Filed Pursuant to Rule 424(b)(3)
Registration No. 333-110858

PROSPECTUS SUPPLEMENT

Number 2

to

Fourth Amended Prospectus dated May 16, 2008, and Prospectus Supplement dated May 20, 2008,

of

NEOPROBE CORPORATION

21,817,257 Shares of Common Stock

This Prospectus Supplement relates to the sale of up to 21,817,257 shares of Neoprobe Corporation common stock (the “Shares”). The Shares are being registered to permit public secondary trading of the shares that are being offered by the selling stockholders named in the prospectus. We are not selling any of the Shares in this offering and therefore will not receive any proceeds from this offering.

This Prospectus Supplement No. 2 includes the attached Quarterly Report on Form 10-Q (the “Form 10-Q”) of Neoprobe Corporation (the “Company”), for the quarter ended June 30, 2008, filed by the Company with the Securities and Exchange Commission on August 14, 2008. The exhibits to the Form 10-Q are not included with this Prospectus Supplement No. 2 and are not incorporated by reference herein. This Prospectus Supplement No. 2 should be read in conjunction with the prospectus supplement dated May 20, 2008.

Our common stock is traded on the OTC Bulletin Board under the symbol “NEOP.”

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus Supplement No. 2 is August 18, 2008.

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended      June 30, 2008     

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

For the transition period from to                      to                     

Commission File Number:      0-26520     

NEOPROBE CORPORATION

 

(Exact name of registrant as specified in its charter)

Delaware		31-1080091
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
425 Metro Place North, Suite 300, Dublin, Ohio		43017-1367
(Address of principal executive offices)		(Zip Code)

(614) 793-7500

(Registrant’s telephone number, including area code)

(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 þ     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 þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Act.)

Yes o      No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 69,115,058 shares of common stock, par value $.001 per share (as of the close of business on August 8, 2008).

 

 

NEOPROBE CORPORATION and SUBSIDIARIES

INDEX

PART I – Financial Information
Item 1. Financial Statements			3
Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007			3
Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2008 and June 30, 2007 (unaudited)			5
Consolidated Statement of Stockholders’ Deficit for the Six-Month Period Ended June 30, 2008 (unaudited)			6
Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2008 and June 30, 2007 (unaudited)			7
Notes to the Consolidated Financial Statements (unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Forward-Looking Statements			23
The Company			23
Product Line Overview			23
Results of Operations			26
Liquidity and Capital Resources			28
Recent Accounting Developments			31
Critical Accounting Policies			33
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4T. Controls and Procedures			35
PART II – Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 4. Submission of Matters to a Vote of Security Holders			37
Item 6. Exhibits			38

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets

		June 30,				December 31,
		2008				2007
		(unaudited)
ASSETS
Current assets:
Cash		$	3,476,226			$	1,540,220
Available-for-sale securities			195,544				—
Accounts receivable, net			1,130,507				1,621,910
Inventory			1,048,589				1,237,403
Prepaid expenses and other			126,237				247,035
Total current assets			5,977,103				4,646,568
Property and equipment			2,039,327				1,918,343
Less accumulated depreciation and amortization			1,704,624				1,630,740
			334,703				287,603
Patents and trademarks			3,025,763				3,016,783
Acquired technology			237,271				237,271
			3,263,034				3,254,054
Less accumulated amortization			1,767,551				1,652,912
			1,495,483				1,601,142
Other assets			650,765				527,634
Total assets		$	8,458,054			$	7,062,947

Continued

Neoprobe Corporation and Subsidiaries
Consolidated Balance Sheets, continued

		June 30,				December 31,
		2008				2007
		(unaudited)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	736,409			$	778,085
Accrued liabilities and other			442,997				801,949
Capital lease obligations, current portion			16,840				14,592
Deferred revenue, current portion			469,728				451,512
Notes payable to finance companies			18,119				124,770
Total current liabilities			1,684,093				2,170,908
Capital lease obligations, net of current portion			13,882				2,422
Deferred revenue, net of current portion			522,233				623,640
Notes payable to CEO, net of discounts of $86,357 and $95,786, respectively			913,643				904,214
Notes payable to investors, net of discounts of $5,307,080 and $2,600,392, respectively			4,692,920				4,399,608
Derivative liabilities			686,638				2,853,476
Other liabilities			49,632				52,273
Total liabilities			8,563,041				11,006,541
Commitments and contingencies
Stockholders’ deficit:
Preferred stock; $.001 par value; 5,000,000 shares authorized at June 30, 2008 and December 31, 2008; none issued and outstanding			—				—
Common stock; $.001 par value; 150,000,000 shares authorized; 69,115,058 and 67,240,030 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively			69,115				67,240
Additional paid-in capital			142,647,735				136,765,697
Accumulated deficit			(142,821,381	)			(140,776,531	)
Accumulated other comprehensive losses			(456	)			—
Total stockholders’ deficit			(104,987	)			(3,943,594	)
Total liabilities and stockholders’ deficit		$	8,458,054			$	7,062,947

See accompanying notes to consolidated financial statements

Consolidated Statements of Operations
(unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Net sales		$	2,255,025			$	1,517,430			$	4,037,817			$	3,260,750
Cost of goods sold			906,670				699,844				1,566,677				1,489,336
Gross profit			1,348,355				817,586				2,471,140				1,771,414
Operating expenses:
Research and development			898,712				875,304				1,462,415				1,739,145
Selling, general and administrative			903,884				650,293				1,779,292				1,432,869
Total operating expenses			1,802,596				1,525,597				3,241,707				3,172,014
Loss from operations			(454,241	)			(708,011	)			(770,567	)			(1,400,600	)
Other income (expenses):
Interest income			18,482				19,199				29,090				44,257
Interest expense			(470,035	)			(444,702	)			(801,814	)			(886,847	)
Change in derivative liabilities			(113,442	)			—				(500,188	)			—
Other			377				(1,128	)			(1,371	)			(2,349	)
Total other expenses, net			(564,618	)			(426,631	)			(1,274,283	)			(844,939	)
Net loss		$	(1,018,859	)		$	(1,134,642	)		$	(2,044,850	)		$	(2,245,539	)
Net loss per common share:
Basic		$	(0.01	)		$	(0.02	)		$	(0.03	)		$	(0.04	)
Diluted		$	(0.01	)		$	(0.02	)		$	(0.03	)		$	(0.04	)
Weighted average shares outstanding:
Basic			68,526,573				61,608,782				67,905,581				60,635,448
Diluted			68,526,573				61,608,782				67,905,581				60,635,448

See accompanying notes to consolidated financial statements.

Consolidated Statement of Stockholders’ Deficit
(unaudited)

																		Accumulated
										Additional								Other
		Common Stock								Paid-in				Accumulated				Comprehensive
		Shares				Amount				Capital				Deficit				Loss				Total
Balance, December 31, 2007			67,240,030			$	67,240			$	136,765,697			$	(140,776,531	)		$	—			$	(3,943,594	)
Issued restricted stock			450,000				450				—				—				—				450
Issued stock to 401(k) plan at $0.28			114,921				115				29,916				—				—				30,031
Issued stock upon exercise of warrants			1,310,107				1,310				112,440				—				—				113,750
Paid common stock issuance costs			—				—				(500	)			—				—				(500	)
Issued warrants to purchase common stock			—				—				1,277,178				—				—				1,277,178
Effect of beneficial conversion feature of convertible promissory note			—				—				1,443,845				—				—				1,443,845
Reclassified derivative liabilities			—				—				2,924,994				—				—				2,924,994
Stock compensation expense			—				—				94,165				—				—				94,165
Comprehensive loss:
Net loss			—				—				—				(2,044,850	)			—				(2,044,850	)
Unrealized loss on available-for-sale securities			—				—				—				—				(456	)			(456	)
Total comprehensive loss			—				—				—				—				—				(2,045,306	)
Balance, June 30, 2008			69,115,058			$	69,115			$	142,647,735			$	(142,821,381	)		$	(456	)		$	(104,987	)

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows
(unaudited)

		Six Months Ended
		June 30,
		2008				2007
Cash flows from operating activities:
Net loss		$	(2,044,850	)		$	(2,245,539	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			199,469				207,508
Amortization of debt discount and debt offering costs			333,754				431,071
Provision for bad debts			29,297				962
Stock compensation expense			94,165				67,224
Change in derivative liabilities			500,188				—
Other			36,160				34,020
Changes in operating assets and liabilities:
Accounts receivable			434,106				101,859
Inventory			143,381				(28,544	)
Prepaid expenses and other assets			147,461				123,349
Accounts payable			(41,676	)			152,484
Accrued liabilities and other liabilities			(361,593	)			330,978
Deferred revenue			(83,191	)			(112,938	)
Net cash used in operating activities			(613,329	)			(937,566	)
Cash flows from investing activities:
Purchases of available-for-sale securities			(196,000	)			—
Purchases of property and equipment			(44,736	)			(36,202	)
Proceeds from sales of property and equipment			120				—
Patent and trademark costs			(8,980	)			(1,885	)
Net cash used in investing activities			(249,596	)			(38,087	)
Cash flows from financing activities:
Proceeds from issuance of common stock			114,200				650,000
Payment of stock offering costs			(500	)			(20,040	)
Proceeds from notes payable			3,000,000				—
Payment of debt issuance costs			(200,154	)			—
Payment of notes payable			(106,651	)			(942,078	)
Payments under capital leases			(7,964	)			(7,873	)
Net cash provided by (used in) financing activities			2,798,931				(319,991	)
Net increase (decrease) in cash			1,936,006				(1,295,644	)
Cash, beginning of period			1,540,220				2,502,655
Cash, end of period		$	3,476,226			$	1,207,011

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements
(unaudited)

1.

Summary of Significant Accounting Policies

	a.		Basis of Presentation: The information presented as of June 30, 2008 and for the three-month and six-month periods ended June 30, 2008 and June 30, 2007 is unaudited, but includes all adjustments (which consist only of normal recurring adjustments) that the management of Neoprobe Corporation (Neoprobe, the Company, or we) believes to be necessary for the fair presentation of results for the periods presented. Certain information and footnote disclosures normally included in 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 U.S. Securities and Exchange Commission. The results for the interim periods are not necessarily indicative of results to be expected for the year. The consolidated financial statements should be read in conjunction with Neoprobe’s audited consolidated financial statements for the year ended December 31, 2007, which were included as part of our Annual Report on Form 10-K.
			Our consolidated financial statements include the accounts of Neoprobe, our wholly-owned subsidiary, Cardiosonix Ltd. (Cardiosonix), and our 90%-owned subsidiary, Cira Biosciences, Inc. (Cira Bio). All significant inter-company accounts were eliminated in consolidation.
	b.		Financial Instruments and Fair Value: We adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, for financial assets and liabilities as of January 1, 2008. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. In determining the appropriate levels, we perform a detailed analysis of the assets and liabilities that are subject to SFAS No. 157. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3. In estimating the fair value of our derivative liabilities, we used the Black-Scholes option pricing model and, where necessary, other macroeconomic, industry and Company-specific conditions.

2.

Fair Value Hierarchy

The following tables set forth by level financial assets and liabilities measured at fair value on a recurring basis.

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of June 30, 2008

		Quoted Prices
		in Active
		Markets for				Significant
		Identical				Other				Significant
		Assets and				Observable				Unobservable				Balance as of
		Liabilities				Inputs				Inputs				June 30,
Description		(Level 1)				(Level 2)				(Level 3)				2008
Assets:
Available-for-sale securities		$	195,544			$	—			$	—			$	195,544
Total available-for-sale securities		$	195,544			$	—			$	—			$	195,544
Liabilities:
Derivative liabilities related to warrants		$	—			$	—			$	—			$	—
Derivative liabilities related to conversion and put options			—				—				686,638				686,638
Total derivative liabilities		$	—			$	—			$	686,638			$	686,638

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2007

		Quoted Prices
		in Active
		Markets for				Significant
		Identical				Other				Significant
		Assets and				Observable				Unobservable				Balance as of
		Liabilities				Inputs				Inputs				December 31,
Description		(Level 1)				(Level 2)				(Level 3)				2007
Assets:
Available-for-sale securities		$	—			$	—			$	—			$	—
Total available-for-sale securities		$	—			$	—			$	—			$	—
Liabilities:
Derivative liabilities related to warrants		$	—			$	1,254,404			$	—			$	1,254,404
Derivative liabilities related to conversion and put options			—				—				1,599,072				1,599,072
Total derivative liabilities		$	—			$	1,254,404			$	1,599,072			$	2,853,476

The following table sets forth a summary of changes in the fair value of our Level 3 liabilities for the three-month period ended June 30, 2008:

										Purchases,
		Balance at								Issuances				Transfers In				Balance at
		March 31,				Unrealized				and				and/or (Out)				June 30,
Description		2008				Losses				Settlements				(See Note 9)				2008
Derivative liabilities related to conversion and put options		$	315,228			$	113,442			$	257,968			$	—			$	686,638
Total derivative liabilities		$	315,228			$	113,442			$	257,968			$	—			$	686,638

The following table sets forth a summary of changes in the fair value of our Level 2 and Level 3 liabilities for the six–month period ended June 30, 2008:

										Purchases,
		Balance at								Issuances				Transfers In				Balance at
		December 31,				Unrealized				and				and/or (Out)				June 30,
Description		2007				Losses				Settlements				(See Note 9)				2008
Derivative liabilities related to warrants		$	1,254,404			$	270,654			$	—			$	(1,525,058	)		$	—
Derivative liabilities related to conversion and put options			1,599,072				229,534				257,968				(1,399,936	)			686,638
Total derivative liabilities		$	2,853,476			$	500,188			$	257,968			$	(2,924,994	)		$	686,638

Nonfinancial Assets and Liabilities Subject to FSP FAS 157-2 Deferral Provisions

We will apply the fair value measurement and disclosure provisions of SFAS No. 157 effective January 1, 2009 to nonfinancial assets and liabilities measured on a nonrecurring basis. We measure the fair value of (1) long-lived assets and (2) intangible assets on a nonrecurring basis.

3.		Stock-Based Compensation
		At June 30, 2008, we have three stock-based compensation plans. Under the Amended and Restated Stock Option and Restricted Stock Purchase Plan (the Amended Plan), the 1996 Stock Incentive Plan (the 1996 Plan), and the Second Amended and Restated 2002 Stock Incentive Plan (the 2002 Plan), we may grant incentive stock options, nonqualified stock options, and restricted stock awards to full-time employees, and nonqualified stock options and restricted awards may be granted to our consultants and agents. Total shares authorized under each plan are 2 million shares, 1.5 million shares and 7 million shares, respectively. Although options are still outstanding under the Amended Plan and the 1996 Plan, these plans are considered expired and no new grants may be made from them. Under all three plans, the exercise price of each option is greater than or equal to the closing market price of our common stock on the day prior to the date of the grant.
		Options granted under the Amended Plan, the 1996 Plan and the 2002 Plan generally vest on an annual basis over one to three years. Outstanding options under the plans, if not exercised, generally expire ten years from their date of grant or 90 days from the date of an optionee’s separation from employment with us.
		Compensation cost arising from stock-based awards is recognized as expense using the straight-line method over the vesting period. As of June 30, 2008, there was approximately $238,000 of total unrecognized compensation cost related to unvested stock-based awards, which we expect to recognize over remaining weighted average vesting terms of 0.8 years. For the three-month periods ended June 30, 2008 and 2007, our total stock-based compensation expense was approximately $46,000 and $33,000, respectively. For the six-month periods ended June 30, 2008 and 2007, our total stock-based compensation expense was approximately $94,000 and $67,000, respectively. We have not recorded any income tax benefit related to stock-based compensation in any of the three-month and six-month periods ended June 30, 2008 and 2007.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model to value share-based payments. Expected volatilities are based on the Company’s historical volatility, which management believes represents the most accurate basis for estimating expected volatility under the current circumstances. Neoprobe uses historical data to estimate forfeiture rates. The expected term of options granted is based on the vesting period and the contractual life of the options. The risk-free rate is based on the U.S. Treasury yield in effect at the time of the grant.

A summary of stock option activity under our stock option plans as of June 30, 2008, and changes during the six-month period then ended is presented below:

		Six Months Ended June 30, 2008
										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual				Intrinsic
		Options				Price				Life				Value
Outstanding at beginning of period			5,495,473			$	0.42
Granted			506,000			$	0.40
Exercised			—				—
Forfeited			—				—
Expired			(17,200	)		$	4.24
Outstanding at end of period			5,984,273			$	0.41			5.4 years					—
Exercisable at end of period			5,138,273			$	0.42			4.8 years					—

A summary of the status of our restricted stock as of June 30, 2008, and changes during the six-month period then ended is presented below:

		Six Months Ended
		June 30, 2008
						Weighted
						Average
		Number of				Grant-Date
		Shares				Fair Value
Outstanding at beginning of period			—				—
Granted			450,000			$	0.36
Exercised			—				—
Forfeited			—				—
Expired			—				—
Outstanding at end of period			450,000			$	0.36

4.

Comprehensive Loss

We had no accumulated other comprehensive loss activity during the three-month and six-month periods ended June 30, 2007. Due to our net operating loss position, there are no income tax effects on comprehensive loss components for the three-month and six-month periods ended June 30, 2008.

		Three Months				Six Months
		Ended				Ended
		June 30, 2008				June 30, 2008
Net loss		$	(1,018,859	)		$	(2,044,850	)
Unrealized losses on securities			(456	)			(456	)
Other comprehensive loss		$	(1,019,315	)		$	(2,045,306	)

5.

Earnings Per Share

Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding during the periods, adjusted for unvested restricted stock. Diluted earnings (loss) per share is calculated using the weighted average number of common shares outstanding during the periods, adjusted for the effects of convertible securities, restricted shares, options and warrants determined using the treasury stock method, if dilutive.

		Three Months Ended								Three Months Ended
		June 30, 2008								June 30, 2007
		Basic				Diluted				Basic				Diluted
		Earnings				Earnings				Earnings				Earnings
		Per Share				Per Share				Per Share				Per Share
Outstanding shares			69,115,058				69,115,058				62,739,731				62,739,731
Effect of weighting changes in outstanding shares			(138,485	)			(138,485	)			(1,130,949	)			(1,130,949	)
Contingently issuable shares			(450,000	)			(450,000	)			—				—
Adjusted shares			68,526,573				68,526,573				61,608,782				61,608,782

		Six Months Ended								Six Months Ended
		June, 2008								June 30, 2007
		Basic				Diluted				Basic				Diluted
		Earnings				Earnings				Earnings				Earnings
		Per Share				Per Share				Per Share				Per Share
Outstanding shares			69,115,058				69,115,058				62,739,731				62,739,731
Effect of weighting changes in outstanding shares			(759,477	)			(759,477	)			(2,104,283	)			(2,104,283	)
Contingently issuable shares			(450,000	)			(450,000	)			—				—
Adjusted shares			67,905,581				67,905,581				60,635,448				60,635,448

There is no difference in basic and diluted loss per share related to the three-month and six-month periods ended June 30, 2008 and 2007. The net loss per common share for these periods excludes the effects of 50,364,050 and 40,055,682 common share equivalents, respectively, since such inclusion would be anti-dilutive. The excluded shares consist of restricted stock and common shares issuable upon exercise of outstanding stock options and warrants, or upon the conversion of convertible debt.

6.

Available-for-Sale Securities

Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis.

A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.

Available-for-sale securities are classified as current based on our intent to use them to fund short-term working capital needs.

7.

Inventory

We capitalize certain inventory costs associated with our Lymphoseek^® product prior to regulatory approval and product launch, based on management’s judgment of probable future commercial use and net realizable value of the inventory. We could be required to permanently write down previously capitalized costs related to pre-approval or pre-launch inventory upon a change in such judgment, due to a denial or delay of approval by regulatory bodies, a delay in commercialization, or other potential factors. Conversely, our gross margins may be favorably impacted if some or all of the inventory previously written down becomes available for commercial use and is used for commercial sale. During the six-month periods ended June 30, 2008 and 2007, we capitalized $1,000 and $150,000, respectively, associated with our Lymphoseek product.

The components of inventory are as follows:

		June 30,				December 31,
		2008				2007
		(unaudited)
Materials and component parts		$	377,402			$	471,753
Work-in-process			152,794				151,741
Finished goods			518,393				613,909
Total		$	1,048,589			$	1,237,403

8.

Intangible Assets

The major classes of intangible assets are as follows:

		June 30, 2008												December 31, 2007
		Wtd				Gross								Gross
		Avg				Carrying				Accumulated				Carrying				Accumulated
		Life				Amount				Amortization				Amount				Amortization
Patents and trademarks		8.3 yrs				$	3,025,763			$	1,547,135			$	3,016,783			$	1,449,350
Acquired technology		0.5 yrs					237,271				220,416				237,271				203,562
Total						$	3,263,034			$	1,767,551			$	3,254,054			$	1,652,912

The estimated amortization expense for the next five fiscal years are as follows:

		Estimated
		Amortization
		Expense
For the year ended 12/31/2008		$	212,148
For the year ended 12/31/2009			170,136
For the year ended 12/31/2010			169,414
For the year ended 12/31/2011			168,310
For the year ended 12/31/2012			168,267

9.

Product Warranty

We warrant our products against defects in design, materials, and workmanship generally for a period of one year from the date of sale to the end customer, except in cases where the product has a limited use as designed. Our accrual for warranty expenses is adjusted periodically to reflect actual experience and is included in accrued liabilities on the consolidated balance sheets. Our primary marketing partner, Ethicon Endo-Surgery, Inc. (EES), a Johnson & Johnson company, also reimburses us for a portion of warranty expense incurred based on end customer sales they make during a given fiscal year. Payments charged against the reserve are disclosed net of EES’ estimated reimbursement.

The activity in the warranty reserve account for the three-month and six-month periods ended June 30, 2008 and 2007 is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Warranty reserve at beginning of period		$	81,513			$	67,401			$	115,395			$	44,858
Provision for warranty claims and changes in reserve for warranties			23,998				39,153				9,962				71,905
Payments charged against the reserve			(17,832	)			(16,378	)			(37,678	)			(26,587	)
Warranty reserve at end of period		$	87,679			$	90,176			$	87,679			$	90,176

10.

Notes Payable

In December 2004, we completed a private placement of four-year convertible promissory notes in an aggregate principal amount of $8.1 million under a Securities Purchase Agreement with Biomedical Value Fund, L.P., Biomedical Offshore Value Fund, Ltd. and David C. Bupp, our President and CEO. Biomedical Value Fund, L.P. and Biomedical Offshore Value Fund, Ltd. are funds managed by Great Point Partners, LLC (collectively, the Great Point Funds). The notes originally bore interest at 8% per annum and were due on December 13, 2008. As part of the original transaction with the Great Point Funds, we issued the investors 10,125,000 Series T warrants to purchase our common stock at an exercise price of $0.46 per share, expiring in December 2009. The fair value of the warrants issued to the investors and the value of the beneficial conversion feature were recorded as discounts on the note and were being amortized over the term of the notes using the effective interest method. In November 2006, we amended the Agreement and modified several of the key terms in the related notes, including the interest rate which was increased to 12% per annum, and modified the maturity of the notes to provide for a series of scheduled payments due on approximately six month intervals through January 7, 2009. We were also required to make additional mandatory repayments of principal to the Great Point Funds under certain circumstances. During 2007, we made scheduled principal payments and mandatory repayments totaling $2.4 million.

In exchange for the increased interest rate and accelerated principal repayment schedule, the note holders eliminated the financial covenants under the original notes and eliminated certain conversion price adjustments from the original notes related to sales of equity securities by Neoprobe. We treated the amendment to the Agreement as a modification for accounting purposes, and the amortization of debt discount and issuance costs using the effective interest method was revised accordingly. During the third quarter of 2007, management determined that we had, from the date of the modification of the notes payable on November 30, 2006, through June 30, 2007, incorrectly applied the effective interest method in calculating the amortization of the debt discount and issuance costs related to the notes. As a result of the error in calculation, we recorded a total adjustment of $286,000 in non-cash interest expense related to the seven months ended June 30, 2007 in our results of operations for the third quarter of 2007. We determined that the net effect of this adjustment was not material, either quantitatively or qualitatively, to our results of operations and would not have resulted in changes to net loss per share, as reported, for the year ended December 31, 2006 or for the quarters ended March 31, 2007 and June 30, 2007. Recording the adjustment did not require amendment of the previously filed reports for the periods affected.

In July 2007, David C. Bupp, our President and CEO, and certain members of his family (the Bupp Investors) purchased a $1.0 million convertible note (the Bupp Note) and warrants. The note bears interest at 10% per annum, had an original term of one year and is repayable in whole or in part with no penalty. The note is convertible, at the option of the investors, into shares of our common stock at a price of $0.31 per share, a 25% premium to the average closing market price of our common stock for the 5 days preceding the closing of the transaction. As part of this transaction, we issued the investors 500,000 Series V warrants to purchase our common stock at an exercise price of $0.31 per share, expiring in July 2012. The fair value of the warrants issued to the investors was approximately $80,000 on the date of issuance and was determined using the Black-Scholes option pricing model with the following assumptions: an average risk-free interest rate of 4.95%, volatility of 105% and no expected dividend rate. The value of the beneficial conversion feature of the note was estimated at $86,000 based on the effective conversion price at the date of issuance. The fair value of the warrants issued to the investors and the value of the beneficial conversion feature were recorded as discounts on the note. We incurred $43,000 of costs related to completing the Bupp financing, which were recorded in other assets. The discounts and the deferred debt issuance costs were being amortized over the term of the note using the effective interest method.

In December 2007, we executed a Securities Purchase Agreement (the Montaur Purchase Agreement) with Platinum Montaur Life Sciences, LLC (Montaur), pursuant to which we issued Montaur: (1) a 10% Series A Convertible Senior Secured Promissory Note in the principal amount of $7,000,000, due December 26, 2011 (the Series A Note); and (2) 6,000,000 Series W warrants to purchase our common stock at an exercise price of $0.32 per share, expiring in December 2012 (the Series W warrants). Additionally, pursuant to the terms of the Montaur Purchase Agreement: (1) upon commencement of the Phase 3 clinical studies of Lymphoseek, we agreed to issue to Montaur a 10% Series B Convertible Senior Secured Promissory Note, due December 26, 2011 (the Series B Note, and hereinafter referred to collectively with the Series A Note as the Montaur Notes), and five-year warrants to purchase an amount of common stock equal to the number of shares into which Montaur may convert the Series B Note, at an exercise price of 115% of the conversion price of the Series B Note (the Series X warrants), for an aggregate purchase price of $3,000,000; and (2) upon completion of enrollment of 200 patients in the Phase 3 clinical studies of Lymphoseek, we agreed to issue to Montaur 3,000 shares of our 8% Series A Cumulative Convertible Preferred Stock (the Preferred Stock) and five-year warrants to purchase an amount of common stock equal to the number of shares into which Montaur may convert the Preferred Stock, at an exercise price of 115% of the conversion price of the Preferred Stock (the Series Y warrants, and hereinafter referred to collectively with the Series W warrants and Series X warrants as the Montaur warrants), also for an aggregate purchase price of $3,000,000.

The Series A Note bears interest at 10% per annum and is partially convertible at the option of Montaur into common stock at a price of $0.26 per share. Interest is payable monthly, in arrears, beginning February 2008 until the earlier of the maturity date or the date of conversion. At our

discretion, we may pay the monthly interest payments in cash, common stock, or a combination of cash and common stock, subject to certain limitations set forth in the Series A Note. According to the provisions of the Certificate of Designations, Voting Powers, Preferences, Limitations, Restrictions, and Relative Rights of Series A 8% Cumulative Convertible Preferred Stock (the Certificate of Designations), Montaur may convert all or any portion of the shares of Preferred Stock into a number of shares of common stock equal to the quotient of: (1) the Liquidation Preference Amount of the shares of Preferred Stock by (2) the Conversion Price then in effect for the Preferred Stock. Per the Certificate of Designations, the Liquidation Preference Amount is equal to $1,000 per share of Preferred Stock, and the Conversion Price is equal to the lesser of $0.50 or the closing price of the common stock on the issuance date of the Preferred Stock, subject to adjustment as described in the Certificate of Designations.

Under the terms of a Registration Rights Agreement, dated December 26, 2007, as amended by the Amendment to Registration Rights Agreement, dated February 7, 2008, and Second Amendment to Registration Rights Agreement, dated April 16, 2008, and Third Amendment to Registration Rights Agreement dated July 10, 2008 (the Rights Agreement), we agreed to file a registration statement with the Securities and Exchange Commission providing for the resale of: (i) the shares of common stock issuable upon conversion of the Series B Note; (ii) the shares of common stock issuable upon exercise of the Series X Warrant; and (iii) 3,500,000 shares of common stock which the Company may elect to issue in payment of interest on the Montaur Notes, no later that 60 days following the closing, which deadline was subsequently extended to May 5, 2008. (See Note 15.) Additionally, in connection with the Montaur Purchase Agreement, we entered into: (1) a Security Agreement, dated December 26, 2007, between Neoprobe and Montaur (the Montaur Security Agreement); and (2) a Patent, Trademark, and Copyright Security Agreement, dated December 26, 2007, by and among Neoprobe, Cardiosonix Ltd., Cira Biosciences, Inc. and Montaur (the IP Security Agreement), pursuant to which we have granted Montaur a security interest in all of our property and assets and our subsidiaries to secure our obligations under the Montaur Notes and all other transaction agreements. The Security Agreement and IP Security Agreement contain covenants, remedies and other provisions as are customary for agreements of such type.

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the conversion option and two put options were considered derivative instruments and were required to be bifurcated from the Series A Note and accounted for separately. In addition, in accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, the Series W warrants were accounted for as a liability due to the existence of certain provisions in the instrument. As a result, we recorded a total aggregate derivative liability of $2.6 million on the date of issuance of the Series A Note and Series W warrants. The fair value of the bifurcated conversion option and put options was approximately $1.45 million on the date of issuance. The fair value of the Series W warrants was approximately $1.15 million on the date of issuance and was determined using the Black-Scholes option pricing model with the following assumptions: an average risk-free interest rate of 3.7%, volatility of 94% and no expected dividend rate. Changes in the fair value of the derivative liabilities are recorded in the consolidated statement of operations. As of December 31, 2007, the derivative liabilities had estimated fair values of $1.60 million and $1.25 million for the conversion and put options and the warrants, respectively.

On March 14, 2008, Neoprobe and Montaur executed amendments to the Series A Note and the Series W warrants. The amendments eliminated certain minor cash-based penalty provisions in the Series A Note and Series W warrants which entitled the holders to different compensation than our common shareholders under certain circumstances and qualifying Triggering Events. The provisions that were eliminated and/or modified were the provisions that led to the derivative accounting treatment for the embedded conversion option in the Series A Note and the Series W warrants. Because the value of our stock increased between December 31, 2007, our year end, and March 14, 2008, the effect of marking the conversion option and warrant liabilities to “market” at March 14, 2008 resulted in an increase in the estimated fair value of the conversion option and warrant liabilities of $381,000 which was recorded as non-cash expense during the first quarter of 2008. The estimated fair value of the conversion option and warrant liabilities of $2.9 million was reclassified to additional

paid-in capital during the first quarter of 2008 as a result of the amendments. The effect of marking the put option liabilities related to the Series A Note to “market” at March 31, 2008 resulted in an increase in the estimated fair value of the put option liabilities of $5,000 which was recorded as non-cash expense during the first quarter of 2008. In addition, the effect of marking the put option liabilities to “market” at June 30, 2008 resulted in an increase in the estimated fair value of the put option liabilities of $75,000 which was recorded as non-cash expense during the second quarter of 2008. The estimated fair value of the put option liabilities related to the Series A Note of $390,000 remained classified as derivative liabilities as of June 30, 2008.

The initial aggregate fair value of the conversion option and the put options related to the Series A Note and the fair value of the Series W warrants of $2.6 million were recorded as a discount on the note and are being amortized over the term of the note using the effective interest method. During the first six months of 2008, we recorded interest expense of $265,000 related to the amortization of the debt discount. We incurred $510,000 of costs related to completing the initial Montaur financing, which were recorded in other assets on the consolidated balance sheet. The deferred financing costs are being amortized using the effective interest method over the term of the note. During the first six months of 2008, we recorded interest expense of $52,000 related to the amortization of the deferred financing costs.

In April 2008, we completed the second closing under the December 2007 Montaur Purchase Agreement, as amended, pursuant to which we issued Montaur a 10% Series B Convertible Senior Secured Promissory Note in the principal amount of $3,000,000, due December 26, 2011; and 8,333,333 Series X warrants to purchase our common stock at an exercise price of $0.46 per share, expiring in April 2013. The Series B Note bears interest at 10% per annum and is fully convertible at the option of Montaur into common stock at a price of $0.36 per share. Interest is payable monthly, in arrears, beginning in April 2008 until the earlier of the maturity date or the date of conversion. At our discretion, we may pay the monthly interest payments in cash, common stock, or a combination of cash and common stock, subject to certain limitations set forth in the Series B Note.

The fair value of the Series X warrants was approximately $1.28 million on the date of issuance and was determined using the Black-Scholes option pricing model with the following assumptions: an average risk-free interest rate of 2.6%, volatility of 95% and no expected dividend rate. The value of the beneficial conversion feature of the Series B Note was estimated at $1.44 million based on the effective conversion price at the date of issuance. The fair value of the warrants issued to the investors and the value of the beneficial conversion feature were recorded as discounts on the notes and are being amortized over the term of the notes using the effective interest method. The two put options were considered derivative instruments and were required to be bifurcated from the Series B Note and accounted for separately. The fair value of the bifurcated put options was approximately $258,000 on the date of issuance. Changes in the fair value of the derivative liabilities are recorded in the consolidated statement of operations. The effect of marking the put option liabilities related to the Series B Note to “market” at June 30, 2008 resulted in an increase in the estimated fair value of the put option liabilities of $38,000 which was recorded as non-cash expense during the second quarter of 2008. The estimated fair value of the put option liabilities related to the Series B Note of $296,000 remained classified as derivative liabilities as of June 30, 2008.

The initial aggregate fair value of the beneficial conversion feature and put options related to the Series B Note, and the fair value of the Series X warrants of $2.98 million were recorded as a discount on the note and are being amortized over the term of the note using the effective interest method. During the second quarter of 2008, we recorded interest expense of $7,000 related to the amortization of the debt discount. We incurred $188,000 of costs related to completing the second Montaur financing, which were recorded in other assets on the consolidated balance sheet. The deferred financing costs are being amortized using the effective interest method over the term of the note. During the second quarter of 2008, we recorded interest expense of $400 related to the amortization of the deferred financing costs.

In connection with the second closing, we also amended the Montaur Purchase Agreement with respect to the milestone that would trigger the third closing for an additional $3 million investment from Montaur. The milestone was revised from the accrual of 200 patients in a Phase 3 trial for Lymphoseek to obtaining 135 vital blue dye lymph nodes from patients with breast cancer or melanoma who have completed surgery with the injection of the drug in a Phase 3 clinical trial of Lymphoseek.

In connection with the Montaur Purchase Agreement, Montaur requested that the term of the $1.0 million Bupp Note be extended until at least one day following the maturity date of the Montaur Notes. In consideration for the Bupp Investors’ agreement to extend the term of the Bupp Note pursuant to an Amendment to the Bupp Purchase Agreement, dated December 26, 2007, we agreed to provide security for the obligations evidenced by the Amended 10% Convertible Note in the principal amount of $1,000,000, due December 31, 2011, executed by Neoprobe in favor of the Bupp Investors (the Amended Bupp Note), under the terms of a Security Agreement, dated December 26, 2007, by and between Neoprobe and the Bupp Investors (the Bupp Security Agreement). As further consideration for extending the term of the Bupp Note, we issued the Bupp Investors 500,000 Series V warrants to purchase our common stock at an exercise price of $0.32 per share, expiring in December 2012. The fair value of the warrants issued to the Bupp Investors was approximately $96,000 on the date of issuance and was determined using the Black-Scholes option pricing model with the following assumptions: an average risk-free interest rate of 3.72%, volatility of 94% and no expected dividend rate. The fair value of the warrants was recorded as a discount on the note and is being amortized over the term of the note using the effective interest method. We treated the amendment to the Bupp Note as an extinguishment of debt for accounting purposes. As such, the remaining discount resulting from the fair value of the warrants and the value of the beneficial conversion feature and the remaining unamortized deferred financing costs associated with the original note were written off as a loss on extinguishment of debt in December 2007.

We applied $5,725,000 from the proceeds of our issuance of the Series A Note and Series W warrants to the complete and total satisfaction of our outstanding obligations under the Replacement Series A Convertible Promissory Notes issued to the Great Point Funds and David C. Bupp as of November 30, 2006, pursuant to the Securities Purchase Agreement, dated as of December 13, 2004, by and among Neoprobe, the Great Point Funds and Mr. Bupp, as amended by the Amendment dated as of November 30, 2006 (the Amended GPP Purchase Agreement). We treated the early repayment of the notes as an extinguishment of debt for accounting purposes. As such, the remaining discount resulting from the fair value of the warrants and the value of the beneficial conversion feature associated with the original notes was written off as a loss on extinguishment of debt in December 2007. We applied an additional $675,000 from the proceeds of our issuance of the Series A Note and Series W warrants to the redemption of 10,000,000 Series T warrants to purchase our common stock at an exercise price of $0.46 per share, issued to the Great Point Funds pursuant to the Amended GPP Purchase Agreement. In connection with the consummation of the Montaur Purchase Agreement and amendment of the Bupp Purchase Agreement, Mr. Bupp agreed to the cancellation of 125,000 Series T warrants to purchase our common stock at an exercise price of $0.46 per share, originally issued to Mr. Bupp pursuant to the Amended GPP Purchase Agreement. The combined events retired all of the Series T warrants issued to the Great Point Funds and Mr. Bupp.

11.

Stock Warrants

During the first six months of 2008, David C. Bupp, our President and CEO, exercised 375,000 Series Q warrants in exchange for issuance of 375,000 shares of our common stock, resulting in gross proceeds of $48,750. In addition, an outside investor exercised 500,000 Series Q warrants in exchange for issuance of 500,000 shares of our common stock, resulting in gross proceeds of $65,000. Also during the first six months of 2008, certain outside investors exercised a total of 1,354,349 Series R warrants and 253,261 Series S warrants on a cashless basis in exchange for issuance of 435,107 shares of our common stock.

At June 30, 2008, there are 19.8 million warrants outstanding to purchase our common stock. The warrants are exercisable at prices ranging from $0.28 to $0.50 per share with a weighted average exercise price of $0.39 per share.

12.

Income Taxes

Effective January 1, 2007, we adopted Financial Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement model for the financial statement recognition of a tax position taken, or expected to be taken, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. No adjustment was made to the beginning retained earnings balance as the ultimate deductibility of all tax positions is highly certain, although there is uncertainty about the timing of such deductibility. As a result, no liability for uncertain tax positions was recorded as of June 30, 2008. Should we need to accrue interest or penalties on uncertain tax positions, we would recognize the interest as interest expense and the penalties as a selling, general and administrative expense.

13.

Segment and Subsidiary Information

We report information about our operating segments using the “management approach” in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This information is based on the way management organizes and reports the segments within the enterprise for making operating decisions and assessing performance. Our reportable segments are identified based on differences in products, services and markets served. There were no inter-segment sales. We own or have rights to intellectual property involving two primary types of medical device products, including oncology instruments currently used primarily in the application of sentinel lymph node biopsy, and blood flow measurement devices. We also own or have rights to intellectual property related to several drug and therapy products.

The information in the following table is derived directly from each reportable segment’s financial reporting.

						Blood				Drug and
($ amounts in thousands)		Oncology				Flow				Therapy
Three Months Ended June 30, 2008		Devices				Devices				Products				Corporate				Total
Net sales:
United States1		$	2,151			$	4			$	—			$	—			$	2,154
International			21				80				—				—				101
Research and development expenses			286				52				561				—				899
Selling, general and administrative expenses, excluding depreciation and amortization2			—				—				—				800				800
Depreciation and amortization			31				63				—				10				104
Income (loss) from operations3			996				(78	)			(561	)			(810	)			(454	)
Other income (expenses)4			—				—				—				(565	)			(565	)
Total assets, net of depreciation and amortization:
United States operations			1,705				596				179				4,516				6,996
Israeli operations (Cardiosonix Ltd.)			—				1,462				—				—				1,462
Capital expenditures			—				—				18				11				29

						Blood				Drug and
($ amounts in thousands)		Oncology				Flow				Therapy
Three Months Ended June 30, 2007		Devices				Devices				Products				Corporate				Total
Net sales:
United States1		$	1,338			$	115			$	—			$	—			$	1,453
International			40				24				—				—				64
Research and development expenses			163				101				611				—				875
Selling, general and administrative expenses, excluding depreciation and amortization2			—				—				—				548				548
Depreciation and amortization			25				66				—				11				102
Income (loss) from operations3			576				(114	)			(611	)			(559	)			(708	)
Other income (expenses)4			—				—				—				(427	)			(427	)
Total assets, net of depreciation and amortization:
United States operations			1,759				698				161				1,804				4,422
Israeli operations (Cardiosonix Ltd.)			—				1,662				—				—				1,662
Capital expenditures			6				—				—				1				7

						Blood				Drug and
($ amounts in thousands)		Oncology				Flow				Therapy
Six Months Ended June 30, 2008		Devices				Devices				Products				Corporate				Total
Net sales:
United States1		$	3,882			$	7			$	—			$	—			$	3,889
International			32				117				—				—				149
Research and development expenses			451				119				892				—				1,462
Selling, general and administrative expenses, excluding depreciation and amortization2			—				—				—				1,580				1,580
Depreciation and amortization			54				126				—				20				199
Income (loss) from operations3			1,927				(206	)			(892	)			(1,599	)			(771	)
Other income (expenses)4			—				—				—				(1,274	)			(1,274	)
Total assets, net of depreciation and amortization:
United States operations			1,705				596				179				4,516				6,996
Israeli operations (Cardiosonix Ltd.)			—				1,462				—				—				1,462
Capital expenditures			2				—				18				25				45

						Blood				Drug and
($ amounts in thousands)		Oncology				Flow				Therapy
Six Months Ended June 30, 2007		Devices				Devices				Products				Corporate				Total
Net sales:
United States1		$	2,890			$	160			$	—			$	—			$	3,050
International			125				86				—				—				211
Research and development expenses			377				207				1,155				—				1,739
Selling, general and administrative expenses, excluding depreciation and amortization2			—				—				—				1,225				1,225
Depreciation and amortization			51				132				—				25				208
Income (loss) from operations3			1,251				(247	)			(1,155	)			(1,250	)			(1,401	)
Other income (expenses)4			—				—				—				(845	)			(845	)
Total assets, net of depreciation and amortization:
United States operations			1,759				698				161				1,804				4,422
Israeli operations (Cardiosonix Ltd.)			—				1,662				—				—				1,662
Capital expenditures			16				9				—				11				36

14.

Supplemental Disclosure for Statements of Cash Flows

During the six-month periods ended June 30, 2008 and 2007, we paid interest aggregating $477,000 and $234,000, respectively. During the six-month periods ended June 30, 2008 and 2007, we transferred $45,000 and $44,000, respectively, of inventory to fixed assets related to the creation and maintenance of a pool of service loaner equipment. During the six-month period ended June 30, 2008, we purchased equipment under a capital lease totaling $20,000. During the six-month periods ended June 30, 2008 and 2007, we issued 114,921 and 107,313 shares of common stock, respectively, as matching contributions to our 401(k) plan.

15.

Subsequent Event

Under the terms of the original Rights Agreement, dated December 26, 2007, we agreed to file a registration statement with the Commission registering the shares of common stock underlying the Notes, the Preferred Stock and the Warrants issued to Montaur pursuant to the Montaur Purchase Agreement. On April 16, 2008, we entered into the Second Amendment to Registration Rights Agreement (the Second Amendment), pursuant to which Montaur agreed to limit our registration obligations to (a) the shares of common stock issuable upon conversion of the Series B Note; (b) the shares of common stock issuable upon exercise of the Series W and X Warrants; and (c) 3,500,000 shares of common stock issuable as interest on the Montaur Notes. On July 10, 2008, we entered into a Third Amendment to Registration Rights Agreement (the Third Amendment), pursuant to which Montaur agreed to further limit our registration obligations to: (a) the shares of common stock issuable upon conversion of the Series B Note; (b) the shares of common stock issuable upon exercise of the Series X Warrants; and (c) 3,500,000 shares of common stock issuable as interest on the Montaur Notes. Additionally, pursuant to the terms of the Rights Agreement, as amended by the Second Amendment and Third Amendment, we agreed that: (a) within thirty-five (35) days following the Third Closing Date (as that term is defined in the Montaur Purchase Agreement) we will prepare and file with the Commission an additional “resale” registration statement providing for the resale of (in the following order of priority): (i) the shares of common stock issuable upon the conversion of the Preferred Shares; (ii) the shares of common stock issuable upon exercise of the Series Y Warrant; and (iii) shares of common stock issuable as dividends on the Preferred Shares, for an offering to be made on a continuous basis pursuant to Rule 415, and (b) within thirty-five (35) days of a receipt by the written request of the Holder therefore, we will prepare and file with the Commission an additional “resale” Registration Statement providing for the resale of the shares of common stock issuable upon the conversion of the Series A Note, and the shares of common stock issuable upon the exercise of the Series W Warrant. (See Note 10.)

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

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of our Company. From time to time, our representatives and we may make written or verbal forward-looking statements, including statements contained in this report and other Company filings with the SEC and in our reports to stockholders. Statements that relate to other than strictly historical facts, such as statements about our plans and strategies, expectations for future financial performance, new and existing products and technologies, anticipated clinical and regulatory pathways, and markets for our products are forward-looking statements within the meaning of the Act. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will” and other similar expressions identify forward-looking statements. The forward-looking statements are and will be based on our then-current views and assumptions regarding future events and operating performance, and speak only as of their dates. Investors are cautioned that such statements involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated results due to many factors including, but not limited to, our continuing operating losses, uncertainty of market acceptance of our products, reliance on third party manufacturers, accumulated deficit, future capital needs, uncertainty of capital funding, dependence on limited product line and distribution channels, competition, limited marketing and manufacturing experience, risks of development of new products, regulatory risks, and other risks detailed in our most recent Annual Report on Form 10-K and other SEC filings. We undertake no obligation to publicly update or revise any forward-looking statements.

The Company

Neoprobe Corporation is a biomedical technology company that provides innovative surgical and diagnostic products that enhance patient care. We currently market two lines of medical devices; our neo2000^® and neoprobe GDS gamma detection systems and the Quantix^® line of blood flow measurement devices of our wholly-owned subsidiary, Cardiosonix Ltd. (Cardiosonix). In addition to our medical device products, we have two radiopharmaceutical products, Lymphoseek^® and RIGScan^® CR, in the advanced phases of clinical development. We are also exploring the development of our activated cellular therapy (ACT) technology for patient-specific disease treatment through our majority-owned subsidiary, Cira Biosciences, Inc. (Cira Bio).

Product Line Overview

This Overview section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Our financial performance is highly dependent on our ability to continue to generate income and cash flow from our gamma detection device product line and on our ability to successfully commercialize the blood flow measurement products of our subsidiary, Cardiosonix. We cannot assure you that we will achieve the volume of sales anticipated, or if achieved, that the margin on such sales will be adequate to produce positive operating cash flow.

We believe that the future prospects for Neoprobe continue to improve as we make progress in all of our key growth areas. We expect revenue from our gamma device line to continue to provide a strong revenue base during 2008 and to exceed 2007. Sales of our blood flow measurement devices continue to fall short of our expectations but we believe some recent improvements in the device may provide an entry into dialysis/vascular access applications. However, we expect blood flow-related revenue for 2008 to be lower than 2007 levels as we complete our assessment of the dialysis/vascular access market. Over the past few years, we have also made progress on our oncology drug development initiatives. Most recently, we initiated patient enrollment in a Phase 3 clinical trial for Lymphoseek in breast cancer and melanoma. We also continue to be optimistic about the longer-term potential for our proprietary RIGS^® (radioimmunoguided surgery) technology; however, neither Lymphoseek nor RIGS are anticipated to generate any significant revenue for us during 2008.

Our operating expenses during the first six months of 2008 were focused primarily on support of Lymphoseek product development. In addition, we continued to modestly invest in our gamma detection device line related to product line expansion and innovation. We expect our drug-related development expenses to increase significantly over the remainder of 2008 as we continue the multi-center Phase 3 clinical evaluations of Lymphoseek that were initiated during the second quarter of 2008 and support the other development activities related to the potential marketing registration of Lymphoseek. We expect to continue to incur development expenses to support our device product lines as well as we work with our marketing partners to expand our product offerings in the gamma device arena. We expect to continue to limit our financial support for our blood flow measurement products during the remainder of 2008 as we assess the dialysis/vascular access opportunity.

Our efforts thus far in 2008 have resulted in the following research and development milestone achievements: