UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-KSB

	[X]

For the fiscal year ended June 30, 2000

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

Hypertension Diagnostics, Inc.

2915 Waters Road, Suite 108, Eagan, Minnesota 55121

(Address of Principal Executive Offices, including Zip Code)

Issuer’s Telephone Number: (651) 687-9999

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)

     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 $423,490.

      The aggregate market value of the voting stock held by nonaffiliates of the issuer as of September 15, 2000 was approximately $35,561,000, based upon the closing sale price for the Common Stock on that date as reported by The Nasdaq SmallCap Market.

      There were 5,255,240 shares of the issuer’s Common Stock, $.01 par value per share outstanding as of September 15, 2000.

DOCUMENTS INCORPORATED BY REFERENCE

PART I

ITEM 1.  Business

Forward-Looking Statements

      The information presented in this Annual Report on Form 10-KSB and our public documents to which we refer contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. In addition, we may make forward-looking statements orally in the future by or on behalf of the company. When used, the words “believe,” “expect,” “will,” “can,” “estimate,” “anticipate” and similar expressions are intended to identify forward-looking statements. We wish to caution readers not to place undue reliance on any forward-looking statements and to recognize that the statements are not predictions of actual future results. Actual results could differ materially from those anticipated in the forward-looking statements due to the risks and uncertainties set forth herein under the caption “Risk Factors,” as well as others not now anticipated. These risks and uncertainties include, without limitation, our ability to receive regulatory approval for our CVProfilor™ DO-2020 CardioVascular Profiling System; the availability of third-party reimbursements; market acceptance of our products; the ability to operate and maintain the Central Data Management Facility (“CDMF”) on a commercial scale; regulatory restrictions pertaining to data privacy issues in utilizing the CDMF; the ability to manufacture our products on a commercial scale and in compliance with regulatory requirements; the availability of integral components for our products; our ability to develop distribution channels; increased competition; changes in government regulation; health care reforms; exposure to potential product liability; and our ability to protect our proprietary technology. We undertake no responsibility to update any forward-looking statement.

      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

      Hypertension Diagnostics, Inc. is engaged in the design, development, manufacturing 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 investigated for many years and clinical studies suggest that a lack of arterial elasticity is an early indicator of vascular disease. We plan to market three versions of our Product: the HDI/PulseWave™ CR-2000 Research CardioVascular Profiling System, the CVProfilor™ DO-2020 CardioVascular Profiling System and the CVProfilor™ MD-3000 CardioVascular Profiling System (previously referred to as the Model DO-2020i). The CR-2000 Research System is being marketed worldwide, has a mechanical device CE Mark (CE₀₁₂₃ ) which allows it to be marketed in the European Union, and is being marketed “for research purposes only” in the United States (that is, not for screening, diagnosing, monitoring or determining treatment of patients). The CVProfilor™ DO-2020 System is for primary care physicians and other health care professionals, and will require FDA clearance to market in the United States. We have forwarded a submission to the FDA to market the CVProfilor™ DO-2020 System and are currently awaiting clearance. The CVProfilor™ MD-3000 System will provide physicians outside the United States with key cardiovascular parameters, which we believe will provide clinically beneficial information useful in screening 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 CVProfilor™ MD-3000 System requires that we obtain a CE Mark in order for it to be marketed inside the European Union and will require regulatory approval to be marketed in Japan and China. We anticipate that the CVProfilor™ DO-2020 System will eventually generate the majority of our 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, including:

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      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 other organs. 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 ateriosclerosis, and leaving one more 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, because it increases with age, and therefore is present in more than half of Americans 60 years of age 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 in 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 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 (that is, heart attacks or strokes). 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 (that is, myocardial infarctions), strokes, angina (that is, myocardial ischemia or loss of oxygenation of the heart muscle), peripheral vascular ischemia (known as claudication) and renal failure are late manifestations of the disease as a result of plaque formation that decreases blood flow. The absence of a clinically applicable method to detect the presence of atherosclerosis prior to plaque obstruction of arterial lumens (that is, the inner space in the blood vessel through which blood flows) has led to widespread efforts to identify the risk factors in the entire population and to intervene with

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The Clinical Problem

      Cardiovascular specialists spend considerable effort on evaluating heart function, including the clinical use of 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, nonspecific and unreliable 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 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 in most individuals. Measurement of ambulatory blood pressure throughout the day provides a more accurate assessment of the 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 directly. Instead, a high ratio 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 such as heart attacks and strokes.

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, our Product evaluates a blood pressure waveform produced by the beating heart that we believe 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 (that is, 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. Such changes in the function and structure of the arterial wall precede the development of coronary artery disease, and the premature stiffening of the small arteries appears to be an early clinical marker for cardiovascular disease, in general.

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

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      This “blood pressure waveform” or “pulse contour analysis” method provides 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 (that is, the arterioles) which produce oscillations or reflections in response to the pressure wave 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 underlying vascular disease. Furthermore, worldwide 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.

The Product

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

      Our 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 versions of our Product consist of four primary components: (a) a non-invasive arterial pulse pressure or PulseWave™ Sensor placed over the radial artery at the wrist; (b) an upper-arm blood pressure cuff connected to an oscillometric blood pressure module; (c) an enclosure which contains a computer, a touch-screen display and other electronics and software programs; and (d) an external printer.

Product Versions

      We currently have two versions of our Product and a third in development:

HDI/ PulseWave™ CR-2000 Research CardioVascular Profiling System

      The CR-2000 Research System is for clinical research purposes only in the United States and has a medical device CE Mark (CE ₀₁₂₃) which allows it to be marketed in the European Union. It non-invasively collects blood pressure waveform data, performs a pulse contour analysis on the digitized data, and 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 computer output port is included to allow research investigators to send blood pressure waveform data and analyzed CardioVascular Profile Report results to computer systems within the researcher’s facilities.

      The CR-2000 Research System is being marketed to medical directors and research investigators at pharmaceutical firms and at academic and medical 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.

CVProfilor™ DO-2020 CardioVascular Profiling System

      Pending FDA clearance, physicians and health care providers will be able to use the CVProfilor™ DO-2020 System to measure blood pressure (systolic, diastolic and mean arterial pressure) and heart pulse rate. The DO-2020 System also calculates pulse pressure, body surface area and body mass index, and provides indications of large and small artery elasticity. A report containing this information is printed in the physician’s

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      Our CDMF is currently capable of handling 48 simultaneous physician transmissions from CVProfilor™ DO-2020 Systems in physicians’ offices which are immediately integrated with our tracking, billing and production systems. Our CDMF is capable of storing cardiovascular profile information on hundreds of thousands of patients from different age groups and with different disease states. Although our CDMF has yet to be stress tested under maximum line load, we believe that it is fully operational. We expect to utilize the information transmitted to our CDMF from patients free of disease (and separated by age and gender), in order to establish a reference range of parameters which will be clinically beneficial to us and to physicians. We believe such a database may also prove helpful to physicians in terms of archiving patient profiles and trending individual patient profile results over time, enhancing the accuracy of ranges for CardioVascular Profile Report parameters, and providing continuity of CardioVascular Profile Report information for patients who may have been seen over a period of time by several physicians in different parts of the United States. Further, the receipt of a patient’s profile results at our CDMF will trigger an accounting event for the purposes of invoicing physicians on a “pay-as-you-use” basis.

      In the future, we may explore the possibility of offering an Internet link to physicians (with security protection) via our web site, allowing physicians to make direct inquiries into the database regarding their patient records at some future date.

      Following FDA clearance, the CVProfilor™ DO-2020 System will initially be marketed to physicians specializing in internal medicine, general and family practitioners, cardiologists, nephrologists, cardiovascular specialists and other physicians in medical practices throughout the United States. Because the DO-2020 System provides indices of a patient’s arterial elasticity, we believe that it can assist physicians in screening patients with underlying vascular disease with more reliability than other methods currently available. With the DO-2020 System, physicians will have a simple, painless and non-invasive procedure easily used in their offices and clinics in order to obtain clinical information on the vascular status of patients. We also believe that such information might be of assistance to physicians and other health care providers in support of their efforts to identify individual patients at risk for developing cardiovascular disease. We expect that the CVProfilor™ DO-2020 System will eventually generate the majority of our revenues derived from “per-test” or “per-patient” physician billings.

CVProfilor™ MD-3000 CardioVascular Profiling System

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

      The Product, currently designated the CVProfilor™ MD-3000 System (previously referred to as the DO-2020i), is intended for use in screening, diagnosing and monitoring the treatment of patients with cardiovascular disease. It will provide physicians outside the United States with the ability to immediately print a CardioVascular Profile Report containing a patient-specific reference range for each parameter on the Report in their office. Due to fundamental differences in physician reimbursement, patient data transfer regulations and telephone communication technologies, this international CVProfilor™ MD-3000 System will be marketed to physicians as a capital purchase without the linkage of transmitting data to a Central Data Management Facility.

      Products marketed in the European Union (EU) require a medical device CE Mark (conformance to Council Directive MDD 93/42/ EEC) prior to importation into the EU and we anticipate obtaining a medical device CE Mark for the MD-3000 System. Other countries have similar requirements based on conformance to quality standards consistent with our ISO-9002, EN-46002, and ISO-13488 certifications.

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CardioVascular Profile Report

      The CardioVascular Profile Report currently generated by the CR-2000 Research System presents the following parameters: a 1.5 Second Blood Pressure Waveform Graph, Body Surface Area (BSA), Body Mass Index (BMI), Systolic Blood Pressure (mmHg), Diastolic Blood Pressure (mmHg), Mean Arterial Pressure (mmHg), Pulse Pressure (mmHg), Pulse Rate (beats/minute), Estimated Cardiac Ejection Time (milli-seconds), Estimated Stroke Volume (ml/beat), Estimated Stroke Volume Index (ml/beat/m2), Estimated Cardiac Output (Liters/minute), 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 (dyne•sec•cm-5), and Total Vascular Impedance (dyne•sec•cm-5).

The Advantages: Potential Beneficial Medical Outcomes for Patients and Payers

      Clinical research suggests that the 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 examination and/or other tests, may provide a meaningful picture of vascular health for patients 15 years of age and older. The large and small artery elasticity indices are of particular clinical importance in this assessment. These indices indicate the elasticity or flexibility of the patient’s arteries, which may be beneficial in assessing vascular disease. These indices also provide valuable information to physicians in screening patients who may be at risk for underlying vascular disease and thereby have a potential for life-threatening cardiovascular events.

      During the last several years, research investigators have evaluated hundreds of “normal” subjects as well as more than 500 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 CVProfilor™ DO-2020 System and the CVProfilor™ MD-3000 CardioVascular Profiling System may help physicians identify these patients and intervene therapeutically.

      Further, the Company believes there may be an advantage to using the CVProfilor™ DO-2020 System and the CVProfilor™ MD-3000 CardioVascular Profiling System 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, and sexual impotence). 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.

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Published Clinical Research Update

      A number of references have been published in medical journals which utilize the basic methodology incorporated in our Product. Since June 1999, we have added these to the bibliography of published titles, abstracts and articles which relate to the general topic of arterial elasticity. These new references are listed here:

      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 in the Ninth European Meeting on Hypertension, 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.

      Resnick L.M.; Lester, M.H.; Chesney, C.F. “Differential Effects of Antihypertensive Drug Therapy on Arterial Compliance.” (Presented at the Fifteenth Scientific Meeting of the American Society of Hypertension and Published in AMERICAN JOURNAL of HYPERTENSION 13:(4, Part 2), pg. 20A, April 2000).

      Gilani, M.: Alinder, C.; Kaiser, D.; Rajala, S.; Bank, A.J.; CDohn, J.N. “Differences in Large and Small Artery Response to Acute Inhibition of Nitric Oxide Synthase in Human Subjects.” AMERICAN JOURNAL of HYPERTENSION, 13: (4, Part 2), Abstract No. B003, April 2000.

      Lane, K.V.; Prisant, M.E.; Prisant, L.M. “Noninvasive Vascular Compliance: Short-Term Assessment of Test Repeatability.” AMERICAN JOURNAL of HYPERTENSION 13: (4, Part 2), Abstract No. B015, April 2000.

      DeBacker, T.L.; DeBuyzere, M.L.; Duprez, D.A.; Clement, D.L.; Cohn, J.N. “Large Artery but Not Small Artery Elasticity Index is Increased in Athletic Sports Men Versus Control Subjects.” AMERICAN JOURNAL of HYPERTENSION 13: (4, Part 2,), Abstract No. B022, April 2000.

      Zimmerman, A.; VanAuker, M.D.; Zakari, A.; Strom, J.A.; Weber, M.A. “Loss of Oscillatory Arterial Compliance is Detectable in Young Patients by Radial Artery Pulse Contour Analysis.” AMERICAN JOURNAL of HYPERTENSION 13: (4, Part 2), Abstract No. B026, April 2000.

      Winer, N.; Mitri, O.; Saradih, H.; Shah, C. “Influence of Cardiovascular Risk Factors and Gender on Vascular Elascticity and Metabolic Parameters.” AMERICAN JOURNAL of HYPERTENSION 13: (4, Part 2), Abstract No. B028, April 2000.

      Kaiser, D.R.; Gilani, M.; Alinder, C.; Rajala, S.; Cohn, J.N. “Intravenous Infusion of L-Name Does Not Alter Brachial Artery Area or Compliance.” AMERICAN JOURNAL of HYPERTENSION 13: (4, Part 2,), Abstract No. B029, April 2000.

      Grey, E.; Bratteli, C.; Glasser, S.P.; Alinder, C.; Finkelstein, S.M.; Lindgren, B.; Cohn, J.N. “Small but Not Large Artery Compliance Predicts Cardiovascular Events.” AMERICAN JOURNAL of HYPERTENSION 13: (4, Part 2), Abstract No. B059, April 2000.

MARKETING, SALES AND DISTRIBUTION

      Within the United States health care industry, which is estimated to have annual sales of approximately $1 trillion by the United States Department of Health and Human Services (December 15, 1997), cardiovascular disease is expected to account for $326 billion in 2000, with $214.7 billion spent on heart disease, 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 couple of decades, these diseases

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	•	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 suffer heart attacks annually, and it is the first sign of cardiovascular disease in 20% to 40% of these 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 (or 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 or borderline 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 including 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 by the year 2008. (Source: Decision Resources, Inc., Hypertension Report, 1999).

      Because of the magnitude and impact cardiovascular disease has on the worldwide population, we believe that our Product offers a significant opportunity for providing a more accurate and effective means with which to screen patients for potential underlying vascular disease. Furthermore, cardiovascular disease is a major cause of death in nearly every developed country throughout the world.

The Research Market

      The HDI/PulseWave™ CR-2000 Research CardioVascular Profiling System is being marketed to medical directors and research investigators at pharmaceutical firms and academic centers on a worldwide basis, yielding 100% of our revenues to date. These research customers have expressed a keen 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 enter pre- or non-clinical testing are ultimately subjected to human testing and only one in five of those is ultimately approved. We believe the CR-2000 Research System provides a new means for gathering information on additional variables during such research endeavors.

      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

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      We have identified three markets for the CR-2000 Research System:

      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 clinical research trials.

      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 CR-2000 Research System. Many references in the peer reviewed medical literature illustrate the growing body of knowledge supporting arterial elasticity measurements and the implications of such measurements for the management of cardiovascular disease.

      The U.S. 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 often conduct large-scale research projects. These organizations represent a market opportunity for the CR-2000 Research System.

      The Company anticipates that use of the CR-2000 Research System 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 CVProfilor™ DO-2020 CardioVascular Profiling System is intended to be used by physicians or trained medical personnel. Our focus will be on the practice of cardiovascular medicine and, in particular, those health care professionals and providers who are directly involved in screening of patients for potential underlying vascular disease. Current American Medical Association estimates indicate there are approximately 650,000 to 700,000 active physicians in the United States, approximately 250,000 of which fall into the target market as potential users of the CVProfilor™ DO-2020 System:

	•	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

      Our primary objective is to establish our Product as the standard for non-invasive patient vascular screening, thereby reducing risk for heart attack and stroke through the early identification and management of vascular disease.

HDI/ PulseWave™ CR-2000 Research System

      We are currently using various methods to market the CR-2000 Research System including our website (www.hdi-pulsewave.com), direct mail, attendance at major medical conventions, the use of a limited sales force and the use of exclusive distributors in international markets to market the CR-2000 Research System to

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CVProfilor™ DO-2020 System

      Upon obtaining FDA clearance to market the DO-2020 System in the United States, we intend to direct its sales and marketing efforts at physicians who screen patients for potential underlying vascular disease. We will seek to gain DO-2020 System acceptance by implementing a strategy that promotes its 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 vascular disease. Our education and awareness strategy will also focus on the publication of additional research studies covering performance and utility of the DO-2020 System and attendance at major cardiovascular conventions.

      The introduction of the DO-2020 System 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 us sufficient time to develop a strong referral base. Second, we will focus early marketing and education efforts on United States physicians who evaluate individuals at risk for developing vascular disease. In an effort to encourage rapid acceptance of the DO-2020 System, we anticipate offering it to physicians on a “per-patient” or “per-report” billing basis. Invoices for physician use of the DO-2020 System will be generated based on the number of CardioVascular Profile Reports that are transmitted to our Central Data Management Facility each month.

      We anticipate 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, we intend to promote the DO-2020 System to people at risk for developing cardiovascular disease through public relations materials, advertising and our Internet website (www.hdi-pulsewave.com).

CVProfilor™ MD-3000 System

      Following receipt of CE Mark certification for the MD-3000 System, we will utilize a network of independent international distributors to market it 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.

      Our primary focus will be on the creation of a distribution network covering the European Union, Japan and other parts of Asia. We anticipate signing a multi-year agreement with distributors to represent us in a specific territory — generally anticipated to be at least a single country. The MD-3000 System will be sold to distributors who will re-sell and service it in their territory. Our distributors have the right to set the selling price of the MD-3000 System within their territory.

      Distributor appointments will generally be based on the distributor’s ability to manage the financial aspects of currency fluctuations, their demonstration of ethical conduct consistent with United States business practices, their ability to market to and support key differences in physician practice patterns, their ability to assist us in obtaining sufficient MD-3000 System reimbursement, and their ability to satisfy government regulations pertaining to use of medical devices that exist within their territory. We anticipate that these distributors will be firms that distribute complementary cardiovascular or general medical products and that have the ability to designate specialist support for marketing the MD-3000 System. We currently have executed distribution agreements covering Japan, Norway, Sweden, Denmark, Italy, Taiwan, China and South Africa.

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Production

      The design, development and integration of all of the components necessary to fabricate and manufacture our Product was undertaken on our behalf by a contract design engineering firm. We have been producing CR-2000 Research Systems since November 1998. According to testing performed at TÜV Product Services, Inc., the CR-2000 Research System has been found to be in full compliance with the electromagnetic compatibility immunity and emissions requirements and the requirements for displaying the CE Mark. The CVProfilor™ DO-2020 System was also evaluated by Underwriters Laboratories, Inc., and is UL listed with a license to display the UL label.

      On November 30, 1999, we announced that our Quality Assurance System was registered to ISO-9002, EN-46002 and ISO-13488 by TÜV Product Services, Inc. Our CR-2000 Research CardioVascular Profiling System now displays the “CE ₀₁₂₃” mark, indicating that the CR-2000 Research System is certified for sale throughout the European Union and that the product complies with applicable safety standards. We are currently pursuing foreign registrations and approvals that will allow marketing of a similar product to physicians, the CVProfilor™ MD-3000 System, in foreign markets.

      We have now brought in-house assembly, testing, packaging and shipping operations for our Product. Improved Product and service quality and manufacturing cost reductions have been incorporated into our operating plans.

      In the interest of flexibility and efficiency, we are conducting final Product assembly, testing and packaging at our facility in Eagan, Minnesota, in compliance in all material respects with the FDA’s Quality System Regulations (“QSR”).

      An integral component of our Product is the Arterial PulseWave ™ Sensor. While Sensors utilized in our Product have performed reliably, we are uncertain as to whether Sensors will be available on a commercial basis, and if available, whether an adequate supply of Sensors meeting our standards of reliability, accuracy and performance will be available. We currently obtain the Sensor from a single vendor and have a manufacturing services agreement with this vendor. Disruption or termination of this relationship would have a material adverse effect on our business and results of operations.

Competition

      Competition in the medical device industry is intense and many of our competitors have substantially greater financial, manufacturing, marketing, distribution and technical resources than we do. We compete directly with manufacturers of sphygmomanometers, as well as drug, medical instrument and health care companies. In addition, we are aware of other companies that are developing products that measure arterial elasticity.

      To the best of our knowledge, no products which measure both large and small artery elasticity have yet obtained either CE Mark or FDA clearances to market, and no other products being developed or being marketed appear capable of providing both large artery and small artery elasticity values. We are aware of six 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), Pulse Metric, Inc. (San Diego, California), PWV Medical Ltd. (Sydney, Australia), Specaway Pty Ltd. (St. Pauls New South Wales, Sydney, Australia) and Novacor (Paris, France). A technology called the “Complior” has been developed in France and has been reported in the general medical literature to measure “arterial stiffness” (versus elasticity). The “Complior” device is based on “pulse wave velocity” (while our Product provides analysis of pulse-pressure waveforms). One of the companies mentioned above has received FDA clearance to market a device which claims to evaluate a patient’s general cardiovascular condition.

Government Regulation

      Medical devices such as our CVProfilor™ DO-2020 System 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

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      Before a new medical device may be introduced into the United States market, the manufacturer generally must obtain prior authorization from the FDA. This 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)”) submission or a Premarket Approval (“PMA”) application. 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 application 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 application 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) submission 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 medical device 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) submission 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 non-approved 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.

      We are seeking clearance from the FDA to market the CVProfilor™ DO-2020 System in the United States and have previously submitted a 510(k) Premarket Notification submission to the FDA. In January 2000, we were notified by the FDA that it would not grant an extension of time to the 510(k) Premarket Notification as we had previously submitted. Instead, the FDA asked that we submit a new 510(k) to include additional information as previously agreed upon with the FDA. We forwarded a new 510(k) Premarket Notification submission to the FDA during June 2000. However, we cannot predict how long the FDA will take to review our 510(k) submission, or when the FDA will clear the DO-2020 System for marketing in the United States, if at all.

      Federal, state and foreign regulations regarding the manufacture and sale of healthcare products and diagnostic devices are subject to future change. We cannot predict what material impact, if any, these changes might have on our business. Future changes in regulations or enforcement policies could impose more stringent requirements on us, compliance with which could adversely affect our business. These changes may relax certain requirements, which could prove beneficial to our competitors and thus adversely affect our business. In addition, regulations of the FDA and state and federal and foreign laws and regulations depend heavily on administrative interpretations, and we cannot assure you that future interpretations made by the FDA, or other regulatory authorities, with possible retroactive effect, will not adversely affect us.

      In addition to the regulations directly pertaining to us and our products, many of our potential customers are subject to extensive regulation and governmental oversight. Regulatory changes in the healthcare industry that adversely affect the business of our customers could have a material adverse effect on our business, financial condition and results of operations.

      We can give no assurance that we 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, these clearances or approvals, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, financial condition and results of operations.

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Reimbursement

      We anticipate that most revenue affiliated with physician use of the CVProfilor™ DO-2020 System will ultimately 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”), Medicare and other federally funded programs, and “self-pay” plans. Each payer establishes its own coverage and payment policies resulting in a range of payments and coverage decisions. Physician reimbursement is an important aspect in the DO-2020 System’s success. Without adequate levels of reimbursement, physicians may be reluctant to try the DO-2020 System, if at all. There is no assurance that adequate third-party reimbursement for the DO-2020 System 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 CVProfilor™ DO-2020 System is Level I. Insurers require physicians to report their services with the CPT coding system.

      Following FDA clearance for the CVProfilor™ DO-2020 System, we will interact with the American Medical Association (“AMA”) to determine whether the DO-2020 System falls within any existing CPT codes or whether it 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 DO-2020 System, we believe that it may take two or more years to obtain a DO-2020 System technology-specific CPT code. During this time, physicians may be required to 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. Physicians may also request payment directly from patients for the procedure in certain markets where it is allowed, until we gain widespread reimbursement, if ever.

Patents and Proprietary Technology

      Our success depends, in part, on our ability to maintain patent protection for our Product and processes, preserve our trade secrets and operate without infringing the property rights of third parties. We are the exclusive assignee for three issued United States patents and have obtained an exclusive license to rights under four United States patents and one European patent issued to the Regents of the University of Minnesota. These eight patents relate to our blood pressure waveform analysis procedures, our cardiovascular profiling technology, the non-invasive determination of cardiac output, and the overall technology and operation of our Product. The license from the University of Minnesota expires with the term of their patents (currently expected to be during 2016). One or more patent applications relating to these United States issued patents are currently pending in Japan, Germany, France and the United Kingdom. We have three patent applications that have been submitted regarding other aspects and components of our Product. We can give no assurance that our current patents and licenses will provide a competitive advantage, that the pending applications will result in patents being issued, or that our competitors will not design around any patents or licenses issued to us.

      Besides seeking additional patents, we intend to rely to the fullest extent possible on trade secrets, proprietary “know-how”, and our ongoing endeavors involving product improvement and enhancement. We can give no assurance that nondisclosure agreements and invention assignment agreements will protect our proprietary information and know-how or provide adequate remedies in the event of unauthorized use or disclosure of that information, or that others will not be able to independently develop that information.

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University of Minnesota Research and License Agreement

      On September 23, 1988, we entered into a Research and License Agreement (the “University License Agreement”) with the University of Minnesota (the “University”), pursuant to which the University granted to us an exclusive, worldwide license under the patents that relate to our 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 during 2016). We also have the right to grant sub-licenses under the University’s patents.

      In consideration of the University License Agreement, we conducted expanded clinical trials of arterial compliance technology and are continuing to use our best efforts to develop commercial medical devices. We must pay a royalty on revenue from commercialization of our 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

      We currently employ 12 full-time employees. We anticipate hiring approximately 8 additional employees during the next 12 months in the areas of marketing and sales, plant operations and assembly tasks, computer software and database development, and for clinical and customer support needs including accounting and administrative staff. We believe that our employee relations are good.

      In addition to vendors under contract to us for specific product-related tasks, we have consultant relationships with several experts including:

	•	Several experts in regulatory affairs and FDA matters;
	•	Jay N. Cohn, M.D. as our Chief Clinical Consultant;
	•	Stanley M. Finkelstein, Ph.D., as our Chief Technical Consultant;
	•	a consulting firm for computer software engineering design and programming;
	•	a consulting firm for medical electronic engineering tasks;
	•	a consulting firm for marketing communications;
	•	consulting firms for third-party reimbursement; and
	•	several experts in sales and marketing.

We may retain additional consultants as necessary to accommodate our need for experts in selected areas of product-related activities.

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      In addition to the other information provided herein, you should carefully consider the following risk factors in evaluating our business.

Risks Related to Our Business

      We are a Development Stage Company and are not presently generating any significant revenues. We cannot assure you that we will ever be able to generate significant revenues, attain or maintain profitable operations or successfully implement our business plan or current development opportunities. As of June 30, 2000, we had a deficit accumulated during the development stage of $(8,814,651), attributable primarily to research and development and general and administrative expenses. Until we are able to generate significant revenues from our activities, we expect to continue to incur operating losses.

      We plan to market three versions of our Product: the HDI/ PulseWave™ CR-2000 Research CardioVascular Profiling System, the CVProfilor™ DO-2020 CardioVascular Profiling System and the CVProfilor™ MD-3000 CardioVascular Profiling System (previously referred to as the Model DO-2020i). We believe that the CR-2000 Research System, intended for research use only in the United States (that is, not for screening, diagnosing, monitoring or determining the treatment of patients), does not require FDA clearance to market, and marketing and distribution activities have commenced worldwide. The CVProfilor™ DO-2020 System, intended for use by physicians to screen patients for the presence of underlying vascular disease, is an FDA regulated medical device. We are unable to market the CVProfilor™ DO-2020 System in the United States until FDA clearance to market is obtained.

      The likelihood of our success must be considered in light of the expenses, difficulties and delays that development stage businesses like ours frequently encounter and the competitive environment in which we operate. Our profitability is dependent in large part on obtaining timely FDA clearance for our CVProfilor™ DO-2020 System, the availability of third-party reimbursement, gaining market acceptance of our Product, establishing distribution channels and developing the capacity to manufacture and sell our Product successfully. We cannot assure you that we will successfully meet all of these goals.

      We have limited financial resources and may need additional financing to continue our business.  Our ability to execute our business strategy depends to a significant degree on our ability to obtain substantial equity capital and other financing. Our business strategy requires a large capital outlay for equipment which we plan to place in physicians’ offices without charge. Consequently, we must first build up and maintain an inventory of System components and equipment before we will know whether our business strategy will be successful. We anticipate that the proceeds from our initial public offering in 1998 will be sufficient to fund our operations through at least the next 12 months. Although we expect that these proceeds will be sufficient to allow initial marketing of all versions of our Product, we can give no assurance that they will be sufficient. Any unforeseen contingencies, including, but not limited to, delays in FDA clearance of the CVProfilor™ DO-2020 System, unavailability of third party reimbursement, delayed or limited market acceptance, delays in establishment of distribution channels, shortage of System components or delays in manufacturing may impede our marketing efforts. We may be required to seek additional funds through another offering of our equity securities or by incurring indebtedness. We cannot assure you that any additional funds will be available on terms acceptable to us or our security holders, or at all, or that any future capital that is available will be raised on terms that are not dilutive to investors. Our 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.

      Failure to obtain FDA clearance for our Product will affect our business.  We believe that the HDI/ PulseWave™ CR-2000 Research System does not require either FDA clearance or approval before we begin marketing it to research institutions and medical research centers for research use only. However, the FDA could disagree with us and require that we submit a 510(k) Premarket Notification or Pre-Market Approval (“PMA”) submission for the HDI/ PulseWave™ CR-2000 Research System. In that event, it is possible that the FDA may not clear or approve the CR-2000 Research System, or may clear or approve it subject to significant limitations on the intended uses for which it is marketed. In contrast, our CVProfilor™ DO-2020

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      Obtaining FDA clearance or approval can be a lengthy process and may require additional clinical testing, financial expenditures and other substantial resources. The timing of the clearance or approval process is unpredictable and we cannot assure you that our 510(k) submission for marketing the CVProfilor™ DO-2020 System will ultimately receive FDA clearance. Even if granted, the FDA clearance or approval may include significant limitations on the intended uses for which the CVProfilor™ DO-2020 System may be marketed. FDA enforcement policy strictly prohibits the promotion of cleared or approved medical devices for non-approved or “off-label” uses. In addition, the FDA may withdraw product clearances if the CVProfilor™ DO-2020 System fails to comply with regulatory standards or we encounter 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 our business, financial condition and results of operations.

      We are dependent upon third-party reimbursement and/ or direct patient payment for our revenues.  Our financial performance will largely depend on the availability of reimbursement, if any, for the cost of medical products and services from government health administration authorities, private health coverage insurers and other payer organizations. No third-party payer has yet approved reimbursement for use of our CVProfilor™ DO-2020 System. Significant uncertainty exists as to the pricing, availability of distribution channels and reimbursement status of new medical products, and we cannot assure you that adequate third-party reimbursement will be available for the CVProfilor™ DO-2020 System. In foreign markets, pricing or profitability of health care products is subject to government control. Our inability to obtain third-party reimbursement and/or direct patient payment for the CVProfilor™ DO-2020 System would have a material adverse effect on our business, financial condition and results of operations.

      Because we have a new product, the uncertainty of market acceptance of our product or medical application of the technology will affect our business.  Our financial performance will depend in large part upon FDA clearance of the CVProfilor™ DO-2020 System. It will also largely depend upon the extent to which the respective versions of our Product are accepted by researchers (for the CR-2000 Research System) as being useful, and by physicians and other health care providers as being effective, reliable and safe for use in screening patients (regarding the DO-2020 System) and for use in screening, diagnosing and monitoring the treatment of patients with vascular disease (regarding the MD-3000 System.) If the CVProfilor™ DO-2020 System 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 Central Data Management Facility or any other factors which prohibit acceptance by physicians, we will likely be required to cease operations. We are unable to predict how quickly or how broadly any versions of our 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 that we educate the marketplace about the anticipated benefits associated with the use of our Product and may also require us to obtain and disseminate additional data acceptable to the medical community as evidence of our Product’s clinical benefits. Because our Product represents a new approach for evaluating vascular disease, there may be a greater reluctance to accept our Product than would occur with products utilizing more traditional technologies or methods of diagnosis. This may result in longer sales cycles and slower revenue growth than currently anticipated. We cannot assure you that we will be successful in educating the marketplace about our Product or that available data concerning these benefits will create a demand by the research or medical community for our Product. Furthermore, our Product will be substantially more expensive to operate than the traditional blood pressure testing instrument, the sphygmomanometer. We cannot assure you that physicians will utilize the CVProfilor™ DO-2020 System once installed, or that our

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      Because we lack manufacturing experience, we must depend upon third-party sub-assembly manufacturers.  To date, we have relied on independent contractors for component sub-assembly manufacturing of all versions of our Product. For our Product to be financially successful, it must be manufactured in accordance with strict regulatory requirements, in commercial quantities, at appropriate quality levels and at acceptable costs. To date, our Product has been manufactured in limited quantities and not on a commercial scale. As a result, we cannot assure you that we will not encounter difficulties in obtaining reliable and affordable contract sub-assembly manufacturing assistance and/or in scaling up our manufacturing capabilities. This may include problems involving production yields, per-unit manufacturing costs, quality control, component supply and shortages of qualified manufacturing personnel. In addition, we cannot assure you that we will not encounter problems relating to integration of components if changes are made in the configuration of the present Product versions. Any of these difficulties could result in our inability to satisfy any customer demand for our Product in a cost-effective manner and would likely have a material adverse effect on our business, financial condition and results of operations.

      Because we have a single source supplier of sensor and other components, failure to obtain this supply could materially affect our business.  An integral component of our Product is our proprietary arterial pulse pressure or PulseWave™ Sensor (the “Sensor”). We currently obtain this Sensor through a manufacturing services agreement with Apollo Research Corp., our sole supplier. The term of the manufacturing services agreement expires in 2008. We presently have no reason to believe that this relationship will be disrupted or terminated. However, either event could have a material adverse effect on our operations. If, in the future, we are unable to obtain sufficient quantities of the Sensor that meet our standards of reliability, accuracy and performance or were unable to develop alternative sources of the Sensor in a timely and cost effective manner, it would adversely affect our operations until new sources of the Sensor became available, if at all. In addition, while the Sensor utilized in prototypes and initial production units of our Product has performed reliably, we cannot assure you that reliable Sensors will be available continuously on a relatively large-scale commercial basis. If we are unable to obtain an adequate supply of Sensors or other components meeting our standards of reliability, accuracy and performance, we would be materially adversely affected. This may include delays due to the unavailability of our Product to sell, delays in obtaining FDA clearance of the CVProfilor^TM DO-2020 System and the necessity of obtaining new patent applications.

      We operate in an intensely competitive market.  Competition from medical devices that are used to screen patients with cardiovascular disease is intense and likely to increase. We compete 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, our Product will also compete with traditional blood pressure testing by means of a standard sphygmomanometer which is substantially less expensive than our Product. Many of our competitors and potential competitors have substantially greater capital resources, name recognition, research and development experience and more extensive regulatory, manufacturing and marketing capabilities than we do. Many of these competitors offer well-established, broad product lines and ancillary services that we do not offer. Some of our competitors have long-term or preferential supply arrangements with physicians and hospitals which may act as a barrier to market entry for our 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 we may produce, and these companies also may be more successful than we are in producing and marketing their new or existing products. Competing companies may also introduce competitive pricing pressures that may adversely affect our sales levels and margins.

      As a result, we cannot assure you that we will be able to compete successfully with existing or new competitors.

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      Our strategic success is dependent upon a single product line, and the CVProfilor™ DO-2020 System pricing structure has not been proven.  Our financial success is dependent upon the marketing of only three versions of our Product. We expect that the CVProfilor™ DO-2020 System will eventually generate the majority of our revenues. We cannot assure you that we will be able to successfully develop any additional products. In addition, we have not yet finalized the pricing structure for the CVProfilor™ DO-2020 System. While we intend to offer the CVProfilor™ DO-2020 System at terms that we believe will be competitive in the market, higher than expected manufacturing, marketing and distribution costs, lower than expected reimbursement levels or other competitive forces may require us to raise or lower our prices or alter our terms in a manner that could have a material and adverse effect on us.

      We lack established sales and distribution channels.  We commenced marketing of the HDI/ PulseWave™ CR-2000 Research System in April 1998 and currently have a limited sales force. We have not yet fully developed a distribution network for our Product. We cannot assure you that we will be able to develop an effective sales force with the requisite knowledge and skill to fully exploit the sales potential of our Product. We also cannot assure you that our sales force will be able to establish distribution channels to promote market acceptance of, and create demand for, our Product. Even if we enter into an agreement with distributors, we cannot assure you that the distributors will devote the resources necessary to provide effective sales and promotional support of our Product. Our ability to expand Product sales will largely depend on our ability to develop relationships with distributors who are willing to devote the resources necessary to provide effective sales and promotional support and to educate and train both a sales force and the medical community. We cannot assure you that we will be able to accomplish these objectives. We also cannot assure you that our financial condition will allow us to withstand long sales cycles for our CR-2000, DO-2020 or MD-3000 Systems.

      If we do not adapt to rapid technological change, our business will suffer.  The medical device market is characterized by intensive development efforts and rapidly advancing technology. Our success will largely depend upon our ability to anticipate and keep pace with advancing technology and competitive innovations. We cannot assure you that we will be successful in identifying, developing and marketing new products or enhancing our existing Product. In addition, we cannot assure you that new products or alternative screening and diagnostic techniques will not be developed that will render our current or planned products obsolete or inferior. Rapid technological development by competitors may result in our Product becoming obsolete before we recover a significant portion of our research, development and commercialization expenses.

      We are subject to product liability exposure and have limited insurance coverage.  We face an inherent business risk of exposure to product liability claims in the event that the use of our Product is alleged to have resulted in adverse clinical events. We have obtained a general liability insurance policy that covers potential product liability claims. We cannot assure you that liability claims will not be excluded from these policies, will not exceed the coverage limits of these policies, or that the 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 our business, financial condition and results of operations.

      The uncertainty of health care reform may have a material impact upon our business.  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 we expect 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 we conduct our business and could have a material adverse effect on our business, financial condition and results of operations.

      Failure to effectively manage the growth of our business would have an adverse effect on our business.  The execution of our business plan will likely place increasing demands on our existing management

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      We depend upon key personnel and must hire and retain qualified personnel to be successful.  We are highly dependent on a limited number of key management and technical personnel, particularly our President, Greg H. Guettler, our Executive Vice President and Chief Technology Officer, Charles F. Chesney, D.V.M., Ph.D., R.A.C. and our Senior Vice-President, Finance and Administration and Chief Financial Officer, James S. Murphy. We do not have key-person life insurance on Mr. Guettler, Dr. Chesney or Mr. Murphy. Effective in December 1999, we entered into employment agreements with Mr. Guettler, Dr. Chesney and Mr. Murphy, which contain confidentiality obligations. Our future success will depend on our ability to attract and retain highly qualified personnel. We compete for qualified personnel with other companies, academic institutions, government entities and organizations. We cannot assure you that we will be successful in hiring or retaining qualified personnel. The loss of key personnel or an inability to hire or retain qualified personnel could have a material adverse effect on our business, financial condition and results of operations.

      If we are unable to protect our proprietary technology, our business will suffer.  Our success depends, in part, on our ability to maintain patent protection for our Product and processes, preserve our trade secrets and operate without infringing the property rights of third parties. We are the exclusive assignee of three United States issued patents and have obtained licenses granting us exclusive rights under four United States patents and one European patent issued to the Regents of the University of Minnesota. These eight patents relate to our blood pressure waveform analysis procedures, our cardiovascular profiling technology, the non-invasive determination of cardiac output, and overall technology and operation of our Product. The license for each patent licensed from the University of Minnesota expires with the term of each patent (the most recently issued one is expected to expire during 2016). Patent applications regarding one or more of these United States issued patents are currently pending in Japan, Germany, France and the United Kingdom. We have three patent applications that have been submitted regarding other aspects and components of our Product. Besides seeking patents, we intend to rely to the fullest extent possible on trade secrets, proprietary “know-how,” and our ongoing endeavors involving product improvement and enhancement to protect our proprietary knowledge.

      The validity and breadth of claims coverage in medical technology patents involve complex legal and factual questions and, therefore, may be highly uncertain. We cannot assure you that our current patents and licenses will provide a competitive advantage, that the pending applications will result in patents being issued, or that our competitors will not design around any patents or licenses issued to us. In addition, we cannot assure you that our nondisclosure agreements and invention assignment agreements will protect our proprietary information and know-how or provide adequate remedies in the event of unauthorized use or disclosure of our information, or that others will not be able to develop this information independently. We cannot assure you that allegations of infringement of the proprietary rights of third parties will not be made, or that if made the allegations will 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 us, to protect trade secrets or know-how we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope or validity of our proprietary rights and the rights of others. Any of these claims may require us 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 us to significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent us from manufacturing, selling or using our Product. The occurrence of this litigation or the effect of an adverse determination in any of this type of litigation could have a material adverse effect on our business, financial condition and results of operations.

      Beneficial ownership by management and provisions in our articles of incorporation may delay or prevent changes of control or in management.  As of September 15, 2000, our officers and directors as a group beneficially owned 20.2% of our outstanding shares. Consequently, they are in a position to influence the

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      Actual or perceived sales of a significant number of our securities in the public market could adversely affect the price of our securities.  As of September 15, 2000, there were 5,255,240 shares of our Common Stock issued and outstanding. All outstanding shares are either freely tradable or eligible for sale under either Rule 144 or Rule 144K. We also have 1,785,755 shares of our common stock purchasable through the exercise of outstanding options, exercisable at per share exercise prices ranging from $1.70 to $7.06. In addition, there are 468,438 shares purchasable through the exercise of the outstanding private placement and underwriter warrants at exercise prices of $2.00 to $4.95 per warrant, and 2,762,500 shares purchasable through the exercise of Class A Redeemable Warrants at an exercise price of $5.50 per Warrant. We have registered all the shares of our common stock purchasable through our 1995 Long-Term Incentive and Stock Option Plan and our 1998 Stock Option Plan, 2,762,500 shares purchasable through the exercise of our Class A Redeemable Warrants, 118,438 shares purchasable through other issued warrants, 175,000 shares purchasable through exercise of an underwriter’s warrant and 1,035,275 shares purchasable through exercise of stock options (649,257 of which shares are currently held in escrow until July 23, 2001 pursuant to Minnesota state securities laws and regulations, and may not be sold before their release without the approval of the State of Minnesota)(collectively, the “Convertible Securities”). At any time our Common Stock trades at prices in excess of the exercise price of the Convertible Securities, it is possible that the holders of the Convertible Securities may exercise their conversion or purchase privileges. If any of these events occur, the number of shares of our outstanding Common Stock could increase substantially. This increase, in turn, could dilute future earnings per share, if any, and could depress the market value of our Common Stock.

      If we fail to meet NASDAQ’S listing requirements, we may be de-listed and our securities may then become illiquid.  Our Common Stock, Class A Redeemable Warrants and Units are quoted on The Nasdaq SmallCap Market. If in the future we fail to satisfy the Nasdaq requirements to maintain our listing on Nasdaq, our 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 brokers who sell securities that are subject to the rules and who sell to other than established customers and institutional accredited investors to complete required documentation, make suitability inquiries of investors and provide investors with information concerning the risks of trading in the security. Consequently, we believe an investor would find it more difficult to buy or sell our securities in the open market.

      Our financial results and the market price of our securities are subject to significant fluctuations, which may affect the price of our securities.  Our quarterly results and the market price of our securities may be subject to significant fluctuations due to numerous factors, such as variations in our revenues, earnings and cash flow, the ability to meet market expectations, the status of the FDA clearance process, the availability of Product components, market acceptance, changes in price, terms or Product mix, changes in manufacturing costs or the introduction of new products by us or our competitors. Until we receive FDA clearance, our inability to market the CVProfilor™ DO-2020 System will adversely affect our financial results which may have an adverse effect on the market price of our securities. We cannot assure you that we will ever generate significant revenues or that our 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, our 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 our 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 that may not have been directly related to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our securities.

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Risks Related to Government Regulation and Legal Uncertainty

      Our business is subject to strict government regulation.  Medical devices such as our CVProfilor™ DO-2020 System 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 related regulations, 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.

      Delays in pre-market approval. Before a new medical device may be introduced into the United States market, the manufacturer generally must obtain prior authorization from the FDA. This 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”) application. 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 a medical device 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 application consists of information provided to the FDA sufficient to establish independently that a medical device is safe and effective for its intended use. By statute, the FDA is required to respond to a PMA application within 180 days from the date of its submission. However, the approval process usually takes substantially longer, often as long as several years.

      Limitations on approvals. 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 CVProfilor^TM DO-2020 System in the United States will require clearance or approval by the FDA. We have already forwarded a 510(k) Premarket Notification application to the FDA. However, the FDA may decide that one or more of the proposed claims or indications for use of the CVProfilor™ DO-2020 System cannot be cleared by means of the 510(k) process. In that case, the FDA might require that we seek approval for the device or particular claims or indications by means of a PMA application which could substantially delay using those claims or indications or marketing the DO-2020 System. We cannot assure you that the FDA will clear or approve the CVProfilor™ DO-2020 System.

      The HDI/ PulseWave™ CR-2000 Research CardioVascular Profiling System is intended for use in research markets and therefore we believe it does not require FDA clearance. The FDA could disagree with our interpretation of the regulations and require a 510(k) application or PMA application which, if pursued, may not be cleared or approved or, if so approved, may contain significant limitations on the intended uses for which the product is marketed.

      United States and foreign regulatory requirements. 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 may be subject to both FDA export permit requirements and, in some cases, general United States export regulations. In order to obtain an FDA export permit, we may be required to provide the FDA with documentation from the medical device regulatory authority of the country in which the purchaser is located.

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      Regulations extending to our contractors and customers. Our company and the design and manufacturing vendors with whom we contract are subject to regulation by the FDA relating to the design and manufacture of the CVProfilor™ DO-2020 System. This regulation includes, but is not limited to, required compliance with the FDA’s Quality System Regulation (“QSR”) and equivalent state and foreign regulations. Our failure, or the failure of any of these vendors, to comply with applicable regulations may subject us or one or more of the vendors, or the medical device designed and produced for and by us, to regulatory action. A regulatory action could threaten or cut off our source of supply or cause the FDA to order the removal of the DO-2020 System from the market. While we believe we could locate and qualify other sources to design or manufacture necessary components, supply interruptions in the meantime may have a materially adverse effect on our business, financial condition and results of operations.

      In addition to the regulations directly pertaining to us and our products, many of our potential customers are subject to extensive regulation and governmental oversight. Regulatory changes in the healthcare industry that adversely affect the business of our customers could have a material adverse effect on our business, financial condition and results of operations.

      Future regulatory requirements. Federal, state and foreign regulations regarding the manufacture and sale of healthcare products and diagnostic devices are subject to future change. We cannot predict what material impact, if any, these changes might have on our business. Future changes in regulations or enforcement policies could impose more stringent requirements on us, compliance with which could adversely affect our business. These changes may relax some requirements, which could prove beneficial to our competitors and thus adversely affect our business. In addition, regulations of the FDA and state and foreign laws and regulations depend heavily on administrative interpretations. We cannot assure you that future interpretations made by the FDA, or other regulatory authorities, with possible retroactive effect, will not adversely affect our business, financial condition and results of operations.

      We cannot assure you that we will be able to obtain necessary regulatory clearances or approvals in the United States or internationally on a timely basis, if at all. Delays in the receipt of, or failure to receive, these clearances or approvals, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, financial condition and results of operations.

      If we fail to meet foreign regulatory requirements, we will not be able to compete internationally. As a part of our marketing strategy, we intend to pursue commercialization of our Product in international markets. Our 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. We cannot assure you that we will be able to meet export requirements or obtain necessary foreign regulatory clearances or approvals for our Product on a timely basis or at all. The facilities and manner in which we operate and do business involve a specific quality system and approach which is presently ISO-9002, EM-46002 and ISO-13488 registered. Our Product has been extensively tested and is entitled to be UL Listed (that is, the DO-2020 System) or display the CE₀₁₂₃ Mark (that is, CE 1023 for the CR-2000 Research System). The CR-2000 Research System conforms to European Council Directive (93/42/EEC) regarding Medical Devices. In order to achieve market acceptance for the CVProfilor™ MD-3000 System in Europe, we will need to seek and obtain the approval for its displaying the CE Mark. In Japan, approval to market our Product will require acceptance of a formal registration to the Ministry of Health and Welfare. Delays in receipt of or failure to receive foreign clearances or approvals, or failure to comply with existing or future regulatory requirements and quality system regulations, would have a material adverse effect on our business, financial condition and results of operations.

      No cash dividends. We have never paid cash dividends and do not anticipate paying any cash dividends on our securities in the forseeable future. We anticipate that profits, if any, received from operations will be devoted to our future operations.

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ITEM 2.  Properties

      Subsequent to June 30, 1997, we entered into a noncancelable operating lease agreement for 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 term of the lease was from November 1, 1997 to October 31, 2000. Effective July 31, 2000, the term of this operating lease was extended for thirty-six (36) months, expiring October 31, 2003. The monthly gross rent, including basic operating expenses, is approximately $7,000. We believe that this facility should be adequate for our currently anticipated requirements for the term of the lease.

ITEM 3.  Legal Proceedings

      We are not a party to any litigation and are 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 our shareholders during the fourth quarter of the fiscal year ended June 30, 2000.

ITEM 5.  Market for Common Equity and Related Stockholder Matters

Market Information

      Our 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 our Common Stock. As of September 15, 2000, we estimate that there were approximately 1,200 holders of our Common Stock.

      The following table sets forth, for the periods indicated, the high and low sales price information for our Common Stock as reported by The Nasdaq SmallCap Market.

      We have not declared any dividends to date and do not plan to declare any dividends in the foreseeable future.

Recent Sales of Unregistered Securities

      No unregistered equity securities were sold by us during the reporting period covered by this Report.

Use of Proceeds From Initial Public Offering

      On July 23, 1998, the SEC declared effective our Registration Statement on Form SB-2 (File No. 333-53025) relating to our initial public offering. On July 28, 1998, we consummated the sale of 2,250,000 units, each unit consisting of one share of Common Stock and one Class A Redeemable Warrant. On August 31,

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      We registered an offering amount of 2,587,500 units and 2,587,500 shares of Common Stock underlying the Class A Redeemable Warrants. Based on an offering price of $4.125 per unit and an exercise price of $5.50 per Class A Redeemable Warrant, the aggregate offering amount was $24,904,688. We 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. Our net offering proceeds were $9,188,414, after deducting total expenses of the offering.

      The following table sets forth our use of the net proceeds from our initial public offering, from July 28, 1998 through June 30, 2000:

Overview

      Our business entity was founded in July 1988 to develop our blood pressure waveform analysis technology into a clinically acceptable, non-invasive method for conducting cardiovascular profiling. We have developed proprietary cardiovascular profiling technology that analyzes non-invasively derived arterial pulse pressure waveform data as a means of determining several parameters that are useful in assessing the cardiovascular system. From inception, the majority of our efforts have been focused on incorporating this technology into an instrument that is intended to allow physicians to reliably and effectively screen patients for cardiovascular disease. While we have developed and tested commercial models of the Product and in April 1998 commenced marketing the HDI/ PulseWave™ CR-2000 Research CardioVascular Profiling System for research use only, we expect to incur substantial net operating losses until we achieve a significant level of revenue following FDA clearance to market the CVProfilor™ DO-2020 CardioVascular Profiling System.

      We plan to market three versions of our Product: the HDI/ PulseWave™ CR-2000 Research CardioVascular Profiling System, the CVProfilor™ DO-2020 CardioVascular Profiling System and the CVProfilor™ MD-3000 CardioVascular Profiling System (previously referred to as the Model DO-2020i). We believe that the CR-2000 System, intended for research use only in the United States (that is, not for screening, diagnosing, monitoring or determining the treatment of patients), does not require FDA clearance to market, and marketing and distribution activities have commenced worldwide. The CVProfilor™ DO-2020 System, intended for use by physicians to screen patients with vascular disease, is an FDA regulated medical device. We are unable to market the CVProfilor™ DO-2020 System in the United States until FDA clearance to market is obtained.

      On November 30, 1999, we announced that our Quality Assurance System was registered to ISO-9002, EN-46002 and ISO-13488 by TÜV Product Services, Inc. Our non-invasive CR-2000 Research CardioVascular Profiling System now displays the ‘CE₀₁₂₃’ mark, indicating that the CR-2000 Research System is certified for sale throughout the European Union and that the product complies with applicable

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Development Stage Results of Operations

      We are a development stage company and are not presently generating any significant revenues. There can be no assurance that we will ever be able to generate significant revenues, attain or maintain profitable operations or successfully implement our business plan or our current development opportunities. As of June 30, 2000, the Company had a deficit accumulated during the development stage of $(8,814,651), attributable primarily to research and development and general and administrative expenses. Until we are able to generate significant revenues from our activities, we expect to continue to incur operating losses.

      We are seeking clearance from the FDA to market the CVProfilor™ DO-2020 System in the United States and have previously submitted a 510(k) Premarket Notification submission to the FDA. In January 2000, we were notified by the FDA that it would not grant an extension of time to the 510(k) Premarket Notification as we had previously submitted. Instead, the FDA asked that we submit a new 510(k) to include additional information as previously agreed upon with the FDA. We forwarded a new 510(k) Premarket Notification submission to the FDA during June 2000. However, we cannot predict how long the FDA will take to review our 510(k) submission, or when the FDA will clear the CVProfilor™ DO-2020 System for marketing in the United States, if at all.

      In accordance with discussions we have had with the FDA, the new 510(k) submission will be in support of a CVProfilor™ DO-2020 System which presents, in the reports it generates, clinical data regarding blood pressure measurements, pulse rate and both large and small artery elasticity indices only. After the receipt of clearance from the FDA on said submission, we plan to submit additional information and/or clinical data with the goal of receiving FDA clearance for an enhancement of the reports. We believe that such an enhanced version of the CVProfilor™ DO-2020 System will facilitate the ability of physicians using it to obtain insurance company and other third-party reimbursement, which cannot be assured.

Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 2000

      For the fiscal years ended June 30, 1999 and 2000, we recorded revenue of $381,247 and $423,490, respectively, relating to sales of the HDI/ PulseWave™ CR-2000 Research CardioVascular Profiling Instrument.

      Total cost and expenses for the fiscal year ended June 30, 1999 were $3,009,857 compared to $4,061,905 for the fiscal year ended June 30, 2000. Approximately 19% of the $3,009,857 and 11% of the $4,061,905 total cost and expenses were related to research and development expenses. A further breakdown of research and development expenses is as follows:

      The design and development of the CDMF was completed in the fiscal year ended June 30, 1999. The CDMF is capable of handling multiple simultaneous transmissions by the CVProfilor™ DO-2020 System integrated with our tracking, billing and production systems and capable of storing and retrieving several hundred thousand patient records.

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

      Our number of employees decreased from fourteen as of June 30, 1999 to twelve as of June 30, 2000.

      The increase in outside consultants expense from $263,145 for the fiscal year ended June 30, 1999 to $360,341 for the fiscal year ended June 30, 2000 was mainly attributable to additional work relating to our FDA 510(k) application and our ISO-9002 certification and CE mark for the HDI/ PulseWave™ CR-2000 Research CardioVascular Profiling System.

      Selling, marketing and promotion expense increased from $316,416 for the fiscal year ended June 30, 1999 to $1,036,878 for the fiscal year ended June 30, 2000. This category includes wages and commissions paid by us relating to its sales and marketing efforts as well as travel expenses.

      Interest income was $414,515 and $314,108 for the fiscal years ended June 30, 1999 and 2000, respectively. In July and August 1998, we 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 $(2,214,095) and $(3,324,307) for the fiscal years ended June 30, 1999 and 2000, respectively. 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. For the fiscal year ended June 30, 2000, basic and dilutive net loss per share was $(.65), based on weighted average shares outstanding of 5,125,791.

Liquidity and Capital Resources

      Cash and cash equivalents had a net increase of $6,444,721 for the fiscal year ended June 30, 1999. 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 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. For the fiscal year ended June 30, 2000, cash and cash equivalents had a net decrease of $(3,665,780). The significant elements of this change were as follows: net cash used in operating activities — net loss, as adjusted for non-cash items, of $(3,146,817); decrease in accounts receivable — $111,706; increase in inventory — $919,919; increase in accrued payroll and payroll taxes — $151,921; net cash provided by financing activities — issuance of Common Stock — $128,924.

      In July 1998, we completed our initial public offering (IPO) in which we sold 2,250,000 units at $4.125 per unit, each unit consisting of one share of Common Stock and one Class A Redeemable 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, 2000, we have cash and cash equivalents of $4,018,745, and anticipate that these funds should allow us to pursue the different elements of our business

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      Although not assured, in addition to the net proceeds from the IPO, we may derive over a period of time up to $14,231,250 from the exercise of the Class A Redeemable Warrants included in the units. Each Class A Redeemable Warrant entitles the holder to purchase one share at an exercise price of $5.50 per Warrant, subject to adjustment. The Class A Redeemable Warrants are subject to redemption by us 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 Redeemable Warrants expire on July 22, 2002. The amounts, if any, that we derive from the exercise of such Class A Redeemable Warrants will be used in connection with our development opportunities, business plan activities and/or working capital requirements.

Year 2000 Compliance

      Although it is now after January 1, 2000, many existing computer programs in the business world still use only two digits to identify a year in a data field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail, create erroneous results, or otherwise lead to significant business delays and disruptions in the Year 2000. We have experienced no Year 2000 information systems problems to date, and we believe our internal information technology systems remain Year 2000 compliant. We have, and expect to have, certain material relationships with suppliers and vendors. Although we have experienced no problems to date, we are currently unable to predict to what extent the Year 2000 issue may affect such existing and anticipated suppliers or vendors, or to what extent we would be vulnerable to any failure by our suppliers or vendors to be Year 2000 compliant. The failure of a supplier or vendor to remediate any Year 2000 issues could have a material adverse effect on our business, financial condition or results of operations.

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ITEM 7.  Financial Statements

Financial Statements

Hypertension Diagnostics, Inc.

Years Ended June 30, 1999 and 2000 and

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Hypertension Diagnostics, Inc.

Financial Statements

Contents

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Board of Directors and Shareholders

      We have audited the balance sheets of Hypertension Diagnostics, Inc. (a development stage company) as of June 30, 1999 and 2000, 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, 2000. 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 auditing standards generally accepted in the United States. 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, 1999 and 2000, 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, 2000, in conformity with accounting principles generally accepted in the United States.

	Ernst & Young LLP

Minneapolis, Minnesota

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Hypertension Diagnostics, Inc.

See accompanying notes.

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Hypertension Diagnostics, Inc.

See accompanying notes.

33

Hypertension Diagnostics, Inc.

34

Statement of Shareholders’ Equity (Continued)

35

Statement of Shareholders’ Equity (Continued)

See accompanying notes.

36

Hypertension Diagnostics, Inc.

See accompanying notes.

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Hypertension Diagnostics, Inc.

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.

Revenue Recognition

      Revenue is recognized at the time the product is shipped.

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.

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Notes to Financial Statements (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, 2000, the Company had a net operating loss carryforward for tax purposes of approximately $8,170,400. This carryforward is available to offset future taxable income through 2015.

      Components of deferred tax assets are as follows:

3.  Shareholders’ Equity

      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 Class A Redeemable Warrant which entitles the holder to purchase one share at an exercise price of $5.50 per share, subject to adjustment. The Class A Redeemable Warrants are subject to redemption 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. Written notice must precede redemption by 30 days and must be sent within 10 business days of the 14 consecutive trading day period. The Class A Redeemable 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.

      In March 2000, 64,462 warrants were exercised at $2.00 per share resulting in net proceeds to the Company of $128,924.

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Notes to Financial Statements (Continued)

4.  Stock Options and Warrants

      During 1995, the Company adopted the Hypertension Diagnostics, Inc. 1995 Long-Term Incentive and Stock Option Plan (“the 1995 Option Plan”) that includes both incentive stock options and nonqualified 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 1995 Option 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 1995 Option Plan is as follows:

      At June 30, 2000, there were 381,500 options outstanding having exercise prices between $2.00 and $7.06 that had been granted under the 1995 Option Plan. The outstanding options had a weighted average remaining contractual life of seven years. The number of options exercisable as of June 30, 1999 and 2000 were 121,050 and 173,225, respectively, at weighted average exercise prices of $2.28 and $2.29 per share, respectively. The weighted average fair value of options granted under the 1995 Option Plan during the years ended June 30, 1999 and 2000 was $1.96 and $2.83 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

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Notes to Financial Statements (Continued)

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 Option Plan is administered in a similar manner to the 1995 Option Plan.

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