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.

At September 30, 2010, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.

(D)

Options

During the period from 1999 – 2001, the Company granted 2,250,000 options for services rendered by members of management. The grant date fair value of these option grants was $8,530. These options vested equally over four years beginning on the one year anniversary of the grant. The entire $8,530 was expensed as of June 2004.

In 2005, the Company granted 2,027,614 options to an officer of the Company for services to be rendered. The options expire 5 years from issuance and have an exercise price of $0.33/share. The grant date fair value of these options was $2,970. These options vested equally over three years beginning on the one year anniversary of the grant. These options fully vested in 2008.

The Company determined the fair value of these options (from 1999-2001 and 2005), based upon the following management assumptions:

Exercise price	$0.003 - $0.24
Expected dividends	0%
Expected volatility	286%
Expected term	3- 5 years
Risk free interest rate	4.25 – 5.74%

In 2009, the Company granted 150,000 options for services to be rendered by a board director. The options expire 5 years from issuance and have an exercise price of $0.22/share. The grant date fair value of these options was $134,160. The options vest 50,000 shares each on September 22, 2010, 2011 and 2012. 50,000 options are vested as of September 30, 2010. The Company has recognized stock based compensation of $79,507 for the nine months ended September 30, 2010.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

The Company determined the fair value of these options, based upon the following management assumptions:

Expected dividends	0%
Expected volatility	286%
Expected term	3 years
Risk free interest rate	1.54%
Estimated forfeitures	0%

The following is a summary of the Company’s options activity:

	Options		Weighted Average Exercise Price		Weighted Average Life
Balance - December 31, 2008		2,027,614	$	0.33	1.84 years
Granted		150,000	$	0.22
Exercised		-	$	-
Forfeited/Cancelled		-	$	-
Outstanding – December 31, 2009		2,177,614	$	0.32	0.97 years
Exercisable – December 31, 2009		2,027,614	$	0.33	0.84 years
Granted		-	$	-
Exercised		-	$	-
Forfeited/Cancelled		-	$	-
Outstanding – September 30, 2010		2,177,614	$	0.32	2.03 years
Exercisable – September 30, 2010		2,077,614	$	0.33	2.03 years

At December 31, 2009, the total intrinsic value of options outstanding and exercisable was $0 and $0, respectively.

At September 30, 2010, the total intrinsic value of options outstanding and exercisable was $0 and $0, respectively.

Note 9 Commitments and Contingencies

Litigation, Claims and Assessments

From time to time, the Company may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise that may harm the Company. The Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.

Protectus Medical Devices, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

September 30, 2010

(Unaudited)

In 2006, the Company accrued a liability of $200,000 in relation to a settlement. The Company is in default under the terms of the settlement; however, the Company believes that the likelihood of a lawsuit is remote.

See Note 5(C) regarding a contingency related to a production bonus that may be due to certain shareholders.

See Note 7 regarding a contingency related to payroll tax liabilities.

In 2008, the Company engaged a firm’s services to assist in its fundraising endeavors by execution of a non-exclusive agreement. Although this agreement was not formally terminated, the firm ceased to provide services, or evidence of such services, but has asserted that additional consulting fees of $15,000 are still due and payable. The Company disagrees and will contest this vigorously. Although the Company believes it unlikely, it could become liable for the additional fees.

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

We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings “Business and Overview,” “Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions.

Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

COMPANY OVERVIEW

Protectus Medical Devices, Inc. (hereinafter referred to as the “we,” “us,” “our,” or the “Company”) incorporated in the State of Delaware on June 28, 2007 under the name “E-18 Corp.” At our inception, our business plan was to distribute and sell biodiesel home processors. Our primary business was to sell biodiesel home processors to farm communities and to non-commercial diesel machine operators in Israel, in particular, to automotive based consumers. We were unable to raise the necessary capital to continue with this venture.

We entered into a share exchange agreement (the “Share Exchange Agreement”) with SquareOne Medical, Inc. (“SquareOne”), a Nevada company, and the shareholders of SquareOne (the “SquareOne Shareholders”) on June 25, 2009 (the “Closing Date”). On the Closing Date, pursuant to the terms of the Share Exchange Agreement, we acquired all of the issued and outstanding common stock of SquareOne from the SquareOne Shareholders. In exchange, we issued to the SquareOne Shareholders, their designees or assigns, 35,000,000 shares of our common stock. In addition, at the Closing Date, Hadas Yaron and Yosef Itamar Krytman, our former officers and directors, and Avraham Yoel Zeitlin, our principal shareholder, cancelled a total number of 15,000,000 shares of our Common Stock. As a result of the cancellation, the 35,000,000 shares represent approximately 77.78% of our common stock issued and outstanding after the closing of the share exchange transaction contemplated under the Share Exchange Agreement (the “Share Transaction”). As a result of the closing of the Share Exchange, SquareQne became our wholly-owned subsidiary. Operating through SquareOne, we are engaged in developing and marketing of the SquareOne Safety Syringe that can potentially reduce accidental needlestick injuries.

According to Occupational Safety and Health Administration report, needlestick injuries expose healthcare workers to bloodborne pathogens and millions workers in the healthcare industry and related occupations are at risk of occupational exposure to bloodborne pathogens which includes Human Immunodeficiency Virus (HIV), Hepatitis B Virus (HBV), Hepatitis C Virus (HCV), and others. After an injection, the blood remaining on and in the needle may contain dangerous and life-threatening viruses, such as HIV, HAV, HBV, HCV, etc., Federal law and institutional policy require healthcare workers to properly and safely dispose of these contaminated devices according to specified procedures. Nonetheless, during the disposal process, these syringes can and do cause needlestick injuries, resulting in millions of injuries per year, which, in turn, lead to tens of thousands of cases of HIV, HBV and other infections.

To reduce these accidental needlestick injuries, the applicable federal law and OSHA regulations now mandate healthcare providers to use safer syringes in all applications, such as automatic, self-sheathing hypodermic syringes. SquareOne Safety Syringe uses an innovative and patented safety design that meets all criteria established by Occupational Safety and Health Administration (“OSHA”) regulations for such safety syringes, especially the self-sheathing criteria. The SquareOne Safety Syringes are intended for general use. We believe that the SquareOne Safety Syringe will replace the existing hypodermic syringes in use today to significantly reduce and possibly eliminate accidental needlestick exposure.

RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2010 AS COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2009

Our general administrative expenses during the third quarter of 2010 decreased as compared to the third quarter of 2009 by approximately 25% to $394,467 from $528,295. The major contributing factor was decreased officer compensation and professional fees.

Our interest expense during the third quarter of 2010 was $139,446 as compared to the third quarter of 2009 interest expense of $0. This increase was a result of issuing additional debt obligations as well as an increase in amortized debt discount, which is reported as interest expense.

The change in fair value of derivative financial instruments during the third quarter of 2010 was $178,623, as compared to $1,133,952 in the third quarter of 2009. This was a result of the quarterly mark to market adjustment on derivative instruments that were issued during 2009.

RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2010 AS COMPARED TO THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2009

Our general administrative expenses during the nine months of 2010 decreased by $99,888 as compared to the nine months of 2009 by approximately 11% to $814,223 from $914,111. The major contributing factor was professional fees.

Our interest expense during the nine month period of 2010 was $494,422 as compared to the first nine months of 2009 interest expense of $140,923. This increase was a result of issuing additional debt obligations as well as an increase in amortized debt discount, which is reported as interest expense.

The change in fair value of derivative financial instruments during the first nine months of 2010 was $117,671 as compared to $1,133,952 during the first nine month period of 2009. This was a result of the mark to market adjustment on derivative instruments that were issued during 2009.

PLAN OF OPERATIONS

Below are the milestones (on a quarterly basis) that we anticipate making in the next nine months in furtherance of our business plan.

Fourth Quarter 2010

●	Continue the fundraising campaign to raise a minimum of $3.5 million to support working capital needs and to support the Phase 1 Market Introduction Program.
●	Begin tooling fabrication program to hasten completion of Phase 1 manufacturing.
●	File additional patent applications covering other applications for percutaneous devices and their improvements to round out the Company’s full line of safety needle devices.
●	Continue demonstration of the Company’s Safety Syringe to doctors’ offices and selected hospital systems using national distributor network.

●	Work with highly qualified public relations and investor relations firms, now under contract, and other service providers suitable for the Company’s product launch and advertising campaigns.
●	Continue aggressive public relations and investor relations programs
●	Identify qualified investment banking firms for capital raise of $11.5 million to support its Phase 2 Market Expansion campaign.

First Quarter 2011

●	Complete fabrication of tooling and equipment to manufacture 150,000 to 250,000 commercial-grade units for limited distribution to doctors’ offices and hospitals.
●	Begin manufacture of first units for rigorous product testing.
●	Complete design of sales and marketing materials, including instructional materials.
●	Initiate $11.5 million capital raise to execute the Phase 2 portion of the Protectus Business Plan – Market Expansion.

Second Quarter 2011

●	Manufacture first 150,000 to 250,000 commercial-grade units ready for clinical use.
●	Launch in-service training program at selected healthcare institutions.
●	Expand distribution plan.
●	Initiate fabrication of tooling and automatic assembly equipment to support manufacturing at the rate of 110 million units per year of the Company’s Safety Syringe.

●	Aggressively expand the Protectus distribution and in-service training programs nationally to be able to support annual production and sales volumes of 110 million units.
●	Launch lobbying effort aimed at enforcement of the federal mandate to utilize efficacious safety needle products nationwide.
●	Launch research program within selected healthcare institutions and training centers to document the efficacy of the Protectus (SquareOne) Safety Syringe.

Expansion of distribution will be bolstered by a vigorous marketing campaign, as well as by education of the medical professionals and those having the interest and power to enforce the new laws covering use of hypodermic syringes and their improvements, particularly, the Protectus (SquareOne) device and its differential benefits.

Liquidity and Capital Resources

We are a development stage company. For the nine months ended September 30, 2010, we have incurred a net loss of $1,190,970. At September 30, 2010, we had an accumulated deficit of $8,114,257 and $14,491 of cash. Our predecessor independent auditor has raised concern about our ability to continue as a going concern. Management is trying to raise additional capital through sales of common stock, as well as seeking financing from third parties.

	Nine months Ended
	September 30,				September 30,				September 21, 1999 (Inception) to September 30,
			2010				2009			2010
Net Cash Used In Operating Activities		$	(228,672	)		$	(547,855	)	$	(2,475,542	)

Net Cash Provided By Financing Activities			241,000				617,985			2,490,032

Net Increase / (Decrease) in Cash			12,328				70,130			14,490

Cash, Beginning of Period			2,163				692			0

Cash, End of Period		$	14,491			$	70,822		$	14,491

Critical Accounting Policies

Development Stage

The Company's financial statements are presented as those of a development stage enterprise. Activities during the development stage primarily include debt funding; equity based financing, and further implementation of the business plan. The Company will look to obtain additional debt and/or equity related funding opportunities.

Risks and uncertainties

Debt Issuance Costs and Debt Discounts

Original Issue Discount

The Company may provide its debt holders with original issue discounts. Original issue discounts are recorded to debt discount reducing the face amount of the notes and are amortized to interest expense immediately, if the underlying term of these debt instruments were due on demand. In cases where the notes are not due on demand, the original issue discount is amortized over the life of the debt to interest expense.

Warrants and Derivative Liabilities

The Company reviews any common stock purchase warrants and other freestanding derivative financial instruments at each balance sheet date and will classify on the balance sheet as:

Earnings per Share

Recent Accounting Pronouncements

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for Smaller Reporting Companies.

Item 4. Controls and Procedures

(a) Disclosure controls and procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of September 30, 2010. Based on this evaluation, as a result of the material weaknesses in internal controls over financial reporting as previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 17, 2010, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are not effective to ensure that all information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls Over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the fiscal quarter ending September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A. Risk Factors.

Not required for Smaller Reporting Companies.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Removed and Reserved

Item 5. Other Information.

None

Item 6. Exhibits

(a) Exhibits

31.1 Certifications pursuant to Section 302 of Sarbanes Oxley Act of 2002

32.1 Certifications pursuant to Section 906 of Sarbanes Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PROTECTUS MEDICAL DEVICES, INC.

Date: November 22, 2010	By:	/s/ John S. Salstrom
		John S. Salstrom
		Chief Executive Officer,
		Chief Financial and Accounting Officer

PROTECTUS MEDICAL DEVICES, INC. 10-Q