HEALTHWATCH INC, SB-2, 1995-09-06

HEALTHWATCH INC
SB-2, 1995-09-06
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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As filed with the Securities and Exchange Commission on September 6, 1995.

Registration No. 33-_____

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933

HEALTHWATCH, INC.
(Exact name of Registrant as specified in its charter)

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<S> <C> <C>
Minnesota 3845 84-0916792
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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HEALTHWATCH, INC.
2445 Cades Way
Vista, California 92083
(619) 598-4333
(Name, address, including zip code, and telephone number including,
area code, of Registrant's principal executive offices)

John D. Greenbaum
HEALTHWATCH, INC.
2445 Cades Way
Vista, California 92083
(619) 598-4333
(Name, address, including zip code, and telephone number, including, area
code, of agent for service of process)

_________________

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.

_________________

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / X /

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Calculation of Registration Fee

Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered per Unit Offering Price Fee

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Common Stock, $.01 par value 5,480,000 shs. $.53125 (1) $2,911,250 (1) $1,003.88
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(1) Estimated solely for purpose of calculating the registration fee. In
accordance with Rule 457(c) of Regulation C, the estimated price is based
on the last sale reported for such stock in the Nasdaq Small Cap Market for
August 31, 1995.

The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8, may
determine.

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HEALTHWATCH, INC.
CROSS-REFERENCE SHEET

Item Number and Caption Heading in Prospectus

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1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover Page

2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front Cover Page

3. Summary Information, Risk Factors........ Outside Front Cover Page;
Prospectus Summary
Risk Factors

4. Use of Proceeds.......................... Use of Proceeds

5. Determination of Offering Price.......... Front Cover Page

6. Dilution................................. *

7. Selling Security Holders................. Principal and Selling Shareholders

8. Plan of Distribution..................... Plan of Distribution

9. Legal Proceedings........................ Business

Directors, Executive Officers, Promoters
and Control Persons...................... Management

11. Security Ownership of Certain Beneficial
Owners and Management.................... Principal and Selling Shareholders

12. Description of Securities................ Description of Securities

13. Interest of Named Experts and Counsel....
*

14. Disclosure of Commission Position on
Indemnification For Securities Act
Liabilities.............................. *

15. Organization Within Last Five Years...... *

16. Description of Business.................. Prospectus Summary; Risk Factors; Business.

17. Management's Discussion and Analysis or
Plan of Operation........................ Management's Discussion and Analysis.

18. Description of Property.................. Business

19. Certain Relationships and Related
Transactions............................. Management

20. Market For Common Equity and Related
Shareholder Matters...................... Market for Common Stock

21. Executive Compensation................... Management

22. Financial Statements..................... Financial Statements

23. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure............................... *
____________________
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* Omitted from Prospectus because item inapplicable or answer is in the
negative.

SUBJECT TO COMPLETION, DATED SEPTEMBER 6, 1995

HEALTHWATCH, INC.

This Prospectus relates to the offer and sale from time to time by
certain Selling Shareholders of shares of the Common Stock, $.01 par value (the
"Common Stock") of HealthWatch, Inc. ("HealthWatch" or the "Company"). The
shares offered hereby include: (i) 2,600,000 shares of Common Stock subject to
outstanding stock purchase warrants (the "Warrants"); (ii) up to 2,400,000
shares of Common Stock issuable upon conversion of outstanding shares of Series
A Preferred Stock (the "Preferred Stock"); and (iii) up to 480,000 shares of
Common Stock which may be issued by the Company in lieu of cash payments of the
dividends payable on the Preferred Stock. The Preferred Stock is currently
convertible into 400,000 shares of Common Stock. However, the number of shares
of Common Stock into which the Preferred Stock may be converted in the future
could increase by up to 2,000,000 additional shares depending upon future market
prices for the Common Stock. See "Principal and Selling Shareholders" and
"Description of Securities-Preferred Stock."

The Selling Shareholders may sell the shares of Common Stock in one or
more transactions in the Nasdaq Small Cap Market, or otherwise, at market prices
prevailing at the time of sale, at prices relating to such prevailing market
prices, or at negotiated prices. It is anticipated that the brokers and dealers,
if any, participating in the sales of such securities will receive the usual and
customary selling commissions. See "Plan of Distribution" and "Principal and
Selling Shareholders." The Warrants grant to the holders thereof the right to
acquire shares of Common Stock from the Company at exercise prices ranging from
$.25 to $.50 per share. The exercise of the Warrants is at the discretion of the
holders and there is, therefore, no assurance that any of the Warrants will be
exercised.

The Company's Common Stock is traded in the over-the-counter market
under the Nasdaq symbol HEAL. On August 31, 1995, the last reported sale price
of the Common Stock, as reported on the Nasdaq Small Cap Market was $.53125 per
share. See "Price Range of Common Stock."

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD
BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS."

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

Since the Common Stock offered pursuant to this Prospectus is being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Act"), the Company cannot include
herein information about the price to the public of the Common Stock or the
proceeds to the Selling Shareholders. The Company will receive no proceeds from
any sales of Common Stock by the Selling Shareholders, and the Company is
obligated to pay the expenses of this offering, which are estimated at
$________. The Selling Shareholders will pay their own expenses in connection
with sales of the Common Stock. The Selling Shareholders and any brokers or
dealers executing selling orders on their behalf may be deemed "underwriters"
within the meaning of the Act, in which event the usual and customary selling
commissions which may be paid to the brokers or dealers may be deemed to be
underwriting commissions under the Act. There can be no assurance that any or
all of the Shares registered hereunder will be sold. See "Plan of Distribution."

THE DATE OF THIS PROSPECTUS IS __________________, 1995.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission. Reports, proxy statements and other information filed by the Company
with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street N.W., Washington, D.C. 20549, and inspected at the Commission's regional
offices at Room 7 World Trade Center, New York, New York 10048 and Suite 1400,
500 West Madison Street, Chicago, Illinois 60661. Copies of such material can
also be obtained from the Public Reference Section of the Commission, 450 Fifth
Street N.W., Washington, D.C. 20549, at prescribed rates.

The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act of 1933, with
respect to the securities offered hereby. This Prospectus omits certain
information included in such Registration Statement. For further information
about the Company and its securities, reference is made to such Registration
Statement and to the exhibits filed as part thereof or otherwise incorporated
therein. Each summary in this Prospectus of information included in the
Registration Statement or any exhibit thereto is qualified in its entirety by
this reference to such information or exhibit.

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the
more detailed information and financial statements appearing elsewhere in this
Prospectus. Except as otherwise noted, all information in this Prospectus has
been adjusted to reflect a one-for-four reverse split of the Common Stock
effective as of January 12, 1994.

THE COMPANY
HealthWatch develops, manufactures and markets cardiovascular
noninvasive diagnostic instruments, accessories and services. The Company's
diagnostic instruments include non-invasive doppler and ultrasound imaging
systems designed to diagnose peripheral vascular (blood vessel) disease and
electrocardiograph and stress-testing equipment and interpretive software. In
1993, HealthWatch acquired Metamed, Inc. ("Metamed"), a development-stage
company which was engaged in the development of products for the infusion
therapy ("IV") industry. Infusion therapy generally involves the delivery of one
or more fluids, primarily pharmaceuticals or nutritionals, to a patient by means
of an infusion line inserted into the circulatory system. The Pacer, the
Company's first IV product, which was approved for marketing by the U.S. Food
and Drug Administration ("FDA") in April 1994, is in the final development
stage. Sales of the Pacer are expected to begin within the next six months.

Markets for the Company's diagnostic products have been adversely
affected by efforts to contain health-care costs as well as by the efforts of
many hospitals and other health-care institutions to reduce their costs by
consolidating operations with the operations of other institutions. This
consolidation has resulted in fewer customers for HealthWatch's diagnostic
products and for delays in obtaining purchase orders from institutions which are
evaluating possible consolidations with other institutions. In contrast, the
Company believes that its IV products will benefit from the health-care
industry's focus on reducing costs, as these products are expected to be
substantially less expensive and easier to use than most competing products. For
this reason, the Company's primary focus during the past year has been on the
development of the Pacer.

The Company's licensed patented IV technology utilizes proprietary
optics and computer technology to measure the size (volume) of drops as they
fall in a drip chamber. By combining this information with the rate of flow of
the drops, the system is able to determine and regulate the amount of the fluid
delivered to the patient. In effect, the Company's IV system utilizes the power
of a microprocessor chip and electronics to replace more cumbersome and
expensive mechanical-based systems. The cost of using the Company's IV systems
is expected to be significantly less than the cost for most competing systems,
both because the purchase prices for the Company's IV systems are expected to be
less than those for competing systems and because the Company's IV systems can
be used with generic IV sets which usually are significantly less expensive than
proprietary IV sets required to be used with most competing systems.

HealthWatch believes that there are more than 900,000 IV instruments
currently being used in the U.S. and that approximately 120,000 IV instruments
are sold annually in the U.S., and that the international market is equal in
size to the U.S. market. The Company intends to market the Pacer based on its
ease of use and the potentially significant cost savings which users of the
Pacer may recognize, both due to the lower cost of the Pacer and the ability to
use lower-priced IV sets.

HealthWatch's executive offices are located at 2445 Cades Way, Vista,
California 92083, telephone number (619) 598-4333.

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THE OFFERING

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Securities Offered by Selling Shareholders 2,600,000 shares of Common Stock minimum - 5,480,000 shares of Common
Stock maximum (1)

Securities Outstanding:
Common Stock......................... 7,998,592 shares(2)

Preferred Stock...................... 400,000 shares(3)

Use of Proceeds........................... The Company will not receive any of the proceeds from the sale of Common
Stock by the Selling Shareholders. The Company may, however, receive
proceeds from the exercise of Warrants by certain of the Selling
Shareholders prior to the sale pursuant to this offering of the Common
Stock subject to the Warrants. Such proceeds, if any, will be used for
working capital purposes, including the purchase of raw materials
required to build initial product inventory for the first IV product,
marketing and sales expenses related to the introduction of this product
and product development.

Risk Factors.............................. Prospective investors should review carefully and consider the factors
described under "RISK FACTORS," including the Company's recent operating
losses, need for additional financing and introduction of new products.

Nasdaq Symbol for Common Stock............ HEAL
_________________________
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(1) The maximum number of shares assumes that the Company does not exercise
its right to redeem the Preferred Stock prior to its conversion and
that the Preferred Stock is converted into the maximum number of shares
of Common Stock into which the Preferred Stock currently could be
converted and that the Company exercises its option to pay the
dividends on the Preferred Stock in shares of Common Stock.
See "Description of Securities-Preferred Stock."

(2) Shares outstanding at September ___, 1995. Does not include
____________ shares of Common Stock reserved for issuance upon the
exercise of stock purchase warrants (including the Warrants) and
options or the conversion of the Company's 10% Convertible Senior
Debentures (the "Debentures") or Preferred Stock.

(3) The Preferred Stock is convertible into 400,000 shares of Common Stock.
If HealthWatch does not redeem the Preferred Stock, one-half of the
Preferred Stock becomes convertible at a reduced conversion price on
March 12, 1996, and the balance becomes convertible at a reduced
conversion price on August 12, 1996. In both cases, the reduced
conversion price is the lesser of $1.00 per share or 50% of the then
market value for the Common Stock, provided that the conversion price
shall not be less than $.25 per share or, if less, the lowest price at
which HealthWatch has sold its Common Stock prior to such conversion.

SELECTED FINANCIAL DATA

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STATEMENT OF INCOME DATA:

NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
1995 1994 1994 1993 1992
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Product sales $ 2,953,238 $ 2,993,800 $ 4,070,146 $ 6,094,862 $ 7,240,106
Gross margin 843,851 734,684 1,118,656 2,774,040 2,645,061
Loss from continuing
operations (1,223,717) (1,412,952) (2,000,959) (1,571,138) (2,623,954)
Total other income (expense)
(47,439) (826,264) (839,654) (54,764) (485,609)
Loss from continuing
operations before
discontinued operations and
extraordinary item
(1,271,156) 2,239,216) (2,840,613) (1,625,902) (3,109,563)
Discontinued operations:
Income from discontinued
operations of
medical services segment -- -- -- 186,797 254,174
Gain on sale of
medical services segment -- -- -- 288,697 --
(Loss) before extra-
ordinary item (1,271,156) (2,239,216) (2,840,613) (1,150,408) (2,855,389)
Gain from reduction in debt
obligation -- 24,328 24,328 102,433 --
Loss from reduction in
note receivable (13,639) -- -- -- --

Net income (loss) $(1,284,795) $(2,214,888) $(2,816,285) $(1,047,975) $(2,855,389)
Income (loss) per share of
Common Stock:
Continuing operations $ (0.47) $ (1.37) $ (1.48) $ (1.33) $ (2.91)
Discontinued operations -- -- -- .39 .24
Extraordinary item -- .01 .01 .08 --
Net income (loss) per share $ (0.47) $ (1.36) $ (1.47) $ (.86) $ (2.67)
Weighted average number of shares outstanding 2,711,754 1,632,694 1,912,915 1,211,591 1,068,350
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BALANCE SHEET DATA:

March 31, 1995(1)

Current Assets $2,044,461
Total Assets 3,753,139
Current Liabilities 1,572,484
Long-Term Debt 580,742
Accumulated Deficit (9,413,364)
Shareholders' Equity 1,599,913
Working Capital 471,977

(1) On August 4, 1995, the Company completed a distribution of 1,040,987
Units of its securities. These Units consisted of four shares of the
Company's Common Stock and two Redeemable Common Stock Purchase
Warrants. Each of the Warrants entitles the holder to purchase one
share of Common Stock at a price of $.75. Gross receipts to the Company
from the offering of the Units was $1,040,987.

RISK FACTORS

In addition to considering the other information set forth in this
Prospectus, prospective purchasers should carefully consider the following
factors in evaluating an investment in the Company.

DECLINE IN REVENUES; RECENT OPERATING LOSSES

The Company's product sales have declined in each of the past three
fiscal years and in the nine-month period ended March 31, 1995, compared to the
prior similar fiscal periods, primarily due, the Company believes, to the
uncertainty in the medical community regarding the effects of various proposals
for health-care reforms, consolidations and mergers of health-care institutions,
continued increased price competition and the Company's lack of sufficient
working capital to adequately fund marketing and product enhancement efforts. In
view of the Company's belief that there is substantially more potential for its
IV products than for its current diagnostic products, HealthWatch intends to
concentrate its efforts and limited working capital on the completion and
initial marketing of the Pacer, its first IV product. While sales of the Pacer
are expected to begin within two months, the Company does not expect to be able
to produce and ship significant quantities of the Pacer for several months after
it commences production of this product. The Company's sales may, therefore,
continue to decrease for the next six or more months.

The Company has incurred losses from operations in each of its last
three fiscal years and in the nine months ended March 31, 1995. The Company
expects to continue to incur losses from operations until it is able to generate
significant sales of the Pacer. The Pacer is still in the development stage and
there can be no assurance that the Company will be able to successfully complete
this product or, assuming such development is successful, realize significant
revenues from the sale of the Pacer. In addition, if the Company is not able to
generate sufficient sales of its existing products to support the value of
certain inventory items or of the intangible assets relating to certain of these
products, it could be required to recognize significant additional losses in
connection with the write-down of these assets for book purposes. At March 31,
1995, the Company had an accumulated deficit of ($9,413,364). There can be no
assurance that the Company will be able to operate at a profit in the future.
The Company is not able to finance current working capital requirements from
operations.

NEED FOR ADDITIONAL FINANCING

The Company estimates that it needs approximately $400,000 of
additional debt or equity capital to sustain its operations during the next
twelve months. In addition to the $400,000 required to sustain operations, the
Company estimates that it will need to obtain from $400,000 to $800,000 of
additional working capital to implement its marketing plan for the Pacer and to
provide adequate working capital to fund a rapid increase in product sales. In
the event that the Company is unable to raise additional capital, it will be
required to defer producing IV or other products, to sell certain assets or
enter into joint ventures with or grant licenses to other companies with respect
to one or more of its products and/or further reduce its operations in order to
sustain operations. There can be no assurance that the Company could, if it were
required to do so to sustain operations, sell any such assets or enter into any
such joint venture or grant any such license, if at all, on terms acceptable to
the Company.

METAMED ACQUISITION; NEW BUSINESS VENTURE; UNPROVEN PRODUCTS

In September 1993, the Company completed the acquisition of Metamed,
Inc., a development-stage company. The Metamed acquisition represented a
significant new business venture for HealthWatch, and the Company's ability to
successfully develop this business is subject to all of the risks inherent in
the establishment of a new business. HealthWatch had not previously been engaged
in the infusion therapy business and Metamed had only a limited history of
operations and had not generated any revenues.

HealthWatch believes that the Metamed acquisition is of strategic
importance because it offers the Company the opportunity to expand its product
offerings to include medical products which it believes will be less sensitive
than its existing diagnostic products to current market pressures and
uncertainties, as the Metamed products are expected to be not only easier to use
but also less costly than existing competing products. While the first Metamed
product, the Pacer, an IV controller, has recently been introduced, there can be
no assurance that it will achieve wide acceptance in the marketplace. Efforts to
obtain required governmental approvals for additional products based on the
Metamed patented technology may be costly and require significant time and
additional effort on behalf of the Company which could further deplete the
Company's limited resources and delay the introduction of additional Metamed
products. There can be no assurance that the Company will be able to obtain
necessary governmental approvals for additional Metamed products or that any
products based on the Metamed technology can be successfully introduced to the
marketplace.

DEPENDENCE ON SUPPLIERS; WORKING CAPITAL REQUIREMENTS

Certain raw materials for the Company's products, particularly its new
IV product, are available from only one or a limited number of suppliers,
require that orders be placed 60 days or more in advance of the desired delivery
date and may be available to the Company only if it places significant orders
which represent several months or more of the Company's projected needs for such
materials. The need to purchase significant quantities of these materials in
advance of their use substantially increases the Company's working capital
requirements.

There can be no assurance that the Company's current suppliers for
these products will continue to supply them to the Company. While alternative
sources for such items are currently available, the Company could be required to
redesign its products in order to be able to use the alternative materials
provided by these additional suppliers. Any such redesign of the Company's
products could be expensive and time consuming and could require six or more
months to complete. The Company is currently redesigning its first IV product so
that it can use a different microprocessor chip that is more readily available
to the Company than the microprocessor chip originally intended to be used in
this product. This redesign effort has delayed the first shipments of the Pacer,
with the first shipments now expected to occur in October 1995. The Company
believes that it either has or has commitments to supply adequate quantities of
the more difficult to obtain components for its initial IV product.

DEPENDENCE ON NEW OR IMPROVED PRODUCTS; TECHNOLOGICAL CHANGES

In general, the medical products industry is subject to rapid and
significant technological changes and frequent introduction of new competitive
products. To respond to these expected changes and to improve or sustain the
marketability of its products, the Company will be required to commit
substantial investments in product improvement and development in order to
periodically enhance its existing products and successfully introduce new
products. There can be no assurance that the Company will either have the
resources required to make such investments or, assuming it has the required
resources, be able to respond adequately to changes in technology or changes in
the markets for its products. The development of new products or technologies by
other firms could have a material adverse effect on the Company's business. In
addition, to the extent that the Company seeks to develop new products, there
can be no assurance that such products will be successfully developed or, if
developed, that such products will be successfully introduced to the
marketplace.

COMPETITION

There are many companies that produce equipment which competes with the
Company's products, particularly its cardiology and current and proposed
infusion therapy products. Most of the Company's competitors have substantially
greater financial and marketing resources than the Company. Three companies
account for a substantial portion of the market for ECG products similar to
those sold by HealthWatch, and five companies account for over 80% of the U.S.
market for infusion therapy systems. All of such companies are substantially
larger than HealthWatch. The Company expects to encounter intense competition in
the market for its IV products. This could require that the Company commit
significantly greater resources to the introduction of its IV products than
would otherwise be required.

GOVERNMENT REGULATION

The FDA regulates the testing, manufacturing, packaging, distribution
and marketing of medical devices in the U.S., including the products
manufactured by HealthWatch. The Company's infusion therapy products are Class
II devices for which permission to market can be obtained under Section 510(k)
of the Medical Device Amendments Act to the Food, Drug and Cosmetic Act.
Products requiring permission to market under 510(k) may be approved after
adequate demonstration of safety, effectiveness and documentation that the
product is substantially equivalent to a similar device in interstate commerce
prior to 1976. The Company submitted a 510(k) application with respect to its
first Metamed infusion therapy system in September 1993. On April 4, 1994, the
Company received notification from the FDA that this product could be marketed
in the U.S. Compliance with the provisions of the Food, Drug and Cosmetic Act
and the FDA's regulations is time consuming and expensive.

PRODUCT LIABILITY INSURANCE

Producers of medical instruments may face substantial liability from
the use of their products. HealthWatch has obtained product liability insurance
in the amount of $1,000,000 per occurrence and $2,000,000 in the aggregate. As
the installed base of IV products increases, the Company plans to raise the
amount of such insurance. There can be no assurance that any such liability of
the Company will be covered by its insurance or that damages will not exceed the
limits of the coverage.

CHANGES IN HEALTH-CARE INDUSTRY

The health-care industry is experiencing significant pressure to reduce
costs. The Clinton administration has identified the containment of health-care
costs as a major priority. While the Company cannot predict what effect any
proposals to contain health-care costs may have on its business, such proposals,
if enacted, could have a material adverse effect on portions of its business,
particularly its diagnostic instruments business. In order to reduce costs and
to improve utilization of facilities, many health-care organizations have
consolidated or merged or are considering consolidating or merging their
operations or portions of their operations with the operations of other
health-care organizations. The consolidation and merging of health-care
organizations has reduced and can be expected to continue to reduce the number
of potential purchasers for the Company's products, particularly its diagnostic
instruments.

RECENT SENIOR MANAGEMENT CHANGE

John D. Greenbaum, President of the Company, is on medical leave. The
absence of senior management for any period of time could have a material
adverse affect on the Company's business.

BROKER-DEALER SALES OF COMPANY COMMON STOCK

Securities and Exchange Commission Rule 15g-9 imposes additional sales
practice requirements on brokers-dealers who sell certain low-priced securities
to persons other than established customers. So long as the Company's Common
Stock continues to be quoted on the Nasdaq Small Cap Market, sales of its stock
are exempt from the application of this rule. In order for securities to
continue to be quoted on the Nasdaq Small Cap Market, they must meet certain
maintenance requirements, including a minimum bid price of at least $1.00 per
share or a market value of the public float for its common stock of at least
$1,000,000 and $2,000,000 in capital and surplus. The bid price for the
Company's Common Stock is below $1.00 per share. While the Company's capital and
surplus is currently slightly in excess of $2,000,000, further losses from
operations could result in such capital and surplus being less than $2,000,000.
It is possible that shareholders will be requested to consider a reverse split
of the Company's Common Stock in the future, if this would better assure the
Company's ability to satisfy the requirements for its Common Stock to continue
to be listed on the Nasdaq Small Cap Market. In the event that the Company's
Common Stock should cease to be traded on the Nasdaq Small Cap Market, or it
should otherwise cease to be exempt from the application of Rule 15g of the
Securities Exchange Act of 1934, it would become subject to Rule 15g-9. In this
event, prior to effecting transactions in the Company's Common Stock,
brokers-dealers would be required to make a special suitability determination
for the purchaser and receive the purchaser's written agreement to the
transaction prior to the sale. These requirements could adversely affect the
ability of brokers-dealers to sell the Company's securities. In addition, in the
event that the Company's securities ceased to be traded on the Nasdaq Small Cap
Market, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the Company's securities.

POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS, WARRANTS, CONVERTIBLE
DEBENTURES AND PREFERRED STOCK

As of September ___, 1995, there were up to ________ shares of Common
Stock reserved for issuance upon the exercise of stock purchase warrants or
options or the conversion of Debentures and Preferred Stock, at exercise or
conversion prices ranging from $.25 to $9.76 per share. To the extent the
trading price of the Company's Common Stock at the time of exercise or
conversion of any such warrants, options, Debentures or Preferred Stock exceeds
the exercise or conversion prices, any such exercise or conversion will have a
dilutive effect on the Company's shareholders.

The Company's Articles of Incorporation, as amended, authorize the
issuance of up to 100,000,000 shares of Common Stock, of which _______ shares
were outstanding on September ___, 1995. The Company's Board of Directors has
the authority to issue additional shares of Common Stock and to issue options
and warrants to purchase shares of the Company's Common Stock without
shareholder approval.

AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK

HealthWatch is authorized to issue up to 10,000,000 shares of Preferred
Stock. The Board of Directors has the power to establish the dividend rates,
liquidation preferences, voting rights, redemption and conversion terms and
privileges with respect to any series of Preferred Stock. The issuance of any
shares of Preferred Stock having rights superior to those of HealthWatch's
Common Stock may result in a decrease in the value or market price of the Common
Stock and could further be used by the Board as a device to prevent a change in
control of HealthWatch. Holders of Preferred Stock may have the right to receive
dividends, certain preferences in liquidation and conversion rights. There are
400,000 authorized shares of Series A Preferred Stock. The Company does not have
any present intention to issue any other shares of Preferred Stock.

MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED SHAREHOLDER MATTERS

The number of record holders of the Company's Common Stock on September
___, 1995 was ____. The high and low sale prices as reported on the Nasdaq Small
Cap Market (National Market through May 12, 1994) are shown in the table below.
These quotations represent prices between dealers, and do not include retail
markups, markdowns or commissions.

QUARTER ENDED HIGH LOW

1993
March 31 2 3/4 2 3/4
June 30 3 2 5/8
September 30 2 5/8 2 3/8
December 31 4 2 1/4

1994
March 31 3 1/4 2 3/16
June 30 3 3/8 1 1/4
September 30 2 1 1/8
December 31 1 1/2 1

1995
March 31 13/32 3/8
June 30
July 1 through
September __

The Company has never paid a cash dividend on its Common Stock. The
payment by the Company of dividends, if any, in the future rests within the
discretion of its Board of Directors and will depend, among other things, upon
the Company's earnings, capital requirements and financial condition.

USE OF PROCEEDS

The Company will not receive any of the proceeds of the sale of the
Common Stock by the Selling Shareholders. The Company may, however, receive
proceeds upon the exercise of Warrants held by certain of the Selling
Shareholders representing the rights to acquire up to 2,600,000 shares of Common
Stock, which Warrants must be exercised prior to the sale pursuant to this
offering by the Selling Shareholders of the underlying shares of Common Stock.
The net proceeds, if any, from the exercise of the Warrants will be used by the
Company primarily for working capital purposes, including the purchase of raw
materials required to build product inventory for the first IV product,
marketing and sales expenses related to the introduction of this product and
product development. The Company estimates that it needs approximately $400,000
of additional debt or equity capital to sustain its operations during the next
12 months. In addition to the $400,000 required to sustain operations, the
Company estimates that it will need to obtain from $400,000 to $800,000 of
additional working capital to implement its marketing plan for the Pacer and to
provide adequate working capital to fund a rapid increase in product sales. In
the event that the Company is unable to raise additional capital, it will be
required to defer producing IV or other products, to sell certain assets or
enter into joint ventures with or grant licenses to other companies with respect
to one or more of its products and/or further reduce its operations in order to
sustain operations. There can be no assurance that the Company could, if it were
required to do so to sustain operations, sell any such assets or enter into any
such joint venture or grant any such license, if at all, on terms acceptable to
the Company.

The Company's estimate regarding the need for additional capital to
fund its operations for the next twelve months is based upon various assumptions
regarding the working capital that will be required to introduce the Pacer,
overall working capital requirements and revenues from product sales, including
sales of the Company's existing products as well as the Pacer product. There can
be no assurance that these assumptions will prove to be correct. In the event
that they are not correct, the Company may be required to obtain additional
capital, delay certain product development and sales and marketing activities,
sell certain assets or enter into one or more joint ventures with other
companies and/or reduce its level of operations.

PROFORMA FINANCIAL STATEMENTS

On September 13, 1993, HealthWatch purchased 100% of the common stock
of Metamed, Inc. The total purchase price was $755,724 and consisted of 625,000
shares of HealthWatch Common Stock valued at $700,000 in exchange for $9,819 of
property and equipment, $3,406 of intangible assets, net of $33,081 of accounts
payable assumed and $55,724 of professional fees incurred.
HealthWatch accounted for the acquisition under the purchase method
whereby the assets and liabilities of Metamed are recorded at their net book
value, which approximated fair market value as of the date of acquisition as
estimated by management. The $775,580 excess purchase price over the fair market
value of tangible assets and liabilities acquired has been identified as
Technology/Product Development acquired and was expensed at the date of
acquisition.
Summarized below are the unaudited condensed and proforma statements of
operations as if the Metamed acquisition had taken place at the beginning of the
year ended June 30, 1994. All adjustments, which in the opinion of management,
are necessary for a fair proforma presentation have been made in the following
proforma consolidated financial statements. These financial statements are
intended to present consolidated results of operations for the period presented.
Had the acquisition actually taken place at the beginning of the period,
operating results may have differed from the proforma results posted below and
accordingly, the proforma results are not intended to be indicative of future
results.

YEAR ENDED JUNE 30, 1994
ACTUAL PROFORMA

Sales $ 4,070,146 $ 4,070,146
Cost of sales 2,951,490 2,951,490
Operating expenses 3,119,615 3,120,407
Loss from continuing operation (2,000,959) (2,001,751)
Other income (expense) (839,654)(1) (839,654)(1)
Loss before extraordinary item (2,840,613) (2,841,405)
Extraordinary item - gain from
extinguishment of debt 24,328 24,328
Net loss $(2,816,285) $(2,817,077)

Net loss per share $ (1.47) $ (1.40)

Weighted average number of shares 1,912,915 2,018,258

(1) Includes an expense of $775,580 relating to the intangible assets
acquired in connection with the Metamed acquisition which were expensed
at the time of the acquisition as the development of the Metamed products
had not been completed at the time of the acquisition.

MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

The Company's focus during the 1991 and 1992 fiscal years was to build
a cardiovascular instrumentation company through the acquisition of products
utilizing related technologies which could be sold through a common distribution
network. Results for these periods reflect the results of consolidating
development, manufacturing and marketing activities for the Telemed, Life
Sciences and Cambridge products, acquired in June, October and December 1990,
respectively. In September 1993, the Company acquired the assets and technology
of Metamed, Inc., a development-stage company, with a proprietary, low cost IV
infusion controller and related technology.

In recent years, the markets in which the Company participates have
experienced significant changes and a period of uncertainty due to proposed
changes in health-care administration in the United States and efforts by
health-care organizations to reduce their operating costs and the cost of health
care in general. As a result, the Company began to focus its products in the
hospital marketplace in anticipation of lower sales directly to physicians. The
Company believes that the major changes which have been introduced to the
health-care industry will place greater emphasis on lower cost products. While
medical standards for safety and effectiveness are expected to remain strong,
costs are expected to be a deciding factor on health-care purchases.

HealthWatch has incurred losses from operations in each of its last
three fiscal years and in the nine months ended March 31, 1995. Based on current
margins for the Company's diagnostic products, the Company believes that it
needs to increase monthly revenues from the sale of these products by from
$250,000 to $300,000, depending on the mix of products sold, in order to operate
at a break-even level. Based on anticipated margins for its new IV product,
HealthWatch believes that if revenues from its existing diagnostic products
continue at current levels, that the Company would be able to operate at a
break-even level if it is able to achieve monthly revenues of approximately
$230,000 (approximately 175 units) from the sale of the Pacer. Due to the
significantly better margins anticipated for its IV products than for its
diagnostic products, the Company's primary focus is on the development of its IV
infusion therapy business. In January 1995, the Company sold its Telemed ECG
software-based analysis program. The Company retained a license to use this
program in its Cambridge products.

RESULTS OF OPERATIONS

FIRST NINE MONTHS OF FISCAL 1995 COMPARED TO FIRST NINE MONTHS OF
FISCAL 1994. The following table compares the results of operations for the
first nine months of fiscal 1995 and the first nine months of fiscal 1994 to
present a comparative basis for the analysis of the differences in operating
results for those periods.

<TABLE>
<CAPTION>
Nine Months Ended March 31, 1995 vs 1994
1995 1994 Increase (Decrease)
<S> <C> <C> <C> <C>
Product sales ................... $ 2,953,238 $ 2,993,800 ($ 40,562) (1.4%)
Product cost of sales ........... 2,109,387 2,259,116 (149,729) (6.6)
Gross profit .................. 843,851 734,684 109,167 14.9

Selling, general & administrative
1,362,257 1,662,470 (300,213) (18.1)
Research & development .......... 424,388 173,184 251,204 145.1
Depreciation & amortization ..... 280,923 311,982 (31,059) (10.0)
Total operating costs &
expenses ................... 2,067,568 2,147,636 (80,068) (3.7)
Loss from continuing
operations ................. (1,223,717) (1,412,952) (189,235) (13.4)
Other income (expenses):
Interest income ............... 4,515 11,216 (6,701) (59.7)
Interest expense .............. (51,954) (66,213) (14,259) (21.5)
Metamed Product
Development ................ -- (775,580) (775,580) N/M
Other income .................. -- 4,313 (4,313) N/M
Total other income
(expenses) .............. (47,439) (826,264) (778,825) (94.3)
Net income (loss) before
extraordinary item ............ (1,271,156) (2,239,216) (968,060) (43.2)
Extraordinary item:
Gain from reduction
in debt obligation .......... 0 24,328 (24,328) N/M
Long term reduction in
note receivable ............. (13,639) 0 (13,639) N/M
Net income (loss) ............. ($1,284,795) ($2,214,888) ($930,093) (42.0%)
</TABLE>

Revenues declined 1.4% during the nine months ended March 31, 1995,
compared to the nine months ended March 31, 1994, primarily due to a decline in
product sales. The Company believes that product sales continue to be depressed
as a result of uncertainty in the medical community regarding the reimbursement
effects of health-care reforms; consolidations of hospital and other health-care
institutions resulting in fewer customers for the Company's diagnostic products
and delays in making purchase commitments by institutions engaged in merger or
consolidation discussions; and competitive pressure on product prices. In
addition, the Company believes that its lack of adequate working capital has
adversely affected its level of sales as the Company has not been able to
adequately support selling efforts and enhancements to its existing products.
While bookings of product orders increased during the first quarter of fiscal
1995, compared to the first quarter of fiscal 1994, bookings of new product
orders declined in the second and third quarters of fiscal 1995, compared to the
second and third quarters of fiscal 1994. At March 31, 1994, the backlog of
booked but not shipped orders was $238,000 compared to $108,000 at March 31,
1995. The backlog at March 31, 1995 does not include an order valued at
$1,000,000 for the Company's IV controller product which is under development.
During the second quarter of fiscal 1995, the Company implemented actions to
improve its material procurement practices which resulted in the reduction in
the backlog of booked but not shipped orders. Completion of the Company's first
IV product has been delayed, most recently by the Company's decision to redesign
the layout for this product in order to be able to use a different
microprocessor chip that is more readily available to the Company. The decision
to incorporate a different microprocessor chip was necessitated by the Company's
inability to obtain the original microprocessor chip in accordance with previous
commitments from the distributor for this chip and because the distributor was
unwilling to provide adequate assurance regarding future deliveries of the chip.
The Company expects to begin limited shipments of its new IV controller product
in the second quarter of fiscal year 1996.

Costs of products sold during the first nine months of fiscal 1995 were
6.6% lower than the prior year period. Gross margins were 28.6% and 24.5% for
both the fiscal 1995 and fiscal 1994 periods, respectively. The higher gross
margin for the 1995 period was primarily due to the lower cost of sales due to
the sale of the Telemed ECG software and the Company's efforts to reduce its
operating costs.

Selling, general and administrative expenses as a percent of sales were
46% in the first nine months of fiscal 1995 compared to 56% in the prior year.
This decrease was due primarily to costs incurred in the fiscal 1994 period in
connection with the relocation of the Company's corporate offices to Vista,
California. While the Company has made substantial reductions in the number of
personnel in response to the lower sales level, it does not expect significantly
lower selling, general and administrative expenses in the remainder of fiscal
1995 due to planned expenditures associated with the introduction of the new IV
product and a charge of $73,350 per quarter for financial and public relations
services being provided throughout the fiscal year.

Research and development expenses increased 145% in the fiscal 1995
period compared to the fiscal 1994 period as development efforts on the
Company's IV controller increased. The Company does not expect these expenses to
decrease in the last quarter of the fiscal year.

The decrease in the Company's other expense in the fiscal 1995 period
compared to the fiscal 1994 period was a result of the Company's acquisition on
September 13, 1993, of Metamed, Inc. The $775,580 of excess purchase price over
the fair market value of tangible assets and liabilities was charged to expense
in the first quarter of fiscal 1994, as the development of Metamed products had
not been completed at the time of the acquisition.

1994 COMPARED TO 1993. The following table compares the results of
operations for fiscal 1994 and fiscal 1993 to present a comparative basis for
the analysis of the differences in operating results for those periods.

<TABLE>
<CAPTION>
1994 vs 1993
1994 1993 Increase (Decrease)

<S> <C> <C> <C> <C>
Product sales ................. $ 4,070,146 $ 6,094,862 ($2,024,716) (33.2%)
Product cost of sales ......... 2,951,490 3,320,822 369,332 11.1
Gross profit ............... 1,118,656 2,774,040 (1,655,384) (59.7)

Selling, general &
administrative ............... 2,513,458 3,573,115 1,059,657 29.7
Depreciation & amortization ... 404,444 490,145 85,701 17.5
Research & development ........ 201,713 281,918 80,205 28.4
Total operating costs &
expenses .................. 3,119,615 4,345,178 1,225,563 28.2
Loss from continuing
operations ................ (2,000,959) (1,571,138) (429,821) (27.4)

Other income (expense):
Metamed Product
Development costs .......... (775,580) 0 (775,580) N/M
Gain on sale of Investment . 84,799 0 84,799 N/M
Interest income ............ 14,084 12,302 1,782 14.5
Interest expense ........... (88,976) (80,533) (8,443) (10.5)
Miscellaneous .............. (3,480) 13,467 (16,947) (125.8)
Loss on disposal of fixed
assets .................... (70,501) 0 (70,501) N/M
Total other income
(expense) ................ (839,654) (54,764) (784,890) (1433.2)

Loss from continuing
operations before
discontinued operations
and extraordinary item . (2,840,613) (1,625,902) (1,214,711) (74.7)

Discontinued operations:
Income from discontinued
operations of medical
services segment ........... 0 186,797 (186,797) (100.0)
Gain on sale of medical
services segment ........... 0 288,697 (288,697) (100.0)
Loss before
extra-ordinary Item ...... (2,840,613) (1,150,408) (1,690,205) (146.9)

Extraordinary item-gain from
extinguishment of debt ........ 24,328 102,433 (78,105) (76.2)

Net loss ...................... ($2,816,285) ($1,047,975) ($1,768,310) (168.7%)
</TABLE>

The decrease of $2,024,716 or 33.2% in product sales in 1994 compared
to 1993 is primarily due, the Company believes, to the continued uncertainty in
the medical community regarding the effects of the health care reform proposed
by the Administration, particularly with respect to the Company's business,
uncertainty with how the proposals may affect reimbursement for diagnostic
procedures, as well as to generally lower sales due to personnel changes,
reductions in list prices for many of the Company's products throughout fiscal
1994 and discontinuation of sales of licensed products produced by other
companies. In December 1993, the Company hired a new Vice President of Sales and
Marketing in an effort to improve sales of the Company's products and to better
position the Company for the introduction of its first Metamed infusion therapy
products currently scheduled for introduction late in the second quarter of
fiscal 1995. The Company believes that its sales for fiscal 1994 were adversely
affected by uncertainties that existed within its sales and marketing group
during the period from the time it determined to seek new leadership for this
group until the new Vice President of sales and marketing was hired and began
working for the Company. Bookings of new product orders increased by
approximately 34 % during the six months ended June 30, 1994, compared to the
first six months of the fiscal year. However, due to difficulties in raw
materials procurement related to the Company's relocation during the first six
months of the fiscal year, a significant number of booked orders were not
shipped by the end of the fiscal period. As of June 30, 1994, the backlog of
orders not shipped was $ 431,509 compared to $ 87,872 as of June 30, 1993.

Cost of product sales, which resulted in a gross margin of 27.5% in
fiscal 1994 (compared with 45.5% in 1993) declined $369,332 or 11.1% due to the
reduction of manufacturing expenses to support the lower level of sales. The
lower gross margins in the fiscal 1994 period were primarily due to the
significantly lower sales revenues which were not sufficient to support certain
relatively fixed costs, costs associated with amending various of the Company's
manufacturing processes and documentation to better assure compliance with the
"good manufacturing practices" of the U.S. Food and Drug Administration, and
increased price competition which caused the Company to reduce the list prices
for several of its products during fiscal 1994.

Selling, general and administrative expenses decreased $1,059,657 or
29.7%, in fiscal 1994 compared to 1993, due primarily to lower head counts and
reduction of certain administrative and selling expenses as a result of the
lower level of sales and decreases in commission expenses also as a result of
the lower level of sales. While the Company has made substantial reductions in
the number of personnel in response to the lower sales level, it does not expect
to significantly lower selling, general and administrative expenses in fiscal
1995 due to planned expenditures associated with the introduction of Metamed
infusion therapy products. In addition, during June 1994, the Company engaged
two consultants to provide financial and public relations services to the
company during the twelve month period ending June 30, 1995. The cost of these
consultants, approximately $24,450 per month will be expensed during the term of
the engagement and may result in an increase in the Company's selling general
and administrative expenses in the fiscal 1995 periods.

Depreciation and amortization decreased in fiscal 1994 by $85,701 or
17.5%, compared to 1993, primarily due to the retirement of property and
equipment in connection with the sale in the third quarter of fiscal 1993 of the
medical services segment of the Company's business and the completion in fiscal
1993 of amortization of certain intangibles relating to the Life Sciences
acquisition.

Research and development expenses decreased $80,205 or 28.4% in fiscal
1994 compared to 1993, as product developments were limited to design
improvements to one product line and final enhancements to the IV controller.
The Company expects research and development expenses to increase during fiscal
1995 to accelerate development of subsequent Metamed IV products and continued
improvements to one product in the Life Sciences product line.

Other income (expense) includes expenses of $775,580 relating to the
value of the intangible assets acquired in connection with the Metamed
acquisition in the first quarter of fiscal 1994 which were expensed at the time
of the acquisition, as the development of the products had not been completed at
the time of the acquisition, a loss of $57,430 recognized in connection with the
sale of a building which originally had been used in connection with the medical
services business sold in 1989, a loss of $10,227 on sale of leasehold
improvements in the Company's former Broomfield, Colorado facilities and income
of $84,799 relating to the sale of common stock of Discovery Technologies, Inc.
Interest income increased in fiscal 1994, compared to 1993, due to interest paid
on the notes received as part of the purchase price for the medical services
business sold during the third quarter of fiscal 1993. Interest expense
increased in fiscal 1994, compared to 1993, due to interest paid on the
Company's 10% Convertible Senior Debentures issued in the second quarter of
fiscal 1993.

The Company's net loss increased by $1,768,310 in fiscal 1994 compared
to 1993 due primarily to the lower level of sales, lower gross margins and the
$775,580 expense relating to the intangible assets acquired in connection with
the Metamed acquisition as described above and direct (approximately $110,000)
and indirect costs incurred in connection with the move of the Company's
corporate offices from Broomfield, Colorado to Vista, California.

1993 COMPARED TO 1992. The following table compares the results of
operations for fiscal 1993 and fiscal 1992 to present a comparative basis for
the analysis of the differences in operating results for those periods.

<TABLE>
<CAPTION>
1993 vs 1992
1993 1992 Increase (Decrease)
<S> <C> <C> <C> <C>
Product sales ................ $ 6,094,862 $ 7,240,106 ($1,145,244) (15.8%)
Product cost of sales ........ 3,320,822 4,595,045 1,274,223 27.7
Gross profit .............. 2,774,040 2,645,061 128,979 4.9

Selling, general &
administrative ............ 3,573,115 4,231,348 658,233 15.6
Depreciation & amortization .. 490,145 621,020 130,875 21.1
Research & development ....... 281,918 416,647 134,729 32.3
Total operating costs
& expenses ............ 4,345,178 5,269,015 923,837 17.5
Loss from continuing
operations ............ (1,571,138) (2,623,954) 1,052,816 40.1

Other income (expense):
Interest income ......... 12,302 140,289 (127,987) (91.2)
Interest expense ........ (80,533) (140,251) 59,718 42.6
Equity in operations of
investee .............. 0 (402,585) 402,585 100.0
Miscellaneous-unrelated
corporations .......... 13,467 (21,086) 34,553 163.9
Miscellaneous-related
corporation ........... 0 (61,976) 61,976 100.0
Total other income
(expenses) ............ (54,764) (485,609) 430,845 88.7
Loss from continuing
operations before
discontinued operations
and extra-ordinary item (1,625,902) (3,109,563) 1,483,661 47.7

Discontinued operations:
Income from discontinued
operations of medical
services segment ...... 186,797 254,174 (67,377) (26.5)
Gain on sale of medical
services segment ...... 288,697 0 288,697 N/A
Loss before
extra-ordinary Item ... (1,150,408) (2,855,389) 1,704,981 59.7

Extraordinary item-gain from
extinguishment of debt ..... 02,433 0 102,433 N/A

Net loss ..................... ($1,047,97) ($2,855,38) ($1,807,414) (63.3%)
</TABLE>

The decrease of $1,145,244 or 15.8 % in product sales in 1993 compared
to 1992 is the result of reductions in list prices throughout 1993 and a decline
on order rate for the Company's products which occurred following the 1992
presidential election. The Company believes this decline was attributed, in
part, to questions potential purchasers had about the new health care program to
be proposed by the new Administration. The greatest reduction in orders was in
the physician marketplace where the Company focused its efforts until February
1993.

Costs of product sales which resulted in a gross margin of 45.5% in
1993 (compared to 36.5% in 1992) declined $1,274,223 or 27.7% due to the
efficiencies of operating from one facility in 1993 and the reduction of
manufacturing expenses to support a lower level of sales activity. Selling,
general and administrative expenses decreased $658,233 or 15.6% in 1993
reflecting a reduction in expenses and headcount to support a lower level of
sales and decreases in commission expenses resulting from lower sales.
Depreciation and amortization decreased in fiscal 1993 by $130,875 or 21.1% due
to the completion, in 1992, of amortization of certain intangibles relating to
the Life Sciences acquisition. Research and development expense decreased 32.3%
or $134,729 in 1993 (approximately 4.6% of product sales) as new product
development effort was curtailed and effort was redirected to existing product
improvements.

The 1993 improvement in the Company's equity in operations of Discovery
Technologies compared to the 1992 period is due to the complete write-off of all
of this investment in 1992 as a result of the Company's share of Discovery
Technologies' losses exceeding its investment.

Interest income decreased from the prior period due to the payoff in
July 1992, of the principal amount outstanding on the note receivable resulting
from the 1989 sale of the medical centers. Interest expense decreased as funds
from the payoff of the note receivable were used to repay debt for which the
note was security. Offsetting this reduction in interest was interest on the
Company's 10% Convertible Senior Debentures issued in September 1992.

Income from discontinued operations of $186,797 decreased $67,377 in
1993 as a result of the sale in February 1993, of the HealthCare Professional
Billing service and in March 1993, of Crossroads Medical Center. The Company
realized a gain on these sales of $288,697. In September 1992, the Company used
part of the proceeds from the sale of the Debentures to retire debt related to
the Life Sciences acquisition for $102,433 less than the amounts outstanding
which is reported as an extraordinary item.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1995, the Company had $693,148 of cash and accounts
receivable. Due to the Company's operating losses during the past four years and
nine months, it has been required to raise additional debt and equity capital to
fund its operations. Capital expenditures during this period have been limited
to routine capital purchases. During the balance of fiscal 1995, assuming
availability of funds, approximately $75,000 is expected to be devoted to the
development of the Metamed IV instrumentation products. Due to uncertainty in
the availability of a key component for the Company's new IV product and the
manufacturer's insistence that the Company place orders for six months or more
of its anticipated need for this component, the Company has decided to redesign
the product so that it will be able to use a competing part that is more
available to the Company. While working capital requirements will remain high,
the decision to use the competing part will substantially reduce the Company's
previously announced significant increases in working capital requirements
through the second quarter of fiscal 1996.

The Company believes it needs to raise approximately $400,000 of
additional working capital in addition to the proceeds raised in connection with
an equity offering completed in August 1995, to sustain operations during the
next twelve months. While not required to sustain operations, the Company
believes it should raise an additional $400,000-$800,000 of such capital to
better fund the sales and marketing expenses for the roll-out of the new IV
product, to continue the development of additional IV products and for general
working capital purposes during the next twelve months. In the event that the
Company is unable to raise additional capital, it will be required to defer
shipment of the initial IV products and/or to sell certain assets or enter into
joint ventures with or grant licenses to other companies with respect to one or
more of its products in order to sustain operations. There can be no assurance
that the Company could, if it were required to do so to sustain operations, sell
any such assets or enter into any such joint venture or grant any such license,
if at all, on terms acceptable to the Company. If the Company is unable to
obtain additional working capital, it will be necessary for the Company to
attempt to further reduce operating expenses and/or curtail certain of its
operations and product development activities.

BUSINESS

INTRODUCTION

HealthWatch develops, manufactures and markets cardiovascular
noninvasive diagnostic instruments, accessories and services. The Company's
diagnostic instruments include non-invasive doppler and ultrasound imaging
systems designed to diagnose peripheral vascular (blood vessel) disease and
electrocardiograph and stress-testing equipment and interpretive software. In
1993, HealthWatch acquired Metamed, Inc. ("Metamed"), a development-stage
company which was engaged in the development of products for the infusion
therapy ("IV") industry. Infusion therapy generally involves the delivery of one
or more fluids, primarily pharmaceuticals or nutritionals, to a patient by means
of an infusion line inserted into the circulatory system. The Pacer, the
Company's first IV product, which was approved for marketing by the U.S. Food
and Drug Administration ("FDA") in April 1994, is in the final development
stage. Sales of the Pacer are expected to begin within the next two months.

HealthWatch's strategy from 1989 to 1994 was to build its business
primarily through the acquisition or licensing of products utilizing new or
related technologies which could be sold through a common distribution network.
HealthWatch believes that there are substantial opportunities to grow its
existing business through sales of its initial IV product, development of
additional IV products utilizing its licensed patented technology and the
development and distribution of related IV products and supplies. The Company
intends, therefore, to concentrate its business development efforts during at
least the next 18 months on the development and expansion of its IV business.
During this period, the Company also intends to complete certain enhancements to
its Life Sciences product line.

References herein to "HealthWatch" or the "Company" include HealthWatch
and its consolidated subsidiaries and their predecessors unless the context
indicates otherwise. HealthWatch was incorporated in the state of Minnesota in
1983.

BUSINESS SEGMENTS

HealthWatch's business prior to the sale of its medical services
businesses in February and March 1993, generally could be divided into two
business segments: medical products and medical services. Revenues and operating
profits (losses) before allocation of certain corporate and other expenses for
both of these segments for the nine months ended March 31, 1995 and past three
fiscal years are as follows:

<TABLE>
<CAPTION>
Nine Months ended
March 31,
Year Ended June 30,
1995 1994 1993 1992
<S> <C> <C> <C> <C>
Revenues:
Medical Products
Cardiology $ 584,341 $ 863,904 $ 1,301,974 $ 1,701,294
Peripheral Vascular $ 1,018,777 $ 1,409,528 $ 2,417,951 $ 2,621,725
Supplies & Technical
Services $ 1,350,120 $ 1,796,714 $ 2,374,937 $ 2,917,087
TOTAL $ 2,953,238 $ 4,070,146 $ 6,094,862 $ 7,240,106

Medical Services:
Management $ 0 $ 0 $ 437,894 $ 598,379
Billing $ 0 $ 0 $ 239,454 $ 297,195
TOTAL $ 0 $ 0 $ 677,348 $ 895,574

Operating Profit (Loss):
Medical Products $ (1,232,717) $(2,000,959) $ (1,344,523) $ (2,015,721)
Medical Services $ 0 $ 0 $ 186,797 $ 254,174
</TABLE>

For the year ended June 30, 1994, the Company reported a decline in
revenues of $438,070 for cardiology products, $1,008,423 for peripheral vascular
products and $578,223 for supplies and technical services when compared with
fiscal 1993. For the year ended June 30, 1993, product revenues declined
$1,145,244 compared to the year ended June 30, 1992. The Company attributes the
reduction in revenues for its cardiology and peripheral vascular products
primarily to a general slowdown in the purchases of capital medical devices due
to the uncertainty in the market for such products caused by proposed
health-care reforms and efforts to reduce health-care costs. In addition the
Company's revenues have been adversely affected by the lack of adequate working
capital, changes in sales personnel, as well as the need to reduce prices for
its products to meet price reductions by competitors, again , the Company
believes, due to the softness in the markets for its products. Revenues from
supplies and technical services are related to the placement of new cardiology
and peripheral vascular products.

Foreign sales accounted for $1,077,707, $1,228,205, $1,529,752 and
$1,724,309 of the Company's medical product revenues during the nine months
ended March 31, 1995 and fiscal 1994, 1993 and 1992, respectively. The revenues
from the international market are generated by distributor sales and a wholly
owned subsidiary, Cambridge Medical Equipments LTD., in England. Cambridge
Medical Equipments LTD. accounted for revenues of $427,134, $476,856, $628,183
and $841,960 for the nine months ended March 31, 1995 and the three years ended
June 30, 1994, 1993 and 1992, respectively. International product sales are
primarily through distributors. HealthWatch currently has approximately 42
distributors worldwide. For additional information regarding the Company's
business segments see Note 17 of the Notes to the Consolidated Financial
Statements. Neither HealthWatch nor any of its affiliates does business with the
government of Cuba or any person or affiliate located in Cuba.

MEDICAL PRODUCTS

HealthWatch's goal has been to build a medical products business, with
an emphasis on cardiac and vascular diagnostic products and IV instrumentation
products for hospital, physician and home care use. Cardiology products are
marketed under the "Cambridge" brand name and peripheral vascular products are
marketed under the "Life Sciences" brand name. IV products are expected to be
marketed under the "Cambridge" brand name.

HealthWatch's first cardiology acquisition was the acquisition in June
1990 of the assets of Telemed, a 20-year old electrocardiograph and ECG overread
service business. HealthWatch considered Telemed's primary value to be its ECG
software-based analysis program which had been validated by a database of over
20 million ECG'S. During January 1995, the Company sold the Telemed ECG analysis
program to an unrelated party for $75,000. The Company retained a license to use
the program with its Cambridge products.

HealthWatch's second cardiology acquisition was the acquisition in
December 1990, of Cambridge Medical Instruments (located in the United States)
and Cambridge Medical Equipments (located in the United Kingdom). Cambridge,
founded in 1911 by Sir Horace Darwin, son of the naturalist Charles Darwin, was
the first company to manufacture electrocardiograph diagnostic equipment.
HealthWatch considered the primary value of the Cambridge acquisition to be the
Cambridge name and the Cambridge exercise stress test product line.

In October 1990, HealthWatch acquired Life Sciences, a 16-year old
company engaged in the design, manufacture and marketing of Doppler and
ultrasound imaging systems for the noninvasive assessment of peripheral vascular
diseases. Life Sciences has an installed base in excess of 2,850 systems.
HealthWatch considered Life Sciences' primary value to be its established
product line and strong name recognition in the hospital and vascular laboratory
markets.

In September 1993, HealthWatch acquired Metamed, a company formed in
1992 to develop a line of IV therapy and drug delivery devices. HealthWatch
expects to begin shipping its first Metamed product, an IV controller, within
two months of the date of this Prospectus. HealthWatch considered Metamed's
primary value to be its licensed patented technology.

Cardiac and peripheral vascular diseases represent the first and third
causes, respectively, of death in the United States. Sales of products and
services for both of these market segments, which have shown significant growth
during the last 15 to 20 years, showed limited growth in fiscal 1994, and are
expected to show limited growth during fiscal 1995 due, HealthWatch believes, to
general uncertainties in the health-care industry as a result of proposed reform
of the United States' health-care delivery system and overall constraints on
health-care costs. HealthWatch believes that while growth rates may be less than
in prior years, markets for such products will continue to grow due to the
continuing increase in life expectancy and emphasis on early detection and
treatment of cardiac and peripheral vascular diseases.

The IV instrumentation marketplace has undergone substantial change
during the past three years due, in part, to the use of newer pharmaceuticals
which require instrumented controls to insure precise delivery of the drugs, an
increase in the desire to provide for concurrent intravenous delivery of
different drugs and a rapid increase in the use of IV instruments in connection
with the care of patients in their homes.

GLOSSARY OF TERMS

CHANNEL (single, three and multi) - Format for recording ECG test data,
a channel representing information from one lead. A single channel ECG machine
prints information from one lead at a time, whereas a three or multichannel
machine prints information from three or multiple leads, respectively, at a
time. Each lead represents a position on the patient from which data is
gathered.

DOPPLER - Measurement by sound or light wave length.

ELECTROCARDIOGRAPH (ECG) - A method of recording the magnitude and
direction of electrical activity of heart cells during each cardiac cycle. Data
is gathered by leads from up to 12 different locations on the patient's body.
ECG OVERREAD SERVICE - A service that provides for a second
reading/interpretation of ECG tests. ECG'S may be transmitted electronically via
modems to a central location for computerized overread/interpretation.

EXERCISE STRESS TESTING - Also called Graded Exercise Testing (GXT), is
the recording of a patient's ECG under a controlled exercise environment.

EXTREMITIES or limbs - Upper extremities include the arms, forearms,
wrists and hands and the lower extremities include the thighs, legs, ankles and
feet.

INFRARED - Invisible heat or light rays having wavelengths longer than
those of red light.

IV - Intravenous delivery of fluids and pharmaceuticals.

OPHTHALMIC ARTERY - Artery supplying blood to the eyes and adjacent
structures.

OCULAR - Pertaining to the eye.

PERIPHERAL VASCULAR - All blood vessels other than those of the heart.

PULMONARY EMBOLI - Blood clots in blood vessels in the lungs.

THROMBOSIS - Development or presence of a blood crust, clot or plug in
one of the cavities of the heart or in a blood vessel.

ULTRASOUND - A form of energy consisting of sound-like vibrations or
waves of high frequency.

VASCULAR - Pertaining to or involving blood vessels (arteries and
veins).

CARDIOLOGY PRODUCTS. ECG equipment provides a method of recording the
magnitude and direction of the electrical activity of the heart cells during
each cardiac cycle. By measuring and identifying electrical activity intervals,
axes and amplitudes of the wave forms, detailed information about cardiac
disease and the functional process of the heart can be derived.

ECG equipment is found in hospitals, clinics and physicians' offices,
as well as ambulances. Recordings are routinely taken by nurses, technicians and
physicians. In most situations, final ECG interpretations must be performed by
physicians.

ECG tests conducted while patients are resting are augmented in certain
situations by other tests, including exercise stress testing. Under induced
stress, a patient may unmask abnormalities not detected at rest with a standard
ECG. However, the ready availability of the ECG and its ease of use and low cost
make it part of most diagnostic workups for cardiac patients. The ECG is one of
the most frequently performed tests in medicine.

HealthWatch's cardiology products include the Cambridge 6600 series and
6900 series lines of ECG and cardiac stress test systems which include
proprietary systems developed by Cambridge and systems manufactured by other
companies. The Cambridge 6900 is a stand-alone ECG stress test system with an
available treadmill or ergometer for cardiac stress test analysis.

The Cambridge MC6000 series of electrocardiograph equipment offers a
wide range of options, from the basic 12-lead system (MC6600) to an advanced
exercise testing configuration (MC6900A). The Telemed software has been migrated
to the Cambridge MC6000 series to complete this product line. Cambridge ECG
equipment sells for $6,500 for low-end licensed products to $13,500 for the
MC6900.

HealthWatch sold the Telemed interpretive software in January 1995.
HealthWatch retained a license to use the Telemed software with its Cambridge
products. Due to the Company's significant working capital requirements, the
relatively lower margins for its cardiology products and management's belief
that the most promising area for significant growth for the Company is in the IV
products portion of its business, the Board of Directors of the Company has
instructed management to attempt to find a buyer for its cardiology products
business.

PERIPHERAL VASCULAR PRODUCTS. While peripheral vascular disease is
generally less likely to produce catastrophic consequences than is cardiac
disease, it may cause significant disability and lifestyle restrictions as well
as death. Vascular disease diagnosis and management has historically been done
by vascular surgeons. With the aging of the U.S. population, a greater awareness
of vascular disease in general, and better surgical and medical management
options, more medical specialists are becoming involved in the diagnosis and
treatment of vascular disease. The capability and sophistication of the
equipment needed to diagnose peripheral vascular disease varies greatly from the
needs of the primary-care physician who may only be attempting to determine
whether or not a patient has symptoms of peripheral vascular disease to the
needs of the vascular laboratory which may be trying to establish the exact
location and severity of the disease.

HealthWatch currently markets two products under the "Life Sciences"
brand name. First, the Modular Vascular Lab (MVL), a computer-controlled
instrument which, through the use of various plug-in modules, can perform a wide
range of vascular diagnostic studies. During fiscal 1992, the Company
re-designed the MVL to simplify the options available and to reduce the cost of
this equipment. The re-designed MVL is referred to as the "MVL Classic."

The MVL produces detailed color reports and is easily operated with a
remote hand controller which allows the vascular technician to concentrate on
the patient rather than on operation of the MVL. The modular concept permits the
customer to purchase only the diagnostic testing modalities desired and to add
new modalities at any time. The MVL includes:

* MVL BASE UNIT. Includes the Modulab with space for ten plug-in
modules, a high resolution color graphics monitor, color printer,
keyboard, strip-chart recorder, remote hand-controller, foot
switch and storage cart.

* PVR MODULE. Calibrated Pulse Volume Recorder, used in the
diagnosis of arterial and venous disease in both the upper and
lower extremities.

* CWD/PPG MODULE. Continuous wave Doppler and photoplethysmograph.
The Doppler is used to measure blood velocity in both arteries
and veins by using high frequency ultrasound. The
photoplethysmograph measures blood flow using an infrared sensing
device.

* SFA-11 MODULE. Spectrum frequency analysis is used in conjunction
with the CWD/PPG module, Imager module or external input source.
The SFA-11 performs real-time analysis of Doppler frequency
shifts using computerized analysis which transforms audio or
visual images into a quantifiable frequency or velocity.

* OPG MODULE. Ocular pneumoplethysmograph, used to measure pressure
changes of the ophthalmic artery, which in turn reflects the
absence or presence of disease in blood vessels that supply
oxygen to the brain.

* IPG-II MODULE. Impedance plethysmograph, used for the detection
of deep venous thrombosis (DVT) by measuring the change in
electrical impedance (resistance) of a limb as blood flow is
occluded (obstructed) and then restored. DVT is a major source of
pulmonary emboli which can be fatal.

* PAG MODULE. Phonoangiograph, used as a sensitive quantitative
stethoscope to "listen" to the vascular system.

There is currently an installed base of over 350 MVL'S. Prices range
from $23,500 for a basic system, consisting of the MVL base unit, PVR module and
CWD/PPG module, to $70,000 for a fully configured system.

The second product is the Pulse Volume Recorder (PVR-IV) with
calibrated PVR (records height and width of wave length, volume of air in cuff
and pressure), bi-directional Doppler (measures blood velocity using
ultrasound), photoplethysmograph (measures blood flow using an infrared sensing
device) and optional ocular pneumo-plethysmograph (measures pressure changes in
certain arteries). The basic unit is used to diagnose blood vessel disease in
both the upper and lower extremities. There is an installed base of over 2,500
PVR'S, of which over 1,000 are PVR-IV's. The PVR-IV is priced at $15,000. The
PVR is suitable for busy vascular labs, where high patient volume is a major
consideration, foreign markets, smaller U.S. hospitals, and physician offices
which cannot cost-justify the MVL.

IV PRODUCTS. IV infusion systems generally rely upon either gravity
(controllers) or mechanical devices (pumps) to provide the force required to
deliver fluids and pharmaceuticals intravenously to patients. While gravity
delivery is the most simple and cost effective means of IV delivery, it has
historically had significant limitations in accuracy and ability to control the
flow of the fluid. The need for accurate intravenous delivery systems has
increased as the potency for new pharmaceuticals has increased and as treatment
procedures have increasingly utilized concurrent intravenous delivery of several
different pharmaceuticals to treat patients.

The concept of automated delivery was developed in the early 1970s with
the introduction of drop counting IV delivery systems which relied on counting
drops of assumed volume for system accuracy. IV delivery systems have evolved
into sophisticated computer controlled controller and pump systems. Controller
systems rely on gravity to provide the delivery force whereas pump systems use
either a syringe pump or peristaltic mechanism to force the fluid to the
patient.

Metamed has adopted the older concept of drop counting systems and
applied computer technology to develop a system which measures the size (volume)
of the drop falling in the drip chamber and determines the flow rate based on
the input through a flow sensor. Metamed has developed a controller and intends
to develop a pump utilizing its licensed patented measurement technology. The
Metamed measurement system requires substantially less power than competing
systems, which enables the required electronics and controls to be incorporated
into the flow sensor itself, resulting in smaller and lighter systems as well as
systems that the Company believes will be easier to use and less costly than
controller and pump systems currently being marketed. In addition, the Metamed
devices are designed to be used with a variety of IV sets compared to other
devices which generally can be used only with proprietary IV sets designed for
the particular controller or pump being used. This ability to be used with a
variety of sets is also expected to make the Metamed system easier to use and to
lower total costs incurred in providing IV therapy to patients.

In December 1994, HealthWatch introduced the Pacer, its first IV
product, a controller, which was approved for marketing by the FDA in April
1994, and expects to begin shipping this product within the next two months. The
Pacer is in the final product validation stage with independent product
validation and initial field trials scheduled for September and October 1995.
The Pacer is expected to sell for $1,300-$1,600, compared to competing single
channel products, normally IV pumps, which sell for in excess of $2,000 for
products with features similar to those for the Pacer to up to $6,500 or more
for more complicated pump products with specialized operating features. The
Pacer may be used with a variety of IV sets, including generic sets which
generally sell for significantly less than proprietary sets which normally must
be used with competing IV pump products. The use of generic IV sets can save
users from $1.25 to $9.25 per IV set used. It is not unusual for hospitals to
use annually from 140 to 200 sets per IV instrument.

HealthWatch believes that there are more than 900,000 IV controllers
and pumps currently being used in the U.S. and that approximately 120,000 IV
instruments are sold annually in the U.S and that the international market is
equal in size to the U.S. market. The Company intends to market the Pacer based
on its ease of use and the potentially significant cost savings which users of
the Pacer may recognize, both due to the lower cost for the Pacer and the
ability to use lower-priced IV sets. The Company does not intend, at least
initially, to market the Pacer for use in critical care or other similar
environments where more complicated products with operating features
specifically designed for these environments are generally used.

SUPPLIES AND TECHNICAL SERVICES. In addition to the sale of medical
instruments, HealthWatch sells disposable supplies, such as ECG recording paper
and electrodes and electrasound gels and cuffs, to purchasers of its cardiology
and peripheral vascular equipment and provides technical service/maintenance for
such equipment. During fiscal 1994, sales of supplies and revenues from service
and maintenance activities accounted for approximately 44 percent of
HealthWatch's revenues from its medical products business segment.

SALES AND MARKETING. The Company has a Vice President of Sales and
Marketing, one clinical support manager, one international sales/marketing
manager, one field sales support representative and one customer service
representative. The Company has in excess of 40 dealers representing its
products worldwide.

During the last quarter of the fiscal year ended June 30, 1993,
HealthWatch modified its sales and marketing strategy to focus on sales to
hospitals and other health-care institutions due to changes and uncertainties in
the health-care industry which, HealthWatch believes, adversely affects
physician purchases of diagnostic equipment. These sales are made directly to
hospitals, specialty physicians and vascular laboratories.

The Company markets internationally through selected independent
manufacturers' representatives and distributors who have appropriately trained
staff capable of providing sales and service for the Company's products. The
Company presently has 42 foreign independent manufacturers' representatives and
distributors who service approximately 70 percent of the international markets.

HealthWatch intends to continue to pursue disposable supply sales,
customer upgrades and service/customer support; development of a network of
domestic independent manufacturers' representatives responsible for sales to
hospitals; and, expansion of international sales. The Company's ability to
develop and implement marketing programs for its existing products and to
develop a direct sales force for its products has been limited because of its
lack of working capital.

HealthWatch believes that its vascular products account for
approximately 15%-20% of the U.S. markets for such products and that its
cardiovascular products account for less than 1%-2% of the markets for these
products.

Initially, HealthWatch intends to distribute the Pacer, its first IV
product, through independent manufacturers' representatives. The Company
believes that the long-term success of any marketing program for its IV
instruments will require that the Company obtain a line of disposable IV sets to
distribute with its IV instruments. HealthWatch believes that there are more
than 900,000 IV instruments currently being used in the U.S. and that
approximately 120,000 IV instruments are sold annually in the U.S., and that the
international market is equal in size to the U.S. market. The Company intends to
market its IV instruments based on their ease of use and potentially significant
cost savings which users may recognize, both due to the instruments' lower costs
and the ability to use lower-priced IV sets.

MANUFACTURING. The Company's manufacturing operations consist primarily
of what is referred to in the industry as "FAT" (final assembly and testing).
The Company has utilized outside consultants to assist in the design of its
products. The Company attempts to maintain a limited inventory of finished
products and normally attempts to fill orders within a month of their receipt.
The Company generally does not have any significant backlog of orders; however,
during the last quarter of fiscal 1994 and the first quarter of fiscal 1995, the
Company had a backlog of orders of $431,509 and $453,262, respectively. The
majority of this backlog was the result of orders received, but not forecasted
and the lead times involved in procurement of raw materials. The Company shipped
the majority of the products on backorder early in the second quarter of fiscal
1995. The Company's backlog of orders at March 31, 1995, was $108,000.

HealthWatch is in the beginning stages of producing the Pacer, its
first IV product. Current plans call for producing approximately 125 units of
the Pacer during September 1995, increasing production to 250 units per month by
December, 1995. Since the Company's primary activities relating to the
production of this product are the assembly, testing and shipping of the final
product, the Company believes that if it has adequate working capital to fund
the purchase of raw materials and component parts it will be able to increase
production levels rapidly after December, 1995. Due to the difficulty of
obtaining the original microprocessor chip to be used in the Pacer, the Company
is redesigning the Pacer so that it will be able to use a different
microprocessor chip which is more readily available to the Company. Several of
the key components for the Pacer must be ordered 60 or more days in advance of
their anticipated need in order to assure their availability on a timely basis.
This need substantially increases the Company's working capital requirements and
may limit its ability to rapidly increase production capabilities for the Pacer
should this be required in order to meet rapidly increasing order rates for this
product.

Certain raw materials for the Company's products, particularly its new
IV product, are available from only one or a limited number of suppliers and may
be available to the Company only if it places significant orders which represent
several months or more of the Company's projected needs for such materials. The
need to purchase significant quantities of these materials in advance of their
use, substantially increases the Company's working capital requirements. There
can be no assurance that the Company's current suppliers for these products will
continue to supply them to the Company. While alternative sources for such items
are currently available, the Company could be required to re-design its products
in order to be able to use the alternative materials provided by these
additional suppliers. Any such re-design of the Company's products could be
expensive and time-consuming and could require six or more months to complete.
The Company believes that it either has or has commitments to supply quantities
of the most critical components for its new IV product.

During fiscal 1994, HealthWatch completed the relocation of all
manufacturing operations from Broomfield, Colorado to Vista, California. This
move was made in concert with the Company's strategic plans for growth in the IV
business and the anticipated need for new personnel knowledgeable in the IV
business. The Company's facilities in Vista, California are within a 50 mile
radius of five key competitors in the IV industry and a broad base of
prospective qualified personnel.

RESEARCH AND DEVELOPMENT. The Company expects to incur an additional
expense of approximately $275,000 for the completion of the design related work
and initial product builds for the IV controller and pump systems. In addition,
subject to available capital resources, the Company plans to make certain
enhancements to its Modular Vascular Laboratory, a product sold under the Life
Sciences name. During the nine-months ended March 31, 1995 and the year ended
June 30, 1994, the Company spent $424,388 and $201,713, respectively, on
research and development activities.

PROPRIETARY INFORMATION. The Company seeks protection of its
proprietary interest in software products and trade secrets. The Company
historically has not relied on patents to protect the proprietary aspects of its
products, but has begun to do so with the products associated with the IV
instrumentation business, the licensed technology for which is covered by a U.S.
patent. HealthWatch maintains nondisclosure and confidentiality agreements with
its employees. While the enforceability of such agreements cannot be assured,
the Company believes that they provide a deterrent to the use of information
which may be proprietary to the Company. The Company licenses the technology for
its IV products from Howard R. Everhart, a former officer and director of the
Company, and licenses the technology for certain components of its other
products from unrelated persons for which it pays license or royalty fees.

PRODUCT WARRANTY AND SERVICE. The Company warrants its products against
defects in material and workmanship for one year. Warranty service is ordinarily
provided by the Company. If a product defect cannot be easily fixed at the
customer's office, the Company's policy is to replace the defective component
and return it to the Company's office for repairs.

COMPETITION. There are many companies that produce equipment which
competes with the Company's cardiology products. While there is significant
competition for each of the Company's peripheral vascular products, the number
of competitors, particularly ones that offer as broad a range of products as
does HealthWatch, is significantly less in the peripheral vascular markets than
in the cardiology markets. Many of the Company's competitors, particularly in
the cardiology markets, have substantially greater financial and marketing
resources than the Company. Hewlett-Packard Corporation, Marquette Electronics,
Inc. and Quinton Instruments Co., all of which are substantially larger than
HealthWatch, account for a substantial portion of the market for ECG products
similar to those sold by HealthWatch. For the products to be sold in the IV
instrumentation business there are a number of competitors which provide mostly
"high end" IV controllers and pumps. Over 80% of the domestic market for IV
instruments is dominated by five companies, Baxter Healthcare Corporation,
Abbott Laboratories, IVAC Corporation, IMED Corporation and Minimed,
Incorporated. All of these companies are substantially larger than HealthWatch.
The international market for IV products is largely fragmented with local
manufacturers.

Competition for medical products generally is on the basis of product
performance and cost. The Company's cardiology and vascular products generally
are priced in the mid range of competing products with the Life Sciences fully
configured MVL product priced at the high-end of the peripheral vascular market.
HealthWatch believes that its cardiology and vascular systems are favorably
priced when compared to competing products which provide comparable features and
quality. The Cambridge and Life Sciences names are well known in their
respective markets. In the IV instrumentation market, competition has
historically been based on product performance and reputation. With the
implementation of the Health Care Reform Act in 1986, competition in these
markets has become more focused on the cost per use of the IV instruments.
HealthWatch IV instruments are expected to be substantially lower in cost per
use than currently marketed products in both the hospital and home-care markets.
The Company expects to encounter intense competition in the market for its IV
products. This could require that the Company commit significantly greater
resources to the introduction of its IV products than would otherwise be
required.

GOVERNMENT REGULATION. From time to time, legislation or regulations
have been proposed which, if enacted, would regulate health-care spending. The
Company is unable to predict what legislation or regulations may be enacted or
what impact, if any, such actions would have on the Company. Further,
governmental reimbursement systems, pursuant to which hospitals and physicians
are reimbursed for medical procedures at a fixed rate according to
diagnosis-related groups, have an economic impact on the purchase and use of
medical equipment. A material decrease in current reimbursement levels for tests
performed by the Company's equipment might have a material adverse affect on the
Company's ability to market its products.

The United States Food and Drug Administration ("FDA"), pursuant to the
Medical Device Amendments of 1976 to the Food, Drug and Cosmetic Act, amended in
1990 (the "1976 Act"), and regulations promulgated thereunder, regulates the
testing, manufacturing, packaging, distribution and marketing of medical devices
in the United States, including the products manufactured by HealthWatch.
Comparable agencies in certain foreign countries also regulate the Company's
activities.

The FDA classifies medical devices intended for human use into three
categories, depending upon the degree of regulatory control deemed appropriate
with respect to each device. The Company's products are Class II devices for
which permission to market can be obtained under section 510(k) of the medical
device amendments to the Food, Drug and Cosmetic Act. Products requiring
permission to market under 5l0(k) may be approved after adequate demonstration
of safety, effectiveness and documentation that the product is substantially
equivalent to a similar device in interstate commerce prior to 1976. In 1990,
Congress enacted the Safe Medical Device Act which requires manufacturers to
obtain permission to market prior to placing the product into interstate
commerce. Manufacturers may, however, market devices outside the U.S. without
510(k) permission to market subject to local government approval and/or a
certificate of export from the FDA. The 1976 Act also requires compliance with
specific manufacturing and quality assurance standards. The FDA has published
regulations defining good manufacturing practices to provide that the
manufacturing process for any device is controlled to maximize the probability
that the finished product meets all quality and design specifications.

FDA regulations also require that each manufacturer establish a quality
assurance program by which the manufacturer monitors the manufacturing process
and maintains records which show compliance with the FDA regulations and the
manufacturer's written specifications and procedures relating to the devices.
The FDA makes unannounced inspections of medical device manufacturers and may
issue reports or citations where the manufacturer has failed to comply with all
appropriate regulations and procedures.

Compliance with the provisions of the Act and the FDA's regulations is
time-consuming and expensive. HealthWatch believes it is in substantial
compliance with the provisions of the 1976 Act and regulations under the 1976
Act.

MEDICAL SERVICES

CROSSROADS MEDICAL CENTER. On December 2, 1988, HealthWatch completed
the sale of seven Denver-area medical centers. HealthWatch continued to operate
through March 1993, its first medical center, the Crossroads Medical Center,
located in Boulder, Colorado. On March 31, 1993, the Company sold the assets of
its medical management business to an unaffiliated company.

HEALTH CARE PROFESSIONAL BILLING. Following the sale of seven of the
Company's medical centers, the HealthWatch billing department began marketing
its services to non-HealthWatch physicians under the name "Health Care
Professional Billing." On February 1, 1993, the Company sold the assets of this
business to an unrelated company.

EMPLOYEES

At August 31, 1995, the Company employed 27 persons, consisting of 5
general administrative, 4 sales and marketing, 8 manufacturing, 4 service, 2
research and product development personnel and 4 service related persons at
Cambridge Medical Equipments LTD. No retirement or pension or similar program is
in effect for the benefit of the Company's employees.

PROPERTIES

The Company's principal offices are located in 24,535 square feet of
space in Vista California, leased for a 65-month term ending January 6, 1999,
with a two-year renewal option, The incremental rate for this space is $14,400
per month.

The Company leases 2,500 square feet of office space in Cambridge,
England on a month-to-month basis for $1,530 per month.

<PAGE>

MANAGEMENT

The directors and executive officers of HealthWatch are as follows:

<TABLE>
<CAPTION>
Director
Name Since Age Positions With The Company

<S> <C> <C> <C>
John D. Greenbaum Sept. 1993 42 President and Chief Executive and Chief
Financial Officer and a Director

William B. Bevan -- 49 Vice President--Sales and Marketing

Douglas C. Layman -- 45 Vice President--Engineering

Sanford L. Schwartz 1983 45 Chairman of the Board of Directors

Kenneth A. Selzer, M.D. 1988 40 Director
</TABLE>

John D. Greenbaum has been President and Chief Executive and Chief
Financial Officers of the Company since September 1993 and provided management
consulting services to the Company from July 1993 to September 1993. From April
1993 to September 1993, Mr. Greenbaum was Chief Executive Officer of Metamed,
Inc., a development-stage company in the intravenous instrumentation business.
From December 1991 to April 1993, he was Chief Executive Officer of Colorado
MEDtech, Inc. (or one of its predecessor companies), a product development and
medical products company. Prior to 1991, Mr. Greenbaum was employed for more
than nine years by IVAC Corp., then a division of Eli Lilly & Company, a medical
products company, where he served in various capacities, including Director of
Product Development, Director of Manufacturing and Director of Quality Assurance
and Regulatory Affairs.

William B. Bevan. Mr. Bevan has been Vice President of Sales and
Marketing of the Company since November 29, 1993. Mr. Bevan was Manager of
Sales, Disctronics Medical Systems, a wholly-owned subsidiary of a Swiss-owned
manufacturer of insulin delivery systems, from October 1992 to November 1993,
Vice President of Sales for Kipp Group, a manufacturer of disposable components
for medical products from September 1991 to October 1992 and Director of
International Operations for IMED Corp., a manufacturer of infusion therapy
devices and disposables from April 1988 to August 1991.

Douglas C. Layman. Mr. Layman has been Vice President of Engineering of
the Company since April 1995 and provided engineering consulting services to the
Company from March 1995 to April 1995. From February 1982 to February 1995, Mr.
Layman was a Technical Manager in Research and Development for IVAC Corp., a
division of River Acquisitions (formerly a division of Eli Lilly & Company), a
medical products company in the intravenous instrumentation business.

Sanford L. Schwartz. Mr. Schwartz, Chairman of the Board of Directors
of the Company, has been a consultant with Creative Business Strategies, Inc., a
business/development consulting firm, since July 1992. He served as Chief
Executive Officer of the Company from June 1983 to September 1993. Mr. Schwartz
is a director of Renaissance Entertainment Corporation.

Kenneth A. Selzer, M.D. Dr. Selzer is a physician with the U.C.S.D.
Medical Center, La Jolla, California, which position he has held since June
1993. He was a resident in neurology at Vanderbilt University from January 1991
to May 1993 and has been a general partner of La Jolla Consulting Group, a
consulting firm which specializes in biomedical products, biotechnology and
health care services, since January 1989. From November 1985 to December 1988,
Dr. Selzer was President of Integrated Healthcare Services, Inc., a company
which provided administrative services to medical centers.

COMPENSATION

The following table sets forth, on an accrual basis, the aggregate cash
compensation paid by the Company and its subsidiaries during the three fiscal
years ended June 30, 1995, to the Company's President and Chief Executive
Officer, Chairman of the Board of Directors, Vice President of Sales and
Marketing and Vice President of Operations (the only executive officers whose
aggregate remuneration exceeded $100,000 in any of such years):

<TABLE>
<CAPTION>
Name and Principal Fiscal Options Restricted All Other
Position Year Salary Bonus (No. of Shares) Stock Awards Compensation

<S> <C> <C> <C> <C> <C> <C>
John D. Greenbaum, 1995 $101,207 -- 27,500shs.(1) -- $6,818
President and Chief, 1994 $150,000 -- 25,000shs. -- $7,200
Executive Officer 1993 $ 22,653 -- 2,500shs. 1,250shs. $600

William B. Bevan, 1995 $107,961 (2) -- 131,250shs.(1) -- --
Vice President, 1994 $ 57,404 (2) -- 6,250 -- --
Sales & Marketing 1993 -- -- -- -- --

Sanford L. Schwartz, 1995 $ 33,250 (3) -- 77,250shs.(1) 250,000shs(3) --
Chairman of the 1994 $ 25,000 (3) -- -- 15,000shs(3) --
Board of Directors 1993 $ 35,000 (3) -- -- -- --

Howard R. Everhart, 1995 $ 96,254 -- -- -- $58,516 (4)
Vice President 1994 $ 84,333 -- 27,500 shs. -- $40,435 (4)
of Operations 1993 $ 11,667 -- -- -- --
____________
</TABLE>

(1) Includes for Messrs. Greenbaum, Bevan and Schwartz, 27,500, 31,250 and
27,250 shares, respectively, subject to previously granted options which
were repriced during the fiscal year. See "Stock Options."

(2) Includes sales commissions.

(3) Includes amounts paid to Creative Business Strategies, Inc. ("CBS"). Mr.
Schwartz is an officer, director and principal shareholder of CBS. The fair
market value as of the date of grants of the shares of Common Stock subject
to the stock awards were $81,000 in 1995 and $26,250 in 1994.

(4) Includes license fees of $40,000 paid to Mr. Everhart during each of fiscal
1995 and 1994, pursuant to a license agreement whereby he licensed to the
Company certain technology and related patent rights.

During fiscal 1995, Kenneth A. Selzer, M.D., a director of the Company,
received a stock award of 25,000 shares of Common Stock (fair market value at
date of grant of $9,500) and was granted options for 75,000 shares of Common
Stock in consideration for services rendered both as a director and as a
consultant to the Company. Dr. Selzer's outstanding stock options were also
repriced during the year. See "Stock Options."

STOCK OPTIONS

The Company has the 1989 Incentive Stock Option Plan and the 1993 Stock
Option Plan ("the 1989 and 1993 Plans") for its key employees directors and
consultants to purchase shares of the Company's Common Stock. The 1989 and 1993
Plans provide that the purchase price of the shares covered by incentive stock
options may not be less than the fair market value of the shares on the date the
option was granted. Nonstatutory stock options granted can be granted at
exercise prices of 85% or more of the fair market value of the Company's Common
Stock on the date of grant. To date, all options granted under the 1989 and 1993
Plans have been at exercise prices equal to the fair market value of the Common
Stock on the date the Company agreed to grant the options.

The Company has, from time to time, also provided nonstatutory stock
options outside of the Plans to directors, officers and consultants. These
nonstatutory options generally have had a term of three to five years and have
had exercise prices equal to the fair market value of the Company's Common Stock
on the date the options were granted.

Directors' Report. On May 1, 1995, the Board of Directors unanimously approved
repricing all outstanding stock options held by current employees and directors
of the Company (a total of 157,189 shares), including 27,500, 27,250 and 36,750
shares subject to options held by John D. Greenbaum, Sanford L. Schwartz and
Kenneth A. Selzer, M.D., respectively, all of whom were directors of the
Company. Mr. Greenbaum was also President and Chief Executive Officer of the
Company at the time of such action. It was the Board of Directors' opinion that
the repricing of these options was appropriate in view of the Company's
inability to provide adequate cash compensation, particularly to its officers
and directors, in view of the Company's lack of working capital. On May 1, 1995,
John D. Greenbaum was being paid a salary of $4,167 per month, which represented
a substantial reduction in the $12,500 per month salary he was to have been paid
pursuant to his employment agreement with the Company, and the Company had an
accrued obligation of $43,161 to Sanford L. Schwartz and an affiliated company
which was then past due.

The following table shows option grants during fiscal 1995 to the named
executive officers of the Company.

<TABLE>
<CAPTION>
Name Options Granted Percent of Total Exercise Expiration
Options Granted Price Date

<S> <C> <C> <C> <C>
John D. Greenbaum 2,500 shs.(1) 0.5% $.42 5/24/98
25,000 shs.(1) 5.5% $.42 9/13/98

William B. Bevan 6,250 shs (1) 1.4% $.38 12/21/98
25,000 shs (1) 5.5% $.38 10/18/99
100,000 shs 21.9% $.38 5/1/00

Sanford L. Schwartz 25,000 shs.(1) 5.5% $.38 8/30/97
2,250 shs.(1) 0.5% $.38 11/6/97
50,000 shs. 10.9% $.38 5/1/00

Howard R. Everhart None -- -- --

</TABLE>

(1) Transaction reported is repricing of option on May 1, 1995.

The following table shows the number of options exercised during fiscal
1995 and the 1995 fiscal year-end value of the options held at the end of the
fiscal year by the named executive officer and by the groups indicated.

<TABLE>
<CAPTION>
Value of Unexercised
Shares Acquired on Number of Unexercised Options at in-the-money Options
Exercise June 30, 1995 at June 30, 1995
Name of Options Exercisable/Unexercisable Exercisable/Unexercisable

<S> <C> <C> <C>
John D. Greenbaum None 10,833/16,667 shs. $ -0-/$-0-
William B. Bevan None 2,083/129,167 shs. $ -0-/$-0-
Sanford L. Schwartz None 26,500/50,750 shs. $ -0-/$-0-
Howard R. Everhart None None --
</TABLE>

OTHER TRANSACTIONS

During fiscal years 1995 and 1994, the Company paid certain directors
or affiliated companies fees for services rendered. For information regarding
amounts paid in fiscal 1995 to such persons, see "Compensation." In fiscal 1994,
no such director and/or affiliated company received fees aggregating $60,000 or
more except for Creative Business Strategies, Inc., a company owned by Sanford
L. Schwartz, Chairman of the Board of Directors, and Allen R. Goldstone, a
former officer/director of the Company, which company was paid on an accrual
basis approximately $62,000 for services rendered during fiscal 1994. In
addition, Messrs. Schwartz and Goldstone received stock grants which, on the
date of grant, had a fair market value of approximately $25,000 each.

During September 1993, the Company completed the acquisition of
Metamed, Inc. Howard R. Everhart, a former officer and director of the Company,
and John D. Greenbaum, President and a director of the Company, were officers
and directors and the principal stockholders of Metamed and received 255,003 and
243,744 shares, respectively, of the Company's Common Stock in connection with
such acquisition. Messrs. Everhart and Greenbaum were elected officers and
directors of the Company upon completion of the acquisition. HealthWatch learned
of Metamed in connection with the Company's retention of Mr. Greenbaum in 1993
to review and provide recommendations on improving its operating procedures and
personnel. Mr. Greenbaum had had no prior relationship with the Company or any
of its officers or directors. In accordance with a license agreement amended at
the time that HealthWatch acquired Metamed, Inc., Mr. Everhart is to be paid
license fees of a minimum of $40,000 per year for six years commencing with
regulatory approval for the first licensed product (April 7, 1994). Maximum fees
to be paid pursuant to the agreement are $100,000 in the first year (actual
amount paid was $40,000), $450,000 in the second and third years, $325,000 in
the fourth year, $150,000 in the fifth year and $40,000 in the sixth year.

It is HealthWatch's policy that any transaction involving the Company
and an affiliated party be ratified by a majority of independent outside members
of the Company's Board of Directors who do not have an interest in the
transaction and that any such transaction be on terms no less favorable to the
Company or its affiliates than those that are generally available from an
unaffiliated party. Based on the amounts actually paid by affiliated parties for
services rendered by the Company (or affiliated companies) or paid by the
Company (or affiliated companies) for services rendered by affiliated persons,
the Company's Board of Directors believes that each of the foregoing
transactions were on as favorable terms to the Company (or affiliated companies)
as could have been obtained from unaffiliated persons.

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth as of _________, 1995, the shares of
Common Stock and percentage of total shares owned by the shareholders known to
beneficially own 5% of the Company's outstanding shares of Common Stock, each
director of the Company, the Selling Shareholders and as to all officers and
directors as a group. All persons indicated have (unless indicated to the
contrary) sole or shared with spouse voting and dispositive power over such
shares.

<TABLE>
<CAPTION>
Name and Address of Beneficial Owner, Name
of Director, Identity of Group, Name of Amount Percentage Amount to Percentage After
Selling Shareholder Beneficially Owned Before Offering be Sold Offering (1)

<S> <C> <C> <C> <C>
Boulder Financial Group, LLC 850,000 (2) ___% 800,000 ___%
595 Utica Venue
Boulder, CO 80304

Gus W. Boosalis 650,000 (2) ___% 200,000 ___%
5712 Dewey Hill Road
Edina, MN 55439

Lindley S. Branson Profit Sharing Trust 510,000 (2) ___% None ___%
33 South Sixth Street
Minneapolis, MN 55402

John D. Greenbaum 268,743 (2) ___% None ___%

Sanford L. Schwartz 342,104 (2)(3) ___% None ___%

Kenneth A. Selzer, M.D. 36,750 (2) * None *

All Officers and Directors ______ (2)(3) ___% None ___%
as a Group (6 persons)

DSN Enterprises Ltd. 400,000 (2) ___% 350,000 *

Write On Communications, Inc. 350,000 (2) ___% 350,000 --

Profinca Holdings S.A. 280,000 (2) ___% 160,000 ___%

Springhill Holdings Limited 280,000 (2) ___% 160,000 ___%

Investor Resource Services, Inc. 250,000 (2)(4) ___% 250,000 (4) *

SMI Capital Corp. 250,000 (2)(4) ___% 250,000 (4) *

Ned H. Chambers, M.D. 182,000 (2) ___% 80,000 ___%

Kenneth and Jill Duckman 1992 Charitable 140,000 (2) ___% 80,000 ___%
Remainder Trust

Steve Neslund 120,000 (2) ___% 120,000 --

Matthew E. Milliken Trust 87,500 (2) ___% 50,000 ___%

David A. Milliken Trust 87,500 (2) ___% 50,000 ___%

Gerry Milliken Loving Trust 87,500 (2) ___% 50,000 ___%

Ralph A. Milliken Loving Trust 87,500 (2) ___% 50,000 ___%

________________
</TABLE>

* Less than one percent of shares outstanding.

(1) The percentages after the offering assume that all of the Warrants have
been exercised, that the Preferred Stock has been converted into
400,000 shares of Common Stock and that no shares of Common Stock have
been issued by the Company in payment of dividends on the Preferred
Stock. Based on the foregoing assumptions there would be __________
shares of Common Stock outstanding upon completion of the offering of
Common Stock pursuant to this Prospectus.

(2) Includes for the following persons the number of shares set forth
opposite their name which are issuable within 60 days of the date of
this Prospectus upon exercise of outstanding stock purchase options or
warrants or conversion of outstanding debentures or Preferred Stock:
Boulder Financial Group, LLC--800,000 shares; Boosalis--350,000 shares;
Branson Trust--280,000 shares; Greenbaum--19,999 shares;
Schwartz--34,750 shares; Selzer--11,750 shares; DSN Enterprises
Ltd.--350,000 shares; Write On Communications, Inc.--350,000 shares;
Profinca Holdings S.A.--200,000 shares; Springhill Holdings
Limited--200,000 shares; Investor Resource Services, Inc.--250,000
shares; SMI Capital Corp.--250,000 shares; Chambers--114,000 shares;
Duckman Trust--100,000 shares; Milliken Trusts--62,500 shares each; and
all officers and directors as a group--__________ shares.

(3) Includes 250,000 shares owned by Creative Business Strategies, Inc., a
company with which Mr. Schwartz is affiliated.

(4) The shares represent the number of shares of Common Stock currently
issuable upon conversion of Preferred Stock plus 50,000 shares subject
to stock purchase warrants. The conversion rate for such Preferred
Stock is subject to adjustment in the future based upon the then price
of the Company's Common Stock. See "Description of Securities -
Preferred Stock." The number of shares beneficially owned and offered
hereby could also increase in the event that the Company elects to
issue shares of Common Stock in lieu of cash payment of dividends on
the Preferred Stock. In the event that the maximum number of shares
which could currently be issued upon conversion of the Preferred Stock
were so issued and the Company elected to pay dividends by the issuance
of additional shares of Common Stock, the Amount Beneficially Owned and
Amount to be Sold by each of such Selling Shareholders would be
1,490,000 shares and 1,490,000 shares, respectively.

DESCRIPTION OF SECURITIES

COMMON STOCK

The Company is authorized to issue up to 100,000,000 shares of Common
Stock, $.01 par value. At September __, 1995, __________ shares of Common Stock
were issued and outstanding. All shares of Common Stock have equal voting rights
and, when validly issued and outstanding, have one vote per share in all matters
to be voted upon by shareholders. The shares of Common Stock have no preemptive,
subscription, conversion or redemption rights and may be issued only as fully
paid and nonassessable shares. Cumulative voting in the election of directors is
not allowed, which means that the holders of a majority of the outstanding
shares represented at any meeting at which a quorum is present will be able to
elect all the directors if they choose to do so and, in such event, the holders
of the remaining shares will not be able to elect any directors. On liquidation
of the Company each common shareholder is entitled to receive a pro rata share
of the Company's assets available for distribution to common shareholders.

Holders of shares of Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company has not paid any dividends on its Common Stock and intends
to retain earnings, if any, to finance the development and expansion of its
business. Future dividend policy is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including earnings, capital
requirements and the financial condition of the Company.

WARRANTS

The Warrants which grant to the holders thereof the right to purchase
an aggregate of 2,600,000 shares of the Common Stock which are included in this
offering, were issued in four separate independently negotiated transactions.
Warrants for an aggregate of 1,000,000 shares were issued to ten investors who
provided short-term loans to the Company and standby purchase commitments
pursuant to which they agreed to purchase an aggregate of 250,000 Units of the
Company's securities if such purchases were required for the Company to satisfy
the minimum purchase requirement for the Unit offering to be effective. These
Warrants are at an exercise price of $.25 per share and expire on April 1, 1997.
Warrants for 1,500,000 shares have been issued to three companies as part
consideration for services being rendered by such companies. The exercise price
for these Warrants is $.30 per share (for 1,300,000 shares) and $.50 per share
(for 200,000 shares) and they expire on May 31 and July 28, 1996. Warrants for
100,000 shares were issued to two of the Company's shareholders in connection
with their conversion of 400,000 shares of Common Stock into 400,000 shares of
Preferred Stock. These Warrants have an exercise price of $.42 per share and
expire on December 31, 1996.

The number of shares issuable upon exercise of the Warrants and the
exercise prices are subject to equitable adjustment upon the occurrence of
certain events such as stock splits, stock dividends and recapitalizations. The
Warrants may be exercised on surrender of the applicable Warrant Certificate on
or before the expiration date of the applicable Warrant exercise, with the form
of "Election to Purchase" executed as directed, and accompanied by payment of
the full exercise price of the number of Warrants being exercised.

PREFERRED STOCK

The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock in series to be designated by the Board of Directors. There currently are
400,000 authorized shares of Series A Convertible Preferred Stock. No additional
shares of Preferred Stock are expected to be issued by the Company in the
immediate future; however, the Board may use its authority to issue Preferred
Stock to effect the business purposes of the Company. Material provisions
concerning the terms of any series of Preferred Stock such as dividend rate,
conversion features and voting rights, will be determined by the Board of
Directors of the Company at the time of such issuance. The ability of the Board
to issue Preferred Stock also could be used by the Company as a means of
resisting a change of control of the Company and, therefore, could be considered
an "anti-takeover" device.

The Series A Convertible Preferred Stock is convertible into shares of
Common Stock at a $1.50 per share and is redeemable at the option of the Company
at a $1.50 per share. If HealthWatch does not redeem this Preferred Stock,
one-half of the Preferred Stock becomes convertible into Common Stock at a
reduced conversion price on March 12, 1996, and the balance becomes convertible
into Common Stock at a reduced conversion price on August 12, 1996. In both
cases, such stock becomes convertible at the lesser of $1.00 per share or 50% of
the then market value of the Common Stock, provided that the conversion price
shall not be less than $.25 per share or, if less, the lowest price at which the
Company has sold Common Stock prior to such conversion. Each share of this
Preferred Stock has equal voting rights and has one vote per share in all
matters to be voted upon by shareholders. These shares of Preferred Stock have
no preemptive or subscription rights.

PLAN OF DISTRIBUTION

The shares of Common Stock which are the subject of this offering
include 2,600,000 shares of Common Stock issuable upon exercise of outstanding
Warrants representing the right to acquire such shares at exercise prices
ranging from $.25 to $.42 per share. In addition, this Prospectus also relates
to the offer by certain Selling Shareholders of up to 2,400,000 shares of Common
Stock issuable upon conversion of the Preferred Stock and up to 480,000 shares
of Common Stock which may be issued to such Selling Shareholders in payment of
dividends on the Preferred Stock in lieu of cash payments of such dividends.

The Company has been advised that the shares of Common Stock offered
hereby may be sold from time to time by the Selling Shareholders or by pledgees,
donees, transferees, or other successors in interest. Such sales may be made in
the over-the-counter market or otherwise at prices and at terms then prevailing
or at prices related to the then current market price or in negotiated
transactions. The Common Stock may be sold by one or more of the following: (a)
a block trade in which the broker or dealer so engaged will attempt to sell the
Common Stock as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus; (c) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and (d) in privately negotiated transactions not
involving a broker or dealer. In effecting sales, brokers or dealers engaged to
sell the Common Stock may arrange for other brokers or dealers to participate.
Brokers or dealers engaged to sell the Common Stock will receive compensation in
the form of commissions or discounts in amounts to be negotiated immediately
prior to each sale. Such brokers or dealers and any other participating brokers
or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended, in connection with such sales. The Company
will receive no proceeds from any sales of Common Stock by the Selling
Shareholders. It is anticipated that the brokers or dealers, if any,
participating in the sales of such securities will receive the usual and
customary selling commissions.

LEGAL MATTERS

The legality of the Common Stock will be passed upon for the Company by
the firm of Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota. A
member of such firm owns 230,000 shares of Common Stock and warrants
representing the right to acquire an additional 280,000 shares of Common Stock.

EXPERTS

The audited financial statements of the Company for the fiscal years
ended June 30, 1994 and 1993 included in this Prospectus and elsewhere in the
Registration Statement have been examined and reported on by Silverman Olson
Thorvilson & Kaufmann, Ltd., whose reports have been included in this Prospectus
and in the Registration Statement upon the authority of that firm as experts in
accounting and auditing.

HEALTHWATCH, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S> <C>
Page

Independent Auditors' Report F-2
Consolidated Balance Sheet at June 30, 1994 and 1993 F-3
Consolidated Statement of Operations for the Years Ended June 30, 1994 and 1993 F-4
Consolidated Statement of Shareholders' Equity for the Years Ended
June 30, 1994 and 1993 F-5
Consolidated Statement of Cash Flows for the Years Ended June 30, 1994 and 1993 F-6
Notes to Consolidated Financial Statements for the Years Ended June 30, 1994 and 1993 F-8
Consolidated Balance Sheet at March 31, 1995 (unaudited) F-19
Consolidated Statement of Operations for the nine months ended
March 31, 1995 and 1994 (unaudited) F-20
Consolidated Statement of Cash Flows for the nine months ended
March 31, 1995 and 1994 (unaudited) F-21
Notes to Consolidated Financial Statements for the nine months ended
March 31, 1995 and 1994 (unaudited) F-22
</TABLE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
HealthWatch, Inc.
Vista, California

We have audited the accompanying consolidated balance sheet of HealthWatch,
Inc. and its subsidiaries, as of June 30, 1994 and 1993, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HealthWatch,
Inc. and its subsidiaries as of June 30, 1994 and 1993, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota

August 12, 1994, except Note 11 which
is dated August 31, 1994

HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1994 AND 1993

ASSETS

<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Current assets:
Cash $ 49,934 $ 45,473
Accounts receivable, net of allowance for doubtful
accounts of $95,143 and $159,118, respectively 753,065 979,235
Inventory (Note 2) 1,206,309 1,664,444
Prepaid expense 66,959 98,099
Current portion of note receivable (Note 3) 114,189 90,018
Subscriptions receivable (Note 11) 225,000 --
Other current assets 119,353 115,436
Total current assets 2,534,809 2,992,705
Note receivable (Note 3) 9,935 124,062
Property and equipment, net (Note 4) 234,623 468,037
Intangible assets, net (Note 5) 1,673,270 1,944,968
Other assets 93,784 73,219
Total assets $ 4,546,421 $ 5,602,991

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 699,060 $ 501,716
Accrued compensation and payroll taxes 255,395 252,853
Other accrued expenses -- related parties 76,974 72,187
Other accrued expenses -- unrelated parties 391,100 269,031
Note payable -- related party (Note 7) 10,000 --
Deferred revenue 173,309 223,446
Current portion of long-term debt (Note 8) 7,399 118,600
Total current liabilities 1,613,237 1,437,833
Long-term debt (Note 8) 4,404 12,519
Debentures payable -- related parties (Note 9) 85,000 100,000
Debentures payable -- unrelated parties (Note 9) 510,000 650,000
Total liabilities 2,212,641 2,200,352
Contingencies and commitments (Note 10) -- --
Shareholders' equity:
Cumulative preferred stock, $.01 par value;
10,000,000 shares authorized, no shares issued
and outstanding -- --
Common stock, $.01 par value; 100,000,000 shares
authorized, 2,602,535 and 1,214,026 issued and
outstanding, respectively 10,726,912 8,729,566
Accumulated deficit (8,128,572) (5,312,287)
Equity adjustment from foreign currency
translation (39,560) (14,640)
Stock subscriptions receivable (Note 11) (225,000) --
Total shareholders' equity 2,333,780 3,402,639
Total liabilities and shareholders' equity $ 4,546,421 $ 5,602,991
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended June 30, 1994 and 1993

<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Product sales $ 4,070,146 $ 6,094,862
Product cost of sales 2,951,490 3,320,822
Gross profit 1,118,656 2,774,040
Operating costs and expenses:
Selling, general and administrative -- related
parties 94,586 --
Selling, general and administrative --
unrelated parties 2,418,872 3,573,115
Depreciation and amortization 404,444 490,145
Research and development 201,713 281,918
Total operating costs and expenses 3,119,615 4,345,178
Loss from continuing operations (2,000,959) (1,571,138)
Other income (expense):
Metamed product development costs (Note 14) (775,580) --
Gain on sale of investment (Note 6) 84,799 --
Interest income 14,084 12,302
Interest expense (88,976) (80,533)
Miscellaneous (3,480) 13,467
Loss on disposal of fixed assets (70,501) --
Total other income (expense) (839,654) (54,764)
Gain on sale of medical services segment -- 288,697
Loss before extraordinary item (2,840,613) (1,150,408)
Extraordinary item -- gain from extinguishment
of debt (Note 16) 24,328 102,433
Net loss $(2,816,285) $(1,047,975)
Income (loss) per share of common stock:
Continuing operations $(1.48) $(1.33)
Extraordinary item .01 .08
Net loss per share $(1.47) $(.86)
Weighted average number of shares outstanding 1,912,915 1,211,591
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1994 AND 1993

<TABLE>
<CAPTION>
COMMON STOCK
TOTAL
ACCUMULATED EQUITY SUBSCRIPTION SHAREHOLDERS'
SHARES AMOUNT DEFICIT ADJUSTMENT RECEIVABLE EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1992 1,209,837 $ 8,723,655 $(4,264,312) $(26,775) $ -- $ 4,432,568
Common stock issued to underwriters 3,125 3,515 -- -- -- 3,515
Common stock options exercised 1,064 2,396 -- -- -- 2,396
Equity adjustment from foreign
currency translation -- -- -- 12,135 -- 12,135
Net loss -- -- (1,047,975) -- -- (1,047,975)

Balances at June 30, 1993 1,214,026 $ 8,729,566 (5,312,287) (14,640) -- 3,402,639
Common stock issued for Metamed
acquisition 625,000 700,000 -- -- -- 700,000
Common stock issued 300,000 519,364 -- -- -- 519,364
Common stock issued for stock
subscriptions 300,000 450,000 -- -- (225,000) 225,000
Common stock issued for
conversion of debentures 77,500 132,718 -- -- -- 132,718
Common stock warrants exercised 18,750 34,628 -- -- -- 34,628
Common stock warrants issued -- 30,000 -- -- -- 30,000
Common stock options exercised 20,187 45,855 -- -- -- 45,855
Common stock issued for services 47,072 84,781 -- -- -- 84,781
Equity adjustment from foreign
currency translation -- -- -- (24,920) -- (24,920)

Net loss -- -- (2,816,285) -- -- (2,816,285)

Balances at June 30, 1994 2,602,535 $10,726,912 $(8,128,572) $(39,560) $(225,000) $ 2,333,780
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1993

<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,816,285) $(1,047,975)
Adjustments to reconcile net loss to net cash used in
operating activities:
Metamed product development costs 775,580 --
Extraordinary gain on extinguishment of debt (24,328) (102,433)
Stock issued as payment of expenses 14,781 3,515
Depreciation and amortization 404,444 493,991
(Gain) loss on sale of property and equipment 70,501 (202)
Gain on sale of business segment -- (288,697)
Decrease (increase) in assets:
Accounts receivable 226,170 355,258
Inventory 458,135 (161,690)
Prepaid expenses 19,714 (32,052)
Other current assets (3,917) 111,160
Due from affiliate -- (30,800)
Other assets (27,569) (35,037)
Increase (decrease) in liabilities:
Accounts payable 174,379 (233,151)
Accrued expense -- related parties 44,701 --
Accrued expenses -- unrelated parties 124,611 (69,592)
Deferred revenue (50,137) (69,827)
Net cash used in operating activities (609,220) (1,107,532)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (66,670) (48,427)
Proceeds from sale of property and equipment 106,656 2,310
Payments received on note receivable 89,956 1,027,038
Proceeds from sale of business segment -- 205,799
Net cash provided by investing activities 129,942 1,186,720
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayment) of bank line -- (703,197)
Proceeds from issuance of note payable 10,000 --
Issuance of long-term debt -- 11,910
Repayment of long-term debt (119,316) (197,725)
Issuance of debentures payable -- 750,000
Net proceeds from issuance of common stock 617,975 2,396
Net cash provided by (used in) financing activities 508,659 (136,616)
Effect of exchange rate changes on cash (24,920) 12,135
Increase (decrease) in cash 4,461 (45,293)
Cash -- beginning of year 45,473 90,766
Cash -- end of year $ 49,934 $ 45,473
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 1994 AND 1993

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

1994 1993
Cash paid during the year for interest $90,912 $61,496

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

During the year ended June 30, 1994:

In connection with the acquisition of Metamed, Inc., the Company acquired
$9,819 of property and equipment, $3,406 of other assets net of $33,081 of
accounts payable for 625,000 shares of common stock valued at $700,000. Along
with $11,426 of prepaid merger costs and $44,298 of accrued professional fees
incurred, the $775,580 excess purchase price was charged to expense as
incomplete development costs.

The Company entered into agreements to issue 300,000 shares of common stock
in exchange for a subscriptions receivable of $450,000.

Debenture holders converted $155,000 of debentures to 77,500 shares of
common stock valued at $132,718, net of $10,410 of debenture issuance costs
written-off and $11,872 of registration fees paid.

The Company issued 40,000 shares of common stock valued at $70,000 as
payment of bonuses, and issued 7,072 shares of common stock valued at $14,781 in
exchange for services.

The Company had $24,328 of liabilities forgiven (Note 16), resulting in an
extraordinary gain.

During the year ended June 30, 1993:

The Company transferred $145,383 of service inventory to property and
equipment.

The Company had $102,433 of long-term debt forgiven (Note 16).

In connection with the sale of the Company's medical services segment (Note
15), HealthWatch sold inventory and equipment with an aggregate book value of
$36,675 and settled on the due from affiliate balance of $263,737 in exchange
for a note receivable of $214,080 and an assignment of accounts receivable of
$169,230, which resulted in a non-cash gain of $82,898.

The accompanying notes are an integral part of the consolidated financial
statements.

HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1994 AND 1993

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF ORGANIZATION:

HealthWatch, Inc. (HealthWatch or the Company) manufactures and distributes
medical products to hospitals and medical clinics worldwide. The Company grants
credit to its customers in the normal course of business.

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of HealthWatch
and HealthWatch Technologies, Inc., a wholly-owned subsidiary of the Company,
and its wholly-owned subsidiaries Life Sciences, Inc. and Cambridge Medical
Equipment Limited.

INVENTORY:

Inventory is recorded at the lower of cost (determined on a first-in,
first-out basis) or market.

PROPERTY AND EQUIPMENT:

Property and equipment is stated at cost. Depreciation is computed using
straight-line methods and is expensed based upon the estimated useful lives of
the assets.

Expenditures for additions and improvements are capitalized, while repairs
and maintenance are expensed as incurred.

DEFERRED REVENUE:

Deferred revenue represents amounts received on service contracts but not
yet earned. Revenue is recognized on a straight-line basis over the life of the
contract.

EQUITY ADJUSTMENT FROM FOREIGN CURRENCY TRANSLATION:

The equity adjustment from foreign currency translation arises upon
translating the Cambridge Medical Equipment Limited activity to U.S. dollars
from British pounds.

REVENUE RECOGNITION:

The Company recognizes revenue from product sales at the time ownership
transfers to the customer, principally, at shipment.

INCOME TAXES:

In 1994, the Company adopted the liability method of accounting for income
taxes pursuant to Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes" and has applied the provisions
prospectively. The Company previously utilized the provisions of Accounting
Principles Board Opinion No. 11. This accounting change had no effect on the
1993 results of operations or ending accumulated deficit as previously stated.

Under SFAS 109, income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes, if any. Deferred taxes represent the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.

INCOME (LOSS) PER SHARE OF COMMON STOCK:

Income (loss) per share is calculated based on the weighted average number
of shares actually outstanding as the effect of including the common stock
equivalents would be anti-dilutive.

RECLASSIFICATIONS:

Certain reclassifications have been made in the 1993 financial statements
in order to conform with 1994 financial statement presentation. These
reclassifications have no effect on accumulated deficit or net loss, as
originally reported.

NOTE 2. INVENTORY

Inventory consisted of the following at June 30:

<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Raw materials $ 929,634 $1,031,955
Work in process 204,296 366,178
Finished goods 72,379 266,311
Total inventory $1,206,309 $1,664,444
</TABLE>

NOTE 3. NOTE RECEIVABLE

The Company has a note receivable resulting from the 1993 sale of its
medical billing and collections services segment (Note 15). The note bears
interest at 8.1%, is unsecured and due in July 1995.

NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at June 30:

<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
1994 1993 IN YEARS
<S> <C> <C> <C>
Furniture and equipment $ 844,122 $ 796,830 5
Leasehold improvements 29,197 121,240 5-6
Building -- 150,000 30
Land -- 55,000 --
Total property and equipment 873,319 1,123,070
Less accumulated depreciation (638,696) (655,033)
Property and equipment, net $ 234,623 $ 468,037
</TABLE>

Depreciation expense was $132,746 and $216,042 for 1994 and 1993, respectively.

NOTE 5. INTANGIBLE ASSETS

Intangible assets arose in the acquisition of Life Sciences and consisted
of the following at June 30:

<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
1994 1993 IN YEARS
<S> <C> <C> <C>
Technology $ 1,594,838 $1,594,838 10
Drawings & documentation 347,149 347,149 10
Life Sciences name 300,000 300,000 10
Applications 250,000 250,000 10
Customer base 225,000 225,000 10
2,716,987 2,716,987
Less accumulated amortization (1,043,717) (772,019)
Intangible assets, net $ 1,673,270 $1,944,968
</TABLE>

Amortization expense was $271,698 and $277,949 for 1994 and 1993, respectively.

NOTE 6. INVESTMENT IN DISCOVERY TECHNOLOGIES, INC.

During 1994, the Company sold its remaining 61,189 shares of Discovery
Technologies, Inc. (Discovery) common stock to an outside investor. The
Discovery shares were sold for $84,799 and the cancellation of certain
indebtedness owed to the Company by Discovery which had been written off by the
Company as uncollectible in 1992.

NOTE 7. NOTE PAYABLE -- RELATED PARTY

As of June 30, 1994, the Company had a $10,000 demand note payable to an
officer/shareholder of the Company. The note accrues interest at 8% and is
unsecured.

NOTE 8. LONG-TERM DEBT

Long-term debt consisted of the following at June 30:

<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Note payable -- secured by computer and software
with interest at 15.2%. The note matures May
1996. $ 7,908 $ 11,535
Note payable -- secured by telephone system with
interest at 10.5%. The note matures October 1994. 3,895 14,584
Note payable -- secured by building and land with
interest at 12% payable monthly. The note matured
January 1994. -- 105,000
11,803 131,119
Less current portion (7,399) (118,600)
Long-term debt $ 4,404 $ 12,519
</TABLE>

Future maturities of long-term debt are as follows for the years ending
June 30:

1995 $ 7,399
1996 4,404
$11,803

NOTE 9. DEBENTURES PAYABLE

Debentures payable accrue interest at 10% payable quarterly. The debentures
mature September 1997 and are secured by substantially all corporate assets. The
debentures can be converted into common stock at any time prior to maturity at
an initial conversion price of $2.00 per common share.

During 1994, debentures aggregating $155,000 were converted to 77,500
shares of the Company's common stock, resulting in an increase in equity of
$132,718, net of $10,410 of debenture issuance costs written-off and $11,872 of
registration fees paid.

Debentures payable to related parties consist of debentures issued to
directors, officers and shareholders of HealthWatch.

NOTE 10. CONTINGENCIES AND COMMITMENTS

STOCK OPTIONS:

At June 30, 1994, an aggregate of 350,000 shares of common stock were
reserved for issuance under the Company's 1983 Incentive Stock Option Plan and
1989 and 1994 Stock Option Plans. Pursuant to the plans, the Board of Directors
may grant options to key individuals at their discretion. Option prices under
the Incentive Stock Option Plan may not be less than the fair market value on
the date the option is granted, whereas, non-statutory stock option prices are
not subject to restriction.

As of June 30, 1994, the Company had qualified and nonqualified options
outstanding as follows:

<TABLE>
<CAPTION>
COMMON SHARES EXERCISE PRICE
UNDER OPTION PER SHARE EXPIRATION DATE
<S> <C> <C>
7,500 $9.76 December 1996
125 6.50 April 1997
82,064 2.25 August 1997
18,750 3.25 November 1997
2,500 2.00 May 1998
37,500 2.24 September 1998
2,500 2.52 September 1998
43,750 2.76 December 1998
15,000 2.75 March 1999
209,689
</TABLE>

Various officers and directors have been granted a total of 135,625 options
under the Company's Stock Option Plans (Note 12) which are included in the above
table.

Options to purchase a total of 209,689 common shares were outstanding, of
which 98,357 are exercisable at June 30, 1994.

STOCK WARRANTS:

At June 30, 1994, the Company had warrants outstanding as follows:

<TABLE>
<CAPTION>
COMMON SHARES EXERCISE PRICE
UNDER WARRANT PER SHARE EXPIRATION DATE
<S> <C> <C>
75,000 $ 3.60 October 1994
273,125 16.00 October 1994
546,250 24.00 October 1994
500,000 2.00 October 1994
93,750 2.00 August 1997
1,488,125
</TABLE>

The warrants that represent the right to acquire shares at $16.00 and
$24.00 per share are redeemable by the Company at any time at a price of $.24
per share, subject to the warrants.

OPERATING LEASES:

The Company leases its corporate offices and manufacturing facilities under
non-cancelable operating leases.

Future minimum lease payments are as follows for the years ended June 30:

1995 $172,800
1996 172,800
1997 172,800
1998 172,800
Thereafter 158,400
$849,600

Rent expense for 1994 and 1993 was $229,990 and $180,836, respectively.

WARRANTY RESERVE:

The Company sells the majority of its products with repair or replacement
warranties. At June 30, 1994 and 1993, included in accrued expenses on the
accompanying balance sheet, the Company has an accrued warranty reserve of
$60,006 and $72,187, respectively, for estimated future warranty claims.

LITIGATION:

During 1994, the landlord of the Company's former corporate offices filed a
claim against the Company. The claim alleges that the Company was in breach of
its lease and seeks damages aggregating approximately $200,000. The Company has
denied these claims and contends that no amounts are due to the landlord.

The claim is scheduled for litigation in March 1995. Although the case is
in a preliminary stage and the outcome cannot be predicted with certainty, it is
the opinion of management that the litigation will not have a material adverse
effect on the Company's financial position.

LEASE GUARANTEE:

During 1994, the lease for the medical services building was transferred to
the 1993 purchaser of the medical service business; however, the Company has
agreed to guarantee the lease through its July 1998 expiration. Total future
minimum lease payments remaining are $137,200.

CONSULTING AGREEMENT:

In June 1994, the Company entered into agreements with consultants whereby
the consultants will provide financial and public relation services to the
Company for a period of one year in exchange for 200,000 shares of the Company's
common stock. As of June 30, 1994, no shares had been issued nor had any
services been received.

NOTE 11. SUBSCRIPTIONS RECEIVABLE

As of June 30, 1994, the Company had entered into agreements to issue
300,000 shares of common stock at a per share price of $1.50 in exchange for
subscriptions receivable aggregating $450,000.

Subsequently, as of August 31, 1994, the Company has received $225,000 of
the $450,000 subscriptions receivable balance at June 30, 1994. Consequently,
the $225,000 of subscriptions received through August 31, 1994 has been
classified as a current asset.

NOTE 12. RELATED PARTY TRANSACTIONS

STOCK OPTIONS:

Qualified Incentive Stock Options:

At June 30, 1994, the Company had outstanding the following qualified
incentive stock options granted to officers and directors:

<TABLE>
<CAPTION>
COMMON SHARES EXERCISE PRICE
UNDER OPTION PER SHARE EXPIRATION DATE
<S> <C> <C>
2,500 $2.00 May 1998
15,000 2.75 March 1999
17,500
</TABLE>

NON-QUALIFIED STOCK OPTIONS:

At June 30, 1994, HealthWatch had outstanding the following non-statutory
options granted to its directors:

<TABLE>
<CAPTION>
COMMON SHARES EXERCISE PRICE
UNDER OPTION PER SHARE EXPIRATION DATE
<S> <C> <C>
69,375 $2.25 August 1997
11,250 3.25 November 1997
37,500 2.24 September 1998
118,125
</TABLE>

Of the total outstanding options granted to officers and directors as
discussed above, options to acquire up to an aggregate of 75,625 shares of
common stock are exercisable at June 30, 1994.

CONSULTING AGREEMENTS:

In September 1993, the Company entered into a one year consulting agreement
with Creative Business Strategies, Inc. (CBS), a company owned by two persons, a
current director of the Company and a former director. Pursuant to the
agreement, CBS is to provide the Company with business development consulting
services in exchange for a monthly fee of $2,000 plus 5.0% of the value of any
CBS-initiated transactions completed by the Company.

During 1994, the Company had incurred $61,986 of fees to CBS, of which
$51,586 remains unpaid at June 30, 1994 and are included in other accrued
expenses -- related parties.

In July 1993, the Company entered into a one-year consulting agreement with
one of the Company's Directors. Pursuant to the agreement, the Company received
financial and accounting consultation in exchange for a monthly fee of $1,500.
During 1994, the Company had incurred and paid $18,000. As of June 30, 1994,
this individual was no longer a director of the Company.

STOCK BONUSES:

During 1994, two members of the Company's Board of Directors were granted
10,000 shares of the Company's common stock as a bonus valued at $25,000. At
June 30, 1994, the bonus is included in other accrued expenses -- related
parties.

NOTE 13. INCOME TAXES

The effective tax rate varies from the maximum federal statutory rate as a
result of the following items:

<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Tax benefit computed at the maximum federal
statutory rate (34.0)% (34.0)%
Increase in taxes resulting from amortization of
intangible assets 9.0 9.0
Loss to be carried forward 25.0 25.0
Income tax provision --% --%
</TABLE>

Deferred taxes consisted of the following at June 30, 1994:

<TABLE>
<CAPTION>
<S> <C>
Asset:
Net operating loss carryforward $ 1,275,000
Other 125,000
Net deferred tax asset 1,400,000
Less valuation allowance (1,400,000)
Net deferred tax asset $ --
</TABLE>

For financial statement purposes, no tax benefit has been reported in 1994
as the Company has had significant losses in recent years and realization of the
tax benefits is uncertain. Accordingly, a valuation allowance has been
established for the full amount of the deferred tax asset.

At June 30, 1994, the Company had net operating loss carryforwards and
unused investment tax credits as follows for income tax purposes:

<TABLE>
<CAPTION>
NET OPERATING INVESTMENT TAX
CARRYFORWARD LOSS CREDITS
EXPIRES JUNE 30, CARRYFORWARDS CARRYFORWARD
<S> <C> <C>
2000 $ -- $16,060
2001 -- 2,468
2002 350,886 9,464
2003 427,616 --
2004 122,457 --
2005 1,371 --
2006 235,901 --
2007 1,461,790 --
2008 281,054 --
2009 1,890,000 --
$4,771,075 $27,992
</TABLE>

The utilization of the carryforwards is dependent upon the ability to
generate sufficient taxable income during the carryforward period. In addition,
utilization of these carryforwards may be limited due to ownership changes as
defined in the Internal Revenue Service Code.

NOTE 14. ACQUISITION

In September 1993, HealthWatch acquired Metamed, Inc. (Metamed). Pursuant
to the agreement, HealthWatch issued 625,000 shares of its common stock in
exchange for 100 percent of the issued and outstanding common stock of Metamed.

The total Metamed purchase price was $755,724 consisting of 625,000 shares
of HealthWatch common stock valued at $700,000 and $55,724 of professional fees
incurred in connection with the acquisition. The $1.12 per share price used to
value the acquisition represented HealthWatch's approximate trading price at the
date of the transaction, discounted to factor in the reduction in the value
stemming from the restricted distribution rights of these non-registered shares
and the size of the block issued.

In accordance with the terms of the agreement, ten percent of the
HealthWatch shares issued in connection with this acquisition have been placed
in escrow to cover unforeseen contingencies for a period of one year following
the commencement of Metamed product sales.

HealthWatch accounted for the acquisition under the purchase method whereby
the assets and liabilities of Metamed are recorded at their fair value as
estimated by management, which approximated net book value as of the date of
acquisition for all tangible assets. Net tangible assets acquired included
property, equipment and other assets of $13,225 and accounts payable of $33,081.
The $775,580 excess purchase price over the fair market value of tangible assets
and liabilities acquired has been charged to expense as incomplete development
of the Metamed product at the date of acquisition.

<TABLE>
<CAPTION>
1994 PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
PRO-FORMA PRO-FORMA
HEALTHWATCH, INC. CONSOLIDATING HEALTHWATCH INC.
CONSOLIDATED METAMED, INC. ENTRIES CONSOLIDATED
<S> <C> <C> <C> <C>
Sales $ 4,070,146 $ -- $-- $ 4,070,146
Cost of sales 2,951,490 -- -- 2,951,490
Operating expenses 3,119,615 792 -- 3,120,407
Loss from continuing operations (2,000,959) (792) -- (2,001,751)
Other income (expense) (839,654) -- -- (839,654)
Loss before extraordinary item (2,840,613) (792) -- (2,841,405)
Extraordinary item-gain from extinguishment
of debt 24,328 -- -- 24,328
Net loss $(2,816,285) $(792) $-- (2,817,077)
Net loss per share $(1.47) $(1.40)
Weighted average number of shares
outstanding 1,912,915 2,018,258
</TABLE>

<TABLE>
<CAPTION>
1993 PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
PRO-FORMA PRO-FORMA
HEALTHWATCH, INC. CONSOLIDATING HEALTHWATCH INC.
CONSOLIDATED METAMED, INC. ENTRIES CONSOLIDATED
<S> <C> <C> <C> <C>
Sales $ 6,094,862 $ -- $ -- $ 6,094,862
Cost of sales 3,320,822 -- -- 3,320,822
Operating expenses 4,345,178 37,007 -- 4,382,185
Loss from continuing operations (1,571,138) (37,007) -- (1,608,145)
Other income (expense) (54,764) (1,600) (775,580) (831,944)
Loss before extraordinary item (1,150,408) (38,607) (775,580) (1,964,595)
Extraordinary item-gain from extinguishment
of debt 102,433 -- -- 102,433
Net loss $(1,047,975) $(38,607) $(775,580) $(1,862,162)
Net loss per share $(.86) $(1.01)
Weighted average number of shares
outstanding 1,211,591 1,836,591
</TABLE>

NOTE 15. DISCONTINUED OPERATIONS

MEDICAL CLINIC MANAGEMENT SERVICES:

In March 1993, HealthWatch sold its medical clinic management services
business, its related inventory and equipment with an aggregate net book value
of $29,247, and a three-year license to use the name HealthWatch Medical Centers
in exchange for $50,000 of cash. In addition, pursuant to the agreement,
HealthWatch was assigned accounts receivable of Colorado Occupational Health
Associates, P.C. (COHA), a clinic managed by HealthWatch, aggregating $169,230
and cash aggregating $15,799, as full satisfaction of COHA's obligation,
pursuant to the management agreement, to pay HealthWatch $263,737. This sale
resulted in a loss of $57,955.

MEDICAL BILLING AND COLLECTIONS SERVICES:

In February 1993, HealthWatch sold its medical billing and collection
services business along with its related inventory and equipment with net book
value of $7,428, in exchange for $140,000 of cash and a note receivable of
$214,080, resulting in a gain of $346,652.

Summarized results of discontinued operations were as follows for the year
ended June 30, 1993:

<TABLE>
<CAPTION>
Medical services segment revenue:
<S> <C>
Medical clinic management -- related
parties $437,894
Billing and collection services:
Related parties 106,808
Unrelated parties 132,646
677,348
Cost of medical services 486,705
Gross profit 190,643
Depreciation 3,846
Net income from discontinued operations $186,797

</TABLE>

NOTE 16. EXTRAORDINARY ITEM -- GAIN FROM EXTINGUISHMENT OF DEBT

In 1994, an obligation to an officer of the Company was discharged,
resulting in an extraordinary gain of $24,328.

During 1993, the Company negotiated with a note holder to settle its
$179,933 obligation to the note holder for $77,500. The transaction resulted in
an extraordinary gain of $102,433.

NOTE 17. SEGMENT REPORTING

Prior to the sale of its medical services businesses in February and March
1993, the Company operated in two industry segments: medical products and
medical services.

The medical products segment consists of the design, development, marketing
and distribution of cardiovascular diagnostic instruments, accessories and
services. The medical products segment includes domestic as well as foreign
operations.

The former medical services segment consisted of providing medical clinic
management services and medical billing and collection services for physicians.
A summary of operations by segment is as follows:

INDUSTRY SEGMENT INFORMATION:

<TABLE>
<CAPTION>
1993
<S> <C>
Revenues:
Medical products $ 6,094,862
Medical services 677,348
Eliminations --
Consolidated $ 6,772,210
Operating profit (loss):
Medical products $(1,344,523)
Medical services 186,797
Corporate and other (226,615)
Consolidated $(1,384,341)
Identifiable assets:
Medical products $ 5,035,408
Medical services --
Corporate and other 567,583
Consolidated $ 5,602,991
Depreciation and
amortization:
Medical products $ 453,547
Medical services 3,846
Corporate and other 36,598
Consolidated $ 493,991
Capital expenditures:
Medical products $ 188,925
Medical services --
Corporate and other 4,885
Consolidated $ 193,810
</TABLE>

GEOGRAPHICAL SEGMENT INFORMATION:

<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Revenues:
United States $3,636,777 $6,144,027
Europe 433,369 628,183
Eliminations -- --
Consolidated $4,070,146 $6,772,210
Operating profit
(loss):
United States ($2,007,688) ($1,572,896)
Europe 6,729 188,555
Eliminations -- --
Consolidated ($2,000,959) ($1,384,341)
Identifiable Assets:
United States $4,327,317 $5,350,429
Europe 219,104 252,562
Eliminations -- --
Consolidated $4,546,421 $5,602,991
</TABLE>

Exports of U.S. produced medical products were $794,836 and $901,569 during
1994 and 1993, respectively.

NOTE 18. REVERSE STOCK SPLIT

In January 1994, the Company completed a one-for-four reverse stock split.
All references in the accompanying financial statements to the number of common
shares and per-share amounts have been retroactively adjusted to reflect the
reverse stock split.

HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)

<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 204,182
Accounts receivable, net 488,966
Inventory (Note 3) 1,080,281
Prepaid expense (Notes 4 & 5) 227,209
Other current assets 43,823
Total current assets 2,044,461
Property and equipment, net 160,809
Intangible assets, net 1,468,810
Other assets 79,059
Total assets 3,753,139
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 593,444
Accrued compensation and payroll taxes 212,454
Other accrued expenses -- related parties 69,981
Other accrued expenses -- unrelated parties (Note 5) 402,656
Note payable 100,000
Deferred revenue 189,734
Current portion of long-term debt 4,215
Total current liabilities 1,572,484
Long-term debt 742
Debentures payable -- related parties 75,000
Debentures payable -- unrelated parties (Note 5) 505,000
Total liabilities 2,153,226
Contingencies and commitments --
Shareholders' equity:
Cumulative preferred stock, $.01 par value; 10,000,000 shares
authorized, no shares issued and outstanding --
Common stock, $.01 par value; 100,000,000 shares authorized, 2,849,123
issued and outstanding (Note 4) 11,047,148
Accumulated deficit (9,413,364)
Equity adjustment from foreign currency translation (33,871)
Total shareholders' equity 1,599,913
Total liabilities and shareholders' equity $ 3,753,139
</TABLE>

HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)

<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Product sales $ 2,953,238 $ 2,993,800
Product cost of sales 2,109,387 2,259,116
Gross profit 843,851 734,684
Operating costs and expenses:
Selling, general and administrative 1,362,257 1,662,470
Depreciation and amortization 280,923 311,982
Research and development 424,388 173,184
Total operating costs and expenses 2,067,568 2,147,636
Loss from continuing operations (1,223,717) (1,412,952)
Other income (expense):
Metamed product development costs 0 (775,580)
Interest income 4,515 11,216
Interest expense (51,954) (66,213)
Miscellaneous 0 4,313
Total other income (expense) (47,439) (826,264)
Net (loss) before extraordinary item (1,271,156) (2,239,216)
Extraordinary item:
Gain from reduction in debt obligation 0 24,328
Loss from reduction in note receivable (Note 6) (13,639) 0
Net Loss $(1,284,795) $(2,214,888)
Net loss per share $(0.47) $(1.36)
Weighted average number of shares
outstanding 2,711,754 1,632,694
</TABLE>

HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)

<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,267,095) $(2,214,888)
Adjustments to reconcile net loss to net cash provided
by
(used in) operating activities:
Depreciation and amortization 280,923 311,982
Metamed product development costs 0 775,580
Stock issued as payment of expenses 220,050 2,188
Loss on sale of property and equipment 0 67,657
Loss from reduction in note receivable 13,639 0
Gain on reduction in debt obligation 0 (24,328)
Decrease (increase) in assets:
Accounts receivable 244,099 125,190
Inventory 126,028 326,973
Prepaid expenses (Note 4) (86,900) 0
Other current assets 75,530 75,558
Other assets 14,728 17,230
Increase (decrease) in liabilities:
Accounts payable (105,616) 210,756
Accrued expenses (56,078) 66,242
Deferred revenue 16,425 (85,667)
Net cash used in operating activities (524,267) (345,527)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (2,649) (62,844)
Increase in intangible assets 0 (44,298)
Payments received on note receivable 110,485 62,825
Net cash provided by investing activities 107,836 (44,317)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of note payable 90,000 0
Repayment of long-term debt (6,846) (9,097)
Proceeds from exercise of options 0 45,932
Net costs of issuance of common stock (13,164) (15,900)
Payments received on stock subscriptions 495,000 430,423
Net cash provided by (used in) financing activities 564,990 451,358
Effect of exchange rate changes on cash 5,689 17,049
Increase (decrease) in cash and cash equivalents 154,248 78,563
Cash and cash equivalents -- beginning of period 49,934 45,473
Cash and cash equivalents -- end of period $ 204,182 $ 124,036
</TABLE>

HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)

NOTE 1. PRINCIPLES OF PRESENTATION

The accompanying unaudited financial statements reflect all adjustments
which in the opinion of management are necessary for a fair presentation of the
Company's financial position as of March 31, 1995, the results of operations and
its cash flows for the nine months ended March 31, 1995 and 1994. The results of
operations for the nine months ended March 31, 1995, may not be indicative of
the results for the full year.

NOTE 2. NET INCOME (LOSS) PER SHARE

The net income (loss) per share in the fiscal 1995 and 1994 periods were
computed based on the weighted average number of shares outstanding during the
periods without taking into effect outstanding options as their effect would be
either anti-dilutive or dilutive by less than 3%.

NOTE 3. INVENTORY

Inventory consisted of the following at March 31, 1995 and June 30, 1994:

<TABLE>
<CAPTION>
3/31/95 6/30/94
<S> <C> <C>
Raw materials $ 896,633 $ 929,634
Work in
process 108,030 204,296
Finished goods $ 75,618 $ 72,379
$1,082,281 $1,206,309
</TABLE>

NOTE 4. PREPAID EXPENSE

In June 1994, the Company entered into an agreement with consultants
whereby the consultants are providing financial and public relations services to
the Company for a period of one year in exchange for 200,000 shares of Common
Stock. The $1.47 per share price used to value the agreement represented the
approximate trading price for the Common Stock at the date the shares were
issued, discounted to factor in the reduction in value stemming from the size of
the block issued.

NOTE 5. SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING, INVESTING AND FINANCING
ACTIVITIES DURING THE NINE MONTHS ENDED MARCH 31, 1995

The Company acquired $293,400 of prepaid consulting services for 200,000
shares of Common Stock. Relating to these services, $220,050 was charged to
expense as professional services for the nine months ended March 31, 1995. As a
result of debenture conversion, 7,500 shares of Common Stock, valued at $15,000,
were issued.

The Company has written off, due to uncollectability, $20,000 in
receivables that were assessed during fiscal 1994 in connection with warrant
exercise programs.

NOTE 6. PREPAYMENT OF NOTE RECEIVABLE

The Company accepted a $13,169 discount for the early payoff of a note
receivable that was scheduled to mature in July 1995. The $45,000 proceeds
obtained from the note prepayment was applied to working capital.

No dealer, salesman, Selling Shareholder, or
other person has been authorized in connection with
this offering to give any information or to make any
representations other than those contained in this
Prospectus. This Prospectus does not constitute an
offer or a solicitation in any jurisdiction to any
person to whom it is unlawful to make such an offer
or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there
has been no change in the circumstances of the
Company or the facts set forth herein since the date
hereof.

TABLE OF CONTENTS
Page
Available Information
Prospectus Summary
Risk Factors
Market for the Company's
Common Stock and
Related Shareholder Matters
Use of Proceeds
Proforma Financial Statements
Management's Discussion and
Analysis
Business
Management
Principal and Selling Shareholders
Description of Securities
Plan of Distribution
Legal Matters
Experts
Financial Statements

____________________________________

HEALTHWATCH, INC.

____________________

P R O S P E C T U S

_______________, 1995

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Minnesota Statutes Section 302A.521 provides that a Minnesota business
corporation shall indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity (as defined) of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights.

Article IX of the Company's Restated Articles of Incorporation
eliminates certain personal liability of the director of the Company for
monetary damages for certain breaches of directors' fiduciary duties.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*

SEC registration fee $
NASD fees
Nasdaq listing fees
Printing expenses
Fees and expenses of counsel for the Company
Fees and expenses of accountants for the Company
Transfer Agent and Registrar fees
Miscellaneous
Total $

All of the above expenses, other than the SEC, NASD and Nasdaq fees, are
estimated.
___________________________

* To be provided by amendment.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

1. During September 1992, the Company issued $750,000 principal amount
of its 10% convertible senior debentures due 1997 to 29 investors, including 23
"accredited" investors. The debentures are convertible into shares of the
Company's Common Stock at a conversion price of $2.00 per share. The debentures
were offered by Elliot, Allen & Co., Inc. (the "Agent") on a best efforts basis
at a commission of 10% of the principal amount of the debentures sold, one-half
of which was paid in cash and one-half paid in the form of a five-year warrant
representing the right to purchase at $2.00 per share, 93,750 shares. The
securities, which were taken for investment and were subject to appropriate
transfer restrictions, were sold without registration under the Securities Act
of 1933, as amended (the "Act"), in reliance upon Rule 504 of Regulation D
promulgated thereunder.

2. During the quarter ended December 31. 1992, the Company issued 3,125
shares of its Common Stock to Elliot, Allen & Co., Inc., in consideration for
investment banking services. The shares were issued in lieu of cash compensation
for such services and were acquired for investment purposes and without
registration under the Act in reliance upon Section 4(2) thereof and Regulation
505 of Regulation D promulgated thereunder.

3. During May 1993, an aggregate of 41, 250 shares of the Company's
Common Stock were authorized for issuance to five persons, including four
directors and one employee of the Company, in consideration for services
rendered and in lieu of cash payments for such services. In addition, during
September 1993, an additional 10,000 shares of such stock were authorized to be
issued to two of such directors for additional services rendered, again in lieu
of cash payments for such services. The shares authorized to be issued in May,
were issued during September and October 1993 and the shares authorized in
September were issued in December 1993. In each of such instances, the shares
were acquired for investment and were subject to appropriate transfer
restrictions. The shares were issued without registration under the Act in
reliance upon Section 4(2) thereof.

4. Effective September 13, 1993, the Company issued 625,000 shares of
its Common Stock to the shareholders of Metamed, Inc. (five persons) in
connection with the merger of Metamed into a subsidiary of the Company. The
shares were acquired for investment purposes and were subject to appropriate
transfer restrictions. The shares were not registered under the Act in reliance
upon Section 4(2) thereof and Rule 505 of Regulation D promulgated thereunder.

5. During October 1993, the Company issued 100,000 shares of its Common
Stock and Warrants representing the right to acquire 150,000 shares of its
Common Stock in consideration for which such investors paid $200,000. The
investor group was led by Redwood Microcap Fund, Inc. and the Rockies Fund,
Inc., each of which funds also received a warrant representing the right to
acquire 125,000 shares of the Company's Common Stock at a warrant exercise price
of $2.00 per share. The securities were acquired for investment purposes and
pursuant to agreements which provided that the securities would be sold or
transferred only pursuant to the registration under the Act or pursuant to an
exemption therefrom. The securities were issued without registration under the
Act in reliance upon Section 4(2) thereof and Rule 505 of Regulation D
promulgated thereunder. One director and one former director of the Company who
were not otherwise compensated by the Company, were to receive compensation
equal to five percent of the proceeds of such financing for services rendered in
connection with obtaining and negotiating the terms of such financing.

6. During December 1993, pursuant to an agreement entered into in
October 1993, the Company issued 100,000 shares of its Common Stock and Warrants
representing the right to acquire 275,000 shares of its stock at $2.50 per share
to one institutional investor in consideration for which the investor paid
$200,000. The agreement pursuant to which the securities were acquired provided
that the investor was acquiring such securities for investment purposes and
would not sell or transfer such securities except pursuant to a registration
under the Act or pursuant to an exemption therefrom. The securities were not
registered under the Act in reliance upon Section 4(2) thereof and Regulation
505 of Regulation D promulgated thereunder.

7. During December 1993, the Company agreed to issue a warrant
representing the right to acquire 75,000 shares of its Common Stock at a warrant
exercise price of $3.60 per share to an accredited investor in consideration for
which the investor paid $30,000. The warrant was acquired for investment
purposes and pursuant to an agreement which provided that the warrant or the
shares subject thereto would not be sold or otherwise transferred except
pursuant to a registration under the Act or pursuant to an exemption therefrom.
The securities were not registered under the Act in reliance upon Section 4(2)
thereof and Regulation 505 of Regulation D promulgated thereunder.

8. During June 1994, the Company agreed to issue an aggregate of
400,000 shares of the Company's Common Stock in June and July 1994, to two
institutional investors at a purchase price of $600,000 ($1.50 per share). The
purchase of these shares was completed in October, 1994. The agreements pursuant
to which the shares were purchased provided that the investors were acquiring
such shares for investment purposes and would not sell or transfer such shares
except pursuant to a registration under the Act or pursuant to an exception
therefrom. The shares were not registered under the Act in reliance upon Section
4(2) thereof and Regulation 505 of Regulation D promulgated thereunder. During
May 1995, the 400,000 shares of Common Stock were agreed to be converted into
400,000 shares of Series A Convertible Preferred Stock and warrants representing
the right to acquire 100,000 shares at anytime from July 31, 1995 to December
31, 1996 were issued. The Preferred Stock is redeemable at the option of the
Company at a $1.50 per share and is convertible into shares of Common Stock at a
$1.50 per share, such conversion rate being subject to adjustment based upon the
future market value for the Company's Common Stock.

9. During November 1994, the Company issued 30,000 shares of the
Company's common stock and warrants representing the right, as adjusted, to
purchase 180,000 shares of such stock at $.25 per share to one investor for a
purchase price of $45,000. The securities were acquired for investment purposes
and were not registered under the Act in reliance upon Section 4(2) thereof and
Regulation 505 of Regulation D promulgated thereunder.

10. During November 1994, 5,000 shares of the Company's common stock
were authorized for issuance to one employee in lieu of a cash bonus. The
shares, which were taken for investment and were subject to appropriate transfer
restrictions, were issued without registration under the Act in reliance upon
Section 4(2) thereof.

11. During April and May 1995, seven qualified investors loaned to the
Company on a short-term basis an aggregate of $125,000 and provided standby
commitments pursuant to which they agreed to purchase up to 250,000 of the Units
subject to this offering if required for the Company to sell 750,000 Units. The
loans bear interest at the rate of 10% per annum. As additional consideration
for the making of the loans and the granting of the standby commitments, these
investors have been granted two-year warrants representing the right to purchase
up to 1,000,000 shares of the Company's Common Stock at $.25 per share.
Protective Group Securities Corporation assisted the Company in arranging for
the loans and the standby commitments and was paid a fee of $6,500 in connection
therewith. The warrants, which were taken for investment and were subject to
appropriate transfer restrictions, were issued without registration under the
Act in reliance upon Section 4(2) thereof.

12. During May and June, 1995, an aggregate of 275,000 shares of the
Company's common stock were authorized for issuance to two directors in lieu of
cash compensation for services rendered. The shares, which were taken for
investment and were subject to appropriate transfer restrictions, were issued
without registration under the Act in reliance upon Section 4(2) thereof.

13. Effective May 1, 1995, the Company entered into a Consultancy
Agreement pursuant to which it agreed to issue a warrant, as adjusted,
representing the right to acquire up to 800,000 shares of the Company's common
stock at $.30 per share and issued such consultant 50,000 shares of its common
stock in consideration for services to be rendered. The warrant and shares were
acquired for investment and are subject to appropriate transfer restrictions and
were issued without registration under the Act in reliance upon Section 4(2)
thereof.

14. Effective July 27, 1995, the Company entered into an agreement
pursuant to which it has issued 50,000 shares of its common stock and agreed to
issue warrants representing the right to acquire 500,000 shares of the Company's
common stock at $.30 per share and 200,000 shares of such stock at $.50 per
share in consideration for services to be rendered. The shares and warrants were
acquired for investment and are subject to appropriate transfer restrictions and
were issued without registration under the Act in reliance upon Section 4(2)
thereof.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

<TABLE>
<CAPTION>
(a) Exhibits

<S> <C>
3.1 Articles of Incorporation, as amended, of the Company (1).

3.2 Bylaws, as amended, of the Company (2).

4.1 Specimen form of the Company's Common Stock certificate (2).

4.2 HealthWatch, Inc. Stock Option Plan of 1989 (3).

4.3 Form of Incentive Stock Option Agreement (3).

4.4 Form of Nonstatutory Stock Option Agreement (3).

4.5 HealthWatch, Inc. Stock Option Plan of 1993 (4).

4.7 Subscription and Purchase Agreement dated as of the 14th
day of August 1992 between the Company and the Purchasers
of the Company's 10% convertible senior debentures due 1997
(including as an appendix thereto the form of the debenture
certificate) (5).

4.8 Subscription and Investment Representation Agreement between SMI Capital
Corp. and the Company (4).

4.9 Subscription and Investment Representation Agreement between Investor
Resource Services, Inc. and the Company (4).

4.10 Warrant Agreement dated May 19, 1995 between the Company and Corporate Stock
Transfer, Inc. (6)

4.11 Warrant Agreement dated November 30, 1994 between the Company and investor
(6).

4.12 Form of Warrant Certificate -- see Exhibit A to Exhibit 4.10.

4.13 Form of Loan and Standby Purchase Agreement (6).

4.14 Exchange Agreement for Preferred Stock and Stock Purchase Warrant (6).

5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A. - filed herewith.

10.1 Lease Agreement dated November 19, 1993, between Steven P. Cade and Wyeth W.
Cade and the Company (5).

10.2 Agreement and Plan of Merger dated July 27, 1993 by and among the Company,
HealthWatch Technologies, Inc., Metamed, Inc., John D. Greenbaum and Howard
R. Everhart (7).

10.3 Employment Agreement dated September 13, 1993 between the Company and John
D. Greenbaum (5).

10.14 License Agreement dated February 27, 1992, as amended September 13, 1993,
between Howard R. Everhart and Metamed, Inc. (5).

10.3 Second Amendment to License Agreement dated May 9, 1995 between Howard R.
Everhart and HealthWatch Technologies, Inc. (6)

10.6 Consultancy Agreement dated May 1, 1995 between HealthWatch, Inc. and
Boulder Financial Group (6).

10.7 Agreement dated July 27, 1995 by and between HealthWatch, Inc. and D.S.N.
Enterprises Ltd. -- filed herewith.

11 Computation of Earnings Per Share (5).

21 Subsidiaries of the Company (5).

23.1 Consent of Gray, Plant, Mooty, Mooty & Bennett, P.A. (see Exhibit 5.1).

23.2 Consent of Silverman Olson Thorvilson & Kaufmann, Ltd. -- filed herewith.

24.1 Power of Attorney (included on signature page of the initial Registration
Statement).

</TABLE>

(1) Incorporated herein by reference to Registration Statement, Form 10-K for
the year ended June 30, 1990 (File No. 0-11476).

(2) Incorporated herein by reference to Registration Statement, Form S-18 (File
No. 2-85688D).

(3) Incorporated herein by reference to Registration Statement, Form S-2 (File
No. 33-42831).

(4) Incorporated herein by reference to Registration Statement, Form 10-KSB,
for the year ended June 30, 1994 (File No. 0-11476).

(5) Incorporated herein by reference to Registration Statement, Form SB-2 (File
No. 33-73462).

(6) Incorporated herein by reference to Registration Statement, Form SB-2 (File
No. 33-88126).

(7) Incorporated herein by reference to Current Report, Form 8-K dated
September 13, 1993 (File No. 0-11476).

ITEM 28. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or event arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.

That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Vista, State of California, on September 5,
1995.

HEALTHWATCH, INC.

By /s/ John D. Greenbaum
John D. Greenbaum
President and Chief Executive Officer

KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints John D. Greenbaum and Annette D. Agner,
and each of them, his/her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him/her and in his/her name,
place, and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full powers and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he/she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their or his/her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 5th day of September, 1995,
by the following persons in the capacities indicated:

/s/ John G. Greenbaum President, Chief Executive Officer, Chief
John D. Greenbaum Financial Officer, and Director (Principal
Executive and Financial Officer)

/s/ Annette D. Agner Controller (Principal Accounting Officer)
Annette D. Agner

/s/ Sanford L. Schwartz Director
Sanford L. Schwartz

/s/ Kenneth A. Selzer, M.D. Director
Kenneth A. Selzer, M.D.

INDEX TO EXHIBITS FILED WITH
FORM SB-2 REGISTRATION STATEMENT

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON SEPTEMBER 6, 1995

Exhibit Page
Number Description of Exhibit Number

3.1 Articles of Incorporation, as amended, of the Company (1).

3.2 Bylaws, as amended, of the Company (2).

4.1 Specimen form of the Company's Common Stock certificate (2).

4.2 HealthWatch, Inc. Stock Option Plan of 1989 (3).

4.3 Form of Incentive Stock Option Agreement (3).

4.4 Form of Nonstatutory Stock Option Agreement (3).

4.5 HealthWatch, Inc. Stock Option Plan of 1993 (4).

4.7 Subscription and Purchase Agreement dated as of the 14th day of
August 1992 between the Company and the Purchasers of the Company's
10% convertible senior debentures due 1997 (including as an
appendix thereto the form of the debenture certificate) (5).

4.8 Subscription and Investment Representation Agreement between SMI
Capital Corp. and the Company (4).

4.9 Subscription and Investment Representation Agreement between
Investor Resource Services, Inc. and the Company (4).

4.10 Warrant Agreement dated May 19, 1995 between the Company and
Corporate Stock Transfer, Inc. (6)

4.11 Warrant Agreement dated November 30, 1994 between the Company and
investor (6).

4.12 Form of Warrant Certificate -- see Exhibit A to Exhibit 4.10.

4.13 Form of Loan and Standby Purchase Agreement (6).

4.14 Exchange Agreement for Preferred Stock and Stock Purchase Warrant
(6).

5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A. - filed
herewith.

10.1 Lease Agreement dated November 19, 1993, between Steven P. Cade and
Wyeth W. Cade and the Company (5).

10.2 Agreement and Plan of Merger dated July 27, 1993 by and among the
Company, HealthWatch Technologies, Inc., Metamed, Inc., John D.
Greenbaum and Howard R. Everhart (7).

10.3 Employment Agreement dated September 13, 1993 between the Company
and John D. Greenbaum (5).

10.14 License Agreement dated February 27, 1992, as amended September 13,
1993, between Howard R. Everhart and Metamed, Inc. (5).

10.3 Second Amendment to License Agreement dated May 9, 1995 between
Howard R. Everhart and HealthWatch Technologies, Inc. (6)

10.6 Consultancy Agreement dated May 1, 1995 between HealthWatch, Inc.
and Boulder Financial Group (6).

10.7 Agreement dated July 27, 1995 by and between HealthWatch, Inc. and
D.S.N. Enterprises Ltd. -- filed herewith.

11 Computation of Earnings Per Share (5).

21 Subsidiaries of the Company (5).

23.1 Consent of Gray, Plant, Mooty, Mooty & Bennett, P.A. (see Exhibit
5.1).

23.2 Consent of Silverman Olson Thorvilson & Kaufmann, Ltd. -- filed
herewith.

24.1 Power of Attorney (included on signature page of the initial
Registration Statement).

(1) Incorporated herein by reference to Registration Statement, Form 10-K for
the year ended June 30, 1990 (File No. 0-11476).

(2) Incorporated herein by reference to Registration Statement, Form S-18 (File
No. 2-85688D).

(3) Incorporated herein by reference to Registration Statement, Form S-2 (File
No. 33-42831).

(4) Incorporated herein by reference to Registration Statement, Form 10-KSB,
for the year ended June 30, 1994 (File No. 0-11476).

(5) Incorporated herein by reference to Registration Statement, Form SB-2 (File
No. 33-73462).

(6) Incorporated herein by reference to Registration Statement, Form SB-2 (File
No. 33-88126).

(7) Incorporated herein by reference to Current Report, Form 8-K dated
September 13, 1993 (File No. 0-11476).

GP:219107 v1

EXHIBIT 5.1

LINDLEY S. BRANSON
612 343-2827

September 6, 1995

HealthWatch, Inc.
2445 Cades Way
Vista, California 92083

RE: Registration Statement on Form SB-2

Gentlemen:

This opinion is furnished in connection with the registration, pursuant
to the Securities Act of 1933, as amended ("Act"), of an aggregate of 5,480,000
shares of the Common Stock, $.01 par value (the "Shares"), of HealthWatch, Inc.
(the "Company").

We have acted as counsel to the Company in connection with the
preparation of the Registration Statement on Form SB-2. We have examined the
Articles of Incorporation, as amended, and the Bylaws of the Company, such
records of proceedings of the Company as we deemed material and such other
certificates, records and documents as we considered necessary for the purposes
of this opinion.

Based on the foregoing, we are of the opinion that upon the issuance
and delivery of the Shares as described in the aforementioned Registration
Statement, the Shares will be legally issued, fully paid and non-assessable
securities of the Company.

The foregoing assumes that all requisite steps will be taken to comply
with the requirements of the Act and applicable requirements of state laws
regulating the offer and sale of securities.

We understand that this opinion is to be used in connection with the
Registration Statement. We consent to a filing of a copy of this opinion with
the Registration Statement.

Very truly yours,

GRAY, PLANT, MOOTY,
MOOTY & BENNETT, P.A.

By ______________________________
Lindley S. Branson

LSB/pbk
GP:219032 v1

EXHIBIT 10.7

AGREEMENT

AGREEMENT made this 27th day of July, 1995, by and between HealthWatch,
Inc., hereafter referred to as "H.E.A.L.", which has its offices at 2445 Cades
Way, Vista, California 92083, and D.S.N. Enterprises Ltd., hereafter referred to
as "D.S.N.", which has its offices at 243 East 19th Avenue, Suite 214, Denver,
Colorado 80203.

WHEREAS, D.S.N. provides professional consulting and advisory services
designed to inform interested parties as to the business, products, management,
marketing and financial potential of its clients; and

WHEREAS, H.E.A.L. is publicly held with its common stock trading on the
National Association of Securities Dealers Automated Quotation System; and

WHEREAS, H.E.A.L. desires to publicize itself with the intention of
making its name and business better known to its customers, shareholders,
prospective investors and investment banking firms; and

WHEREAS, D.S.N. desires to engage H.E.A.L. as a client and is duly
qualified to enter into this Agreement and is not subject to any claim or
legislation which would preclude such retention.

NOW, THEREFORE, in consideration of the premises, the terms, covenants
and conditions herein and other valuable consideration, the receipt, adequacy
and sufficiency of which the parties hereto acknowledge, the parties hereto
agree as follows:

1. TERM AND TERMINATION: This Agreement shall be effective as of the
28th day of July 1995, and shall continue in effect for a period of six months,
and shall expire on the 28th day of January, 1996. Such expiration date is
subject to possible modification as stated hereafter.

2. CONSULTING SERVICES: During the term of this Agreement, D.S.N. shall
provide services to H.E.A.L. Such services shall include but not be limited to:

a. The preparation, implementation and monitoring of marketing
plans;

b. Assistance in the creation of literature describing H.E.A.L.'s
business, products and marketing plans; and

c. Such other related assistance as D.S.N. and H.E.A.L. shall deem
necessary or appropriate. Such services shall include, but not be
limited to, the following:

Public Relations: D.S.N. will assist H.E.A.L. in any and all ways
with public relations. These services will include, at H.E.A.L.'s
option:

i. Preparation and placement of written articles about H.E.A.L.
or its products;

ii. Preparation and placement of press releases regarding
H.E.A.L.; and

iii. Preparation and placement of advertisements in financial
publications regarding H.E.A.L.

Informational Approval: All information disseminated by D.S.N.
regarding H.E.A.L. shall be derived from written information
provided by H.E.A.L. to D.S.N. In the event that the information
is used in or incorporated in a different format or literature,
D.S.N. must obtain H.E.A.L.'s prior written approval before
distribution of or dissemination of same.

3. PAYMENT: In consideration for the services to be rendered to
H.E.A.L. by D.S.N. as provided for herein, H.E.A.L. shall issue to D.S.N. 50,000
(fifty thousand) shares of H.E.A.L.'s Common Stock, $.01 par value ("Common
Stock"). D.S.N. acknowledges and represents as follows:

(a) It has been given full access to information regarding H.E.A.L.
(including the opportunity to meet with H.E.A.L.'s officers and
to review all the documents that it may have requested) and has
utilized such access to its satisfaction for the purpose of
obtaining information.

(b) It has sufficient knowledge and experience in financial and
business matters that it is capable of evaluating the merits and
risks of investment in the Common Stock;

(c) It understands that the purchase of the Common Stock is a highly
speculative investment and involves a high degree of risk;

(d) It believes that the investment in the Common Stock is suitable
based upon its investment objectives and financial needs and that
it has adequate means of providing for current financial needs;
and

(e) It understands that there are substantial restrictions on the
transfer of the Common Stock; and, accordingly, it may not be
able to liquidate an investment in the Common Stock for an
indefinite period.

D.S.N. has been advised that the Common Stock has not been registered
under the Act, or state securities laws and is being sold pursuant to exemptions
from the Act and such laws, and that H.E.A.L.'s reliance upon such exemptions is
predicated in part on its representations contained herein. D.S.N. represents
and warrants that the Common Stock is being acquired for its account and for
investment. D.S.N. further represents and agrees that the Common Stock may not
be sold except pursuant to an effective registration statement under the Act and
applicable state securities laws, or an opinion of counsel that such
registration is not required.

H.E.A.L. shall file a registration statement for such shares pursuant
to the Securities Act of 1933 ("Act") and use its best efforts to cause such
registration statement to be made effective by the Securities and Exchange
Commission ("Commission") as soon as possible following delivery of such shares.

All expenses incurred by H.E.A.L. in registering such shares,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the National Association of Securities Dealers,
Inc.), printing expenses, fees and disbursements of counsel for the Company and
the expense of any special audits incident to or required by any such
registration shall be paid by H.E.A.L. Only the selling commission applicable to
the sale of the Common Stock and the expenses of counsel, if any, for D.S.N.,
shall be borne by D.S.N.

D.S.N. agrees to supply H.E.A.L. with such information as may be
required by the Company to register or qualify the Common Stock. D.S.N.
represents and warrants that it will comply with all applicable federal and
state laws in connection with the offer and sale of the Common Stock. In
connection with such filing and the subsequent disposition of the shares of
Common Stock, D.S.N. agrees as follows:

a. It has no agreement or understanding with any broker/dealer or
underwriter with respect to the proposed sale of such stock and
hereby agrees and warrants that if it shall at a later date enter
into any agreement for an underwritten offering of all or a
portion of such shares, it will immediately so advise H.E.A.L.
and provide H.E.A.L. with the details of any such undertaking;

b. It expects that any of the shares of the Common Stock which it
sells pursuant to the registration statement will be sold in the
over-the-counter market at prices and at terms then prevailing or
at prices related to the then current market price or in
negotiated transactions and that no more than ordinary and
customary fees will be paid to a broker/dealer in connection with
any such sale and agrees to notify H.E.A.L. if there is any
change in such expectation; and

c. It understands that the sale of any of the shares subject to the
registration statement must be accompanied by the delivery of an
effective prospectus and agrees that it will inform any
broker/dealer who it engages to sell any of its shares of Common
Stock subject to the registration statement that the sale must be
accompanied by the delivery of a prospectus. The undersigned
further understands that it is its sole responsibility to provide
the broker/dealer with a copy of the prospectus. (H.E.A.L. will
advise D.S.N. when the registration statement has been declared
effective by the Commission, prior to which no sales pursuant to
the registration statement may be made.)

If within 15 days from the date of signing this Agreement, H.E.A.L. has
been unable to complete the registration of such shares pursuant to the Act,
H.E.A.L. shall make an advance to D.S.N. in the amount of $4,000.00. Such
payment shall be made to D.S.N. on the 15th day after the date of signing this
Agreement. In the instance that H.E.A.L. continues to be unable to complete such
registration, H.E.A.L. shall make additional advances, in the amount of
$4,000.00 per payment, every thirty days thereafter until such stock is so
registered. By way of clarification, if such stock is not so registered, an
additional advance of $4,000.00 shall be made by H.E.A.L. to D.S.N. on the 45th,
75th, 105th day, etc., after the date of signing this Agreement. Upon H.E.A.L.'s
completion of such registration, D.S.N. shall have 45 days in which to pay back
to H.E.A.L. any such sums advanced to D.S.N. prior to the completion of such
registration.

Additionally, at the time of signing this Agreement, H.E.A.L. shall
issue to D.S.N. warrants purchase up to 500,000 shares of Common Stock at an
initial exercise price of $.30 per share and to purchase up to 200,000 shares of
Common Stock at an exercise price of $.50 per share, such warrants to be in the
form of Exhibits A and B to this Agreement.

4. EXPENSES: H.E.A.L. shall reimburse D.S.N. only for such reasonable
travel and other expenses, pre-approved in writing by H.E.A.L., which are
incurred by D.S.N. during the term of this Agreement in rendering services to
H.E.A.L. hereunder. D.S.N. shall provide receipts and vouchers to H.E.A.L. for
all such expenses for which reimbursement is claimed.

5. PERSONNEL: D.S.N. is, and shall be, an independent contractor, and
no personnel utilized by D.S.N. in providing services hereunder shall be deemed
to be an employee or agent of H.E.A.L. Moreover, neither D.S.N. nor any such
personnel shall be empowered hereunder to act on behalf of H.E.A.L. D.S.N. shall
have sole and exclusive responsibility and liability for, and to, such
personnel, and D.S.N. alone shall be responsible to make, and shall make, all
necessary or appropriate payments for all such personnel.

6. DISCLAIMER BY D.S.N.: D.S.N. makes no representation that, as a
result of its services to be performed pursuant to this Agreement, (a) the price
of H.E.A.L.'s publicly traded securities will increase, (b) any person will
purchase securities in H.E.A.L., or (c) any investor will lend money to or
invest in or with H.E.A.L.

7. NON-ASSIGNABILITY: The rights, obligations and benefits established
by this Agreement shall not be assignable by either party hereto without the
written consent of the other. This Agreement shall be binding upon and shall
inure to the benefits of the parties and their successors.

8. CONFIDENTIALITY: Neither D.S.N. nor any of its personnel,
consultants or officers or directors shall disclose any knowledge or information
it has, or they have, obtained in the course of performing the services provided
for herein, which knowledge or information concerns the confidential affairs of
H.E.A.L. with respect to H.E.A.L.'s business or its finances.

9. LIMITED LIABILITY: Neither D.S.N. nor any of its consultants,
officers or directors shall be held liable for consequential or incidental
damages of any kind to H.E.A.L. that may arise out of or in connection with any
services performed by D.S.N. hereunder, except if such damages are the result of
unlawful conduct or gross willful misconduct on the part of D.S.N.

10. COMPLIANCE AND GOVERNING LAW: D.S.N., together with its agents and
associates, shall take all necessary, appropriate and reasonable steps to
provide the services in accordance with all federal and state securities laws,
as well as in accordance with the rules and regulations of the National
Association of Securities Dealers, Inc. The terms and provisions of this
Agreement shall be governed and construed by the laws of the State of Colorado
and any dispute or cause of action arising under this Agreement shall be
litigated, if at all, in the federal or state courts located n Denver, Colorado,
and the parties hereby submit to the jurisdiction of such courts and shall not
object to or challenge venue in such courts. The prevailing party in any
litigation to enforce its rights under this Agreement shall be entitled to
costs, charges and expenses, including court costs and reasonable attorneys'
fees, and costs of collection, incurred by the prevailing party in enforcing
this Agreement.

11. NOTICES: Notice hereunder shall be in writing and shall be deemed
to have been given at the time when deposited for mailing in a receptacle under
the control of the United States Postal Service, by registered or certified
mail, prepaid, return receipt requested. Such notices shall be mailed to the
address of the parties as aforestated herein.

12. NO OTHER AGREEMENT: This Agreement supersedes all prior
understandings, written or orally given and constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof. No waiver,
modification or termination of this Agreement shall be valid unless in writing
signed by each of the parties hereto.

13. SEVERABILITY: Should any clause or provision of this Agreement be
declared illegal, or contrary to existing case law or state or federal statute,
the parties hereto agree that such clause or provision is deemed stricken and
that the rest and remainder of the Agreement shall not be affected thereby and
shall remain in full force and effect.

IN WITNESS WHEREOF, the parties have hereunto set their hands this
_____ day of _____________, 1995.

HealthWatch, Inc. D.S.N. Enterprises Ltd.

By _______________________________ By _____________________________
Dirk Nye
Its ____________________________ Its President

GP:219088 v1

EXHIBIT A

SEE PARAGRAPH 7 FOR RESTRICTIONS ON THE TRANSFER OF THIS WARRANT

No. DSN-1
Warrant
to Purchase 500,000
Shares

WARRANT TO PURCHASE COMMON STOCK OF
HEALTHWATCH, INC.

THIS CERTIFIES THAT for value received ______________ is entitled,
subject to the terms and conditions hereinafter set forth, to purchase from
HEALTHWATCH, INC., a Minnesota corporation (the "Company"), 500,000 fully paid
and non-assessable shares of Common Stock of the Company (herein called the
"Common Stock"), upon presentation and surrender of this Warrant with the
Subscription Form duly executed, at any time during the term hereof, at the
principal office of the Company or at such other office as shall have
theretofore been designated by the Company by notice pursuant hereto and upon
payment therefor of the Purchase Price, in lawful money of the United States of
America, determined as set forth below. The term of this Warrant shall commence
on the date hereof, and terminate, if not exercised or redeemed prior thereto,
at 5:00 p.m. California Time, on July 28, 1996.

This Warrant is subject to the following terms and conditions:

1. The purchase rights represented by this Warrant are exercisable at
the option of the Holder, in whole at any time, or in part from time to time
(but not as to a fractional share of Common Stock). In the case of the purchase
of less than all the shares purchasable under this Warrant, the Company shall
cancel this Warrant upon the surrender hereof and shall execute and deliver a
new Warrant of like tenor for the balance of the shares purchasable hereunder.
Subject to the terms hereof, the Company may at any time after the later of
January 28, 1996, or five months after the effective date of the registration
statement to be filed pursuant to paragraph 8 hereof, redeem this Warrant, at
its discretion, upon payment to the Holder hereof of one cent ($.01) per Warrant
to be redeemed. The Company shall give written notice of the date set by the
Company for such redemption (the "Redemption Date") at least 10 days prior to
the Redemption Date. The Redemption Date shall be the expiration date for the
Warrant, provided that the Company tenders on the Redemption Date payment of the
redemption price for the Warrants to be redeemed. Following the Redemption Date,
this Warrant shall be deemed to have expired and the Holder hereof shall have no
rights with respect hereto, except the right to receive payment of the
redemption price upon surrender of this Warrant certificate.

2. The purchase price for each share of Common Stock purchasable
pursuant to the exercise of this Warrant shall be thirty cents ($.30) per share,
such price being sometimes hereinafter referred to as the "Base Purchase Price".
The Base Purchase Price and, from time to time, the number of shares of Common
Stock subject to purchase hereunder are subject to adjustment in certain
circumstances provided for below, and the Base Purchase Price, as it may be
adjusted from time to time, is hereinafter referred to as the "Purchase Price".

(a) In case the Company shall (i) pay a dividend in shares of its
capital stock (other than an issuance of shares of capital stock to
holders of Common Stock who have elected to receive a dividend in shares
in lieu of cash), (ii) subdivide its outstanding shares of Common Stock,
(iii) reduce, consolidate or combine its outstanding shares of Common
Stock into a smaller number of shares, or (iv) issue by reclassification
of its shares of Common Stock any shares of the Company, the Purchase
Price in effect immediately prior thereto shall be adjusted to that
amount determined by multiplying the Purchase Price in effect
immediately prior to such date by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding on such date
before giving effect to such division, subdivision, reduction,
combination or consolidation or stock dividend and of which the
denominator shall be the number of shares of Common Stock after giving
effect thereto. Such adjustment shall be made successively whenever any
such effective date or record date shall occur. An adjustment made
pursuant to this subsection (a) shall become effective retroactively,
immediately after the record date in the case of a dividend and shall
become effective immediately after the effective date in the case of a
subdivision, reduction, consolidation, combination or reclassification.
The Purchase Rate in effect immediately prior to any such issuance,
subdivision, reduction, consolidation or combination shall be increased
or decreased, effective at the opening of business on the day following
the date of such issuance, subdivision, reduction, consolidation or
combination so that the Purchase Rate (i.e., the number of shares
issuable upon exercise of the Warrants) when multiplied by the Purchase
Price, shall be equal to the product of thirty cents ($.30) times the
number of shares of Common Stock for which this Warrant was initially
exercisable.

(b) In the event the Company shall at any time be consolidated
with or merged into any other corporation or corporations, or shall sell
or lease all or substantially all of its property and business as an
entirety, lawful provision shall be as part of the terms of such
consolidation, merger, sale, or lease as the Board of Directors of the
Company deems necessary and appropriate to protect the rights of the
Holder of this Warrant.

3. In case at any time:

(a) The Company shall declare any cash dividend on its Common
Stock at a rate in excess of the rate of the last cash dividend
theretofore paid;

(b) The Company shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash
dividends) to the holders of its Common Stock;

(c) The Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class
or other rights;

(d) There shall be any capital reorganization, or
reclassification of the capital stock of the Company or consolidation or
merger of the Company with, or sales of all or substantially all of its
assets to, another corporation; or

(e) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;

then, in any one or more of said cases, the Company shall give written notice,
by first class mail, postage prepaid, addressed to the Holder at the address of
such holder as shown on the books of the Company, of the date on which (1) the
books of the Company shall close or a record shall be taken for such dividend,
distribution or subscription rights, or (2) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also specify
the date as of which the holders of Common Stock of record shall participate in
such dividend, distribution or subscription rights, or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding up, as the case may be. Such written notice shall be
given at least 20 days prior to the action in question and not less than 20 days
prior to the record date or the date on which the Company's transfer books are
closed in respect thereto.

4. If any event occurs as to which, in the sole opinion of the Board of
Directors of the Company, the other provisions of this Warrant are not strictly
applicable or if strictly applicable would not fairly protect the rights of the
Holder in accordance with the essential intent and principles of such
provisions, then the Board of Directors shall make such adjustment in the
application of such provisions as may be necessary, in the sole judgment of such
Board, in accordance with such essential intent and principles, to protect such
rights as aforesaid.

5. Exercise of this Warrant shall be made by the surrender hereof by the
Holder to the Company at its principal office together with (i) the attached
Subscription Form designating the number of shares of Common Stock being
purchased, (ii) a certified check or cash in payment for such shares and (iii) a
letter of transmittal setting forth the computation of the amount of said
payment. The Company shall thereafter promptly (in any event within seven (7)
business days after such exercise) issue certificates for the number of shares
of the Common Stock of the Company purchased at the Purchase Price in effect at
the time of such exercise. The Holder shall be deemed to be the record owner of
such shares of Common Stock as of the close of business on the date of such
exercise. The Holder shall not be entitled to receive a fractional share, but in
lieu thereof the Company shall pay in cash an amount equal to the market value
of such fractional share if the Common Stock has a market value, or if not, the
book value of such fractional share. The Company shall thereupon cancel this
Warrant; and in the event that less than the entire number of shares purchasable
are purchased, shall issue a new Warrant for the number not so purchased.

6. The Company covenants and agrees that all shares which may be issued
upon the exercise of this Warrant will, upon issuance, be duly and validly
authorized and issued, fully paid and nonassessable, and free from all taxes,
liens and charges with respect to the issue thereof; and without limiting the
generality of the foregoing, the Company covenants and agrees that it will, from
time to time, take all such action as may be requisite to assure that the par
value or stated value per share of the Common Stock to be acquired upon the
exercise of this Warrant is at all times equal to or less than the then
effective Purchase Price per share of the Common Stock issuable pursuant to
exercise of this Warrant. The Company further covenants and agrees that during
the period within which this Warrant may be exercised, the Company will at all
times have authorized and reserved for the purpose of the issue upon exercise of
this Warrant a sufficient number of shares of its Common Stock to provide for
such exercise.

7. (a) The Holder represents that he is acquiring this Warrant and, in
the absence of an effective registration statement under the Securities Act of
1933 (the "1933 Act") for the shares of Common Stock issuable hereunder, such
shares, for the purpose of investment and not with a view to or for sale in
connection with any distribution thereof. The Holder and the holder of any
shares of Common Stock issued upon exercise hereof, by his acceptance hereof,
agrees that he/she/it will notify the Company in writing before selling or
otherwise disposing of this Warrant or any shares of Common Stock issued to
him/her/it upon exercise hereof, describing briefly the nature of any such sale
or other disposition, and no such sale or other disposition shall be made unless
and until (i) the Company has received an opinion of counsel reasonably
acceptable to it that no registration (or perfection of an exemption) under the
1933 Act is required with respect to such sale or disposition (which opinion may
be conditioned upon the transferee's assuming the Holder's obligation under this
paragraph 7) or (ii) an appropriate registration statement with respect to such
Warrant or such Common Stock, or both, has been filed with the Securities and
Exchange Commission (the "Commission") and declared effective by the Commission.
The Company may require that this Warrant and certificates representing shares
of Common Stock issued upon exercise hereof be stamped or imprinted with an
appropriate legend reflecting the foregoing restrictions. For the purposes of
this paragraph 7, the term "Securities" shall include this Warrant and the
shares of Common Stock issued or issuable upon the exercise hereof.

(b) The restrictions imposed by this paragraph 7 on the transfer of the
Securities shall terminate as to any portion of the Securities when:

(i) Such portion of the Securities shall have been effectively
registered under the 1933 Act and sold by the holder thereof in
accordance with such registration or exemption; or

(ii) Written opinions to the effect that such a registration is
no longer required or necessary under any federal or state law or
regulation of governmental authority shall have been received from legal
counsel for the Company and counsel for the holder of such portion of
the Securities; or, if a favorable opinion is obtained from holder's
counsel, and counsel for the Company declines to render such an opinion,
upon the holder's undertaking to indemnify the Company, on terms
satisfactory to the Company, against all liability or loss the Company
may sustain in connection with such transfer; or

Whenever the restrictions imposed by this paragraph 7 shall terminate,
as provided above, any holder of the Securities as to which such restrictions
shall have terminated shall be entitled to receive promptly from the Company,
without expense to him, a new certificate, not bearing the restrictive legend
referred to in clause (a) hereof.

8. The Company shall file as soon as reasonably possible a registration
statement under the 1933 Act with respect to the Common Stock issuable upon
exercise of this Warrant. The Company shall be required to effect only one
registration pursuant to this Section 8. In connection with such registration,
the Company will:

(a) Use its best efforts to cause such registration statement
to become and remain effective for a period of 120 days following the
exercise of the Warrant; provided, however, that the Company shall not
be obligated to maintain such registration after July 28, 1996;

(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the 1933 Act
with respect to the sale or other disposition of the Common Stock;

(c) Furnish to the Holder hereof such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the 1933 Act, and such other documents as it may
reasonably request in order to facilitate the public sale or other
disposition of the Common Stock;

(d) Notify the Holder hereof at any time when a prospectus
relating to the Common Stock covered by such registration statement is
required to be delivered under the 1933 Act within the appropriate
period, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances
then existing, and at the Holder's request, prepare and furnish to each
of them a reasonable number of copies of a supplement to, or an
amendment of, such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of the Common Stock, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of
the circumstances then existing.

All expenses incurred by the Company in complying with this Section 8,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the National Association of Securities Dealers,
Inc.), printing expenses, fees and disbursements of counsel for the Company and
the expense of any special audits incident to or required by any such
registration shall be paid by the Company. Only the underwriting discount or
selling commission applicable to the sale of the Common Stock and the expenses
of counsel, if any, for the Holder hereof, shall be borne by the Holder hereof.

The Holder hereof agrees to supply the Company with such information as
may be required by the Company to register or qualify the Common Stock. The
Holder hereof represents and warrants that it will comply with all applicable
federal and state laws in connection with the offer and sale of the Common
Stock. In connection with such filing and the subsequent disposition of the
shares of Common Stock, the Holder agrees as follows:

(i) It has no agreement or understanding with any broker/dealer or
underwriter with respect to the proposed sale of such stock
and hereby agrees and warrants that if it shall at a later
date enter into any agreement for an underwritten offering of
all or a portion of such shares, it will immediately so advise
the Company and provide the Company with the details of any
such undertaking;

(ii) It expects that any of the shares of the Common Stock which it
sells pursuant to the registration statement will be sold in
the over-the-counter market at prices and at terms then
prevailing or at prices related to the then current market
price or in negotiated transactions and that no more than
ordinary and customary fees will be paid to a broker/dealer in
connection with any such sale and agrees to notify the Company
if there is any change in such expectation; and

(iii) It understands that the sale of any of the shares subject to
the registration statement must be accompanied by the delivery
of an effective prospectus and agrees that it will inform any
broker/dealer who it engages to sell any of its shares of
Common Stock subject to the registration statement that the
sale must be accompanied by the delivery of a prospectus. The
undersigned further understands that it is its sole
responsibility to provide the broker/dealer with a copy of the
prospectus. (The Company will advise selling stockholders when
the registration statement has been declared effective by the
Commission, prior to which no sales pursuant to the
registration statement may be made.)

9. This Warrant is exchangeable, upon the surrender hereof by the Holder
at the principal office of the Company, for new warrants of like tenor and date
representing in the aggregate the right to purchase the number of shares
purchasable hereunder, each of such new Warrants to represent the right to
purchase such number of shares as shall be designated by said Holder at the time
of such surrender. Subject to paragraph 7 hereof, this Warrant and all rights
hereunder are transferable in whole or in part by the Holder, in person or by
duly authorized attorney, upon surrender of this Warrant duly endorsed, at the
principal office of the Company.

10. Upon the receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will make and deliver a new Warrant of like tenor, in
lieu of this Warrant.

11. All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid or delivered to a telegraph office for
transmission:

(a) If to the Holder, at such address as may have been
furnished by such holder to the Company in writing; and

(b) If to the Company, at such address as may have been furnished
by the Company to the Holder of this Warrant in writing.

12. This Warrant shall be binding upon any successors or assigns of
the Company.

13. This Warrant shall be construed in accordance with and governed
by the laws of the State of California.

IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and delivered as of the date set forth below by one of its officers
thereunto duly authorized.

Dated: ______________, 1995.

HEALTHWATCH, INC.

By ______________________________________
Its President and Chief
Executive Officer
GP:208396 v1

SUBSCRIPTION FORM

To be signed only upon exercise of Warrant

The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for and to
purchase thereunder, _______________ of the shares of Common Stock of
HEALTHWATCH, INC. to which such Warrant relates, and herewith makes payment of
$_______ therefor, in cash or by certified check, and requests that the
certificates for such shares be issued in the name of, and be delivered
to,_______________ , the address for which is set forth below the signature of
the undersigned.

Dated:__________________________________

__________________________________
(Signature)
__________________________________

__________________________________
(Address)

__________________________________

To be signed only upon transfer of Warrant

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto _________________________ the right to purchase _________ shares of Common
Stock of HEALTHWATCH, INC. to which the within Warrant relates and appoints ,
attorney, to transfer said right on the books of HEALTHWATCH, INC. with full
power of substitution in the premises.

Dated:__________________________________

__________________________________

(Signature)
__________________________________

__________________________________

(Address)

GP:208396 v1

EXHIBIT B

SEE PARAGRAPH 7 FOR RESTRICTIONS ON THE TRANSFER OF THIS WARRANT

No. DSN-2
Warrant
to Purchase 200,000
Shares

WARRANT TO PURCHASE COMMON STOCK OF
HEALTHWATCH, INC.

THIS CERTIFIES THAT for value received ________________ is entitled,
subject to the terms and conditions hereinafter set forth, to purchase from
HEALTHWATCH, INC., a Minnesota corporation (the "Company"), 200,000 fully paid
and non-assessable shares of Common Stock of the Company (herein called the
"Common Stock"), upon presentation and surrender of this Warrant with the
Subscription Form duly executed, at any time during the term hereof, at the
principal office of the Company or at such other office as shall have
theretofore been designated by the Company by notice pursuant hereto and upon
payment therefor of the Purchase Price, in lawful money of the United States of
America, determined as set forth below. The term of this Warrant shall commence
on the date hereof, and terminate, if not exercised or redeemed prior thereto,
at 5:00 p.m. California Time, on July 28, 1996.

This Warrant is subject to the following terms and conditions:

2. The purchase price for each share of Common Stock purchasable
pursuant to the exercise of this Warrant shall be fifty ($.50) per share, such
price being sometimes hereinafter referred to as the "Base Purchase Price". The
Base Purchase Price and, from time to time, the number of shares of Common Stock
subject to purchase hereunder are subject to adjustment in certain circumstances
provided for below, and the Base Purchase Price, as it may be adjusted from time
to time, is hereinafter referred to as the "Purchase Price".

(a) In case the Company shall (i) pay a dividend in shares of its
capital stock (other than an issuance of shares of capital stock to
holders of Common Stock who have elected to receive a dividend in shares
in lieu of cash), (ii) subdivide its outstanding shares of Common Stock,
(iii) reduce, consolidate or combine its outstanding shares of Common
Stock into a smaller number of shares, or (iv) issue by reclassification
of its shares of Common Stock any shares of the Company, the Purchase
Price in effect immediately prior thereto shall be adjusted to that
amount determined by multiplying the Purchase Price in effect
immediately prior to such date by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding on such date
before giving effect to such division, subdivision, reduction,
combination or consolidation or stock dividend and of which the
denominator shall be the number of shares of Common Stock after giving
effect thereto. Such adjustment shall be made successively whenever any
such effective date or record date shall occur. An adjustment made
pursuant to this subsection (a) shall become effective retroactively,
immediately after the record date in the case of a dividend and shall
become effective immediately after the effective date in the case of a
subdivision, reduction, consolidation, combination or reclassification.
The Purchase Rate in effect immediately prior to any such issuance,
subdivision, reduction, consolidation or combination shall be increased
or decreased, effective at the opening of business on the day following
the date of such issuance, subdivision, reduction, consolidation or
combination so that the Purchase Rate (i.e., the number of shares
issuable upon exercise of the Warrants) when multiplied by the Purchase
Price, shall be equal to the product of fifty cents ($.50) times the
number of shares of Common Stock for which this Warrant was initially
exercisable.