HYPERTENSION DIAGNOSTICS INC /MN, 10KSB, 1999-09-28

HYPERTENSION DIAGNOSTICS INC /MN
10KSB, 1999-09-28
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-KSB

(MARK ONE)

/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 1999

/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-24635

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HYPERTENSION DIAGNOSTICS, INC.
(Name of Small Business Issuer in Its Charter)

MINNESOTA 41-1618036
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

2915 WATERS ROAD, SUITE 108, EAGAN, MINNESOTA 55121
(Address of Principal Executive Offices, including Zip Code)
(651) 687-9999
(Issuer's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK ($.01 PAR VALUE)
(Title of Class)
REDEEMABLE CLASS A WARRANT
(Title of Class)
UNITS, CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE CLASS A
WARRANT
(Title of Class)

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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
/ /
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
The issuer's revenues for its most recent fiscal year were $381,247.
The aggregate market value of the voting stock held by nonaffiliates of the
issuer as of August 30, 1999 was approximately $12,710,000, based upon the
closing sale price for the Common Stock on that date as reported by the Nasdaq
Stock Market.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.

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PART I

ITEM 1. BUSINESS

FORWARD-LOOKING STATEMENTS

The information presented in this Annual Report on Form 10-KSB under the
Items "Business", "Properties" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. When used in this report, the words "believe", "expect", "will", "can",
"estimate", "anticipate" and similar expressions are intended to identify such
forward-looking statements.

Forward-looking statements involve risks and uncertainties, including those
discussed under "Risk Factors", that could cause actual results to differ
materially from those anticipated. Because actual results may differ, readers
are cautioned not to place undue reliance on these forward-looking statements.

INTRODUCTION

The Company is engaged in the design, development, assembly and marketing of
a proprietary medical device that it believes will non-invasively detect subtle
changes in the elasticity of large and small arteries. Vascular compliance or
elasticity has been researched for many years and clinical studies suggest that
a lack of arterial elasticity is an early indicator of vascular disease. The
Company has developed two models of its HDI/PULSEWAVE-TM- CardioVascular
Profiling Instrument and has a third in development (the "Product"). The Model
CR-2000 is for research purposes only (that is, not for screening, diagnosing,
monitoring or determining treatment of patients), and is currently being
marketed. The Model DO-2020 is for primary care physicians and other health care
professionals, and will require U.S. Food and Drug Administration (the "FDA")
clearance to market in the United States. The Model DO-2020i will provide
physicians outside the United States with key cardiovascular parameters, which
the Company believes will provide clinically valuable information useful in
screening and diagnosing individuals who may be at risk for future
cardiovascular disease and in monitoring the effectiveness of treatment of
individuals with previously diagnosed cardiovascular disease. The Company has
submitted an application to the FDA to market the Model DO-2020. The Model
DO-2020i will need a CE Mark to be marketed inside the European Union and will
require regulatory approval to be marketed in Japan. The Company expects that
the Model DO-2020 will eventually generate the majority of its revenues.

BACKGROUND

VASCULAR DISEASE

Disease of the blood vessels (vascular disease) is the leading cause of
death and a primary cause of heart attacks and strokes in the United States.
Vascular disease can manifest itself in many ways: hypertension, coronary artery
disease, peripheral artery disease, atherosclerosis, aneurysm, stroke, kidney
failure and retinopathy. According to a Fall 1997 article by the National Heart,
Lung and Blood Institute, 58 million Americans have some form of cardiovascular
disease and hypertension is the leading cardiovascular disease. Coronary artery
disease affects 13.9 million Americans and is the nation's number one killer.
Stroke is ranked number three. According to a 1997 release by the National
Heart, Lung and Blood Institute, approximately 50 million Americans
(approximately 28% of the adult population in the United States) have been
diagnosed as suffering from hypertension, typically defined as a blood pressure
greater than 140 millimeters of mercury ("mmHg") systolic pressure and/or
greater than 90 mmHg diastolic pressure, with nearly 75% of those (37.5 million)
not properly treated for the condition and thus facing significantly increased
risk for heart and kidney disease and strokes. According to the Johns Hopkins
White Papers on Hypertension (1998), an additional 30 million Americans are
estimated to have "high-normal hypertension" (sometimes referred to as
"borderline hypertension"), defined as a blood pressure reading at or slightly
above 130/85 mmHg. These individuals are twice as likely to develop hypertension
and they have a greater risk of cardiovascular events than people with lower
blood pressure.

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In fact, high-normal blood pressure is so common in the United States that the
majority of cardiovascular events attributable to high blood pressure occur in
people who demonstrate this condition.

Hypertension can easily go undetected and has been called the "silent
killer" because it usually produces no symptoms until after it seriously damages
the heart, kidneys, brain or some other organ. Elevated blood pressure indicates
that the heart is working harder than normal, putting both the heart and the
arteries under greater strain. Over time, these arteries become scarred,
hardened and less elastic, accelerating the process of atherosclerosis and
leaving one susceptible to heart attacks, strokes, kidney failure and eye
damage. According to the Archives of Internal Medicine (March 24, 1997), high
blood pressure is of particular concern to older adults, as levels increase with
age, and is present in more than half of Americans age 60 or older. The
seriousness of this problem increases as the population grows older because
individuals with sustained high blood pressure have an increased overall death
rate from stroke, heart attack and kidney disease.

Hypertension is a deadly disease that damages both large and small arteries,
leading to pathological changes in the tissues or organs supplied by these
damaged arteries, and accelerating the development of atherosclerosis (the
formation of plaque and the accumulation of fatty deposits lining the walls of
the artery which affect blood flow) in large blood vessels, and the arteries
supplying blood to the brain, heart, kidneys and legs. Atherosclerotic plaques
can cause mini-strokes (transient ischemic attacks) due to diminished blood flow
(ischemia) to parts of the brain; angina from partly obstructed coronary
arteries; or pain in the leg muscles when walking, a result of poor blood supply
to the legs (peripheral arterial disease). Blood clots, which tend to occur at
the sites of atherosclerotic narrowing, can totally block a vessel and cause a
stroke or heart attack.

Atherosclerosis begins in the wall of the artery with an early abnormality
in the lining of the arterial wall called the endothelium. The endothelium helps
to maintain the flexibility or elasticity of the artery and normally inhibits
the accumulation of lipid and cellular deposits into the arterial wall of the
artery. Abnormal function of the endothelium and the associated structural
changes in the wall result in a loss of elasticity of the small arteries.
Detection of this loss in elasticity can identify individuals with abnormal
arterial structure and function long before plaque formation can cause morbid
cardiovascular events. Furthermore, demonstration of normal arterial structure
and function might suggest that the individual does not have early
atherosclerosis and may not need aggressive risk factor management.

A number of risk factors for atherosclerosis have been identified, including
elevated blood pressure, elevated cholesterol level, smoking, diabetes and
family history of atherosclerosis. Clinical events associated with
atherosclerosis, including heart attacks (myocardial infarction), strokes,
angina (myocardial ischemia), peripheral vascular ischemia (claudication) and
renal failure are late manifestations of the disease as a result of plaque
formation that impinges on blood flow. The absence of a clinically applicable
method to detect the presence of atherosclerosis prior to plaque obstruction of
the lumen (the inner space in the blood vessel through which blood passes) has
led to widespread efforts to identify the risk factors in the entire population
and to intervene on those who harbor such risk factors. The problem with this
approach is two-fold: (a) patients without these risk factors will not be
identified even though up to half of the atherosclerotic clinical events occur
in individuals without any of the traditional risk factors; and (b) patients who
have one or more risk factors may be subjected to therapy even though they do
not have the atherosclerotic process the therapy is designed to inhibit.

THE CLINICAL PROBLEM

Cardiovascular specialists spend considerable effort on evaluating heart
function, including electrocardiograms (ECGs), echocardiograms and stress tests,
but have been unable to assess the functional and structural abnormality of the
arteries prior to the late phase of arterial obstruction. Blood pressure
measurement is a very insensitive and nonspecific means of assessing the
condition of the arteries. Traditionally, a patient's arterial blood pressure is
obtained clinically by using a sphygmomanometer which involves a cuff placed on
the patient's upper arm that is pressurized to occlude blood flow. As the cuff

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pressure is gradually reduced, sounds are generated in the artery below the cuff
and these are identified by using a stethoscope placed over that artery. The
initial occurrence of sound as the cuff is deflated reflects the "systolic blood
pressure" or the highest pressure generated during the heart's contraction, and
the pressure at which the sounds finally disappear is taken as the "diastolic
blood pressure," or the lowest pressure reached before the next cardiac cycle.

Although an elevated blood pressure is associated with a higher risk for
cardiovascular events, the elevated blood pressure is not the disease but merely
a crude marker for the likelihood of disease. Furthermore, blood pressure itself
is highly variable from moment to moment and day to day. Measurement of
ambulatory blood pressure throughout the day provides a more accurate assessment
of the actual pressure but it is a cumbersome and expensive technique and still
does not demonstrate the disease in the blood vessels it is attempting to
identify. Elevated cholesterol, especially an increase in the low-density
lipoproteins/high-density lipoproteins ("LDL/HDL") ratio, also is associated
with a higher risk for morbid cardiovascular events, but this measurement does
not identify blood vessel disease but rather identifies a factor that might
accelerate blood vessel disease if it is present. Thus, the only methods in
routine use by physicians today to identify individuals who need treatment are
methods that are neither sensitive nor specific in detecting the blood vessel
disease that leads to morbid cardiovascular events.

THE COMPANY'S SOLUTION

The traditional systolic-diastolic method for measuring blood pressure
provides the physician with very limited clinical information about the
patient's vascular health. In contrast, the Company's Product measures a blood
pressure waveform produced by the beating heart that the Company believes can be
analyzed to provide an assessment of arterial elasticity. When the aortic valve
closes after the heart has ejected its stroke volume of blood (the blood ejected
during each heart beat), the decay or decrease of blood pressure within the
arteries prior to the next heart beat forms a pressure curve or waveform which
is indicative of arterial elasticity. Subtle changes in arterial elasticity
introduce changes in the arterial system that are reflected in the arterial
blood pressure waveform and research suggests that these changes in the function
and structure of the arterial wall precede the development of coronary artery
disease, or the premature stiffening of the small arteries which appears to be
an early marker for cardiovascular disease.

Incorporating the physiological phenomena associated with blood pressure
waveforms, Drs. Jay N. Cohn and Stanley M. Finkelstein, Professors at the
University of Minnesota in Minneapolis and two of the founders of the Company,
developed in the early 1980's a method for determining a measure of elasticity
in both large and small arteries. The technique involved an invasive procedure
that placed a catheter connected to a pressure transducer into the patient's
artery in order to obtain a blood pressure waveform that could be analyzed using
a modified Windkessel model, a well-established electrical analog model which
describes the pressure changes during the diastolic phase of the cardiac cycle
in the circulatory system.

This "blood pressure waveform" or "pulse contour" analysis method provided
an independent assessment of the elasticity or flexibility of the large arteries
which expand to briefly store blood ejected by the heart, and of the small and
very small arteries (arterioles) which produce oscillations or reflections in
response to the blood pressure waveform generated during each heart beat.

By assessing the elasticity of the arterial system, clinical investigators
have been able to identify a reduction in arterial elasticity in patients
without evidence of traditional risk factors, suggesting the early presence of
vascular disease. Furthermore, clinical research data has demonstrated that
individuals with heart failure, coronary artery disease, hypertension and
diabetes, typically exhibit a loss of arterial elasticity. These abnormal blood
vessel changes often appear to precede overt signs of cardiovascular disease and
the occurrence of a heart attack or stroke by many years. Clinical investigators
have also demonstrated an age-related loss of elasticity of both the large and
small arteries suggesting that premature stiffening of an individual's arteries
is an apparent marker for the early onset of cardiovascular disease.

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THE PRODUCT

Although the aorta and large arteries can be visualized by various
noninvasive techniques, such as radiology, magnetic resonance imaging ("MRI"),
computerized tomography ("CT") scans and ultrasonography, the Company believes
there is currently no clinical way to evaluate the elasticity of the small and
very small arteries which appear to be the first to become altered in
hypertension and other vascular diseases. For this reason, the Company sought an
easy to use, non-invasive solution that could assess the status of these small
blood vessels.

The Product incorporates a patented and proprietary instrument and
procedures which painlessly and non-invasively collects 30 seconds of blood
pressure waveform data, automatically analyzes this data by means of an embedded
computer and generates a CardioVascular Profile Report. All models of the
Product consist of four primary components: (a) a non-invasive arterial pulse
pressure sensor placed over the radial artery at the wrist; (b) an upper-arm
blood pressure cuff connected to an oscillometric pressure module; (c) an
enclosure which contains a computer, other electronics and software programs;
and (d) an external printer.

PRODUCT MODELS

The Company currently has two models of its Product and a third in
development.

MODEL CR-2000

The Model CR-2000 is for clinical research purposes only. The Model CR-2000
non-invasively collects blood pressure waveform data, performs a pulse contour
analysis on the digitized data, generates a Research CardioVascular Profile
Report (some report parameters are displayed on the screen and the entire report
is generated by an external printer). A standard output port is included to
allow research investigators to send blood pressure waveform data and an
analyzed Research CardioVascular Profile Report results to computer systems
within the researcher's research facilities.

The Model CR-2000 is being marketed to medical directors and research
investigators at pharmaceutical firms and academic research centers on a
worldwide basis. These organizations are in the business of conducting
cardiovascular research and have an interest in a non-invasive means of
gathering information from human research subjects.

MODEL DO-2020

Following FDA clearance, physicians will be able to utilize the Model
DO-2020 which non-invasively collects blood pressure waveform data, performs a
pulse contour analysis on the digitized data, generates a CardioVascular Profile
Report (some report parameters are displayed on the screen and a report is
generated by an external printer). A brief medical history of the patient is
recorded by the user and an internal modem transmits data via a toll-free
telephone line to the Company's Central Data Management Facility ("CDMF").

The Company's CDMF is currently capable of handling 48 simultaneous
physician transmissions integrated with the Company's tracking, billing and
production systems, and is capable of storing cardiovascular profile information
on several hundred thousand patients from different age groups and with
different disease states. Although the CDMF has yet to be stress tested under
maximum line load, the Company believes it is fully operational. The Company
expects to compare the information transmitted to stored data from age and
gender-matched patients free of disease in order to establish a range of
clinical information useful to both physicians and the Company. The Company
believes the CDMF may also prove useful to physicians in terms of archiving
patient profiles and trending patient data over time, enhancing the accuracy of
ranges for report parameters, and providing continuity of CardioVascular Profile
Reports

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for patients who may have been seen over a period of time by several physicians
in different parts of the United States.

The Company may explore the possibility of offering at some future date an
Internet link to physicians (with security protection) via the Company's website
(www.hdi-pulsewave.com), allowing physicians to make direct inquiries into the
database regarding their patient records. The Company currently has in place
toll-free telephone access to Company personnel for customers to obtain
technical Product support.

Following FDA clearance, the Model DO-2020 will initially be marketed to
cardiovascular specialists, cardiologists, general and family practitioners,
internists, nephrologists and other physicians in medical practices throughout
the United States. Because the Model DO-2020 provides an index of a patient's
arterial elasticity, the Company believes it could assist physicians in
screening, diagnosing and monitoring the treatment of patients with
cardiovascular disease with more reliability than other methods currently
available. With the Model DO-2020, physicians could have a simple, painless and
non-invasive method to obtain vital information on the vascular status of
patients in support of their efforts to identify individuals at risk for
developing cardiovascular disease and to more effectively monitor the treatment
of patients receiving cardiovascular therapy. The Company expects that the Model
DO-2020 will eventually generate the majority of its revenues derived from
"per-patient" or "per-report" billing basis. The commercial value of the
database developed over time will be limited by ethical standards of patient
confidentiality law and practice. The economic value of "information" is
therefore unknown.

MODEL DO-2020i

An international version of a physician-use Product is currently in
development and, following the Company's receipt of CE Mark certification, it
will be marketed to cardiovascular specialists, cardiologists and family
physicians outside the United States.

The Product, currently designated the Model DO-2020i, will be similar to the
U.S. Model DO-2020 in terms of its intended use in screening, diagnosing and
monitoring the treatment of patients with cardiovascular disease. Similar to the
U.S. Model DO-2020, the DO-2020i will provide international physicians with the
ability to immediately print a CardioVascular Profile Report containing
patient-specific reference ranges in their office. Due to fundamental
differences in physician reimbursement, patient data transfer regulations and
telephone communication technologies, the DO-2020i will be marketed to
physicians as a capital purchase without a CDMF linkage.

Products marketed in the European Union (the "EU") require a medical device
CE Mark (conformance to Council Directive MDD 93/42/EEC) prior to importation
into the EU and the Company anticipates obtaining a medical device CE Mark for
the Model DO-2020i. Other countries have similar requirements based on
conformance to safety standards consistent with the Company's anticipated ISO
9002, EN 46002, and ISO 13488 certifications.

CARDIOVASCULAR PROFILE REPORT

The CardioVascular Profile Report currently in use on the Model CR-2000
provides the following 14 cardiovascular values:

A 1.5 Second Blood Pressure Waveform Graph, Systolic Blood Pressure (mmHg),
Diastolic Blood Pressure (mmHg), Mean Arterial Pressure (mmHg), Pulse Rate
(beats/min), Cardiac Ejection Time (msec), Stroke Volume (ml/beat), Stroke Index
Volume (ml/beat/m2), Estimated Cardiac Output (L/min), Estimated Cardiac Index
(L/min/m2), Large Artery Elasticity Index (ml/mmHg X 10), Small Artery
Elasticity Index (ml/mmHg X 100), Systemic Vascular Resistance (dynes-sec-cm-5),
and Total Vascular Impedance (dynes-sec-cm-5).

Clinical research suggests that arterial elasticity indices can be used to
determine the clinical age of the body's arteries and that these values, when
viewed in combination with a medical history, physical

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examination and/or other tests, may provide a meaningful picture of vascular
health for patients 15 years of age and older. The large artery elasticity index
and the small artery elasticity index are of particular clinical importance in
this assessment. These indices indicate the elasticity or flexibility of the
patient's large and small arteries, which may be beneficial in distinguishing
between individuals with high-normal blood pressure and those with more severe
vascular disease. These indices also are expected to provide valuable
information to physicians in monitoring the effectiveness of treatment provided
to patients with confirmed cardiovascular disease as well as screening patients
who may be at risk for future vascular disease and/or life-threatening
cardiovascular events.

THE ADVANTAGES: POTENTIAL BENEFICIAL MEDICAL OUTCOMES FOR PATIENTS AND PAYERS

During the last several years, research investigators have evaluated
hundreds of "normal" subjects as well as more than 250 patients with
cardiovascular disease. They have summarized their clinical research data in
order to establish the approximate "normal range" for arterial elasticity and
other cardiovascular parameters. Patients with normal blood pressure have been
identified who have "premature stiffening" of their small and very small
arteries. Without the benefit of a CardioVascular Profile Report, it is possible
that such patients would be considered "clinically normal and asymptomatic." It
is believed that the Model DO-2020 and the Model DO-2020i may help physicians
identify these patients and intervene therapeutically.

Further, the Company believes there may be an advantage to using the Model
DO-2020 and the Model DO-2020i to clinically evaluate high-normal hypertensive
patients in order to decide who requires immediate and aggressive treatment
versus those who might merely need to be monitored on a periodic basis. This
would be an important clinical distinction which cannot be easily determined in
medical practice today. Some patients, therefore, are being treated needlessly
despite cost containment concerns and despite the potential for drug side
effects (such as liver dysfunction, sexual impotence, etc.). Further, it is
possible that many other patients with normal blood pressure readings who should
perhaps be treated for a latent hypertensive condition of their arteries, are
being misdiagnosed, thereby leaving them at risk for progressive and severe
cardiovascular disease.

The Company believes that arterial compliance is becoming an increasingly
important clinical parameter in the treatment of cardiovascular disease.
According to an article by Stephen P. Glasser et al, in the JOURNAL OF CLINICAL
PHARMACOLOGY (1998), a drug's effect on arterial compliance (distinct from the
drug's effect on blood pressure and/or vessel size, both important interrelated
parameters in regard to compliance) is potentially an important consideration in
selecting optimal drug therapy because many cardiovascular drugs exert their
primary and secondary effects on cardiovascular hemodynamics and/or vascular
wall integrity. These considerations are important because a reduction in
arterial compliance has long been regarded as a potentially useful indicator of
the presence of arterial disease. Further, changes in the arterial wall leading
to reductions in arterial compliance may precede the onset of clinically
apparent disease, and may identify individuals at risk before disease onset
(symptoms due to disease are generally late manifestations of alterations in
organ function). Thus, drugs that favorably impact arterial compliance may play
a significant role in reducing morbidity and mortality.

PUBLISHED CLINICAL RESEARCH UPDATE

A number of significant references were added to the bibliography of
published titles, abstracts and articles cited/circulated by the Company related
to the general topic of "arterial elasticity" since June of 1998, including:

Duprez, D.A.; DeBuyzere, M.L.; Rietzschel, E.R.; Teas, Y.; Clement, D.L.;
Morgan, D.; and Cohn, J.N. "Inverse Relationship between Aldosterone and Large
Artery Compliance in Chronically Treated Heart Failure Patients." EUROPEAN HEART
JOURNAL 19:1371-1376, 1998.

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Bratteli, C.W.; Alinder, C.; Morgan, D.; McVeigh, G.; Finkelstein, S.; Cohn,
J.N. "Determinants of Large and Small Artery Compliance." Presented at the
International Society of Hypertension Conference, Amsterdam, June 1998.

DeBuyzere, M.; Van DeVeire, N.; Duprez, D.A.; Clement, D.L.; Morgan, D.;
Finkelstein, S.; Chesney, C.; Cohn, J.N. "The Carotid Artery Intima-Media
Thickness is related to the Distal Arterial Compliance but not to the Proximal
Arterial Compliance in Borderline Hypertension." Presented at the International
Society of Hypertension Conference, Amsterdam, June 1998.

Glasser, S.P.; Arnett, D.K.; McVeigh, G.E.; Finkelstein, S.M.; Bank, A.K.;
Morgan, D.J.; and Cohn, J.N. "The Importance of Arterial Compliance in
Cardiovascular Drug Therapy." JOURNAL of CLINICAL PHARMACOLOGY 38:202-212, 1998.

Bratteli, C.W.; Finkelstein, S.M.; Alinder, C.; Cohn, J.N. "Analysis of Aging
Effects on the Arterial Pulse Contour Using an Artificial Neural Network."
Accepted IEEE ENGINEERING in MEDICINE and BIOLOGY SOCIETY Conference, October
1998.

McVeigh, Gary E. "Evaluation of Arterial Compliance." Published in: Izzo, J.L.
and Black, H.R., Eds. HYPERTENSION PRIMER Publication by Council on High Blood
Pressure Research, American Heart Association 1998, Chapter 114, pp. 327-329.

Bratteli, C.W.; Alinder, C.M.; Cohn, J.N. "Contrasting Arterial Compliance
Effects of Enalapril and Amlodipine in Normotensive Elderly Subjects." AMERICAN
JOURNAL of HYPERTENSION 12 (4, Part 2), Abstract No. B015, April 1999.

Duprez, D.; DeBuyzere, M.; DeBruyne, L.; Clement, D.L.; Cohn, J.N. "Small Artery
Elasticity Index is Positively Related to Ankle/Brachial Index in Peripheral
Arterial Occlusive Disease." AMERICAN JOURNAL of HYPERTENSION 12 (4, Part 2),
Abstract No. B017, April 1999. JOURNAL of HYPERTENSION 17 (Suppl. 3): Poster No.
P2.45, May 1999.

Duprez, D.; DeBuyzere, M.; Van De Viere, N.; Tuyttens, C.; Rottiers, R.;
Clement, D.L.; Cohn, J.N. "Small Artery Elasticity Index but not Large Artery
Elasticity Index is Related to the Disease Duration in Early Onset Insulin
Dependent Diabetes Mellitus." AMERICAN JOURNAL of HYPERTENSION 12 (4, Part 2),
Abstract No. B016, April 1999. JOURNAL of HYPERTENSION 17 (Suppl. 3): Abstract
No. 95, May 1999. (Presented at the Ninth European Meeting on Hypertension and
published in the SCIENTIFIC PROGRAMME AND ABSTRACTS ON LARGE ARTERY STRUCTURE
AND FUNCTION, Milan, Italy, June 1999).

Noortgate, N. Van Den; Afschrift, M.; Achten, E.; Simoens, J.; DeBuyzere, M.;
Duprez, D., Cohn, J.N. "Cerebral White Matter Lesions are Associated with
Decreased Elasticity of Arteries in the Elderly." JOURNAL of HYPERTENSION 17:
(Suppl. 3): Poster No. P2.31, May 1999.

Resnick, Lawrence M. "Pulse Wave Velocity and Other Markers of Arterial Wall
Stiffness: Methods and Clinical Relevance." (Presented at the Ninth European
Meeting on Hypertension and published in the SCIENTIFIC PROGRAMME AND ABSTRACTS
ON LARGE ARTERY STRUCTURE AND FUNCTION, Milan, Italy, June 1999).

Resnick, L.M.; Chesney, C.F.; Lester, M.A. "Physiologic Correlates of Arterial
Compliance in Essential Hypertension." (Published at the Ninth European Meeting
on Hypertension, in the SCIENTIFIC PROGRAMME
AND ABSTRACTS ON LARGE ARTERY STRUCTURE AND FUNCTION, Milan, Italy, June 1999).

McVeigh, Gary E.; Bratteli, Christopher W.; Morgan, Dennis J.; Alinder, Cheryl
M.; Glassner, Stephen P.; Finkelstein, Stanley M.; Cohn, Jay N. "Age-Related
Abnormalities in Arterial Compliance Identified by Pressure Pulse Contour
Analysis." HYPERTENSION 33:1392-1398, June 1999.

MARKETS

Within the United States health care industry, which is estimated at
approximately $1 trillion by the United States Department of Health and Human
Services (December 15, 1997), cardiovascular disease is

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expected to account for $274 billion (27%) in 1998, with approximately $26
billion of that spent on physician and other professional services, according to
American Heart Association estimates. Although significant advances have been
made in the prevention and treatment of heart attacks and strokes during the
past few decades, these diseases remain among the leading causes of death in the
United States and many other countries.

- According to the American Heart Association, cardiovascular disease is the
leading cause of death in the United States accounting for more than
one-half of all deaths (over one million) every year.

- More than one million Americans annually suffer heart attacks, the first
sign of cardiovascular disease in 20% to 40% of patients. (Sources: 1997
Heart and Stroke Statistical Update, American Heart Association (1996);
Johns Hopkins Coronary Heart Disease).

- According to a 1997 release by the National Heart, Lung and Blood
Institute, approximately 50 million adults (approximately 28% of the adult
American population) are currently diagnosed with high blood pressure,
with nearly 75% of those (37.5 million) not properly treated for the
condition.

- According to the Johns Hopkins White Papers on Hypertension (1998), an
additional 30 million American adults are estimated to have "high-normal
hypertension."

- Hypertension is present in more than 50% of Americans age 60 or older.
(Source: Archives of Internal Medicine, Volume 157, Number 6, March 24,
1997).

- Stroke accounts for about one in every 15 deaths in the United States.
(Sources: 1997 Health Care Almanac & Yearbook; 1997 Heart and Stroke
Statistical Update, American Heart Association).

- According to a March 1997 survey by the Pharmaceutical Research and
Manufacturers of America, research expenditures within the United States
by all research-based pharmaceutical companies is estimated at $15 billion
in 1997.

- Cardiovascular research and development is estimated to account for
approximately $3.1 billion to $3.97 billion (or 16% to 21% of all United
States research and development spending in 1997). (Source: Parexel's
Pharmaceutical R&D Statistical Sourcebook (1997)).

- In 1998, more than 180 million adults in the seven major markets of the
United States, France, Germany, Italy, Spain, United Kingdom and Japan,
suffered from hypertension and the market for anti-hypertensive therapy is
expected to reach $22 billion in 2008. (Source: Decision Resources, Inc.,
Hypertension Report, 1999).

Because of the magnitude of the impact cardiovascular disease has on the
world population, the Company believes it has a significant opportunity for
providing a more accurate and effective means with which to screen, diagnose and
monitor the treatment of patients with cardiovascular disease. Furthermore,
cardiovascular disease is a major cause of death in nearly every other developed
country throughout the world.

THE RESEARCH MARKET

The Model CR-2000 is being marketed to medical directors and research
investigators at pharmaceutical firms and academic centers on a worldwide basis,
yielding 100% of the Company's revenues to date. These research customers have
expressed an interest in a non-invasive means of gathering information from
human research subjects.

According to the Tufts Center for the Study of Drug Development and a
February 1993 report by the U.S. Congressional Office of Technology Assessment,
it costs a company, on average, $359 million and about fifteen years to get one
new drug from the laboratory to the pharmacist's shelf. According to the
Pharmaceutical Research and Manufacturers of America, only five in 5,000
chemical compounds that

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enter preclinical testing are ultimately subjected to human testing and only one
in five of those is ultimately approved. The Company believes the Model CR-2000
provides a new means for gathering information on additional variables during
research.

The clinical research market is diverse, with pharmaceutical companies, the
federal government and medical device manufacturers funding the vast majority of
research. According to annual surveys by the Pharmaceutical Research and
Manufacturers of America, pharmaceutical companies spent an estimated $13.6
billion and $15 billion on all R&D within the United States in 1996 and 1997,
respectively. Of this amount, spending on clinical development in Phases I to IV
of research was approximately $4.8 billion in 1996. In most cases, the direct
costs of physician payments and the costs of additional medical care due to the
trial are paid directly to the provider organization by the pharmaceutical study
sponsor.

The Company has identified three markets for the Model CR-2000:

PHARMACEUTICAL COMPANIES. There are approximately 1,950 firms conducting
clinical research trials in the United States alone. Nonetheless, according to
Parexel's Pharmaceutical R&D Statistical Sourcebook 1997, a small number of
pharmaceutical firms in the world accounted for the majority of all research and
development spending. These pharmaceutical firms often seek new ways to gather
additional information non-invasively on human subjects during research trials,
and the Company has announced its technology inclusion in one important trial
this year.

ACADEMIC CENTERS. Hundreds of universities throughout the world conduct
research under grants supplied by government agencies, disease management
foundations and private sponsors. Universities with research centers conducting
clinical trials in the areas of preventative cardiology, nephrology and
epidemiology are a particular target market for the Model CR-2000. Nearly 90
references in the peer reviewed medical literature illustrate the growing body
of knowledge supporting arterial elasticity measurements and the implications of
measurements for the management of cardiovascular disease.

THE UNITED STATES GOVERNMENT. The National Institutes of Health and
Veterans' Affairs Medical Centers, the Agency for Health Care Policy and
Research and the Centers for Disease Control and Prevention conduct large-scale
research projects. These organizations represent a market opportunity for the
Model CR-2000.

The Company anticipates that use of the Model CR-2000 in research settings
will not only provide information contributing to the advancement of significant
cardiovascular research, but also will likely lead to the publication of
favorable articles in respected medical journals that will promote a greater
awareness of arterial elasticity and its correlation with cardiovascular
disease.

THE PRACTICING PHYSICIAN MARKET

The Model DO-2020 is intended to be used by physicians or trained medical
personnel. The Company's focus will be on the practice of cardiovascular
medicine within these facilities and, in particular, those health care
professionals who are directly involved in the screening, diagnosis, and
monitoring the treatment of patients with cardiovascular disease. Current
American Medical Association (the "AMA") estimates indicate there are
approximately 650,000 active physicians in the United States, approximately
250,000 of which fall into the target market as potential users of the Model
DO-2020:

- Approximately 120,000 internal medicine physicians

- Approximately 80,000 general and family practice physicians

- Approximately 30,000 medical sub-specialty physicians

- Approximately 20,000 cardiovascular disease specialists

MARKETING STRATEGY

The Company's primary objective is to establish the Product as the standard
of non-invasive patient cardiovascular screening and the predominant methodology
used for the diagnosis and monitoring of patients with cardiovascular diseases.

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MODEL CR-2000

The Company is currently using various methods to market the Model CR-2000
including the Company's website (www.hdi-pulsewave.com), direct mail, attendance
at major medical conventions and the use of a limited (that is, two persons)
direct United States-based sales force to market the Product to pharmaceutical
companies, academic centers and major cardiovascular research centers worldwide.
Following geography-specific regulatory clearance, the Company anticipates using
a core direct sales force to sell the Model CR-2000 in the United States and to
identify and manage independent medical distribution firms for marketing the
Product internationally. The Company has established a sale price of $19,750 for
the Model CR-2000. Higher than expected manufacturing, marketing or distribution
costs or competitive pressures may, however, force the Company to raise or lower
the price of the Product.

MODEL DO-2020

Once the Model DO-2020 obtains FDA clearance to market in the United States,
which cannot be assured, the Company intends to direct its sales and marketing
efforts at physicians who screen, diagnose and monitor the treatment of patients
with cardiovascular disease. The Company will seek to gain Product acceptance by
implementing a strategy that promotes the Product's benefits directly to people
who have, or are at risk for developing, cardiovascular disease, and to educate
healthcare professionals, managed care decision makers and insurers as to the
potential advantages involved in early detection of cardiovascular disease. The
Company's education and awareness strategy will also focus on the publication of
additional research covering performance and utility of the Product and
attendance at major cardiovascular conventions.

The introduction of the Model DO-2020 will occur in two stages. The first
will consist of a controlled introduction to key opinion leaders in the United
States in order to allow the Company sufficient time to develop a strong
referral base. Second, the Company will focus early marketing and education
efforts on United States physicians who evaluate individuals at risk for
developing cardiovascular disease and monitor patient response to cardiovascular
drug therapy. In an effort to encourage rapid acceptance of the Product, the
Company anticipates offering the Model DO-2020 to physicians on a "per-patient"
or "per-report" billing basis. Invoices for physician use of the Product will be
generated based on the number of CardioVascular Profile Reports that are
transmitted to the Company's CDMF each month.

The Company anticipates using a core direct sales force to call on key
cardiovascular opinion leaders and to establish distribution arrangements with
independent and/or contract sales representatives and medical companies with
complementary distribution networks. Long-term, the Company intends to promote
the Product to people at risk for developing cardiovascular disease through
public relations materials, advertising and the Company's Internet website
(www.hdi-pulsewave.com).

MODEL DO-2020i

Following CE Mark Certification on the Model DO-2020i, the Company
anticipates using a network of independent international distributors to market
the Product to cardiovascular specialists, cardiologists and family physicians
for use in screening, diagnosing and monitoring the treatment of patients with
cardiovascular disease within key international markets.

The Company's primary focus will be on the creation of a distribution
network covering the European Union and Japan. Secondary distribution efforts
will focus on South America, Canada, Scandinavian countries and the Pacific Rim.
The Company anticipates signing a multi-year agreement with distributors to
represent the Company in a specific territory--generally anticipated to be at
least a single country. The Product will be sold to distributors who will
re-sell and service the Product in their territory. It is anticipated that the
distributors will have the right to set the selling price within their
territory.

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Distributor appointments will generally be based on the distributor's
ability to manage the financial aspects of currency fluctuations, their
demonstrations of ethical conduct consistent with U.S. business practices, their
ability to market to and support key differences in physician practice patterns,
their ability to assist the Company in obtaining sufficient Product
reimbursement, and their ability to satisfy local government regulations
pertaining to sale of medical devices that exist within their territory. The
Company anticipates that these distributors will be firms that distribute
complementary cardiovascular products and which have the ability to designate
specialist support for marketing the DO-2020i.

PRODUCTION

The design, development and integration of all of the components necessary
to fabricate and manufacture the Product was undertaken on behalf of the Company
by a contract design engineering firm. The Company has completed an initial
production run for fiscal year 1999 CR-2000 sales. According to testing
performed at TUV Product Services, Inc., the Product has been found to be in
compliance with the electromagnetic compatibility immunity requirements and the
requirements for displaying the CE Mark. The Model DO-2020 was also investigated
by Underwriters Laboratories, Inc., is UL listed and will display the UL label.

In August 1999, the Company was audited by TUV Product Services, Inc. and
the Company was recommended for ISO 9002, 1994/EN 46002, 1996/ISO 13488, and
1996 93/42/EEC Annex V certifications. Following receipt of these
certifications, which cannot be assured, the Model CR-2000 will carry a CE Mark
for medical devices, permitting it to be marketed throughout the European Union.

The Company has now brought in-house certain assembly, testing, packaging
and shipping operations for its Product. Improved Product and service quality
and manufacturing cost reductions have been incorporated into the Company's
operating plans.

In the interest of flexibility and efficiency, the Company is conducting
final Product assembly, testing and packaging at its facility in compliance in
all material respects with the FDA's Quality System Regulations ("QSR").

An integral component of the Company's Product is the Sensor. While Sensors
utilized in the Product have performed reliably, the Company is uncertain as to
whether Sensors will be available on a commercial basis, and if available,
whether an adequate supply of Sensors meeting its standards of reliability,
accuracy and performance will be available. The Company currently obtains the
Sensor from a single source. The Company has a manufacturing services agreement
with the sole supplier of the Sensor. Disruption or termination of this
relationship would have a material adverse effect on the Company's operations.

COMPETITION

Competition in the medical device industry is intense and many of the
Company's competitors have substantially greater financial, manufacturing,
marketing, distribution and technical resources than the Company. The Company
directly competes with manufacturers of sphygmomanometers, as well as drug,
medical instrument and health care companies. In addition, the Company is aware
of other companies that are developing products that measure arterial
elasticity. A technology called the "Complior" has been developed in France and
has been reported in medical literature to measure "arterial compliance" (versus
elasticity). Research in a number of centers continues, supported by the
"Complior," although the status of commercial sales is unknown at this time. The
"Complior" device is based on "pulse wave velocity" (while the Company's Product
provides analysis of pulse waveforms). The Company plans to conduct an analysis
of "Complior" utility, reproducibility, ease of use and price over the next
year.

To the best of the Company's knowledge, no products which measure both large
and small artery elasticity have yet obtained either CE Mark certification or
FDA clearance to market and no other products developed and known to the Company
appear capable of providing both large artery and small

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artery elasticity values. The Company is aware of five other firms that are
developing products that attempt to measure vascular elasticity and which may be
viewed as competitive alternatives. The five firms are International Medical
Device Partners (Las Vegas, Nevada), ASULAB Research Labs of the SMH Group
(Neuchatel, Switzerland), Pulse Metric, Inc. (San Diego, California), PWV
Medical Ltd. (Sydney, Australia) and Specaway Pty Ltd. (St. Pauls New South
Wales, Sydney, Australia). One such firm has received FDA clearance to market a
device which claims to evaluate a patient's general cardiovascular condition.

GOVERNMENT REGULATION

Medical devices including the Company's Model DO-2020 are subject to strict
regulation by state and federal authorities, including the FDA and comparable
authorities in certain states. Under the 1976 amendments to the Federal Food,
Drug, and Cosmetic Act (the "FDCA") and the regulations promulgated thereunder,
manufacturers of medical devices are required to comply with very specific rules
and regulations concerning the testing, manufacturing, packaging, labeling and
marketing of medical devices. Failure to comply with the FDCA and any applicable
regulatory requirements could result in, among other things, civil and criminal
fines, product recalls, detentions, seizures, injunctions and criminal
prosecutions.

Before a new medical device may be introduced into the U.S. market, the
manufacturer generally must obtain prior authorization from the FDA. Such
authorization is based on a review by the FDA of the medical device's safety and
effectiveness for its intended uses. Medical devices may be authorized by the
FDA for marketing in the United States either pursuant to a 510(k) Pre-Market
Notification ("510(k)") application or a Pre-Market Approval ("PMA") submission.
The process of obtaining clearances or approvals from the FDA and other
applicable regulatory authorities can be expensive, uncertain and time
consuming, frequently requiring several years from the commencement of clinical
trials or submission of data to regulatory acceptance.

A PMA submission consists of information provided to the FDA sufficient to
establish independently that a device is safe and effective for its intended
use. By statute, the FDA is required to respond to a PMA submission within 180
days from the date of its submission; however, the approval process usually
takes substantially longer, often as long as several years. On the other hand, a
510(k) application requires an applicant to show that a medical device is
"substantially equivalent" in terms of safety and effectiveness to a predicate
product marketed prior to 1976 or to a device already cleared by the FDA for
marketing in the United States. In practice, clearance of products often takes
substantially longer than the 510(k) application review period of 90 days.

FDA clearances and approvals, if granted, may include significant
limitations on the intended uses for which a product may be marketed. FDA
enforcement policy strictly prohibits the promotion of cleared or approved
medical devices for nonapproved or "off-label" uses. In addition, product
clearances or approvals may be withdrawn for failure to comply with regulatory
standards or the occurrence of unforeseen problems following initial marketing.

Marketing of the Model DO-2020 Product in the United States will require
clearance or approval by the FDA. The Company has submitted a 510(k) application
to the FDA. On May 13, 1999, the FDA granted HDI an extension of time for its
510(k), which expires on October 1, 1999. The Company has requested another
extension to gather more data regarding its Model DO-2020 and to incorporate
that data into its 510(k) submission. If the extension request is not granted,
the Company can apply for a new 510(k). The Company continues to pursue the
510(k) clearance process but its outcome cannot be predicted with certainty.

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<PAGE>
Company's competitors and thus adversely affect the Company's business. In
addition, regulations of the FDA and state and federal and foreign laws and
regulations depend heavily on administrative interpretations, and there can be
no assurance that future interpretations made by the FDA, or other regulatory
authorities, with possible retroactive effect, will not adversely affect the
Company.

In addition to the regulations directly pertaining to the Company and its
products, many of the Company's potential customers are subject to extensive
regulation and governmental oversight. Regulatory changes in the healthcare
industry that adversely affect the business of the Company's customers could
have a material adverse effect on the Company's business, financial condition
and results of operations. An example includes limitations to the archiving,
processing or transmittal of patient data.

There can be no assurance that the Company will be able to obtain necessary
regulatory clearances or approvals in the United States or internationally on a
timely basis, if ever. Delays in the receipt of, or failure to receive, such
clearances or approvals, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.

REIMBURSEMENT

The Company anticipates that most revenue affiliated with physician use of
the Model DO-2020 Product will be derived from insurance coverage and
third-party payers. The patient payer marketplace includes commercial insurers,
Blue Cross/Blue Shield plans and Health Maintenance Organizations ("HMOs"), with
Medicare, other federally funded and "self-pay" plans accounting for a smaller
percentage of the payers. Each payer group establishes its own coverage and
procedure payment schedule resulting in a range of allowable payments. Physician
reimbursement is an important aspect in the Model DO-2020's success. Without
adequate levels of reimbursement, physicians will be reluctant to try the Model
DO-2020, if at all. There is no assurance that adequate third-party
reimbursement for the Model DO-2020 Product will be available.

The Health Care Financing Administration ("HCFA") a division of the U.S.
Department of Health and Human Services ("HHS"), has established three levels of
coding for health care products and services: Level I, Current Procedural
Terminology ("CPT") codes for physicians' services; Level II, National Codes for
supplies and certain services; and Level III, Local Codes. The coding system
applicable to the Model DO-2020 is Level I. Insurers require physicians to
report their services with the CPT coding system.

Following FDA clearance for the Model DO-2020, which cannot be assured, the
Company will work with the AMA to determine whether the Model DO-2020 falls
within any existing CPT codes or whether the use of the Model DO-2020 requires a
new code application or code revision. In the event the AMA determines that none
of the existing CPT codes are appropriate for the use of the Model DO-2020, the
Company believes that it will take one or more years to obtain a Model DO-2020
technology-specific CPT code. During this time, physicians may use a
"miscellaneous code" for patient billing purposes, although the level of
reimbursement they receive, if any, will depend on each individual payer's
assessment of the procedure.

PATENTS AND PROPRIETARY TECHNOLOGY

The Company's success depends, in part, on its ability to maintain patent
protection for its products and processes, and to preserve its trade secrets and
to operate without infringing the property rights of third parties. The Company
is the exclusive assignee for one issued United States patent and has obtained
an exclusive license to rights under three United States patents issued to the
Regents of the University of Minnesota (the "University"). These four patents
relate to the Company's blood pressure waveform analysis procedures, its
cardiovascular profiling technology, the non-invasive determination of cardiac
output, and the overall technology and operation of the Product. The license
from the University expires with the term of their patents (currently expected
to be in 2012). One patent is registered in Hong Kong.

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One or more patent applications relating to these United States issued patents
are currently pending in Japan, Germany, France and the United Kingdom. In
addition, one United States patent application has been allowed and, while not
assured, the Company believes it will be issued. The Company has five U.S.
patent applications and two International (Patent Cooperation Treaty)
applications that are pending regarding certain other aspects and components of
the Product. No assurance can be given that the Company's current patent and
licenses will provide a competitive advantage, that the pending applications
will result in patents being issued, or that competitors of the Company will not
design around any patents or licenses issued to the Company.

Besides seeking additional patents, the Company intends to rely to the
fullest extent possible on certain trade secrets, on proprietary "know-how", and
on its ongoing endeavors involving product improvement and enhancement. No
assurance can be given that nondisclosure agreements and invention assignment
agreements will protect the Company's proprietary information and know-how or
provide adequate remedies in the event of unauthorized use or disclosure of such
information, or that others will not be able to develop independently such
information.

UNIVERSITY OF MINNESOTA RESEARCH AND LICENSE AGREEMENT

On September 23, 1988, the Company entered into a Research and License
Agreement (the "University License Agreement") with the University, pursuant to
which the University granted to the Company an exclusive, worldwide license
under its patents that relate to the Product for diagnostic, therapeutic,
monitoring and related uses. The University License Agreement expires with the
last to expire of the patents related to the licensed technology (currently
expected to be in 2012). The Company also has the right to grant sub-licenses
under the University's patents described immediately above.

In consideration of the University License Agreement, the Company conducted
expanded clinical trials of arterial compliance technology and is continuing to
use its best efforts to develop commercial medical devices. The Company must pay
a royalty on revenue from commercialization of the Product (or future products,
which incorporate the licensed arterial compliance technology) in the amount of
3% of gross revenue (less certain reductions, such as returned goods).

EMPLOYEES AND CONSULTANTS

The Company currently employs 16 full-time employees. The Company
anticipates hiring approximately 10 additional personnel during the next 12
months for marketing and sales activities, for plant operations and assembly
tasks, for computer software and data base endeavors and for clinical and
customer support needs including accounting and administrative staff. The
Company believes that its relations with its employees are good.

In addition to vendors under contract to the Company regarding specific
product-related tasks, the Company has consultant relationships with several
experts including: (a) several experts in regulatory affairs and FDA matters;
(b) Jay N. Cohn, M.D. as its Chief Clinical Consultant; (c) Stanley M.
Finkelstein, Ph.D. as its Chief Technical Consultant; (d) a consulting firm for
computer software engineering design and programming; (e) a consulting firm for
medical electronic manufacturing and production engineering tasks; (f)
consulting firms for third-party reimbursement; and (g) several experts in sales
and marketing. Additional consultants may be retained as necessary to
accommodate the Company's need for experts in selected areas of product-related
activities.

RISK FACTORS

The following are important factors that could cause actual results to
differ materially from those anticipated in any forward-looking statements made
by or on behalf of the Company.

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DEVELOPMENT STAGE COMPANY; SUBSTANTIAL ANTICIPATED FUTURE LOSSES

The Company is a development stage company that until April 1998 has been
engaged primarily in research, design, development and commercialization of the
Company's Product. While the Company has developed a commercial version of the
Model CR-2000 and a version of the Model DO-2020, the Company has only since
April 1998 commenced marketing efforts for the Model CR-2000 and has $381,247 in
revenues for the year ended June 30, 1999. As of June 30, 1999, the Company had
a deficit accumulated during the development stage of $(5,490,344). The Company
expects to continue to incur substantial net operating losses as clinical
testing, research and development, sales and marketing activities and operations
continue.

The likelihood of the success of the Company must be considered in light of
the expenses, difficulties and delays frequently encountered in connection with
development stage businesses and the competitive environment in which the
Company will operate. The Company's ability to achieve profitability is
dependent in large part on obtaining timely FDA clearance for its Model DO-2020,
the availability of third-party reimbursement, gaining market acceptance of its
Product, establishing distribution channels, the ability to operate and maintain
the CDMF on a commercial scale, developing the capacity to manufacture and sell
its Product on a commercial scale and in compliance with regulatory
requirements, the availability of integral components for the Company's Product,
increased competition, changes in governmental regulation, health care reforms,
exposure to product liability and the Company's ability to protect its
proprietary technology. There can be no assurance that the Company will
successfully market any model of its Product or operate profitably.

LIMITED FINANCIAL RESOURCES; NEED FOR ADDITIONAL FINANCING

The Company's ability to execute its business strategy depends to a
significant degree on its ability to obtain substantial equity capital and other
financing. The Company's business strategy requires a large capital outlay for
equipment which is to be placed in a physician's office without charge.
Consequently, the Company will necessarily build up and maintain an inventory of
equipment before the Company will know whether its business strategy will be
successful. The proceeds of the Company's initial public offering, declared
effective on July 23, 1998, are expected to be sufficient to fund the Company's
operations through the next 18 to 24 months. Although the Company estimates that
the proceeds from such offering will be sufficient to allow initial marketing of
the Company's Product, no assurance of such can be given. Any unforeseen
contingencies, including, but not limited to, delays in FDA clearance of the
Model DO-2020, unavailability of third party reimbursement, delays or limited
market acceptance, delays in establishment of distribution channels, shortage of
components or delays in manufacturing may impede the Company's initial marketing
efforts. If the proceeds of the initial public offering are not sufficient to
achieve initial marketing of both models of the Company's Product, the Company
will be required to seek additional funds through another offering of the
Company's equity securities or by incurring indebtedness. If additional funds
are required, there can be no assurance that any additional funds will be
available on terms acceptable to the Company or its security holders, or at all,
or that any future capital that is available will be raised on terms that are
not dilutive to investors. The Company's business plan and financing needs are
subject to change depending on, among other things, market conditions, business
opportunities and cash flow from operations, if any.

LACK OF FDA CLEARANCE FOR PRODUCT

The Company believes that the Model CR-2000 does not need either FDA
clearance or approval prior to marketing to research institutions for research
use only. However, the FDA could disagree with the Company's position and
require a 510(k) application or PMA submission for the Model CR-2000, which, if
pursued, may not be cleared or approved, or if cleared or approved, may contain
significant limitations on the intended uses for which the Product is marketed.
In contrast, the Company's Model DO-2020 will be regulated by the FDA as a
medical device and will need FDA clearance or approval prior to being

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marketed in the United States. Clearance for marketing of the Company's Model
DO-2020 has not been received from the FDA. The Company has submitted a 510(k)
application to the FDA. The FDA may decide that one or more of the proposed
claims or indications for use of the Model DO-2020 cannot be cleared by means of
the 510(k) process. In that case, the FDA might require that the Company seek
approval for the device or particular claims or indications by means of a PMA
submission which could substantially delay marketing the device or using such
claims or indications for marketing purposes by several months or even years.

The process of obtaining FDA clearance or approval can be lengthy and could
require additional clinical testing and expenditure of financial and other
substantial resources. The timing of the FDA clearance or approval process is
unpredictable and there can be no assurance that the Company's 510(k)
application for marketing the Model DO-2020 will ultimately receive FDA
clearance. FDA clearance and/or approval, if granted, may include significant
limitations on the intended uses for which a product may be marketed. FDA
enforcement policy strictly prohibits the promotion of cleared or approved
medical devices for nonapproved or "off-label" uses. In addition, product
clearances may be withdrawn for failure to comply with regulatory standards or
the occurrence of unforeseen problems following initial marketing. Failure to
receive necessary regulatory clearances or approvals or a lengthy approval
process would have a material adverse effect on the Company's business,
financial condition and results of operations.

UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT

The Company's financial performance will depend in large part on the extent
to which reimbursement for the cost of medical products and services will be
available from government health administration authorities, private health
coverage insurers and other payer organizations, if at all. No third-party payer
has yet approved reimbursement for use of the Company's Model DO-2020.
Significant uncertainty exists as to the pricing, availability of distribution
channels and reimbursement status of new medical products, and there can be no
assurance that adequate third-party reimbursement will be available for the
Model DO-2020. In certain foreign markets, pricing or profitability of health
care products is subject to government control. Inability of the Company to
obtain third-party reimbursement for the Product would have a material adverse
effect on the Company.

NEW PRODUCT; UNCERTAINTY OF MARKET ACCEPTANCE OF PRODUCT OR MEDICAL APPLICATION
OF TECHNOLOGY

The Company's financial performance will depend in large part upon FDA
clearance of the Model DO-2020 and the extent to which the respective models of
the Product are accepted by researchers (Model CR-2000) as useful, and by
physicians (Model DO-2020 and Model DO-2020i) as effective, reliable and safe
for use in screening, diagnosing and monitoring the treatment of patients with
vascular disease. If the Model DO-2020 does not achieve market acceptance due to
lack of appropriate third-party reimbursement, FDA clearance, acceptance of test
data as reliable and beneficial, operational problems with the CDMF or any other
factors which prohibit acceptance by physicians, the Company will likely be
required to cease operations. The Company is unable to predict how quickly or
how broadly either model of its Product will be accepted by the market, if at
all, or if accepted, what the demand for them could be. Achieving market
acceptance will require the Company to educate the marketplace about the
anticipated benefits associated with the use of the Company's Product and may
also require the Company to obtain and disseminate additional data acceptable to
the medical community as evidence of such benefits. Because the Company's
Product represents a new approach for evaluating vascular disease, there may be
a greater reluctance to accept the Company's Product than would occur with
products utilizing more traditional technologies or methods of diagnosis,
resulting in longer sales cycles and slower revenue growth than currently
anticipated. There can be no assurance that the Company will be successful in
educating the marketplace about its Product or that available data concerning
these benefits will create a demand by the medical community for the Company's
Product. Furthermore, the Company's Product will be substantially more expensive
to operate than the traditional blood pressure testing instrument, the
sphygmomanometer.

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There can be no assurance that physicians will utilize the Model DO-2020 once
installed, or that the Company's services will be profitable to or become
generally accepted by such physicians. In addition, the Company's Product is
premised on the medical assumption that a loss of arterial elasticity is an
indicator for the early onset of cardiovascular disease. While the Company
believes, based on its clinical studies, that the loss of arterial elasticity is
an indicator for the early onset of cardiovascular disease, there can be no
assurance that the Company's claims will be accepted by the medical community.

LACK OF MANUFACTURING EXPERIENCE; DEPENDENCE ON THIRD-PARTY SUB-ASSEMBLY
MANUFACTURERS

To date, the Company has relied on independent contractors and consultants
for component sub-assembly manufacturing of all models of the Product. For the
Company to be financially successful, its products must be manufactured in
accordance with strict regulatory requirements, in commercial quantities, at
appropriate quality levels and at acceptable costs. To date, the Company's
Product has been manufactured in limited quantities and not on a commercial
scale. As a result, there can be no assurance that the Company will not
encounter difficulties in obtaining reliable and affordable contract
sub-assembly manufacturing assistance and/or in scaling up its manufacturing
capabilities, including problems involving production yields, per-unit
manufacturing costs, quality control, component supply and shortages of
qualified manufacturing personnel. In addition, there can be no assurance that
the Company will not encounter problems relating to integration of components if
changes are made in the present models' configuration. Any such difficulties
could result in the inability of the Company to satisfy any customer demand for
its Product in a cost-effective manner and would likely have a material adverse
effect on the Company.

SINGLE SOURCE OF SUPPLY OF SENSOR AND OTHER COMPONENTS

The Company currently obtains its proprietary arterial pulse pressure sensor
(the "Sensor"), an integral component of the Company's Product, from a single
source. The Company has a manufacturing services agreement with Apollo Research
Corp., the sole supplier of the Sensor. Disruption or termination of this
relationship could have a material adverse effect on the Company's operations.
While the Company has no reason to believe that this relationship will be
disrupted or terminated, the inability to obtain sufficient quantities of the
Sensor meeting its standards of reliability, accuracy and performance or the
need to develop alternative sources in a timely and cost effective manner, if
and as required in the future, would adversely affect the Company's operations
until new sources of the Sensor become available, if at all. In addition, while
the Sensor utilized in prototypes of the Product has performed reliably, there
is no assurance that reliable Sensors will be available on a large-scale
commercial basis. Should the Company be unable to obtain an adequate supply of
Sensors or other components meeting its standards of reliability, accuracy and
performance, the Company would be materially adversely affected, including
delays due to the unavailability of Products to sell, delays in obtaining FDA
clearance of the Model DO-2020 and new patent applications.

INTENSE COMPETITION

Competition from medical devices which are used to screen, diagnose and
monitor the treatment of patients with cardiovascular disease is intense and
likely to increase. The Company competes with manufacturers of, for example,
non-invasive blood pressure monitoring equipment and instruments, and may
compete with manufacturers of other non-invasive devices. In addition, the
Company's products will also compete with traditional blood pressure testing by
means of a standard sphygmomanometer which is substantially less expensive than
the Company's Product. Many of the Company's competitors and potential
competitors have substantially greater capital resources, name recognition,
research and development experience and extensive regulatory, manufacturing and
marketing capabilities. Many of these competitors offer well established, broad
product lines and ancillary services not offered by the Company. Some of the
Company's competitors have long-term or preferential supply arrangements with
physicians

18
<PAGE>
and hospitals which may act as a barrier to market entry for the Company's
Product. In addition, other large health care companies or medical instrument
firms may enter the non-invasive vascular product market in the future.
Competing companies may succeed in developing products that are more efficacious
or less costly than any that may be produced by the Company, and such companies
also may be more successful than the Company in producing and marketing such
products or their existing products. Competing companies may also introduce
competitive pricing pressures that may adversely affect the Company's sales
levels and margins. As a result, there can be no assurance that the Company will
be able to compete successfully with existing or new competitors.

STRATEGIC DEPENDENCE ON SINGLE UNITED STATES PRODUCT; MODEL DO-2020 PRICING
STRUCTURE NOT YET DETERMINED

The Company's financial success is dependent upon the marketing of the Model
CR-2000 and the Model DO-2020 versions of the Product. The Company expects that
the Model DO-2020 will eventually generate the majority of its revenues. No
assurance can be given that the Company will be able to successfully develop any
additional products. In addition, the Company has not yet finalized the pricing
structure for the Model DO-2020. While the Company intends to offer the Model
DO-2020 at terms that it believes will be competitive in the market, higher than
expected manufacturing, marketing and distribution costs, lower than expected
reimbursement levels or competitive forces may force the Company to raise or
lower its price or alter its terms in a manner which has a material and adverse
effect on the Company.

GOVERNMENT REGULATION

Medical devices including the Company's Model DO-2020 are subject to strict
regulation by state and federal authorities, including the FDA and comparable
authorities in certain states. Under the 1976 amendments to the Federal Food,
Drug and Cosmetic Act (the "FDCA") and the regulations promulgated thereunder,
manufacturers of medical devices are required to comply with very specific rules
and regulations concerning the testing, manufacturing, packaging, labeling and
marketing of medical devices. Failure to comply with the FDCA and any applicable
regulatory requirements could result in, among other things, civil and criminal
fines, product recalls, detentions, seizures, injunctions and criminal
prosecutions.

Before a new medical device may be introduced into the United States market,
the manufacturer generally must obtain prior authorization from the FDA. Such
authorization is based on a review by the FDA of the medical device's safety and
effectiveness for its intended uses. Medical devices may be authorized by the
FDA for marketing in the United States either pursuant to a 510(k) Pre-Market
Notification application or a Pre-Market Approval submission. The process of
obtaining clearances or approvals from the FDA and other applicable regulatory
authorities can be expensive, uncertain and time consuming, frequently requiring
several years from the commencement of clinical trials or submission of data to
regulatory acceptance.

A 510(k) application requires an applicant to show that a medical device is
"substantially equivalent" in terms of safety and effectiveness to a predicate
product marketed prior to 1976 or to an instrument already cleared by the FDA
for marketing in the United States. In practice, clearance of products often
takes substantially longer than the statutory 510(k) application review period
of 90 days. On the other hand, a PMA submission consists of information provided
to the FDA sufficient to establish independently that a device is safe and
effective for its intended use. By statute, the FDA is required to respond to a
PMA submission within 180 days from the date of its submission; however, the
approval process usually takes substantially longer, often as long as several
years.

19
<PAGE>
approved medical devices for nonapproved or "off-label" uses. In addition,
product clearances or approvals may be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing.

The Model CR-2000 is intended for use in research markets and therefore the
Company believes it does not require FDA clearance. The FDA could disagree with
the Company's interpretation of the regulations and require a 510(k) application
or PMA submission which, if pursued, may not be cleared or approved or, if
approved, may contain certain significant limitations on the intended uses for
which the product is marketed.

Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain clearance by a foreign country may be longer or shorter than that
required for FDA clearance, and the requirements may differ. Export sales of
certain devices that have not received FDA marketing clearance generally are
subject to both FDA export permit requirements and, in some cases, general
United States export regulations. In order to obtain a FDA export permit, the
Company may be required to provide the FDA with documentation from the medical
device regulatory authority of the country in which the purchaser is located. No
assurance can be given that foreign regulatory clearances or approvals will be
granted on a timely basis, if ever, or that the Company will not be required to
incur significant costs in obtaining or maintaining its foreign regulatory
clearance or approvals.

The Company's contract design and manufacturing organizations, as well as
the Company itself, are subject to regulation by the FDA in connection with the
design and manufacture of the Model DO-2020, including, but not limited to,
required compliance with the FDA's Quality System Regulation ("QSR") and
equivalent state and foreign regulations. Failure of any of these organizations
to comply with those regulations may subject one or more of those organizations,
or the medical device designed and produced for and by the Company, to
regulatory action. Such regulatory action could threaten or cut off the
Company's source of supply or cause the FDA to order the removal of the Product
from the market. While the Company believes it could locate and qualify other
sources to design or manufacture medical device products, supply interruptions
in the meantime would have a materially adverse effect on the Company's
business, financial condition and results of operations.

Federal, state and foreign regulations regarding the manufacture and sale of
healthcare products and diagnostic devices are subject to future change. The
Company cannot predict what material impact, if any, such changes might have on
its business. Future changes in regulations or enforcement policies could impose
more stringent requirements on the Company, compliance with which could
adversely affect the Company's business. Such changes may relax certain
requirements, which could prove beneficial to the Company's competitors and thus
adversely affect the Company's business. In addition, regulations of the FDA and
state and foreign laws and regulations depend heavily on administrative
interpretations, and there can be no assurance that future interpretations made
by the FDA, or other regulatory authorities, with possible retroactive effect,
will not adversely affect the Company.

20
<PAGE>
There can be no assurance that the Company will be able to obtain necessary
regulatory clearances or approvals in the United States or internationally on a
timely basis, if ever. Delays in the receipt of, or failure to receive, such
clearances or approvals, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.

COMPLIANCE WITH FOREIGN REGULATORY REQUIREMENTS

As a part of its marketing strategy, the Company intends to pursue
commercialization of its Product in international markets. The Company's Product
will be subject to regulations that vary from country to country. The process of
obtaining foreign regulatory approvals in certain countries can be lengthy and
require the expenditure of substantial resources. Until FDA clearance or
approval is obtained for the Model DO-2020, it also must comply with the export
requirements of the FDCA before they can be exported. There can be no assurance
that the Company will be able to meet FDCA requirements or obtain necessary
foreign regulatory clearances or approvals for the Product on a timely basis or
at all. Delays in receipt of or failure to receive such clearances or approvals,
or failure to comply with existing or future regulatory requirements, would have
a material adverse effect on the Company's business, financial condition and
results of operations.

LACK OF ESTABLISHED SALES/DISTRIBUTION CHANNELS

The Company commenced marketing of the Model CR-2000 in April 1998, and
currently has a limited sales force. The Company has not fully developed a
distribution system for any of its models. There can be no assurance that the
Company will be able to develop an effective sales force with the requisite
knowledge and skill to fully exploit the sales potential of the Company's
Product or be able to establish distribution channels to promote market
acceptance of, and create demand for, the Company's Product. Even if the Company
enters into an agreement with distributors, there can be no assurance that such
distributors will devote the resources necessary to provide effective sales and
promotion support to the Company's Product. The Company's ability to expand
Product sales will depend in large part on its ability to develop relationships
with distributors who are willing to devote the resources necessary to provide
such effective sales and promotional support and to educate and train a sales
force and the medical community. There can be no assurance that the Company will
be able to accomplish these objectives. There is also no assurance that the
Company's financial condition will allow it to withstand long sales cycles for
its Model CR-2000, its Model DO-2020 or its Model DO-2020i.

RAPID TECHNOLOGICAL CHANGE

The medical device market is characterized by intensive development efforts
and rapidly advancing technology. Success of the Company will depend, in large
part, upon its ability to anticipate and keep pace with advancing technology and
competitive innovations. There can be no assurance that the Company and its
personnel will be successful in identifying, developing and marketing new
products or enhancing its existing Product. In addition, there can be no
assurance that new products or alternative diagnostic techniques will not be
developed that will render the Company's current or planned products obsolete or
inferior. Rapid technological development by competitors may result in the
Company's Product becoming obsolete before the Company recovers a significant
portion of the research, development and commercialization expenses incurred
with respect to such Product.

PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE

The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its Product is alleged to have resulted in
adverse effects. The Company has obtained a general liability insurance policy
that covers potential product liability claims. There can be no assurance that
liability claims will not be excluded from such policies, will not exceed the
coverage limits of such policies,

21
<PAGE>
or that such insurance will continue to be available on commercially reasonable
terms or at all. Consequently, a product liability claim or other claim with
respect to uninsured liabilities or in excess of insured liabilities would have
a material adverse effect on the Company's business, financial condition and
results of operations.

UNCERTAINTY OF HEALTH CARE REFORM

The levels of revenue and profitability of medical device companies may be
affected by the efforts of government and third-party payers to contain or
reduce the costs of health care through various means. In the United States
there have been, and the Company expects that there will continue to be, a
number of federal, state and private proposals to control health care costs.
These proposals may contain measures intended to control public and private
spending on health care as well as to provide universal public access to the
health care system. If enacted, these proposals may result in a substantial
restructuring of the health care delivery system. Significant changes in the
nation's health care system are likely to have a substantial impact over time on
the manner in which the Company conducts its business and could have a material
adverse effect on the Company's business, financial condition and results of
operations.

MANAGEMENT OF GROWTH

The execution of its business plan will likely place increasing demands on
the Company's existing management and operations. The Company's future growth
and profitability will depend on its ability to successfully attract, train,
motivate, manage and retain new employees and to continue to improve its
operational, financial and management information systems. There can be no
assurance that the Company will be able to effectively manage any expansion of
its business. Management's inability to manage its growth effectively could have
a material adverse effect on the Company's business, financial condition and
results of operations.

DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL

The Company is highly dependent on a limited number of key management and
technical personnel, particularly its Chief Executive Officer, Dennis L. Sellke,
its President, Greg H. Guettler, and its Executive Vice President and Chief
Technology Officer, Charles F. Chesney, D.V.M., Ph.D., R.A.C. The Company does
not have key-person life insurance on Messrs. Sellke, Guettler or Dr. Chesney.
In October 1995, the Company entered into a five-year employment agreement with
Dr. Chesney which contains certain confidentiality obligations. Messrs. Sellke
and Guettler do not have written employment agreements with the Company and are
presently employed on an at will basis. The Company's future success will depend
on its ability to attract and retain highly qualified personnel. The Company
competes for such personnel with other companies, academic institutions,
government entities and other organizations. There can be no assurance that the
Company will be successful in hiring or retaining such qualified personnel. The
loss of key personnel or an inability to hire or retain qualified personnel
could have an adverse effect on the Company's business, financial condition and
results of operations.

UNCERTAIN ABILITY TO PROTECT PROPRIETARY TECHNOLOGY

The Company's success depends, in part, on its ability to maintain patent
protection for its products and processes, preserve its trade secrets and
operate without infringing the property rights of third parties. The Company is
the exclusive assignee for one issued United States patent and has obtained an
exclusive license to rights under three United States patents issued to the
University. These four patents relate to the Company's blood pressure waveform
analysis procedures, its cardiovascular profiling technology, the non-invasive
determination of cardiac output and overall technology and operation of the
Product. The license from the University expires with the term of their patents
(currently expected to be in 2012). One patent is registered in Hong Kong. One
or more patent applications relating to these United States issued patents are
currently pending in Japan, Germany, France and the United Kingdom. In addition,
one United States patent application has been allowed, and while not issued, the
Company believes it will be

22
<PAGE>
issued. The Company has five United States patent applications and two
International (Patent Cooperation Treaty) applications that are pending
regarding certain other aspects and components of the Product. Besides seeking
patents, the Company intends to rely to the fullest extent possible on certain
trade secrets, on proprietary "know-how," and on its ongoing endeavors involving
product improvement and enhancement.

The validity and breadth of claims coverage in medical technology patents
involve complex legal and factual questions and, therefore, may be highly
uncertain. No assurance can be given that the Company's current patent and
licenses will provide a competitive advantage, that the pending applications
will result in patents being issued, or that competitors of the Company will not
design around any patents or licenses issued to the Company. Furthermore, there
can be no assurance that the Company's nondisclosure agreements and invention
assignment agreements will protect its proprietary information and know-how or
provide adequate remedies in the event of unauthorized use or disclosure of such
information, or that others will not be able to develop such information
independently. There can be no assurance that allegations of infringement of the
proprietary rights of third parties will not be made, or that if made, such
allegations would not be sustained if litigated. There has been substantial
litigation regarding patent and other intellectual property rights in the
medical device industry. Litigation may be necessary to enforce patents issued
to the Company, to protect trade secrets or know-how owned by the Company, to
defend the Company against claimed infringement of the rights of others or to
determine the ownership, scope or validity of the proprietary rights of the
Company and others. Any such claims may require the Company to incur substantial
litigation expenses and to divert substantial time and effort of management
personnel. An adverse determination in litigation involving the proprietary
rights of others could subject the Company to significant liabilities to third
parties, could require the Company to seek licenses from third parties, and
could prevent the Company from manufacturing, selling or using its Product. The
occurrence of such litigation or the effect of an adverse determination in any
such litigation could have a material adverse effect on the Company's business,
financial condition and results of operations.

CONTROL BY MANAGEMENT

As of August 31, 1999, the officers and directors of the Company as a group
beneficially own 19.7% of the Company's outstanding shares and they are in a
position to influence the outcome of shareholder votes, including the election
of directors. In addition, the Company's Articles of Incorporation provide that
the Board of Directors will be divided into three classes, with each class
elected in a different year for a term of three years. This and other provisions
in the Company's Articles of Incorporation could have the effect of delaying or
preventing changes of control or in management.

SHARES ELIGIBLE FOR FUTURE SALE

As of August 31, 1999, there were 5,109,235 shares of Common Stock issued
and outstanding. All outstanding shares are either freely tradable or eligible
for sale under either Rule 144 or Rule 144k. There were also 2,151,320 shares
purchasable through the exercise of outstanding options and warrants,
exercisable at per share exercise prices ranging from $1.70 to $5.50. In
addition, there are 2,587,500 shares purchasable through the exercise of the
Company's outstanding Class A Warrants at an exercise price of $5.50 per share.
Sales of significant amounts of shares in the public market or the perception
that such sales may occur could adversely affect the market price of the
Company's securities or the future ability of the Company to raise capital
through an offering of its equity securities.

POSSIBLE ILLIQUIDITY FOR SECURITIES

The Company's Common Stock, Class A Warrants and Units are quoted on the
Nasdaq SmallCap Market. If the Company fails to satisfy the Nasdaq requirements
to maintain listing on Nasdaq on an on-going basis, the Company's securities
will likely be quoted in the over-the-counter market in the so-called "pink
sheets" or the OTC Bulletin Board. In addition, the securities would be subject
to the rules promulgated under the Securities Exchange Act of 1934 relating to
"penny stocks." These rules require

23
<PAGE>
brokers who sell securities subject to such rules to persons other than
established customers and institutional accredited investors to complete certain
documentation, make suitability inquiries of investors and provide investors
with certain information concerning the risks of trading in the security.
Consequently, an investor would find it more difficult to buy or sell the
Company's securities in the open market.

FLUCTUATIONS IN FINANCIAL RESULTS; VOLATILITY OF MARKET PRICE

The Company's quarterly results and the market price of its securities may
be subject to significant fluctuations due to numerous factors, such as
variations in the Company's revenues, earnings and cash flow, ability to meet
market expectations, status of the FDA clearance process, availability of
Product components, market acceptance, changes in price, terms or product mix,
changes in manufacturing costs or the introduction of new products by the
Company or competitors. Until the Company receives FDA clearance, the Company's
inability to market the Model DO-2020 will adversely affect the Company's
financial results which may have an adverse effect on the market price of its
securities. There can be no assurance that the Company will ever generate
significant revenues or that the Company's revenues or income will ever improve
on a quarterly basis or that any improvements from quarter to quarter will be
indicative of future performance. In addition, the Company's expenses are based
in part on expectations of future revenues. As a result, expenses may not match
revenues on a quarterly basis, and a delay in future revenues would adversely
affect the Company's operating results. In addition, the stock markets have
experienced price and volume fluctuations, resulting in change in the market
prices of the stocks of many companies which may not have been directly related
to the operating performance of these companies. Such broad market fluctuations
may adversely affect the market price of the Company's securities.

NO CASH DIVIDENDS

The Company has never paid cash dividends and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. It is anticipated
that profits, if any, received from operations will be devoted to the Company's
future operations.

CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS;
POSSIBLE REDEMPTION OF WARRANTS

Warrantholders will be able to exercise their Class A Warrants only if a
current prospectus relating to the shares underlying the Class A Warrants is
then in effect and only if such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Class A Warrants reside. Although the Company will use its
best efforts to (i) maintain the effectiveness of a current prospectus covering
the shares underlying the Class A Warrants and (ii) maintain the registration of
such shares under the securities laws of the states in which the Company
initially qualified the units for sale, there can be no assurance that the
Company will be able to do so.

The Class A Warrants are subject to redemption at any time by the Company at
$.01 per Warrant commencing October 21, 1998, on 30 days prior written notice,
if the closing bid price of the shares exceeds $6.50 (subject to adjustment) for
14 consecutive trading days. If the Class A Warrants are redeemed,
Warrantholders will lose their right to exercise the Warrants except during such
30 day redemption period. The Class A Warrants expire on July 22, 2002.
Redemption of the Class A Warrants could force the holders to exercise the Class
A Warrants at a time when it may be disadvantageous for the holders to do so or
to sell the Class A Warrants at the then market price or accept the redemption
price, which likely would be substantially less than the market value of the
Class A Warrants at the time of redemption.

ITEM 2. PROPERTIES

Under the terms and conditions of a 36-month lease effective November 1997,
the Company occupies approximately 6,900 square feet of commercial office and
light assembly space at The Waters in Eagan, Minnesota, a location in close
proximity to the Minneapolis/St. Paul International Airport. The monthly gross
rent, including basic operating expenses, is approximately $7,000. The Company
believes that this facility should be adequate for its currently anticipated
requirements for the term of the lease.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any litigation and is not aware of any
threatened litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year ended June 30, 1999.

24
<PAGE>
PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's Common Stock began trading on the Nasdaq SmallCap Market on
August 7, 1998 under the symbol "HDII." Prior to that date, there was no
established trading market for the Common Stock. As of August 31, 1999, the
Company estimates that there were approximately 1,100 holders of the Company's
Common Stock.

The following table sets forth, for the periods indicated, the high and low
closing bid and asked prices for the Common Stock as reported by the Nasdaq
SmallCap Market. Such quotations reflect inter-dealer prices, without retail
markup, mark-down or commission and may not represent actual transactions.

<TABLE>
<CAPTION>
CLOSING BID PRICE CLOSING ASKED PRICE
---------------------- -----------------------
PERIOD HIGH LOW HIGH LOW
- --------------------------------------------- --------- ------- --------- --------
<S> <C> <C> <C> <C>
August 7, 1998--September 30, 1998........... $ 4 3/16 $ 2 3/4 $ 4 3/8 $ 3 3/16
October 1, 1998--December 31, 1998........... 3 7/8 2 5/8 4 1/8 2 7/8
January 1, 1999--March 31, 1999.............. 3 1/2 2 3 15/16 2 1/4
April 1, 1999--June 30, 1999................. 3 5/8 2 1/4 3 13/16 2 5/8
July 1, 1999--August 31, 1999................ 2 15/16 2 1/4 3 2 1/2
</TABLE>

The Company has not declared any dividends to date and does not plan to
declare any dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

No unregistered equity securities were sold by the Company during the
reporting period covered by this report.

USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING

On July 23, 1998, the SEC declared effective the Company's Registration
Statement on Form SB-2 (File No. 333-53025) relating to its initial public
offering. On July 28, 1998, the Company consummated the sale of 2,250,000 units,
each unit consisting of one share of Common Stock and one redeemable Class A
Warrant. On August 31, 1998, the underwriter exercised in full an overallotment
option to purchase an additional 337,500 units. R.J. Steichen & Company served
as the underwriter of the offering.

The Company registered an offering amount of 2,587,500 units and 2,587,500
shares of Common Stock underlying the Class A Warrants. Based on an offering
price of $4.125 per unit and an exercise price of $5.50 per Class A Warrant, the
aggregate offering amount was $24,904,688. The Company has sold 2,587,500 units,
resulting in gross proceeds of $10,673,438.

Total offering expenses were $1,485,024. These expenses consisted of: (i)
$907,031 in underwriting discounts; (ii) $266,836 of expenses paid to the
underwriter; (iii) $164,936 of legal and accounting fees; and (iv) $146,221 of
printing and other expenses. The net offering proceeds to the Company were
$9,188,414 after deducting total expenses of the offering.

25
<PAGE>
From July 28, 1998 through June 30, 1999, the Company has used the net
offering proceeds of $9,188,414 as follows:

<TABLE>
<CAPTION>
<S> <C>
Temporary investments (U.S. Government obligations/notes
and U.S. Government money market fund; other short-term
high quality, interest-bearing instruments)................................... $ 7,684,525
Central Data Management Facility................................................ 318,194
Purchase of property and equipment.............................................. 326,087
Sales, marketing and promotion.................................................. 157,714
Wages, related expenses and benefits............................................ 370,351
Outside consultants............................................................. 88,916
Inventory....................................................................... 242,627
------------
$ 9,188,414
------------
------------
</TABLE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. In addition, forward-looking
statements may be made orally in the future by or on behalf of the Company. When
used in this report, the words "believe," "expect," "will," "can," "estimate,"
"anticipate" and similar expressions are intended to identify such
forward-looking statements.

OVERVIEW

The Company was founded in July 1988 to develop its blood pressure waveform
analysis technology into a clinically acceptable, non-invasive method for
conducting cardiovascular profiling. From inception, the majority of the
Company's efforts have been focused on incorporating this technology into an
instrument that is intended to allow physicians to reliably and effectively
screen, diagnose and monitor the treatment of patients with cardiovascular
disease. While the Company has developed and tested commercial models of the
Product and in April 1998 commenced marketing the Model CR-2000 for research use
only, it expects to incur substantial net operating losses until it achieves a
significant level of revenue following FDA clearance to Market the Model
DO-2020.

The Company plans to market three models: the Model CR-2000, the Model
DO-2020, and the Model DO-2020i. Management believes that the Model CR-2000,
intended for research use only (that is, not for screening, diagnosing,
monitoring or determining treatment of patients), does not require FDA clearance
to market, and marketing activities have commenced worldwide. The Model DO-2020,
intended for use by physicians to screen, diagnose and monitor the treatment of
patients with vascular disease, is an FDA regulated medical device. Although a
510(k) Application has been submitted to the FDA, the Company is unable to
market the Model DO-2020 in the United States until FDA clearance to market is
obtained. Following receipt of a medical device CE Mark, the Company intends to
pursue foreign registrations and approvals that will allow marketing of a
similar product, the DO-2020i, in foreign markets.

The Company wishes to caution readers not to place undo reliance on any
forward-looking statements and to recognize that the statements are not
predictions of actual future results. Actual results could differ materially
from those anticipated in the forward-looking statements due to the risks and
uncertainties set forth in the this Report under the caption "Risk Factors," as
well as others not now anticipated. These risks and uncertainties include,
without limitation, the Company's ability to receive regulatory approval for its
Model DO-2020 product and its anticipated Model DO-2020i product; the
availability of third-party reimbursements; market acceptance of the Company's
products; the ability to operate and maintain the

26
<PAGE>
CDMF on a commercial scale; the ability to manufacture the Company's products on
a commercial scale and in compliance with regulatory requirements; the
availability of integral components for the Company's products; the Company's
ability to develop distribution channels; increased competition; changes in
government regulation; health care reforms; exposure to potential product
liability; and the Company's ability to protect its proprietary technology.

DEVELOPMENT STAGE RESULTS OF OPERATIONS

The Company is a development stage company and is not presently generating
any significant revenues. There can be no assurance that the Company will ever
be able to generate significant revenues, attain or maintain profitable
operations or successfully implement its business plan or its current
development opportunities. As of June 30, 1999, the Company had a deficit
accumulated during the development stage of $(5,490,344), attributable primarily
to research and development and general and administrative expenses. Until it is
able to generate significant revenues from its activities, the Company expects
to continue to incur operating losses.

The Company has developed proprietary cardiovascular profiling technology
that analyzes non-invasively derived arterial pulse pressure waveform data as a
means of providing parameters that are useful in assessing the cardiovascular
system. The Company has developed two models of the HDI/ PULSEWAVE-TM-
CardioVascular Profiling Instrument: (1) the CR-2000 which is currently in use
by physician scientists for research purposes only; and (2) the DO-2020 which is
intended to assist physicians and other health care professionals in screening,
diagnosing and monitoring the treatment of patients with cardiovascular disease.
Following receipt of a medical device CE Mark, the Company intends to pursue
foreign registrations and approvals that will allow marketing of a similar
model, the DO-2020i, in foreign markets. The Company has not yet received
permission to market the DO-2020 from the FDA. Although FDA clearance on the
Model DO-2020 is taking longer than the Company had originally anticipated, the
Company continues to believe that a FDA 510(k) clearance is the correct approach
and that the process will be completed within the fiscal year ending June 30,
2000.

FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998

Operating expenses for the fiscal year ended June 30, 1997 were $953,170
compared to $1,206,255 for the fiscal year ended June 30, 1998. Approximately
55% of the $953,170 and 22% of the $1,206,255 total operating expenses were
related to research and development expenses. A further breakdown of research
and development expenses is as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Design and development of prototype devices and other enhancements and
improvements........................................................ $ 425,988 $ 189,949
Design and development of Central Data Management Facility (CDMF)..... -- 41,650
Recognized compensation cost for value of stock options granted in
lieu of cash compensation........................................... 100,364 33,115
---------- ----------
Total research and development expenses........................... $ 526,352 $ 264,714
---------- ----------
---------- ----------
</TABLE>

For the fiscal year ended June 30, 1997 and June 30, 1998, respectively,
approximately 81% of $425,988 and 76% of $189,949 were paid to the Company's
contract design engineering firm.

27
<PAGE>
The following is a summary of the major categories included in general and
administrative expenses:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Wages, related expenses and benefits.................................. $ 176,045 $ 385,307
Patent expenses....................................................... 21,019 32,818
Outside consultants................................................... 133,663 203,712
Rent building and utilities........................................... -- 53,259
Insurance--general and health......................................... 26,008 34,197
Travel................................................................ 4,689 22,829
Legal and accounting.................................................. 6,930 85,682
Selling, marketing and promotion...................................... 2,489 40,408
Other--general and administrative..................................... 55,975 83,329
---------- ----------
Total general and administrative expenses........................... $ 426,818 $ 941,541
---------- ----------
---------- ----------
</TABLE>

The Company's number of employees increased from three in the fiscal year
ended June 30, 1997 to six in the fiscal year ended June 30, 1998. In September
1997, the Company hired its President, Greg H. Guettler. Effective November
1997, the Company leased approximately 6,900 square feet of commercial office
and light assembly space in Eagan, Minnesota.

Interest income was $81,198 and $64,092 for the fiscal years ended June 30,
1997 and June 30, 1998, respectively. A private placement of the Company's
shares of Common Stock yielded net proceeds of $1,220,720 in the fiscal year
ended June 30, 1998.

Net loss was $(871,972) and $(1,142,163) for the fiscal years ended June 30,
1997 and June 30, 1998, respectively. For the fiscal year ended June 30, 1997,
basic and dilutive net loss per share was $(.44), based on weighted average
shares outstanding of 1,962,011. For fiscal year ended June 30, 1998, basic and
dilutive net loss per share was $(.51), based on weighted average shares
outstanding of 2,221,914.

FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999

For the fiscal year ended June 30, 1999, the Company recorded revenue of
$381,247 relating to sales of the HDI/PULSEWAVE-TM- CR-2000 Research
CardioVascular Profiling Instrument. Initial sales of the CR-2000 were recorded
in the second quarter ended December 31, 1998. There was no revenue for the
fiscal year ended June 30, 1998.

Total cost and expenses for the fiscal year ended June 30, 1998 were
$1,206,255 compared to $3,009,857 for the fiscal year ended June 30, 1999.
Approximately 22% of the $1,206,255 and 19% of the $3,009,857 total cost and
expenses were related to research and development expenses. A further breakdown
of research and development expenses is as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Design and development of prototype devices and other enhancements and
improvements........................................................ $ 189,949 $ 257,451
Design and development of a Central Data Management Facility (CDMF)... 41,650 318,194
Recognized compensation cost for value of stock options granted in
lieu of cash compensation........................................... 33,115 --
---------- ----------
Total research and development expenses............................. $ 264,714 $ 575,645
---------- ----------
---------- ----------
</TABLE>

28
<PAGE>
For the fiscal year ended June 30, 1999, approximately 55% of the total
research and development expenses related to the design and development of a
CDMF.

The following is a summary of the major categories included in selling,
general and administrative expenses:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------
1998 1999
---------- ------------
<S> <C> <C>
Wages, related expenses and benefits................................ $ 385,307 $ 749,389
Outside consultants................................................. 203,712 263,145
Rent--building and utilities........................................ 53,259 86,753
Insurance--general and health....................................... 34,197 78,523
Selling, marketing and promotion, including
applicable wages.................................................. 40,408 316,416
Depreciation and amortization....................................... 16,158 75,413
Other--general and administrative................................... 208,500 725,785
---------- ------------
Total selling, general and administrative expenses................ $ 941,541 $ 2,295,424
---------- ------------
---------- ------------
</TABLE>

The Company's number of employees increased from six in the fiscal year
ended June 30, 1998 to fourteen in the fiscal year ended June 30, 1999.
Effective November 1997, the Company leased approximately 6,900 square feet of
commercial office and light assembly space in Eagan, Minnesota. The Company
hired its President, Greg H. Guettler, in September 1997 and its Chief Executive
Officer, Dennis L. Sellke, in April 1999.

The increase in outside consultants expense from $203,712 for the fiscal
year ended June 30, 1998 to $263,145 for the fiscal year ended June 30, 1999 was
mainly attributable to additional work relating to the Company's FDA 510(k)
application and efforts concerning an approach for obtaining physician
reimbursement from insurance coverage and third party payers.

Selling, marketing and promotion expense increased from $40,408 for the
fiscal year ended June 30, 1998 to $316,416 for the fiscal year ended June 30,
1999. This category includes wages and commissions paid by the Company relating
to its sales and marketing efforts as well as travel expenses. In this regard,
the Company added the following individuals: Director of Sales (during March
1998), Director of Marketing (during May 1998) and Mid-Atlantic regional sales
manager (during March 1999).

Interest income was $64,092 and $414,515 for the fiscal years ended June 30,
1998 and 1999, respectively. In July and August 1998, the Company raised
$9,188,414 (net of underwriting discounts and offering expenses) through an
initial public offering of 2,587,500 units (which included 337,500 additional
units to cover over-allotments) at $4.125 per unit.

Net loss was $(1,142,163) and $(2,214,095) for the fiscal years ended June
30, 1998 and 1999, respectively. For the fiscal year ended June 30, 1998, basic
and dilutive net loss per share was $(.51), based on weighted average shares
outstanding of 2,221,914. For the fiscal year ended June 30, 1999, basic and
dilutive net loss per share was $(.45), based on weighted average shares
outstanding of 4,973,472.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents had a net increase of $41,026 for the fiscal year
ended June 30, 1998. The significant elements of this change were as follows:
NET CASH USED IN OPERATING ACTIVITIES--net loss, as adjusted for non-cash items,
of $(1,092,890); NET CASH PROVIDED BY FINANCING ACTIVITIES--issuance of Common
Stock--$1,317,301. For the fiscal year ended June 30, 1999, cash and cash
equivalents had a net increase of $6,444,721. The significant elements of this
change were as follows: NET CASH USED IN OPERATING ACTIVITIES--net loss, as
adjusted for non-cash items, of $(2,049,232); increase in accounts
receivable--$182,728; increase in

29
<PAGE>
inventory--$336,443; decrease in prepaid expenses--$153,515; NET CASH USED IN
INVESTING ACTIVITIES--purchase of property and equipment--$326,087; NET CASH
PROVIDED BY FINANCING ACTIVITIES--issuance of Common Stock--$9,196,464.

In July 1998, the Company completed its initial public offering (IPO) in
which it sold 2,250,000 units at $4.125 per unit, each unit consisting of one
share of Common Stock and one redeemable Class A Warrant. In August 1998, the
underwriter exercised in full an overallotment option to purchase an additional
337,500 units. Total net proceeds from the IPO were $9,188,414. As of June 30,
1999, the Company has cash and cash equivalents of $7,684,525, and anticipates
that these funds should allow it to pursue the different elements of the
Company's business development strategy for at least the next 18 to 24 months.
The Company's business plan and financing needs are subject to change depending
on, among other things, market conditions, timing of the receipt of clearance
from the FDA to market the Model DO-2020, business opportunities and cash flow
from operations. Pending application of the net proceeds, such proceeds will be
invested in short-term, high quality, interest-bearing instruments.

Although not assured, in addition to the net proceeds from the IPO, the
Company may derive over a period of time up to $14,231,250 from the exercise of
the Class A Warrants included in the units. Each Class A Warrant entitles the
holder to purchase one share at an exercise price of $5.50 per Warrant, subject
to adjustment. The Class A Warrants are subject to redemption by the Company for
$.01 per Warrant at any time commencing October 21, 1998, provided that the
closing bid price of the shares exceeds $6.50 (subject to adjustment) for 14
consecutive trading days. The Class A Warrants expire on July 22, 2002. The
amounts, if any, that the Company derives from the exercise of such Class A
Warrants will be used in connection with the Company's development
opportunities, business plan activities and/or working capital requirements.

YEAR 2000 COMPLIANCE

The Company has considered the potential impact of the Year 2000 for its
internal information systems, external integration problems, the various models
of its Product and the CDMF. The Company believes that its internal information
systems and current Product and the CDMF are Year 2000 compliant. The Company's
Product and the CDMF have been designed and developed to be Year 2000 compliant.
In addition, the Product and the CDMF have been tested to ensure that their
performance and functionality are not affected by the Year 2000 compliance
issues. There can be no assurance, however, that the Company will not experience
unexpected costs and delays in achieving Year 2000 compliance, which could
result in a material adverse effect on the Company's future results of
operations.

30
<PAGE>
ITEM 7. FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

YEARS ENDED JUNE 30, 1998 AND 1999 AND
PERIOD FROM JULY 19, 1988 (INCEPTION)
TO JUNE 30, 1999

31
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998 AND 1999 AND PERIOD FROM
JULY 19, 1988 (INCEPTION) TO JUNE 30, 1999

CONTENTS

<TABLE>
<S> <C>
Report of Independent Auditors......................................................... 33

Audited Financial Statements

Balance Sheets......................................................................... 34
Statements of Operations............................................................... 35
Statement of Shareholders' Equity...................................................... 36
Statements of Cash Flows............................................................... 38
Notes to Financial Statements.......................................................... 39
</TABLE>

32
<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Hypertension Diagnostics, Inc.

We have audited the balance sheets of Hypertension Diagnostics, Inc. (a
development stage company) as of June 30, 1998 and 1999, and the related
statements of operations, shareholders' equity and cash flows for each of the
years then ended and the period from July 19, 1988 (inception) to June 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amount and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hypertension Diagnostics,
Inc. at June 30, 1998 and 1999, and the results of its operations and its cash
flows for each of the years then ended and the period from July 19, 1988
(inception) to June 30, 1999, in conformity with generally accepted accounting
principles.

Ernst & Young LLP

Minneapolis, Minnesota
August 16, 1999

33
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30
----------------------------
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 1,239,804 $ 7,684,525
Accounts receivable............................................................... -- 182,728
Interest receivable............................................................... 4,676 49,753
Inventory......................................................................... 39,054 375,497
Prepaid expenses.................................................................. 11,254 4,720
------------- -------------
Total Current Assets.......................................................... 1,294,788 8,297,223
Property and Equipment:
Leasehold improvements............................................................ 13,377 17,202
Furniture and equipment........................................................... 136,737 458,999
Less accumulated depreciation..................................................... (25,997) (92,119)
------------- -------------
124,117 384,082
Patents, net of accumulated amortization of $12,524 and $21,605 at June 30, 1998 and
1999, respectively................................................................ 32,881 23,800
Prepaid Offering Expenses........................................................... 146,981 --
Others Assets....................................................................... 6,740 6,730
------------- -------------
Total Assets.................................................................. $ 1,605,507 $ 8,711,835
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................. $ 188,100 $ 113,397
Accrued payroll and payroll taxes -- 98,356
Other accrued expenses............................................................ -- 10,856
------------- -------------
Total Current Liabilities..................................................... 188,100 222,609
Shareholders' Equity:
Preferred Stock, $.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares--none............................................. -- --
Common Stock, $.01 par value:
Authorized shares--25,000,000
Issued and outstanding shares--2,517,735 and 5,109,235 at June 30, 1998 and
1999, respectively............................................................ 25,177 51,092
4,668,479
Additional paid-in capital........................................................ 14,083,028
Deferred compensation............................................................. -- (154,550)
Deficit accumulated during the development stage.................................. (3,276,249) (5,490,344)
------------- -------------
Total Shareholders' Equity.................................................... 1,417,407 8,489,226
------------- -------------
Total Liabilities and Shareholders' Equity.................................... $ 1,605,507 $ 8,711,835
------------- -------------
------------- -------------
</TABLE>

See accompanying notes.

34
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
JULY 19, 1988
YEAR ENDED JUNE 30 (INCEPTION)
---------------------------- TO
1998 1999 JUNE 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Equipment sales.................................................... $ -- $ 381,247 $ 381,247
Cost and Expenses:
Cost of equipment sales............................................ -- 138,788 138,788
Research and development........................................... 264,714 575,645 2,134,944
Selling, general and administrative................................ 941,541 2,295,424 4,167,867
------------- ------------- -------------
Total Cost and Expenses........................................ 1,206,255 3,009,857 6,441,599
------------- ------------- -------------
Operating Loss....................................................... (1,206,255) (2,628,610) (6,060,352)
Other Income (Expense):
Interest income.................................................... 64,092 414,515 617,039
Interest expense................................................... -- -- (47,031)
------------- ------------- -------------
64,092 414,515 570,008
------------- ------------- -------------
Net Loss and Deficit Accumulated During the Development
Stage........................................................ $ (1,142,163) $ (2,214,095) $ (5,490,344)
------------- ------------- -------------
------------- ------------- -------------
Basic and Dilutive Net Loss per Share................................ $ (.51) $ (.45) $ (4.42)
Weighted Average Shares Outstanding.................................. 2,221,914 4,973,472 1,241,145
</TABLE>

See accompanying notes.

35
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
-------------------- PAID-IN DEFERRED DEVELOPMENT
SHARES AMOUNT CAPITAL COMPENSATION STAGE TOTAL
--------- --------- ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 19, 1988 (inception)....... -- $ -- $ -- $ -- $ -- $ --
Conversion of notes payable to Common
Stock at $3.00 (August 1988 through
June 1989)............................. 75,167 752 224,748 -- -- 225,500
Sale of Common Stock at $.04 (September
1988 through June 1989)................ 342,853 3,428 10,286 -- -- 13,714
Net loss................................. -- -- -- -- (188,496) (188,496)
--------- --------- ----------- ------------- ------------ ----------
418,020 4,180 235,034 -- (188,496) 50,718
Sale of Common Stock at $.04 (July
1989).................................. 1,900 19 57 -- -- 76
Private placement of Common Stock at
$3.00 (October 1989 through January
1990).................................. 58,750 587 175,663 -- -- 176,250
Conversion of notes payable to Common
Stock at $3.00 (July 1989 through April
1990).................................. 13,000 130 38,870 -- -- 39,000
Redemption of Common Stock (August
1989).................................. (7,500) (75) (225) -- -- (300)
Net loss................................. -- -- -- -- (195,716) (195,716)
--------- --------- ----------- ------------- ------------ ----------
Balance at June 30, 1990................... 484,170 4,841 449,399 -- (384,212) 70,028
Private placement of Common Stock at
$3.00 (July 1990)...................... 1,667 17 4,984 -- -- 5,001
Net loss................................. -- -- -- -- (134,857) (134,857)
--------- --------- ----------- ------------- ------------ ----------
Balance at June 30, 1991................... 485,837 4,858 454,383 -- (519,069) (59,828)
Net loss................................. -- -- -- -- (3,076) (3,076)
--------- --------- ----------- ------------- ------------ ----------
Balance at June 30, 1992................... 485,837 4,858 454,383 -- (522,145) (62,904)
Net Income............................... -- -- -- -- 45,061 45,061
--------- --------- ----------- ------------- ------------ ----------
Balance at June 30, 1993................... 485,837 4,858 454,383 -- (477,084) (17,843)
Net loss................................. -- -- -- -- (17,743) (17,743)
--------- --------- ----------- ------------- ------------ ----------
Balance at June 30, 1994................... 485,837 4,858 454,383 -- (494,827) (35,586)
Net loss -- -- -- -- (53,202) (53,202)
--------- --------- ----------- ------------- ------------ ----------
Balance at June 30, 1995 (carried
forward)................................. 485,837 4,858 454,383 -- (548,029) (88,788)
</TABLE>

36
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF SHAREHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
---------------------- PAID-IN DEFERRED DEVELOPMENT
SHARES AMOUNT CAPITAL COMPENSATION STAGE TOTAL
---------- ---------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 (brought
forward)............................. 485,837 $ 4,858 $ 454,383 $ -- $ (548,029) $ (88,788)
Common Stock issued in connection
with bridge financing at $1.00
(August 1995), net of expenses of
$6,250............................. 125,000 1,250 117,500 -- -- 118,750
Conversion of notes payable to Common
Stock at $1.00..................... 2,174 22 2,152 -- -- 2,174
Private placement of Common Stock at
$2.00 (October 1995 through May
1996), net of expenses of
$385,313........................... 1,349,000 13,490 2,299,197 -- -- 2,312,687
Purchase of warrants................. -- -- 50 -- -- 50
Value of stock options granted in
lieu of cash compensation.......... -- -- 349,974 -- -- 349,974
Net loss............................. -- -- -- -- (714,085) (714,085)
---------- ---------- ------------- ------------- ------------- ------------
Balance at June 30, 1996............... 1,962,011 19,620 3,223,256 -- (1,262,114) 1,980,762
Value of stock options granted in
lieu of cash compensation.......... -- -- 100,364 -- -- 100,364
Net loss............................. -- -- -- -- (871,972) (871,972)
---------- ---------- ------------- ------------- ------------- ------------
Balance at June 30, 1997............... 1,962,011 19,620 3,323,620 -- (2,134,086) 1,209,154
Private placement of Common Stock at
$3.00 (December 1997 through March
1998), net of expenses of
$279,280........................... 500,000 5,000 1,215,720 -- -- 1,220,720
Purchase of warrants................. -- -- 50 -- -- 50
Value of stock options granted in
lieu of cash compensation.......... -- -- 33,115 -- -- 33,115
Stock options exercised.............. 55,724 557 95,974 -- -- 96,531
Net loss............................. -- -- -- -- (1,142,163) (1,142,163)
---------- ---------- ------------- ------------- ------------- ------------
Balance at June 30, 1998............... 2,517,735 25,177 4,668,479 -- (3,276,249) 1,417,407
Sale of Common Stock at $4.125 per
unit in initial public offering
(July and August, 1998), net of
expenses of $1,485,024............. 2,587,500 25,875 9,162,539 -- -- 9,188,414
Purchase of warrants................. -- -- 50 -- -- 50
Value of stock options granted in
lieu of cash compensation.......... -- -- 244,000 (214,000) -- 30,000
Amortization of deferred
compensation....................... -- -- -- 59,450 -- 59,450
Stock options exercised.............. 4,000 40 7,960 -- -- 8,000
Net loss............................. -- -- -- -- (2,214,095) (2,214,095)
---------- ---------- ------------- ------------- ------------- ------------
Balance at June 30, 1999............... 5,109,235 $ 51,092 $ 14,083,028 $ (154,550) $ (5,490,344) $ 8,489,226
---------- ---------- ------------- ------------- ------------- ------------
---------- ---------- ------------- ------------- ------------- ------------
</TABLE>

See accompanying notes.

37
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
JULY 19, 1988
YEAR ENDED JUNE 30 (INCEPTION)
---------------------------- TO
1998 1999 JUNE 30, 1999
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................. $ (1,142,163) $ (2,214,095) $ (5,490,344)
Adjustments to reconcile net loss to net cash used in operating
activities:
Value of stock options granted in lieu of cash compensation...... 33,115 89,450 572,903
Depreciation..................................................... 10,267 66,122 128,588
Amortization..................................................... 5,891 9,291 22,655
Write-off of property and equipment.............................. -- -- 42,702
Change in operating assets and liabilities:
Accounts receivable............................................ -- (182,728) (182,728)
Interest receivable............................................ 699 (45,077) (49,753)
Inventory...................................................... (39,054) (336,443) (375,497)
Prepaid expenses............................................... (158,235) 153,515 (4,720)
Other assets................................................... (6,530) (200) (6,730)
Accounts payable............................................... 183,549 (74,703) 113,397
Accrued payroll and payroll taxes.............................. -- 98,356 98,356
Other accrued expenses......................................... -- 10,856 11,030
------------- ------------- -------------
Net cash used in operating activities........................ (1,112,461) (2,425,656) (5,120,141)
INVESTING ACTIVITIES:
Purchase of property and equipment................................... (129,814) (326,087) (555,372)
Payment of patent costs.............................................. (34,000) -- (46,455)
------------- ------------- -------------
Net cash used in investing activities........................ (163,814) (326,087) (601,827)
FINANCING ACTIVITIES:
Proceeds from notes payable.......................................... -- -- 315,500
Payments of notes payable............................................ -- -- (49,000)
Issuance of common stock............................................. 1,317,301 9,196,464 13,140,293
Redemption of common stock........................................... -- -- (300)
------------- ------------- -------------
Net cash provided by financing activities................ 1,317,301 9,196,464 13,406,493
------------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................ 41,026 6,444,721 7,684,525
Cash and cash equivalents at beginning of period............. 1,198,778 1,239,804 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 1,239,804 $ 7,684,525 $ 7,684,525
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Conversion of note payable and accrued interest into Common Stock.... $ -- $ -- $ 266,674
Cash paid for interest............................................... -- -- 12,526
</TABLE>

See accompanying notes.

38
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 1999

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Hypertension Diagnostics, Inc. (the "Company") is a development stage
company formed on July 19, 1988 to develop, design and market a cardiovascular
profiling system.

CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Improvements are capitalized,
while repair and maintenance costs are charged to operations when incurred.
Depreciation is computed principally using the straight-line method. Estimated
useful lives for property and equipment are the term of the lease for leasehold
improvements and 5-7 years for furniture and equipment.

PATENTS

Costs incurred in obtaining patents and trademarks are capitalized as
incurred and amortized on a straight-line basis over 60 months. The Company
periodically reviews its patents and trademarks for impairment in value. Any
adjustment from the analysis is charged to operations.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.

RESEARCH AND DEVELOPMENT COSTS

All research and development costs are charged to expense as incurred.

INCOME TAXES

Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial reporting and
tax bases of assets and liabilities.

INVENTORY

Inventory is stated at the lower of cost (first-in, first-out method) or
market.

39
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET LOSS PER SHARE

Under Financial Accounting Standards Board Statement No. 128, "Earnings per
Share," basic earnings per share is based on the weighted average shares of
common stock outstanding during the period. Diluted earnings per share includes
any dilutive effects of options, warrants and convertible securities. Diluted
loss per share as presented is the same as basic loss per share as the effect of
outstanding options, warrants and convertible securities is antidilutive.

STOCK-BASED COMPENSATION

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," but applies Accounting Principles Board Opinion No. 25 (APB 25)
and related interpretations in accounting for its plans. Under APB 25, when the
exercise price of employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.

2. INCOME TAXES

At June 30, 1999, the Company had a net operating loss carryforward for tax
purposes of approximately $4,917,500. This carryforward is available to offset
future taxable income through 2014.

Components of deferred tax assets are as follows:

<TABLE>
<CAPTION>
JUNE 30
----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Loss carryforwards.............................................. $ 1,117,000 $ 1,967,000
Less valuation allowance........................................ (1,117,000) (1,967,000)
------------- -------------
Net deferred tax assets......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>

3. SHAREHOLDERS' EQUITY

From December 1997 to March 1998, the Company sold 500,000 shares of Common
Stock at $3.00 per share resulting in net proceeds to the Company of $1,220,720.
In connection with the sale of Common Stock, the Company granted warrants, to
the placement agent, to purchase a total of 50,000 shares of Common Stock at an
exercise price of $4.95 per share. The warrants are exercisable in February and
March 1999 and expire in February and March 2004.

In May 1998, 6000 incentive stock options were exercised at $2.00 per share
and 49,724 nonqualified stock options were exercised at $1.70 per share
resulting in net proceeds to the Company of $96,531.

In July and August 1998, the Company raised $9,188,414 (net of underwriting
discounts and offering expenses), through an initial public offering of
2,587,500 units (which includes 337,500 additional units to cover
over-allotments) at $4.125 per unit (the "Initial Public Offering"). Each unit
consists of one share of Common Stock and one redeemable Class A Warrant which
entitles the holder to purchase one share at an exercise price of $5.50 per
warrant, subject to adjustment. The Class A Warrants are subject to redemption

40
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

3. SHAREHOLDERS' EQUITY (CONTINUED)
by the Company for $.01 per Warrant at any time commencing 90 days after the
Effective Date (July 23, 1998), provided that the closing bid price of the
Common Stock exceeds $6.50 (subject to adjustment) for 14 consecutive trading
days. The Class A Warrants expire on July 22, 2002.

In December 1998, 4,000 incentive stock options were exercised at $2.00 per
share resulting in net proceeds to the Company of $8,000.

4. STOCK OPTIONS AND WARRANTS

During 1995, the Company adopted the Hypertension Diagnostics, Inc. 1995
Long-Term Incentive and Stock Option Plan ("the Plan") that includes both
incentive stock options and nonqualifed stock options to be granted to
employees, directors, officers, consultants and advisors of the Company. The
maximum number of shares reserved under the Plan is 400,000 shares. The Board of
Directors establishes the terms and conditions of all stock option grants,
subject to the Plan and applicable provisions of the Internal Revenue Code.
Incentive stock options must be granted at an exercise price not less than the
fair market value of the Common Stock on the grant date. The options granted to
participants owning more than 10% of the Company's outstanding voting stock must
be granted at an exercise price not less than 110% of fair market value of the
Common Stock on the grant date. The options expire on the date determined by the
Board of Directors but may not extend more than ten years from the grant date
while incentive stock options granted to participants owning more than 10% of
the Company's outstanding voting stock expire five years from the grant date.

A summary of outstanding options under the Plan is as follows:

<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
AVAILABLE OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING PER SHARE
----------- ----------- ---------------
<S> <C> <C> <C>
Balance at June 30, 1995............................ -- -- $ --
Shares reserved................................... 400,000 -- --
Granted........................................... (15,000) 15,000 2.00
----------- -----------
Balance at June 30, 1996............................ 385,000 15,000 2.00
Granted........................................... (11,900) 11,900 2.00
----------- -----------
Balance at June 30, 1997............................ 373,100 26,900 2.00
Granted........................................... (290,600) 290,600 2.04
Exercised......................................... -- (6,000) 2.00
----------- -----------
Balance at June 30, 1998............................ 82,500 311,500 2.04
Granted........................................... (81,500) 81,500 3.35
Exercised......................................... -- (4,000) 2.60
Canceled/forfeited................................ 5,400 (5,400) 3.40
----------- -----------
Balance at June 30, 1999............................ 6,400 383,600 2.30
----------- -----------
----------- -----------
</TABLE>

41
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

4. STOCK OPTIONS AND WARRANTS (CONTINUED)
At June 30, 1999, there were 383,600 options outstanding having exercise
prices between $2.00 and $4.00 that had been granted under the Plan. The
outstanding options had a weighted average remaining contractual life of eight
years. The number of options exercisable as of June 30, 1998 and 1999 were
61,675 and 121,050, respectively, at weighted average exercise prices of $2.06
and $2.28 per share, respectively. The weighted average fair value of options
granted under the Plan during the years ended June 30, 1998 and 1999 was $.50
and $1.96 per share, respectively.

On May 1, 1998, the Board of Directors approved the 1998 Stock Option Plan
(the "1998 Option Plan"), under which stock options may be granted to employees,
consultants and independent directors of the Company. Stock options may be
either qualified or nonqualified for income tax purposes. Up to a maximum of
750,000 shares may be issued under the 1998 Option Plan. The 1998 Plan is
administered in a similar manner to the 1995 Plan.

A summary of outstanding options under the 1998 Option Plan is as follows:

<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
AVAILABLE OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING PER SHARE
---------- ----------- ---------------
<S> <C> <C> <C>
Balance at June 30, 1997............................. -- -- $ --
Shares reserved.................................... 750,000 -- --
---------- -----------
Balance at June 30, 1998............................. 750,000 -- --
Granted............................................ (250,000) 250,000 3.21
---------- -----------
Balance at June 30, 1999............................. 500,000 250,000 3.21
---------- -----------
---------- -----------
</TABLE>

At June 30, 1999, there were 250,000 options outstanding having exercise
prices between $2.81 and $3.66 that had been granted under the 1998 Option Plan.
The outstanding options had a weighted average remaining contractual life of
nine years. The number of options exercisable as of June 30, 1999 was 115,334 at
a weighted average exercise price of $3.10 per share. The weighted average fair
value of options granted under the 1998 Option Plan during the year ended June
30, 1999 was $1.70 per share.

At June 30, 1999, the Company has also granted a total of 1,115,275 options
outside the Plan and the 1998 Option Plan. These options all have exercise
prices between $1.70 and $3.375 and a weighted average remaining contractual
life of eight years. The number of non-Plan options exercisable at June 30, 1998
and 1999 were 1,050,275 and 1,105,275, respectively, at weighted average
exercise prices of $1.73 and $1.76, respectively. The weighted average fair
value of non-Plan options granted during the years ended June 30, 1998 and 1999
was $.50 and $1.44 per share, respectively.

For the years ended June 30, 1998 and 1999, the Company recognized $33,115
and $89,450, respectively, of expense related to the granting of options for
consulting services provided to the Company.

Pro forma information regarding net loss is required by Statement No. 123,
and has been determined as if the Company had accounted for its stock options
under the fair value method of that Statement. The fair value of options granted
during fiscal 1999 was estimated using the Black-Scholes option pricing model
with the following weighted average assumptions: risk-free interest rate of
5.0%, no expected dividend

42
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

4. STOCK OPTIONS AND WARRANTS (CONTINUED)
yield, expected life of five years and expected volatility of .643. The fair
value of 1998 option grants was estimated at the date of grant using the minimum
value option pricing model with the following weighted average assumptions:
risk-free interest rate of 5.5% and a weighted average expected life of the
option of five years.

The effect of applying Statement No. 123's fair value method of the
Company's stock-based awards results in a net loss that is not materially
different than the amounts reported for the years ended June 30, 1998 and 1999,
respectively.

During the initial phase-in period, the effects of applying Statement No.
123 for recognizing compensation cost may not be representative of the effects
on reported net income or loss for future years because the options vest over
several years and additional awards will be made in the future.

WARRANTS

In connection with private equity offerings, the Company has issued
warrants, to placement agents, to purchase shares of Common Stock as follows:

<TABLE>
<CAPTION>
WARRANTS EXERCISE PRICE EXPIRATION DATE
- --------- --------------- -----------------------------
<S> <C> <C>
132,900 $ 2.00 October 2000
50,000 4.95 February and March 2004
- ---------
182,900
- ---------
- ---------
</TABLE>

In connection with the Company's initial public offering in July and August
1998, the Company issued to the underwriter a warrant to purchase 175,000 units,
exercisable for a period of four years commencing July 23, 1999, at an exercise
price of $4.95 per unit.

5. LICENSE AGREEMENT

In September 1988, the Company entered into a license agreement with the
Regents of the University of Minnesota (the "Regents"), whereby the Company was
granted a license to utilize certain technology developed by the Regents. Under
the license agreement, the Company is required to pay royalties on net product
sales containing the technology licensed from the Regents. In the first two
years after execution of the agreement, royalties were 1% of net sales, and for
the third and fourth years were 1.5% of net sales. Beginning in the fifth year,
and continuing through the termination of the agreement, royalties were 2% of
net sales, and 3% if the Regents obtain a United States patent on any of the
technology covered under the agreement (which, in fact, occurred) Termination
occurs with the expiration of the last patent, or ten years after the date of
the first commercial product sale, if no patent exists.

6. COMMITMENTS

Subsequent to June 30, 1997, the Company entered into a noncancelable
operating lease agreement for office/warehouse space. The term of the lease is
from November 1997 to October 2000. Prior to

43
<PAGE>
HYPERTENSION DIAGNOSTICS, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 1999

6. COMMITMENTS (CONTINUED)
entering into this lease agreement, the Company had utilized office space of its
founders and officers for which it paid no rent.

The following is a schedule of future minimum lease payments due as of June
30, 1999:

<TABLE>
<S> <C>
Year ending June 30:
2000............................................................ $ 78,988
2001............................................................ 26,329
---------
$ 105,317
---------
---------
</TABLE>

7. EMPLOYMENT AGREEMENTS AND CONSULTING AGREEMENTS

The Company has entered into employment agreements or consulting agreements
with its officers and some members of the Board of Directors. The agreements
call for salaries or consulting fees to be paid in cash and/or stock options.
The employment agreements terminate at various times.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

44
<PAGE>
PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The following table provides information about the Company's directors,
executive officers and key consultant:

<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- ------------------------------------------------ ----------- ------------------------------------------------ -----------
<S> <C> <C> <C>
Melville R. Bois(1)(2)(3)....................... 53 Chairman of the Board of Directors 1995
Dennis L. Sellke(4)............................. 53 Chief Executive Officer and Director 1999
Greg H. Guettler(4)............................. 45 President and Director 1997
Charles F. Chesney, D.V.M., Ph.D., R.A.C.(3).... 56 Executive Vice President, Secretary, Chief 1988
Technology Officer and Director
James S. Murphy................................. 55 Vice President of Finance and Chief --
Financial Officer
Jay N. Cohn, M.D.(1)(5)......................... 69 Chief Clinical Consultant, Chairman of the 1988
Scientific and Clinical Advisory Board and
Director
Kenneth W. Brimmer(1)(2)(5)..................... 44 Director 1995
Stanley M. Finkelstein, Ph.D.................... 58 Chief Technical Consultant --
</TABLE>

- ------------------------

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

(3) Class I Director; term expires 1999.

(4) Class II Director; term expires 2000.

(5) Class III Director; term expires 2001.

MELVILLE R. BOIS Mr. Bois was elected to the Board of Directors in November
1995 and was elected its Chairman in 1997. From January 1996 until September
1997, he was the Company's President and Chief Executive Officer. For more than
30 years, Mr. Bois has been employed by title insurance and financial companies.
In 1979, he founded and was the owner of Universal Title Insurance Company. This
company became Universal Title and Financial Corporation in 1984 and Mr. Bois
continues as its President. Universal Title and Financial Corporation is a
private holding company which is engaged in commercial real estate and related
records and data management. Mr. Bois has been and is presently a member of the
board of directors of several companies, including Hilex Corporation and Grand
Forks Abstract Company and since 1988 he has been the owner and President of the
Bois Family Foundation, a charitable organization.

DENNIS L. SELLKE. Mr. Sellke was appointed Chief Executive Officer on April
16, 1999 and was appointed to the Board of Directors in April 1999. Mr. Sellke
has nearly 30 years experience in the medical device industry beginning as a
territory salesperson for a division of C.R. Bard, Inc. in Chicago. Most
recently Mr. Sellke served as President and Chief Executive Officer of
Ela*Angeion LLC, Minneapolis, Minnesota, a French and United States joint
venture established to market and sell pacemakers and ICDs in the United States.
Mr. Sellke also serves as Chairman and was Chief Executive Officer of Clarus
Medical, Inc., Minneapolis, Minnesota, a privately-held medical device company
involved in fiber optic imaging/OEM manufacturing and laser spinal disc therapy
sales. Previous to that, he served over 17 years in various executive, corporate
development and marketing capacities with Medtronic, Inc., Fridley, Minnesota.
Mr. Sellke holds a Bachelor of Science degree from the School of Business at
Southern Illinois

45
<PAGE>
University (1968) and a Master of Business Administration (M.B.A.) degree from
Rivier College in Nashua, New Hampshire (1978).

GREG H. GUETTLER. Mr. Guettler has been the President and a Director of the
Company since September 1997. Mr. Guettler has more than 20 years of experience
in sales, marketing and management positions within the medical industry. Prior
to joining the Company, Mr. Guettler was a senior manager at Universal Hospital
Services, Inc. ("UHS"), a nationwide provider of medical devices and device
management services to the health care industry. During his 14 years at UHS, Mr.
Guettler held positions as Director of National and Strategic Accounts where he
led a national accounts sales team, as Director of Alternate Care and Specialty
Product Promotions where he was responsible for the development of UHS's
alternate care business unit and the nationwide distribution of new medical
products, and as Marketing Manager where he was responsible for company-wide
marketing and planning. Additionally, Mr. Guettler has held territory sales,
sales management, product management, marketing and business development
positions for the American Red Cross Blood Services. Mr. Guettler holds a
Bachelor of Arts degree from the University of St. Thomas in St. Paul, Minnesota
(1977) and a Master of Business Administration (M.B.A.) degree from the
University of St. Thomas Graduate School of Management in St. Paul, Minnesota
(1983).

CHARLES F. CHESNEY, D.V.M., PH.D., R.A.C. Dr. Chesney was the President and
Chief Executive Officer of the Company from its inception in 1988 until January
1, 1996 when he became the Company's Executive Vice President and Chief
Technology Officer. He has been a member of the Board of Directors since its
inception in July 1988 and has been the Secretary of the Company since December
1988. From 1978 until 1997, Dr. Chesney was a consultant with P-T Consulting
Associates, Inc., a biomedical research, product
development and consulting firm, which he owns. From 1984 to 1987, Dr. Chesney
was employed by the 3M Company as Research and Development Manager for 3M/Riker
Laboratories in its Pharmaceutical and Health Care Divisions. Dr. Chesney is the
founder of a small computer firm which offers data base management systems to
large drug and chemical companies and he is the author of more than 30
scientific publications in the field of medical pathology, toxicology and
cardiovascular physiology. Dr. Chesney is a member of more than 30 professional
societies and has been engaged in new product research and development in the
pharmaceutical, medical device and bio-technology industries since 1974. In
1991, Dr. Chesney became "Board Certified" in regulatory affairs by the
Certification Board of the Regulatory Affairs Professional Society. Dr. Chesney
holds the degree of Doctor of Veterinary Medicine from the University of
Minnesota (1970) and a Ph.D. in Medical Pathology with a minor in Cardiovascular
Physiology from the University of Wisconsin Madison (1973).

JAMES S. MURPHY, C.P.A. Mr. Murphy joined the Company as Vice President of
Finance and Chief Financial Officer in May 1996 and has more than 29 years of
combined accounting experience in both the public and private sectors. Mr.
Murphy was Controller of Gaming Corporation of America from December 1992
through November 1995. From 1978 to 1988, Mr. Murphy was the tax partner with
Fox, McCue and Murphy, a certified public accounting firm located in Eden
Prairie, Minnesota. From 1970 to 1978, Mr. Murphy was employed by Ernst & Ernst
(currently Ernst & Young LLP) with both audit (six years) and tax (two years)
experience. Mr. Murphy is a member of the American Institute of Certified Public
Accountants and the Minnesota Society of CPAs. Mr. Murphy holds a Bachelor of
Science degree from Saint John's University in Collegeville, Minnesota (1966)
and a Master of Business Administration (M.B.A.) degree from the University of
Minnesota (1968).

JAY N. COHN, M.D. Dr. Cohn has served as a member of the Board of Directors
of the Company since its inception in July 1988. Since 1974, Dr. Cohn has been
employed by the University of Minnesota Medical School as a Professor of
Medicine and was Head of the Cardiovascular Division from 1974 through 1997. Dr.
Cohn is the co-inventor of the technology used in the Company's Product. Dr.
Cohn is the Company's Chief Clinical Consultant and has been a consultant to
several pharmaceutical firms. He became the Chairman of the Company's Scientific
and Clinical Advisory Board in 1996. Dr. Cohn is

46
<PAGE>
currently President of the International Society of Hypertension and is also a
member of the editorial boards of 12 professional journals and of approximately
17 professional societies. Since 1959, Dr. Cohn has published more than 500
scientific articles and a new textbook of cardiovascular medicine. Dr. Cohn
received his M.D. degree from Cornell University (1956). Dr. Cohn currently
serves on the board of directors of Medco Research, Inc.

KENNETH W. BRIMMER Mr. Brimmer was elected to the Board of Directors in
November 1995. Mr. Brimmer presently serves on the board of directors of
Rainforest Cafe, Inc., and has served as its Treasurer since May 1995 and its
President since April 1997. Mr. Brimmer was previously employed by Grand
Casinos, Inc. and its predecessor, from October 1990 until April 1997, serving
as Special Assistant to the Chairman and Chief Executive Officer. Mr. Brimmer
also currently serves on the board of directors of New Horizons Kids Quest, Inc.
and Oxboro Medical International, Inc.

STANLEY M. FINKELSTEIN, PH.D. Dr. Finkelstein is the Company's Chief
Technical Consultant. Dr. Finkelstein has been employed by the University of
Minnesota since 1977, and is a Professor of Laboratory Medicine and Pathology in
the Medical School. He has also been Associate Director of the Division of
Health Computer Sciences within the Department of Laboratory Medicine and
Pathology since 1982 and is currently the Director of Graduate Studies for
Biomedical Engineering. Dr. Finkelstein is the author of over 100 scientific
articles in professional journals and technical conference proceedings on
subjects relating to arterial vascular compliance, pulmonary disease, medical
informatics and data management. He has also presented related material at more
than 100 conferences and technical meetings. Dr. Finkelstein is the co-inventor
of the technology used in the Company's Product. Dr. Finkelstein earned his
Ph.D. in Electrical Engineering/Systems Science Bioengineering from the
Polytechnic Institute of Brooklyn, Brooklyn, New York (1969).

The Company's Articles of Incorporation and Bylaws provide: (a) the Board of
Directors is classified into three classes, each of which member would serve
(after a transitional period) for a staggered three-year term; (b) directors may
be removed for cause with the vote of the holders of a majority of the then
outstanding shares entitled to vote or other than for cause with the vote of the
holders of at least 80% of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors, voting
together as a single class; (c) any new director elected to fill a vacancy on
the Board shall serve for the remainder of the full term of the class in which
the vacancy occurred rather than until the next meeting of shareholders; and (d)
require an 80% shareholder vote requirement to alter, amend or repeal the
foregoing provisions of the Articles or Bylaws. Such classification will make it
more difficult to change the members of the Board of Directors or to effect a
takeover of the Company.

SCIENTIFIC AND CLINICAL ADVISORY BOARD

In order to provide the Company with a wide range of scientific and clinical
advice, the Company's Board of Directors appointed Dr. Jay N. Cohn to become the
Chairman for an Advisory Board of cardiovascular experts. The following
physicians are members of the Advisory Board:

- Hans R. Brunner, M.D.--Professor of Medicine, Division of Hypertension and
Vascular Medicine, Centre Hospitalier Universities Vandois, Department of
Medicine, University of Lausanne, Switzerland.

- Jay N. Cohn, M.D.--Professor of Medicine, Cardiovascular Division,
University of Minnesota Medical School, Minneapolis, Minnesota.

- Daniel Duprez, M.D., Ph.D.--Professor of Medicine, Department of
Cardiovascular Diseases, The University Hospital, University of Ghent,
Ghent, Belgium.

- Thomas D. Giles, M.D.--Professor of Medicine, Director of Program in
Hypertension and Heart Failure, Director of Cardiovascular Research,
Department of Medicine, Louisiana State University Medical Center, New
Orleans, Louisiana.

47
<PAGE>
- Stevo Julius, M.D., Sc.D.--Professor of Medicine and Physiology, Division
of Hypertension, University of Michigan Medical Center, Ann Arbor,
Michigan.

- Giuseppe Mancia, M.D.--Professor of Medicine, Head of First Division of
Internal Medicine at the San Gerardo Hospital and Chairman of the
Department of Internal Medicine at the University of Milan School of
Medicine, Vice President of the Scientific Council of the European Society
of Hypertension, President, Italian Society of Hypertension, Milan, Italy.

- Karl-Heinz Rahn, M.D.--Professor of Medicine and Chairman, Department of
Medicine, University of Munster, Munster, Germany.

- Lawrence M. Resnick, M.D.--Professor of Internal Medicine and Physiology,
Director of Hypertension, Wayne State University School of Medicine,
Detroit, Michigan.

- Michel E. Safar, M.D.--Professor of Medicine, Chief of the Department of
Internal Medicine and Hypertension, Broussais Hospital, Director of
Research National Institute, Centre de Diagnostics, Paris, France.

- Marc A. Silver, M.D.--F.A.C.P., F.A.A.C., Professor of Medicine, Director
of Heart Failure Institute, Director of Cardiovascular Disease Fellowship
Program, Christ Hospital and Medical Center, Oak Lawn, Illinois.

- Michael A. Weber, M.D.--Professor of Medicine, Chairman, Department of
Medicine, The Brookdale University Hospital & Medical Center, State
University of New York, Brooklyn, New York; President of the American
Society of Hypertension.

The Scientific and Clinical Advisory Board meets at least once a year and
serves to provide the Company with advice regarding advances in the field of
arterial elasticity and to review results and new developments associated with
the Company's technology. Under some circumstances, members of the Board may be
asked to test products in their own laboratories.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Pursuant to Section 16(a) under the Securities Exchange Act of 1934,
executive officers, directors and 10% shareholders (insiders) of the Company are
required to file reports on Forms 3, 4, and 5 of their beneficial holdings and
transactions in the Company's Common Stock. To the Company's knowledge, all
insiders of the Company made timely filings of Forms 3, 4 or 5 with respect to
transactions or holdings during 1999 except that Charles F. Chesney, D.V.M.,
Ph.D., R.A.C., Jay N. Cohn, M.D. and Messrs. Dennis L. Sellke, Greg H. Guettler,
Melville R. Bois, Kenneth W. Brimmer and James S. Murphy, each of whom is either
a director or officer of the Company, or both, made a late filing with the
Securities and Exchange Commission on Form 5, each relating to a single
transaction reported at fiscal year end.

48
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the aggregate compensation for the years
indicated for the Company's executive officers who received salary and bonus in
excess of $100,000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
-------------------- -------------------
FISCAL YEAR SECURITIES
NAME AND PRINCIPAL POSITION ENDED JUNE 30 SALARY BONUS UNDERLYING OPTIONS
- ----------------------------------------- --------------- --------- --------- -------------------
<S> <C> <C> <C> <C>
Dennis L. Sellke(1)...................... 1999 $ 38,154 $ -- 100,000
Chief Executive Officer 1998 -- -- --
1997 -- -- --

Greg H. Guettler(2)...................... 1999 $ 132,423 25,200 5,000
President 1998 105,000 -- 150,000
1997 -- -- --

Charles F. Chesney, D.V.M.,.............. 1999 111,646 20,160 5,000
Executive Vice President, Secretary 1998 97,026 -- 75,000
and Chief Technology Officer 1997 75,677 -- --

James S. Murphy.......................... 1999 107,905 20,020 5,000
Vice President of Finance and 1998 76,800 -- 53,100
Chief Financial Officer 1997 40,000 -- 6,900
</TABLE>

- ------------------------

(1) Mr. Sellke became Chief Executive Officer in April 1999.

(2) Mr. Guettler became President in September 1997.

The following table provides information about each stock option grant made
during the fiscal year ended June 30, 1999 to the named executive officers.

OPTION GRANTS IN FISCAL YEAR 1999

<TABLE>
<CAPTION>
NUMBER OF EXERCISE OR
SECURITIES PERCENT OF TOTAL OPTIONS BASE
UNDERLYING OPTIONS GRANTED TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
- ------------------------------------- ------------------- ------------------------- --------------- -----------
<S> <C> <C> <C> <C>
Dennis L. Sellke..................... 100,000 51.5% $ 2.94/share 4/15/2009
Greg H. Guettler..................... 5,000 2.6% $ 2.81/share 2/18/2009
Charles F. Chesney, D.V.M............ 5,000 2.6% $ 2.81/share 2/18/2009
James S. Murphy...................... 5,000 2.6% $ 2.81/share 2/18/2009
</TABLE>

49
<PAGE>
The following table summarizes stock option exercises during the fiscal year
ended June 30, 1999 and the total number of options held at the end of fiscal
year 1999 by the named executive officers.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999 AND
FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT JUNE 30,
SHARES OPTIONS AT JUNE 30, 1999 1999(1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dennis L. Sellke................... -- $ -- 40,000 60,000 $ -- $ --
Greg H. Guettler................... -- -- 35,000 114,000 7,500 28,500
Charles F. Chesney, D.V.M.......... -- -- 245,046 57,000 126,625 14,250
James S. Murphy.................... -- -- 53,450 26,550 12,113 6,638
</TABLE>

- ------------------------

(1) The values have been calculated based on the closing bid price for the
Common Stock as of June 30, 1999 (before payment of applicable income
taxes).

EMPLOYMENT AGREEMENTS

On October 30, 1995, the Company entered into a five-year employment
agreement with Dr. Charles F. Chesney to serve as its President and Chief
Executive Officer until the Company appointed another President and/or Chief
Executive Officer, at which time Dr. Chesney would become the Executive Vice
President and Chief Technology Officer (which actually occurred on January 1,
1996). Pursuant to the employment agreement, Dr. Chesney was paid an annual
salary (exclusive of benefits, bonuses or incentive payments) subject to annual
adjustments to reflect increases in the cost of living. Under the agreement, Dr.
Chesney's base annual salary, plus benefits, bonuses and incentive payments,
must be equal to, or greater than, 80% of that paid to the Company's President
and/or Chief Executive Officer. Dr. Chesney also was granted a stock option to
purchase 288,046 shares at an exercise price of $1.70 per share and is entitled
to certain registration rights with respect to the Shares underlying such
options. In addition, on August 18, 1997, the Company granted Dr. Chesney a
stock option under the 1995 Option Plan to purchase 75,000 shares at an exercise
price of $2.00 per share. The employment agreement is terminable by Dr. Chesney
for any reason, upon sixty (60) days written notice. Dr. Chesney may be
terminated by the Company only for "reasonable cause," as defined. The
employment agreement contains certain confidentiality obligations. On February
19, 1999, the Company granted Dr. Chesney a stock option under the 1998 Option
Plan to purchase 5,000 shares of stock at $2.81 per share. In connection with
the hiring of Mr. Sellke as Chief Executive Officer, and pursuant to an
amendment to Dr. Chesney's Employment Agreement dated effective April 16, 1999,
Dr. Chesney's annual salary was increased to $128,000, and Dr. Chesney waived
the right to any adjustment regarding any other types of compensation which may
have otherwise resulted from such other, non-annual types of compensation paid
to Mr. Sellke.

Messrs. Sellke, Guettler and Murphy are currently employed by the Company on
an at-will basis with no written agreement. The Company and such individuals are
presently negotiating the terms of their respective employment agreements. The
Company has granted Mr. Sellke on April 16, 1999 a nonqualified Stock Option
pursuant to its 1998 Option Plan to purchase 100,000 shares at an exercise price
of $2.94 per share; on September 8, 1997, the Company granted Mr. Guettler
150,000 shares of stock at an exercise price of $2.00 per share and an option to
purchase 5,000 shares of stock on February 19, 1999 at $2.81 per share; and on
July 1, 1997, the Company granted Mr. Murphy an option to purchase 53,100 shares
of stock, vesting monthly over the initial four-year period, at an exercise
price of $2.00 per share and an option to purchase 5,000 shares of stock on
February 19, 1999 at $2.81 per share.

50
<PAGE>
OUTSIDE DIRECTOR COMPENSATION

Members of the Board of Directors receive no cash compensation for such
service. However, the Company has granted to each of the Company's outside
directors an option to purchase 25,000 shares at an exercise price of $2.00 per
share. On February 19, 1999, the Company granted each of the outside directors
an option to purchase 5,000 shares at an exercise price of $2.81 per share.
Furthermore, the Company has established for future outside board members an
option-based compensation policy for the compensation of such members of its
Board of Directors providing that each newly appointed or elected outside
director will be granted a ten-year option, vesting over four years, for 20,000
shares of the Company's common stock, exercisable at the fair market value of
such stock on the date of grant of the option. In addition each such outside
director will be granted an additional option for 3,000 shares of the Company's
common stock at the end of each year of service, vested as of the date of grant,
for a ten year term exercisable at the fair market value of the common stock on
the date of grant. In addition, the Chairman of the Board will be granted an
option for 1,000 shares of the Company's Common Stock, vested as of the date of
grant, for a ten-year term exercisable at the fair market value of the Common
Stock on the date of grant.

On October 30, 1995, the Company entered into a four-year consulting
agreement with Jay N. Cohn, M.D., a member of the Board of Directors. Dr. Cohn
is also one of the founders of the Company and serves as the Company's Chief
Clinical Consultant and Chairman of the Scientific and Clinical Advisory Board.
The agreement is cancellable for any reason by either the Company or Dr. Cohn
upon 60 days prior notice. Under the terms of the agreement, the Company agreed
to grant Dr. Cohn nonqualified stock options to purchase 449,265 shares, which
are exercisable for a period of ten years at an exercise price of $1.70 per
share, to serve as clinical liaison and spokesman for the Company's arterial
compliance technology and to use his best efforts to forward the research,
clinical penetration and marketing of the Company's Products. All of the shares
underlying these options have been fully vested. Dr. Cohn is entitled to certain
registration rights with respect to the shares underlying these options.

Effective August 31, 1998, the Company amended Dr. Cohn's consulting
agreement. Under the amended consulting agreement, Dr. Cohn will perform
marketing, sales and public relations activities. As consideration for such
additional services, the Company has agreed to grant to Dr. Cohn an option to
purchase 100,000 shares of Common Stock under the Company's 1998 Stock Option
Plan, with an exercise price equal to $3.656 per share (which was the fair
market value of the Common Stock on the date of grant). The option vests in
three equal annual installments commencing on the date of grant. The consulting
agreement has been extended through August 2001.

On January 1, 1996, the Company entered into a consulting agreement with
Melville R. Bois, currently the Chairman of the Board of Directors, to serve as
the Company's President and Chief Executive Officer on a part-time basis until
such time as the Company appointed another President and/or Chief Executive
Officer. Under the terms of the agreement, the Company agreed to pay Mr. Bois a
monthly consulting fee of $4,000 and grant Mr. Bois nonqualified stock options
to purchase 12,500 shares, which are exercisable for a period of ten years at an
exercise price of $2.00 per share. All of the shares underlying such options
have been fully vested. The agreement was terminated by the Company in
accordance with its terms, upon the hiring of Greg H. Guettler as President in
September 1997. On July 1, 1997, the Company granted Mr. Bois a stock option to
purchase 12,500 shares at an exercise price of $2.00 per share. All of the
shares underlying such options have been fully vested. Mr. Bois is entitled to
certain registration rights with respect to the shares underlying his options.

On February 19, 1999, the Company granted Mr. Brimmer an option to purchase
10,000 shares of stock at $2.81 per share.

51
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table presents, as of August 31, 1999, certain information
regarding beneficial ownership of the Company's Common Stock by (i) each person
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock; (ii) each director and executive officer of the Company; and
(iii) all directors and executive officers of the Company as a group. Unless
otherwise indicated, the persons listed below have sole voting and investment
power with respect to the shares and may be reached at 2915 Waters Road, Suite
108, Eagan, MN 55121.

<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED(1) OWNED
- ---------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Dennis L. Sellke(2)....................................... 40,000 *
Greg H. Guettler(3)....................................... 78,000 1.5%
Charles F. Chesney, D.V.M., Ph.D., R.A.C.(4).............. 310,046 5.7
James S. Murphy(5)........................................ 107,875 2.1
Jay N. Cohn, M.D.(6)...................................... 498,052 8.9
Melville R. Bois(7)....................................... 75,000 1.4
Kenneth W. Brimmer(8)..................................... 82,000 1.6
Stanley M. Finkelstein, Ph.D.(9)
Health Informatics Division Box 609
UMHC, 420 Delaware St. S.E.,
Minneapolis, Minnesota 55455............................ 312,071 5.8
All Officers and Directors as a Group (7 persons)......... 1,190,973 19.7
</TABLE>

- ------------------------

* Less than 1%.

(1) Shares of Common Stock subject to options and warrants that are currently
exercisable or exercisable within 60 days are deemed to be beneficially
owned by the person holding the options or warrants for computing such
person's percentage, but are not treated as outstanding for computing the
percentage of any other person.

(2) Includes options to purchase 40,000 shares.

(3) Includes options and warrants to purchase 57,000 shares.

(4) Includes options to purchase 254,046 shares.

(5) Includes options to purchase 57,875 shares.

(6) Includes options to purchase 423,878 shares.

(7) Includes options to purchase 50,000 shares.

(8) Includes options and warrants to purchase 41,000 shares.

(9) Includes options to purchase 257,688 shares.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On October 30, 1995, the Company entered into a four-year consulting
agreement with Stanley M. Finkelstein, Ph.D., one of the founders of the Company
and currently the Company's Chief Technical Consultant. The agreement is
cancellable for any reason by either the Company or Dr. Finkelstein upon 60 days
prior notice. Under the terms of the agreement, the Company agreed to grant Dr.
Finkelstein nonqualified stock options to purchase 297,688 shares of Common
Stock, which are exercisable for a period of ten years at an exercise price of
$1.70 per share, to serve as technical liaison and spokesman for the Company's
arterial compliance technology and to use his best efforts to forward the
research, clinical penetration and marketing of the Company's Products. All of
the shares underlying these options have been fully vested. Dr. Finkelstein is
entitled to certain registration rights with respect to the shares underlying
these options.

52
<PAGE>
See Item 10 for description of the Company's consulting agreement with Dr.
Cohn.

The Company's management believes that the terms of this transaction are no
less favorable to the Company than would have been obtained from a nonaffiliated
third party for similar services. Any future transactions between the Company
and any of its officers, directors or affiliates will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
All future material affiliated transactions must be approved by a majority of
the independent outside members of the Company's Board of Directors who do not
have an interest in the transactions.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

<TABLE>
<C> <S>
3.1 Articles of Incorporation*
3.2 Bylaws*
3.3 Articles of Amendment to Articles of Incorporation, dated June 2, 1998*
4.1 Specimen of Common Stock Certificate*
4.2 Form of Warrant Agreement*
4.3 Specimen of Warrant Certificate*
4.4 Specimen of Unit Certificate*
10.1 1995 Long-Term Incentive and Stock Option Plan*#
10.2 1998 Stock Option Plan*#
10.3 Form of Stock Option Agreement for 1998 Stock Option Plan*#
10.4 Research and License Agreement between the Company and the Regents of the University
of Minnesota, dated September 23, 1988*
10.5 Employment Agreement between Charles F. Chesney, D.V.M., Ph.D., R.A.C. and the
Company, dated October 30, 1995*#
10.6 Consulting Agreement between Jay N. Cohn, M.D. and the Company, dated October 30,
1995*#
10.7 Amended Consulting Agreement between Jay N. Cohn, M.D. and the Company dated
effective August 31, 1998**#
10.8 Consulting Agreement between Stanley M. Finkelstein, Ph.D. and the Company, dated
October 30, 1995*
10.9 Consulting Agreement between Melville R. Bois and the Company, dated January 1,
1996*#
10.10 Office Lease Agreement, dated as of October 24, 1997*
10.11 Manufacturing Services Agreement between Altron, Inc. and the Company, dated July 15,
1997.*
10.12 Manufacturing Services Agreement between Apollo Research Corp. and the Company, dated
May 14, 1998.*
10.13 Amendment to Employment Agreement of Charles F. Chesney, D.V.M., Ph.D., R.A.C., dated
April 16, 1999.#
27 Financial Data Schedule
</TABLE>

- ------------------------

* Incorporated herein by reference to the Company's Registration Statement on
Form SB-2, File No. 333-53025.

** Incorporated herein by reference to the Company's Form 10-QSB for the
quarter ended December 31, 1998, File No. 0-24635

# Executive compensation plans and arrangements.

(B) REPORTS ON FORM 8-K

None.

53
<PAGE>
SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

HYPERTENSION DIAGNOSTICS, INC.

--------------------------------------

DENNIS L. SELLKE
CHIEF EXECUTIVE OFFICER

Dated: September 28, 1999

In accordance with the requirements of the Exchange Act, this report has
been signed below on behalf of the registrant and in the capacities indicated on
September 28, 1999.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ------------------------------------------------------
<C> <S>

/s/ MELVILLE R. BOIS Chairman of the Board of Directors
-------------------------------------------
Melville R. Bois

/s/ DENNIS L. SELLKE Chief Executive Officer and Director (Principal
------------------------------------------- Executive Officer)
Dennis L. Sellke

/s/ GREG H. GUETTLER President and Director
-------------------------------------------
Greg H. Guettler

/s/ CHARLES F. CHESNEY, D.V.M. Executive Vice President, Secretary, Chief Technology
------------------------------------------- Officer and Director
Charles F. Chesney, D.V.M.

/s/ JAMES S. MURPHY Vice President of Finance and Chief Financial Officer
------------------------------------------- (Principal Financial and Accounting Officer)
James S. Murphy

/s/ JAY N. COHN, M.D. Director
-------------------------------------------
Jay N. Cohn, M.D.

/s/ KENNETH W. BRIMMER Director
-------------------------------------------
Kenneth W. Brimmer
</TABLE>

54
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<C> <S>
3.1 Articles of Incorporation*

3.2 Bylaws*

3.3 Articles of Amendment to Articles of Incorporation, dated June 2, 1998.*

4.1 Specimen of Common Stock Certificate*

4.2 Form of Warrant Agreement*

4.3 Specimen of Warrant Certificate*

4.4 Specimen of Unit Certificate*

10.1 1995 Long-Term Incentive and Stock Option Plan*

10.2 1998 Stock Option Plan*

10.3 Form of Stock Option Agreement for 1998 Stock Option Plan*

10.4 Research and License Agreement between the Company and the Regents of the University
of Minnesota, dated September 23, 1988*

10.5 Employment Agreement between Charles F. Chesney, D.V.M., Ph.D., R.A.C. and the
Company, dated October 30, 1995*

10.6 Consulting Agreement between Jay N. Cohn, M.D. and the Company, dated October 30,
1995*

10.7 Amended Consulting Agreement between Jay N. Cohn, M.D. and the Company, dated
effective August 31, 1998**#

10.8 Consulting Agreement between Stanley M. Finkelstein, Ph.D. and the Company, dated
October 30, 1995*

10.9 Consulting Agreement between Melville R. Bois and the Company, dated January 1, 1996*

10.10 Office Lease Agreement, dated as of October 24, 1997*

10.11 Manufacturing Services Agreement between Altron, Inc. and the Company, dated July 15,
1997.*

10.12 Manufacturing Services Agreement between Apollo Research Corp. and the Company, dated
May 14, 1998.*

10.13 Amendment to Employment Agreement of Charles F. Chesney, D.V.M., Ph.D., R.A.C., dated
April 16, 1999.#

27 Financial Data Schedule
</TABLE>

- ------------------------

* Incorporated herein by reference to the Company's Registration Statement on
Form SB-2, File No. 333-53025.

** Incorporated herein by reference to the Company's Form 10-QST for the
quarter ended December 31, 1998, File No. 0-24635.

# Executive compensation plans and arrangements.

(B) REPORTS ON FORM 8-K

None.

<PAGE>

AMENDMENT
TO
EMPLOYMENT AGREEMENT

This Amendment is made effective the 16th day of April, 1999, between
Hypertension Diagnostics, Inc., a Minnesota corporation (hereinafter called the
"Company"), and Charles F. Chesney, D.V.M., Ph.D., an executive of the Company
(hereinafter called "Employee").

WHEREAS, the Company and Employee entered into an Employment Agreement
dated as of the 30th day of October, 1995 (the "Agreement"); and

WHEREAS, the Company and Employee desire to amend the Agreement as
provided in this Amendment.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth and for other good and valuable consideration, the sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:

1. The last sentence of Section II (C) of the Agreement is hereby
deleted and replaced in its entirety with the following:

"In connection with the hiring of Dennis L. Sellke, Employee's
base Annual Salary (exclusive of benefits, bonuses and
incentive payments) shall be increased to $128,000, effective
April 16, 1999. Employee and Company acknowledge and agree
that Employee shall receive further upward adjustments in base
Annual Salary such that Employee's base Annual Salary shall at
all times be equal to, or greater than, eighty percent (80%)
of the base Annual Salary paid to the Company's President
and/or Chief Executive Officer, whichever is greater. Employee
expressly waives the right to any such adjustment or increase
with respect to any other form of compensation, including, but
not limited to, either the President's or Chief Executive
Officer's benefits, stock options, bonuses and incentive
payments for the duration of this Agreement."

2. All other terms of the Agreement shall remain unchanged.

3. Capitalized terms used in this Amendment and not otherwise
defined have the meanings given to them in the Agreement.

4. This Amendment constitutes the entire agreement between the
parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements, understandings, negotiations
and discussions, whether oral or written, of the parties

<PAGE>

hereto, pertaining to such subject matter. There are no
warranties, representations or agreements, express or implied,
between the parties in connection with the subject matter
hereof except as may be specifically set forth herein.

IN WITNESS WHEREOF, the Company and the Employee have executed this
Amendment as of the date first written above.

HYPERTENSION DIAGNOSTICS, INC.

By /s/ Melville R. Bois
---------------------------------------
Melville R. Bois
Chairman, Board of Directors

/s/ Charles F. Chesney
---------------------------------------
Charles F. Chesney, D.V.M., Ph.D.

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS OF AND FOR THE TWELVE MONTHS ENDED JUNE 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 7,684,525
<SECURITIES> 0
<RECEIVABLES> 232,481
<ALLOWANCES> 0
<INVENTORY> 375,497
<CURRENT-ASSETS> 8,297,223
<PP&E> 476,201
<DEPRECIATION> 92,119
<TOTAL-ASSETS> 8,711,835
<CURRENT-LIABILITIES> 222,609
<BONDS> 0
0
0
<COMMON> 51,092
<OTHER-SE> 8,438,134
<TOTAL-LIABILITY-AND-EQUITY> 8,711,835
<SALES> 381,247
<TOTAL-REVENUES> 795,762
<CGS> 138,788
<TOTAL-COSTS> 138,788
<OTHER-EXPENSES> 2,871,069
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,214,095)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,214,095)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,214,095)
<EPS-BASIC> (.45)
<EPS-DILUTED> (.45)

</TABLE>