HEALTHWATCH INC, SB-2/A, 1995-05-19

HEALTHWATCH INC
SB-2/A, 1995-05-19
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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Registration No. 33-88126

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Amendment No. 2
to
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933

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

Minnesota 3845 84-0916792
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

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_/

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.

[LOGO]

HealthWatch, Inc.

PROSPECTUS

May 19, 1995

[LOGO]

1,400,000 UNITS
5,600,000 SHARES OF COMMON STOCK
2,800,000 COMMON STOCK PURCHASE WARRANTS

This Prospectus relates to the offer and sale from time to time by
HealthWatch, Inc. ("HealthWatch" or the "Company") of up to 1,400,000 Units (the
"Units"), each Unit consisting of four shares of Common Stock, par value $.01
per share (the "Common Stock"), and two Redeemable Common Stock Purchase
Warrants (the "Warrants"). Each Warrant entitles the holder to purchase one
share of Common Stock at a price of $.75 after it becomes separately
transferable until December 31, 1996. The Warrants may be redeemed by the
Company at a price of $.05 per Warrant at any time after November 15, 1995, upon
at least 30 days prior written notice to the Warrantholders. The Common Stock
and the Warrants offered hereby are not separately transferable until October
31, 1995, or such earlier date as the Company may determine. After 750,000 Units
have been sold, purchase orders from existing securityholders will be given
preference to purchase orders over investors who are not existing
securityholders of the Company.

This Prospectus also relates to the offer and sale from time to time
following completion of the offering of the Units by HealthWatch of up to
950,000 shares of Common Stock to creditors of the Company in payment of all or
a portion of amounts which the Company owes such persons. The shares will be
offered and sold to such persons at a price of $.47 per share. See "Risk
Factors" and "Plan of Offering -- Offering to Creditors."

The Company's Common Stock is traded in the over-the-counter market under
the Nasdaq symbol HEAL. On May 17, 1995, the last reported sale price of the
Common Stock, as reported on the Nasdaq Small Cap Market was $.375 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.

<TABLE>
<CAPTION>
UNDERWRITING
COMMISSIONS(1) PROCEEDS TO THE
PRICE TO PUBLIC (2) COMPANY(2)
<S> <C> <C> <C>
Per Unit $ 1.00 $ .10 $ .90
Total Minimum(3) $ 750,000 $ 75,000 $ 675,000
Total Maximum $1,400,000 $140,000 $1,260,000
</TABLE>

(1) The Units and Common Stock offered hereunder will be offered by the officers
of the Company who have no prior experience in the sale of securities. No
underwriting discounts or commissions will be paid to such officers,
although their out-of-pocket expenses will be reimbursed by the Company. The
Company also intends to offer the Units through brokers and dealers who are
members of the National Association of Securities Dealers, Inc., as sales
agents, at a commission of 10% of the price at which the shares are sold to
the public. The Company has agreed to indemnify such brokers and dealers
against certain civil liabilities, including certain liabilities under the
Securities Act of 1933. See "Plan of Distribution."

(2) Assuming that a commission is paid with respect to all Units sold by the
Company at the rate of 10%, but before deduction of expenses of the offering
to be paid by the Company, estimated at $90,000.

(3) Until at least 750,000 of the Units offered hereby are sold, the proceeds of
subscribers shall be held in escrow by the National City Bank of
Minneapolis, Minneapolis, Minnesota. In the event that at least 750,000 of
the Units are not sold within 45 days of the date of this Prospectus
(subject to an extension of up to 45 days at the sole discretion of the
Company), such proceeds, without interest, will be returned to subscribers.
The Company has obtained standby commitments to purchase up to 250,000 Units
if necessary for the Company to sell 750,000 Units. See "Plan of Offering --
Standby Purchase Commitments."

The Units and shares of Common Stock offered by the Company are subject to
prior sale, receipt and acceptance and subject to the right of the Company to
reject any order in whole or in part and certain other conditions.

The date of this Prospectus is May 19, 1995.

[PHOTO GRAPHIC]

The Pacer, the Company's new IV product.

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.

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

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.

THE OFFERING

Securities Offered (1) 750,000 Units minimum -- 1,400,000 Units maximum, each
Unit consisting of four shares of Common Stock and two
Warrants. Offering price is $1.00 per Unit.

Warrant Terms:

Exercisable for One share of Common Stock after the Warrants become
separately transferable from the Common Stock.

Exercise Price $.75 per share.

Expiration December 31, 1996

Redemption The Warrants are subject to redemption by the Company at
any time after October 31, 1995 on not less than 30 days
notice, at $.05 per Warrant.

Transferability The Warrants are not separately transferable from the
shares of Common Stock comprising each Unit until
October 31, 1995, or such earlier date as the Company
may determine.

Securities Outstanding:

Common Stock 2,849,123 shares(2)

Preferred Stock 400,000 shares(3)

Use of Proceeds 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(4)

(1) In addition to the Units, this Prospectus relates to the offer and sale from
time to time by HealthWatch of up to 950,000 shares of Common Stock to
certain creditors of the Company. See "Risk Factors" and "Plan of Offering
-- Offering to Creditors."

(2) Shares outstanding at April 30, 1995. Does not include 3,112,189 shares
of Common Stock reserved for issuance upon the exercise of stock purchase
warrants and options or the conversion of the Company's 10% Convertible
Senior Debentures (the "Debentures") or Series A Preferred Stock ("Preferred
Stock"). There will be 400,000 shares of Common Stock reserved for issuance
upon conversion of the Preferred Stock. This number could increase by
2,000,000 or more shares depending upon future market prices for the
Company's Common Stock.

(3) The Preferred Stock to be issued pursuant to an agreement dated May 11,
1995 will be convertible into 400,000 shares of Common Stock. If HealthWatch
does not redeem the Preferred Stock, one-half of the Preferred Stock will
become convertible into Common Stock at the holders' option eight months
following completion of this offering or March 12, 1996, whichever is
earlier, and the balance will become convertible into Common Stock at the
holders' option on August 12, 1996. In both cases, the Preferred Stock would
be convertible at 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. See "Description of
Securities -- Preferred Stock."

(4) Neither the Units nor the Warrants will be listed on the Nasdaq Small Cap
Market. Prior to this offering, no market existed for either the Units or
the Warrants. There can be no assurance that a trading market for such
securities will develop. See "Risk Factors -- Broker-Dealer Sales of Company
Common Stock; No Public Market for Units or Warrants."

SELECTED FINANCIAL DATA

STATEMENT OF INCOME DATA:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
1995 1994 1994 1993 1992
<S> <C> <C> <C> <C> <C>
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)
Gain on sale of medical services
segment -- -- -- 288,697 --
(Loss) before extraordinary 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 $ (.47) $(1.37) $(1.48) $(1.33) $(2.91)
Extraordinary item -- .01 .01 .08 --
Net income (loss) per share $ (.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
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
MARCH 31, 1995
ACTUAL AS ADJUSTED(1)
<S> <C> <C>
Current Assets $ 2,044,461 $ 2,629,461
Total Assets 3,753,139 4,338,139
Current Liabilities 1,572,484 1,572,484
Long-Term Debt 580,742 580,742
Accumulated Deficit (9,413,364) (9,413,364)
Shareholders' Equity 1,599,913 2,184,913
Working Capital 471,977 1,056,977
</TABLE>

(1) Adjusted to reflect the sale of 750,000 Units offered by the Company at a
public offering price of $1.00 per Unit.

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 period, 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 six 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

HealthWatch intends to rely on cash from operations and the proceeds, if
any, from the sale of the Units offered hereby to finance its business
development and marketing plan. The Company estimates that it needs
approximately $1,000,000 of additional debt or equity capital to fund its
operations during the next twelve months. The net proceeds from the sale of the
minimum number of Units which must be sold for this offering to be effective are
not expected to be sufficient to fund the Company's operations for more than
seven months. In addition, even if all of the Units offered hereby are sold, the
Company expects that it will need to obtain additional working capital to fully
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. See "Use of
Proceeds."

At March 31, 1995, the Company had accounts payable of $593,444,
substantially all of which were past due. The Company has allocated from
$250,000 to $350,000 of the proceeds of this offering to the payment of a
portion of such obligations. In addition to the Units offered hereby, this
Prospectus relates to the offer and sale of up to 950,000 shares of Common Stock
in payment of a portion of such obligations. See "Plan of Offering -Offering to
Creditors." In the event that a number of the Company's creditors are not
willing to accept partial or deferred payment or accept shares of Common Stock
in payment of all or a portion of the amounts they are owed by the Company, the
Company could be required to allocate more of the proceeds of this offering to
the payment of such creditors. In this event, the Company would be required to
raise additional debt or equity capital in order to be able to complete its IV
product or to sustain its operations.

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 advailable
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 September or 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. The proceeds of this offering, even if the maximum
number of Units offered hereby are sold, are not expected to be sufficient to
permit the Company to implement an aggressive marketing and sales program for
the Pacer.

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 CHANGES

John D. Greenbaum, President of the Company, has requested a medical leave
of absence commencing May 19, 1995, for an undetermined period. During his leave
of absence, Mr. Greenbaum intends to meet with and to maintain regular contact
with the other officers and directors of the Company. While the Board of
Directors has determined that it is not necessary at this time to replace Mr.
Greenbaum, either on an interim or permanent basis, Mr. Greenbaum's absence for
more than one or two months could have a material adverse effect on the
Company's business.

Howard R. Everhart, Vice President of Operations from September 1993 to
October 1994, resigned as an officer and director of the Company in October
1994. Mr. Everhart was an officer and director of Metamed, Inc., prior to its
acquisition by HealthWatch, and holds the patent on the technology embodied in
the Company's new IV product. Mr. Everhart has granted a license on this
technology to the Company and has provided consulting services to the Company.
The loss of Mr. Everhart's assistance during the next several months could cause
a delay in the Company's ability to complete the Pacer, the Company's first IV
product.

BROKER-DEALER SALES OF COMPANY COMMON STOCK; NO PUBLIC MARKET FOR UNITS AND
WARRANTS

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. At March 31, 1995, the
Company's capital and surplus was $1,599,913. The bid price for the Company's
Common Stock has recently been below $1.00 per share. The Company has been
notified by Nasdaq that if it does not meet the requirements for continued
listing by June 17, 1995, its Common Stock will be considered for delisting from
the Nasdaq system. While the net proceeds of this offering are expected to
result in capital and surplus for the Company of more than $2,000,000, further
losses from operations could again result in such capital and surplus being less
than $2,000,000. The Company has deferred a decision regarding a possible
reverse split of its Common Stock until completion of this offering. However, 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 applications 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 Common Stock 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.

Neither the Units nor the Warrants will be traded on the Nasdaq Small Cap
Market. There is presently no market for the Units or the Warrants, and there
can be no assurance that a market for such securities will develop at the
conclusion of this offering. Accordingly, purchasers of the Units may have
difficulty in selling them prior to the separation date should they decide to do
so and following the separation date may have difficulty in selling the Warrants
should they decide to do so.

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

As of May 15, 1995, there were up to 3,112,189 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. The number of such reserved shares
could increase by up to 2,000,000 or more shares depending upon future market
prices for the Company's Common Stock. See "Description of Securities --
Preferred Stock." 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 2,849,123 shares were
outstanding on March 31, 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. See "Description of Securities."

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 March 31,
1995 was 824. The high and low sale prices as reported on the Nasdaq Small Cap
Market (National Market through May 12, 1994, the date upon which the Common
Stock ceased to satisfy the qualitative listing requirements for the National
Market) are shown in the table below. These quotations represent prices between
dealers, and do not include retail markups, markdowns or commissions.

<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
<S> <C> <C>
1992

March 31 12 6 1/4
June 30 7 2 1/2
September 30 2 3/4 2 1/4
December 31 3 5/8 2 5/8

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
April 1 to May 17 15/32 1/4

</TABLE>

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 net proceeds (after estimated expenses of $90,000) from the sale of the
Units offered hereby is estimated to be $585,000 if the minimum number of Units
are sold and up to $1,170,000 if the maximum number of Units offered are sold.
The proceeds of this offering will be used by the Company primarily for working
capital purposes. The Company estimates that it needs approximately $1,000,000
of additional debt or equity capital to fund its operations for the next twelve
months. If the Company is not able to obtain such additional capital through
this offering, it will be required to try to obtain additional debt or equity
capital from other sources. In the event that the Company is unable to raise
additional capital, it may be required to defer shipment of the initial IV
product 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. In this connection, the Board of Directors has instructed
management of the Company to attempt to find a buyer for the Company's Cambridge
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 table below indicates how the proceeds from the sale of the Units
offered hereby will be used assuming varying percentages of the total maximum
proceeds available from the sale of such Units are raised. Information in the
table is based on the following assumptions: (i) that the offering price for the
Units offered is $1.00 per Unit; and (ii) that a commission is paid with respect
to all of the Units sold by the Company pursuant to this offering. To the extent
that less than $1,000,000 of net proceeds is made available to the Company
through this offering, it will be required to raise additional debt or equity
capital or to take other steps as indicated above to either raise additional
capital or reduce working capital requirements.

Use of Net Proceeds Assuming Following Percentages of
Maximum Proceeds Are Raised (Listed in Order of Priority)

<TABLE>
<CAPTION>
USE 50% (MINIMUM) 80% 100%(2)
<S> <C> <C> <C>
DEBT REPAYMENT (1) $125,000 $125,000 $ 125,000
WORKING CAPITAL:
Purchase of Raw Materials 75,000 200,000 200,000
Payment of Trade Creditors (2) 250,000 350,000 350,000
Production of Demonstration
Products 75,000 100,000 150,000
General Working Capital 60,000 60,000 60,000
Expenses for Establishing Dealers
and Distributors for New Products -- 75,000 75,000
PRODUCT DEVELOPMENT:
Engineering-Refinement of New and
Existing Products -- 25,000 225,000
Initial Design and Prototype
Development of Pump and Multi
Unit IV Products Planned for FY's
1995 -- 1996 -- -- 10,000
Total $585,000 $935,000 $1,170,000
</TABLE>

(1) $125,000 of the net proceeds of this offering will be used to repay
short-term loans obtained by the Company from seven investors in April and
May 1995 to fund its working capital requirements. The loans bear interest
at the rate of 10% and are due and payable on October 7, 1995 or, if
earlier, at such time as the Company raises $500,000 of additional capital.
In addition to loaning the Company $125,000, these investors have provided
the Company with $250,000 of standby purchase commitments pursuant to which
they have agreed to purchase up to 250,000 Units if required for the Company
to sell 750,000 Units pursuant to this offering. In consideration for making
such loans and standby purchase commitments, these investors have been
granted warrants to purchase up to 1,000,000 shares of the Common Stock at a
price of $.25 per share. See "Plan of Distribution -- Standby Purchase
Commitments."

(2) This Prospectus also relates to the offer and sale from time to time
following completion of the offering of Units by HealthWatch of up to
950,000 shares of Common Stock to certain creditors of the Company in
payment of all or a portion of amounts which the Company owes such persons.
See "Plan of Distribution -- Offering to Creditors."

The Company's estimate that it needs approximately $1,000,000 of 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
initial IV products, overall working capital requirements, the amount required
to be paid on past-due accounts payable and revenues from product sales,
including sales of the Company's existing products as well as the IV controller
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.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1994
ACTUAL PROFORMA
<S> <C> <C>
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
</TABLE>

(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
$190,000 (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 view of the Company's significant working capital
requirements and the relatively lower margins associated with the sale of its
cardiology products, the Company's Board of Directors has instructed management
to try to find a buyer for its Cambridge operations. 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
Loss from reduction in note
receivable (13,639) -- (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
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)
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
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 102,433 0 102,433 N/A
Net loss $(1,047,975) $(2,855,389) $(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 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 $1,000,000 of
additional working capital to sustain operations during the next twelve months.
While not required to sustain operations, the Company believes it should raise
an additional $500,000-$700,000 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.

There can be no assurance that any of the Units offered hereby by the
Company will be sold. While the net proceeds for the sale of the minimum number
of Units which must be sold for this offering to be effective is expected to be
enough to enable the Company to complete the development of its first IV
product, the Company expects that if only the minimum number of Units are sold,
it will need to obtain additional working before October or November 1995 in
order to sustain its operations. If the Company is not able to obtain sufficient
additional capital through this offering, it will be required to obtain
additional debt or equity capital from other sources. 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. In this connection, the
Board of Directors has instructed management of the Company to attempt to find a
buyer for the Company's Cambridge 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 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.

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 six months ended December 31, 1994 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 $(1,233,717) $(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 "HealthWatch" 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 six 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
new 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 six months. The Pacer is
in the final product validation stage with independent product validation and
initial field trials scheduled for June and July 1995. The Pacer is expected to
sell for $1,300, 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).
Assembly work is done by employees of the Company, at the Company. 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 25 units of the Pacer
during August or September 1995, increasing production to 250 units per month by
November or 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 days or more 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 at 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 offices, the Company's policy is to replace the defective component
and return it to the Company's offices 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. The proceeds of this offering, even if the maximum number of Units
offered hereby are sold, are not expected to be sufficient to permit the Company
to implement an aggressive marketing and sales program for the Pacer.

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 Medfin Management of Colorado, Inc., an
unaffiliated company for $50,000. Henry J. Roth, M.D., a shareholder and former
director of the Company, owns one-half of the stock of the purchaser. The assets
transferred consisted of furniture and equipment at the Crossroads Medical
Center, the Company's rights under the management agreement with Colorado
Occupational Health Associates, P.A.("COHA"), and the goodwill associated with
this business. COHA's sole shareholder was Dr. Roth. In consideration of COHA's
agreement to the assignment of the management agreement and COHA's assignment to
the Company of its accounts receivable of approximately $170,000, the Company
released COHA from all its obligations to the Company whether pursuant to the
management agreement or otherwise arising. See Note 15 of the Notes to
Consolidated Financial Statements.

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 T.H. Lehman & Co., Inc., an unrelated company, for $380,000,
$140,000 of which was paid in cash and the balance of which was to be paid in 24
monthly payments of $10,000 through July 1995. In February 1995, the Company
accepted a cash payment of $45,000 in lieu of the remaining monthly payments.
The assets sold consisted primarily of furniture and equipment, including a
computer system, and the goodwill associated with the business.

EMPLOYEES

At March 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.

DISCOVERY TECHNOLOGIES

On May 5, 1989, HealthWatch acquired all of the outstanding shares of
common stock of Discovery Technologies, Inc., formed in 1987 to design,
manufacture and market video products that transmit pictures over standard voice
grade telephone lines. HealthWatch's aggregate investment in Discovery
Technologies, including operating funds advanced in fiscal years 1989 and 1990
and a consolidation gain recognized during fiscal 1990 as a result of Discovery
Technologies' offering of its common stock in fiscal 1990, was $3,593,353. As of
June 30, 1992, this investment had been reduced to $0 as a result of HealthWatch
including its proportionate share of Discovery Technologies' net losses in
HealthWatch's Consolidated Statement of Operations. See Note 6 of the Notes to
Consolidated Financial Statements.

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.

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. Mr.
Greenbaum has requested and the Company has agreed to permit him to take a
medical leave of absence commencing May 19, 1995, for an undetermined period.
During his leave of absence, Mr. Greenbaum intends to meet with and to maintain
regular contact with the other officers and directors of the Company. 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, 1994, to the Company's President and Chief Executive
Officer and Vice President of Operations (the only executive officers whose
aggregate remuneration exceeded $100,000 in any of such years):

<TABLE>
<CAPTION>
NAME AND FISCAL OPTIONS RESTRICTED ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (NO. OF SHARES) STOCK AWARDS COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
John D. Greenbaum, 1994 $150,000 -- 25,000 shs. -- $ 7,200
President and
Chief 1993 $ 22,653 -- 2,500 shs. 1,250 shs. $ 600
Executive Officer 1992 --(1) -- -- -- --
Howard R. Everhart, 1994 $ 84,333 -- 27,500 shs. -- $40,435(2)
Vice President 1993 $ 11,667 -- -- -- --
of Operations 1992 --(1) -- -- -- --
</TABLE>

(1) Messrs. Greenbaum and Everhart were not employed by the Company in any
capacity until late in the fiscal year ended June 30, 1993. Mr. Everhart
resigned as an officer and director of the Company in 1994.

(2) Includes license fees of $39,750 paid to Mr. Everhart pursuant to a license
agreement whereby he licensed to the Company certain technology and related
patent rights.

On September 13, 1993, the Company entered into employment agreements with
John D. Greenbaum, President and Chief Executive Officer and a director of the
Company, and Howard R. Everhart, Vice President of Operations and a director of
the Company. Mr. Greenbaum's agreement is for a term of three years, is
terminable upon 90 days written notice by either the Company or Mr. Greenbaum
and provides for an annual salary of at least $150,000 plus participation in a
bonus pool equal to 12% of the Company's after-tax earnings. Due to the
Company's lack of working capital, Mr. Greenbaum has agreed to a temporary
reduction in his salary and is currently being paid at an annual rate of
$50,000. Mr. Greenbaum has requested and the Company has agreed to permit him to
take a medical leave of absence commencing May 19, 1995, for an undetermined
period. Following use of his accrued vacation, Mr. Greenbaum will not be
compensated during the leave of absence except for reimbursement of expenses
incurred on behalf of the Company and for specific services as he and
the Company may agree. In accordance with the agreement, Mr. Greenbaum was
granted a nonstatutory stock option for 25,000 shares of the Company's Common
Stock at an exercise price of $2.24 per share. Mr. Everhart's agreement was for
a term of one year and provided for an annual salary of at least $80,000 plus
participation in the bonus pool. In accordance with his agreement, Mr. Everhart
was granted a nonstatutory stock option for 12,500 shares of the Company's
Common Stock at an exercise price of $2.24 per share. Mr. Greenbaum's and Mr.
Everhart's agreements both provide that they will not compete with the Company
for a period of three years following termination of their employment with the
Company. 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.

STOCK OPTIONS

The Company has the 1983 Incentive Stock Option Plan and the 1989 Stock
Option Plan ("the 1983 and 1989 Plans") for its key employees directors and
consultants to purchase shares of the Company's Common Stock. On January 28,
1993, the Board of Directors adopted the 1993 Stock Option Plan (the "1993
Plan") (which was approved by stockholders on December 21, 1993) in order to
increase by 200,000 the total number of shares available for option grants under
its various stock option plans. The 1983, 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 under the 1989 and 1993 Plans 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 1983,
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.

The following table shows option grants during fiscal 1994 to the named
executive officers of the Company.

<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS EXERCISE EXPIRATION
NAME OPTIONS GRANTED GRANTED PRICE DATE
<S> <C> <C> <C> <C>
John D. Greenbaum 25,000 shs. 25% $2.24 9/13/98
Howard R. Everhart 12,500 shs. 13% $2.24 9/13/98
15,000 shs. 15% $2.89 3/19/99
</TABLE>

The following table shows the number of options exercised during fiscal
1994 and the 1994 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
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT JUNE 30, 1994 AT JUNE 30, 1993
SHARES ACQUIRED ON VALUE
NAME EXERCISE OF OPTIONS REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
John D. Greenbaum None -- 10,833 shs. 16,667 shs. $-0- $-0-
Howard R. Everhart 12,500 shs. $907 0 15,000 shs. $-0- $-0-
</TABLE>

OTHER TRANSACTIONS

During fiscal 1994, the Company paid certain directors or affiliated
companies fees for services rendered. No such director and/or affiliated company
received, in fiscal 1994, 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 fiscal 1993, the Company paid certain directors or affiliated
companies fees for services rendered. No such director and/or affiliated company
received, in fiscal 1993, fees aggregating $60,000 or more except for Allen R.
Goldstone, a former officer/director of the Company, who received in the
aggregate approximately $96,000 (including approximately $36,000 paid by
Discovery Technologies, Inc., a then affiliated company), for services he
rendered during fiscal 1993. The $96,000 includes approximately $43,000 paid to
Mr. Goldstone in the form of a stock grant (15,000 shares) and a cash bonus
($16,000) for services performed in connection with the acquisition of Metamed,
Inc.

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. See "Compensation" for a description of a License
Agreement between the Company and Mr. Everhart.

The Company had a contract with COHA, a professional association owned by
Henry J. Roth, M.D., a director of the Company until December 1992, pursuant to
which COHA provided physicians for the HealthWatch medical center. HealthWatch
managed the medical center and received a management fee therefor ($437,894 and
$598,379 in 1993 and 1992, respectively). On March 31, 1993, the Company sold
the assets of its medical management business to Medfin Management of Colorado,
Inc. for $50,000. Dr. Roth owned one-half of the stock of the purchaser. The
assets transferred consisted of furniture and equipment at the medical center,
the Company's rights under the management agreement with COHA and the goodwill
associated with this business. In consideration for COHA's agreement to the
assignment of the management agreement and COHA's assignment to the Company of
its accounts receivable of approximately $170,000, the Company released COHA
from all obligations to the Company. This transaction resulted in a loss to the
Company of approximately $58,000.

One of the customers of HealthWatch's billing services business was
Integrated Health Management, a medical practice conducted by Dr. Roth. During
the two years ended June 30, 1993, Integrated Health Management paid fees of
$106,808 and $121,476, respectively, to HealthWatch for services rendered by the
billing services business. The fees were generally paid within 30 to 45 days of
billing. On February 1, 1993, the Company sold the assets of this business to an
unrelated company for $380,000, $140,000 of which was paid in cash. The assets
sold consisted primarily of furniture and equipment, including a computer
system, and the goodwill associated with this business. This transaction
resulted in a gain to the Company of approximately $346,000.

In connection with serving on the Board of Directors of Discovery
Technologies, a then affiliated company, Sanford Schwartz and Robert Geller,
directors of HealthWatch at such time, were granted options to purchase up to
412,500 shares and 450,000 shares, respectively, of Discovery Technologies'
common stock at an exercise price of 8.5 cents per share.

The Company owned approximately 10% of the outstanding common stock of
Hemcure, Inc. Sanford L. Schwartz, Chairman of the Board of Directors, and Allen
R. Goldstone and Robert M. Geller, former officers/directors of HealthWatch,
were also officers/directors and shareholders of Hemcure. The Company provided
Hemcure with periodic operating advances and management services in prior years.
No management fees were charged in the fiscal year ended June 30, 1993. In the
fiscal year ended June 30, 1992, certain assets of Hemcure were purchased by an
unrelated party by issuing notes payable totaling $80,000. In fiscal 1993,
Hemcure assigned these notes to the Company. The assigned notes were initially
valued by the Company at $61,771, the amount which the Company believed it would
receive as a result of negotiations for an up-front lump sum payment. Later in
fiscal 1993, the Company accepted $58,000 as full satisfaction of the assigned
note.

During September 1992, the Company completed a private placement of
$750,000 of its 10% Convertible Senior Debentures due 1997. The Debentures are
convertible into shares of the Company's Common Stock at $2.00 per share and are
secured by substantially all of the Company's assets. Six current and/or former
officers and directors of the Company, including Sanford L. Schwartz ($15,000
principal amount), Allen R. Goldstone ($15,000 principal amount), John W.
Erickson ($23,000 principal amount), Mr. Erickson's wife, Constance Erickson
($12,000 principal amount), Richard T. Case ($10,000 principal amount), Robert
M. Geller ($10,000 principal amount) and Henry J. Roth ($15,000 principal
amount), participated in the offering and acquired, in the aggregate, $100,000
principal amount of the Debentures.

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 SHAREHOLDERS

The following table sets forth as of March 31, 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 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>
PERCENT AFTER OFFERING
NAME AND ADDRESS OF
BENEFICIAL OWNER, AMOUNT PERCENTAGE ASSUMING ASSUMING ALL
NAME OF BENEFICIALLY BEFORE 750,000 UNITS OF THE UNITS
DIRECTOR OR IDENTITY OF GROUP OWNED OFFERING ARE SOLD ARE SOLD
<S> <C> <C> <C> <C>
John D. Greenbaum 259,577(1) 9.1% 4.4% 3.1%
2445 Cades Way
Vista, CA 92083

Howard R. Everhart 255,003 9.0% 4.4% 3.0%
725 Southgate Court
Oceanside, CA 92057

SMI Capital Corp. (2) 250,000 8.6% 4.2% 2.9%
2901 Hill Street
New Smyrna Beach,
Florida 32169

Investor Resources
Services, Inc. (2) 250,000 8.6% 4.2% 2.9%
932 Burke Street
Winston-Salem,
North Carolina 27101

Sanford L. Schwartz 91,354(1) 3.2% 1.6% 1.1%

Kenneth A. Selzer, M.D. 11,750(1) * * *

All Officers and Directors
as a Group (6 persons) 617,684(1) 21.1% 10.4% 7.2%
</TABLE>

*Less than one percent of shares outstanding.

(1) 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: Greenbaum -- 10,833 shares; Schwartz
-- 34,000 shares; Selzer -- 11,750 shares; and all officers and directors as
a group -- 74,940 shares.

(2) The shares represent the number of shares of Common Stock 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." SMI Capital Corp.
is a public relations/investment holding company, the President and
Secretary of which are Richard J. Fixaris and Frances D. Crawford Fixaris,
respectively. Investor Resources Services, Inc. is a public relations
company, the President of which is Daniel Starezewski.

DESCRIPTION OF SECURITIES

THE UNITS

The Units offered hereby consist of four shares of Common Stock and two
Warrants to purchase one share of Common Stock, exercisable at $.75 per share
anytime after the Common Stock and Warrants become separately transferable until
December 31, 1996. The shares of Common Stock and Warrants will not be
separately transferable until October 31, 1995 or such earlier date as the
Company may determine (the "Separation Date"). Until the Separation Date, it is
expected that a Unit will be represented only by the Warrant certificates. The
Warrant certificate will contain a legend stating that the certificate also
evidences the right to receive two shares of Common Stock for each Warrant, in
accordance with the terms of a Deposit Agreement, to be dated the date of the
closing, between the Company and Corporate Stock Transfer, Inc. as Depositary
(the "Deposit Agreement"). The Deposit Agreement provides that, upon initial
issuance and until the close of business on the Separation Date, the shares
constituting part of the Units will be held by the Depositary. As soon as
practical after the Separation Date, the Depositary will cause to be delivered
or mailed to the registered holders of the Warrants at the close of business on
the Separation Date the certificates representing the shares held for the
benefit of such registered holders. Until the certificates for the shares of
Common Stock are delivered to the Unit holders, each Warrant Certificate will,
in addition to representing the rights of a Warrantholder, represent the
beneficial interest of such holder in the shares of Common Stock deliverable in
respect thereto. Prior to the close of business on the Separation Date, each
Unit will be transferable only as a whole and any transfer of Warrants will
constitute a transfer of the holder's beneficial interest in the related shares.

COMMON STOCK

The Company is authorized to issue up to 100,000,000 shares of Common
Stock, $.01 par value. At March 31, 1995, 2,849,123 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 offered hereby are to be in registered form. Each Warrant is
exercisable at a price of $.75 per share until December 31, 1996. The
description herein is a summary of certain of the terms of the Warrant
Agreement, and reference should be made to the Warrant Agreement for a complete
description of the terms and conditions of the Warrants.

GENERAL. The exercise price of the Warrants is arbitrary and there is no
assurance that the price of the Common Stock of the Company will ever rise to a
level where exercise of the Warrants would be of any economic value to a holder
of the Warrants. The exercise prices of the Warrants are in excess of recent
market prices for the Common Stock and the net tangible book value of the
Company's Common Stock both before and after the offering.

The Warrants will not be quoted on the Nasdaq Small Cap Market. There is
presently no market for the Warrants, and there can be no assurance that a
market will develop at the conclusion of this offering. Accordingly, purchasers
of the Units may have difficulty in selling their Warrants should they decide to
do so. The Warrants have no value other than as the right to acquire the
Company's Common Stock at the exercise price. The Warrants do not confer upon
the holders thereof any of the rights or privileges of a shareholder.

In order for a holder to exercise his Warrants, there must be a current
registration statement on file with the Securities and Exchange Commission and
various state securities commissions to continue registration of the shares of
Common Stock underlying the Warrants. The Company intends to maintain a current
registration statement while the Warrants are exercisable. The maintenance of a
currently effective registration statement could result in substantial expense
to the Company, and there is no assurance that the Company will be able to
maintain a current registration statement covering the shares issuable upon
exercise of the Warrants. The Warrants may be deprived of any value if a current
prospectus covering the shares issuable upon the exercise thereof is not kept
effective or if such underlying shares are not qualified in the states in which
Warrantholders reside.

ADJUSTMENT. The number of shares issuable upon exercise of the Warrants and
the exercise price will be equitably adjusted upon the occurrence of certain
events such as stock splits, stock dividends, and recapitalizations. No
adjustment in the exercise price is required until the required adjustments
aggregate $.05.

REDEMPTION. The Warrants are redeemable by the Company prior to their
exercise or expiration at any time after October 31, 1995. The Company may call
the Warrants by mailing a Notice of Redemption to Warrantholders of record,
giving 30 days notice of redemption. The redemption price of the Warrants is
$.05 per Warrant. Any Warrantholder who does not exercise prior to the
redemption date, as set forth in the Company's Notice of Redemption, will
forfeit the right to purchase shares of Common Stock underlying the Warrants.
Any Warrants outstanding after the redemption date will be deprived of any value
except the right to receive the redemption price.

EXERCISE OF WARRANTS. The Warrants may be exercised on surrender of the
applicable Warrant certificate at anytime after the Separation Date prior to
expiration of the Warrant exercise period or the redemption date, if any, with
the form of "Election to Purchase" on the reverse side of the certificate
executed as directed, and accompanied by payment of the full exercise price of
the number of Warrants being exercised. Payment must be by certified funds or
cashier's check payable to the order of the Warrant Agent. The Warrants may only
be exercised if there is a currently effective registration statement relating
to the shares underlying the Warrants, and the Warrantholder resides in a state
in which the shares are qualified for sale. As discussed above, there can be no
assurance that these conditions will be met.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS. The following is a description
of the material federal income tax consequences resulting from a purchase of the
Units. The Company has not received an opinion from its counsel with respect to
such federal income tax consequences, but believes that this discussion is an
accurate representation of those consequences. No ruling has been or is expected
to be requested from the Internal Revenue Service ("IRS") as to the federal
income tax consequences of the purchase of the Units. Since no ruling or opinion
of counsel has been obtained, no assurance can be given that the IRS will agree
with the conclusions herein or that a challenge by the IRS, if made, will not be
successful. Prospective purchasers of the Units should consult their own tax
advisors with respect to the consequences to them of the purchase and holding of
the Units and the applicability and effect of federal, state and other tax laws.

The original tax basis of the Units to a purchaser will be the purchase
price paid. The tax basis must be allocated by the purchaser between the shares
of Common Stock and the Warrants in proportion to their respective fair market
values on the date of purchase.

If a Unit is sold or exchanged, the holder of such Unit will recognize gain
or loss equal to the difference between the amount realized on such sale or
exchange and the tax basis of the Common Stock and Warrants comprising that
Unit. Similarly, if the shares of Common Stock or Warrants comprising the Unit
are sold or exchanged separately, gain or loss will be recognized in an amount
equal to the difference between the amount realized on such sale or exchange and
the tax basis of the Common Stock or Warrants sold. If a Warrant is redeemed by
the Company, a holder generally will recognize income or loss equal to the
difference between the holder's tax basis in the Warrants and the redemption
price. If a Warrant expires unexercised, the holder generally will recognize a
capital loss in the amount of the holder's tax basis in the Warrant.

All gains or losses recognized upon the sale or exchange of Units, Common
Stock or Warrants generally will be capital gain or loss. Such capital gain or
loss will be long-term capital gain or loss if the holder has held the security
for more than one year.

No gain or loss will be recognized by a holder of a Warrant on the purchase
of a share of Common Stock for cash on exercise of the Warrant. The adjusted
basis of a share of Common Stock received upon exercise of a Warrant will equal
the sum of the holder's tax basis in the exercised Warrant and the exercise
price. The tax holding period for the shares of Common Stock so acquired will
commence on the date the shares are purchased upon the exercise of the Warrant
and will not include the period during which the Warrant was held.

The anti-dilution provisions of the Warrant Agreement require that the
number of shares of Common Stock purchasable upon exercise of Warrants or the
exercise price of the Warrants will be adjusted in the event of certain
transactions. As to certain types of adjustments, holders of Warrants may be
deemed to have received a constructive distribution that may be taxable as a
dividend under Sections 301 and 305 of the Internal Revenue Code of 1986, as
amended.

DEBENTURES

The Debentures, in the original principal amount of $750,000, mature on
September 1, 1997. Each Debenture bears interest at 10% per annum. At March 31,
1995, $580,000 principal amount of the Debentures were issued and outstanding.

The holders of the Debentures are entitled at any time prior to the close
of business on September 1, 1997, subject to prior redemption, to convert the
Debentures into Common Stock of the Company, at the conversion price of $2.00
per share, subject to adjustment as described below. No adjustment will be made
on conversion of any Debenture for interest accrued thereon or for dividends on
any Common Stock issued. In the case of Debentures called for redemption,
conversion rights will expire at the close of business on the redemption date.

Subject to certain limitations and as further provided in the Subscription
and Purchase Agreement for the Debentures, the Conversion Price shall be
adjusted upon the occurrence of certain events, including the subdivision,
consolidation or reclassification of the outstanding Common Stock; the issue of
any shares of the Company to holders of Common Stock by way of stock dividends,
other than an issue of shares to holders of Common Stock who have elected to
receive dividends in shares in lieu of receiving cash dividends paid in the
ordinary course; the issuance of rights or warrants to all or substantially all
holders of Common Stock entitling them within a period of 45 days to acquire
Common Stock (or securities convertible into Common Stock) at less than the then
current market price of the Common Stock; and the distribution to all or
substantially all holders of Common Stock of shares of any other class or of
rights or warrants or of evidences of indebtedness or of assets (including cash
dividends paid in the ordinary course).

In the event (i) Common Stock issuable upon conversion of the Debentures is
changed into the same or a different number of shares of any class or classes of
stock, whether by capital reorganization, reclassification or otherwise, (ii)
there is a capital reorganization of the Common Stock, or (iii) there is a
merger or consolidation of the Company with or into another corporation, or a
disposition of its properties and assets substantially as an entirety to any
other person, the Debentures then outstanding will thereafter be convertible
into the kind and amount of shares of stock or other securities or property
(including cash) to which the holders thereof would have been entitled if they
had converted such Debentures into Common Stock immediately prior to such
reorganization, reclassification, consolidation, merger or disposition.

Payment of the Debentures is secured by a pledge of the Company's accounts
receivable and other rights to receive payments of money, inventory and
equipment. The payment of the principal of and interest on the Debentures may,
with the consent of at least a majority of the principal amount of the
Debentures then outstanding, be subordinated in right of payment to the prior
payment in full of all Superior Indebtedness of the Company. The Company may, at
its option, issue up to $500,000 of additional indebtedness with equal rights to
payment and to be secured by the Collateral as that of the Debentures.

The Debentures are subject to redemption upon not less than 30 nor more
than 60 days notice by first class mail at the election of the Company, by the
payment of the full principal amount of the Debentures plus accrued interest to
date of redemption.

An Event of Default is defined as (i) default for 30 days in payment of any
interest on the Debentures, (ii) default in payment of principal of the
Debentures when due and payable, (iii) certain events of bankruptcy, insolvency,
receivership or reorganization or (iv) default in the performance or breach of a
covenant or warranty contained in the Subscription and Purchase Agreement for
the Debentures which continues for a period of 60 days after notice thereof. In
case an Event of Default should occur and be continuing, the Holders of not less
than 25% in principal amount of Debentures then outstanding may declare the
principal of all of the Debentures to be immediately due and payable; provided,
however, that the holders of a majority in principal amount of the Debentures
may rescind or annul the declaration of acceleration in certain circumstances.

With the consent of the Holders of at least 66-2/3% in aggregate principal
amount of the outstanding Debentures, the Company and such Holders may execute a
supplemental agreement to add provisions to, or change in any manner or
eliminate any provision of, the Debenture or modify in any manner the rights of
the Debenture Holders, provided that, without the consent of the holder of each
outstanding Debenture so affected, no such supplemental agreement shall, among
other things, (i) change the date of payment of principal of or interest on any
Debenture or reduce the principal amount thereof or the interest thereon or any
premium payable upon the redemption thereof, (ii) reduce the aforesaid
percentage of Debenture Holders whose consent shall be required for the
authorization of any such supplemental agreement, to consent to the
subordination of Debentures, or (iii) adversely affect the right to convert the
Debentures.

Compliance by the Company with certain covenants may be waived by holders
of at least a majority in principal amount of the Debentures at the time
outstanding.

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 which is to be issued pursuant to
an agreement dated May 11, 1995, will be convertible into shares of Common Stock
at a $1.50 per share and will be 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 will become convertible into Common Stock at the holders'
option eight months from the completion of this offering or March 12, 1996,
whichever is earlier, and the balance will become convertible into Common Stock
at the holders' option 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 will have
equal voting rights and will have one vote per share in all matters to be voted
upon by shareholders. These shares of Preferred Stock will have no preemptive or
subscription rights.

OUTSTANDING WARRANTS

The Company has warrants outstanding representing the right to acquire up
to (i) 1,000,000 shares of Common Stock at $.25 per share at any time prior to
April 1, 1997, (ii) 400,000 shares of Common Stock at $.30 per share at anytime
prior to December 31, 1996, (iii) 100,000 shares of Common Stock at $.42 per
share at any time prior to December 31, 1996, (iv) 93,750 shares of Common Stock
at $2.00 per share at any time up to September 1, 1997, and (v) 47,500 shares of
Common stock at $10.00 per share prior to October 30, 1996. The warrants for
1,000,000 shares, which are redeemable after April 1, 1996, at the option of the
Company at $.05 per share, were granted in connection with the making by certain
investors of short-term loans and providing standby commitments to purchase up
to 250,000 Units in this offering, if required to sell 750,000 Units. See "Plan
of Distribution -- Standby Purchase Commitments." In addition, there are
warrants outstanding representing the right to purchase 30,000 shares of Common
Stock at $1.50 per share at any time prior to December 31, 1995. The exercise
price of these warrants and the number of shares issuable thereunder are subject
to adjustment provisions which will, assuming this offering is successful, cause
the terms of such warrants to be adjusted, and to represent the right to acquire
up to 180,000 shares of Common Stock at $.25 per share.

PLAN OF DISTRIBUTION

OFFERING OF UNITS

The Company is offering hereby an aggregate of 1,400,000 Units at $1.00 per
Unit. Proceeds from subscriptions for Units initially will be deposited with
National City Bank of Minneapolis, Minneapolis, Minnesota (the "Escrow Agent"),
pursuant to an Escrow Agreement between the Company and the Escrow Agent. The
Escrow Agent will hold such funds until (i) it has received a minimum of
$750,000 or (ii) the 90th day after the date of this Prospectus, whichever is
earlier. If condition (i) is not satisfied, the sale of Units hereunder will not
be completed and the full amount paid by subscribers will be refunded without
interest.

The Units will be offered and sold pursuant to a continuing offer over the
period ending 45 days after the date of this Prospectus, subject to a 45-day
extension at the discretion of the Company, without special compensation, and by
selected brokers and dealers who are members of the National Association of
Securities Dealers, Inc., as sales agents. A commission equal to 10% of the
public offering price will be paid to such brokers and dealers with respect to
the Units sold by them. Officers of the Company are not experienced in the sale
of securities. No underwriting discount or commissions of any kind will be paid
to such officers in connection with this offering, although the Company will
reimburse such officers for their out-of-pocket expenses, if any.

Initially, the Units will be offered primarily to holders of the Company's
Common Stock. After 750,000 Units are sold, purchase orders received from such
security holders will be given preference over purchase orders received from
other investors. Each of the brokers or dealers named below has indicated that
it intends to participate in this offering of the Company's Units. No broker or
dealer has agreed to purchase any of the Units, however, and no assurance can be
given that any brokers or dealers will actively offer or sell any of the Units
offered hereby.

BROKER OR DEALER AND ADDRESS

Protective Group Securities Corporation
7901 Flying Cloud Drive
Suite 100
Eden Prairie, Minnesota 55344

Hanifen Imhoff
1125 17th Street
Suite 1810
Denver, Colorado 80202

Duke & Co.
909 Third Avenue
9th Floor
New York, New York 10022

The Company will indemnify all brokers and dealers who enter into an agency
agreement with the Company against certain civil liabilities, including certain
liabilities under the Securities Act of 1933.

STANDBY PURCHASE COMMITMENTS

The Company has entered into Standby Purchase Agreements pursuant to which
certain qualified investors as Standby Purchasers have severally agreed, subject
to certain conditions, to acquire from the Company up to 250,000 Units if
required for the Company to sell 750,000 Units pursuant to this offering.
Standby Purchasers will not be required to purchase any Units pursuant to this
offering unless at least 500,000 Units are sold to other investors. The Standby
Purchasers have loaned to the Company $125,000. The loans bear interest at the
rate of 10% and are to be paid on October 7, 1995 or, if earlier, when the
Company has received $500,000 of gross proceeds from the sale of its securities.
These loans, which have been used for working capital purposes, will be repaid
from the net proceeds of this offering. As additional consideration for the
grant of such loans and providing the standby purchase commitments, these
investors have been granted stock purchase warrants which expire on April 1,
1997, to purchase 1,000,000 shares of the Company's Common Stock at $.25 per
share. The Warrants are redeemable after April 1, 1996, at the option of the
Company at $.05 per share.

Protective Group Securities Corporation has acted as financial advisor to
the Company in connection with negotiating and finalizing the Standby Purchase
Agreements and loans described above. The Company has agreed to pay Protective
Group Securities Corporation $6,500 for such services.

The following table sets forth certain information relating to the Standby
Purchasers.

<TABLE>
<CAPTION>
AMOUNT OF SHORT-TERM NUMBER OF
STANDBY PURCHASER LOAN UNITS
<S> <C> <C>
Neil H. Chambers $ 10,000 20,000
Kenneth and Jill Duckman 10,000 20,000
Steven Neslund 15,000 30,000
Profinco Holdings S.A. 20,000 40,000
Spring Hill Holdings Limited 20,000 40,000
Gus W. Boosalis 25,000 50,000
Gerry and Ralph Milliken Trusts 25,000 50,000
Total $125,000 250,000
</TABLE>

OFFERING TO CREDITORS

This Prospectus also relates to the offer and sale from time to time,
following completion of the Unit offering by HealthWatch of up to 950,000 shares
of Common Stock to certain creditors of the Company, such shares to be exchanged
for and to represent payment of all or a portion of amounts which the Company
owes such persons, generally for purchases of inventory or supplies or services
rendered. The shares will be offered by the officers of the Company to such
persons at a price of $.47 per share. At March 31, 1995, the Company had
approximately $615,000 of accounts payable. The Company expects to use
approximately $250,000 of the proceeds of the offering of the Units (assuming
that 750,000 Units are sold pursuant to this offering) to pay a portion of such
obligations. The Company does not have any agreements or obligations with
respect to the issuance of shares in exchange for its obligations to such
persons and there can be no assurance that any of such persons will elect to
exchange all or a portion of the Company's obligations to them for shares of
Common Stock.

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 30,000 shares of Common Stock and warrants currently
representing the right to acquire an additional 30,000 shares of Common Stock at
$1.50 per share which will, assuming this offering is successful, be adjusted to
represent the right to acquire 180,000 shares of Common Stock at $.25 per share.

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.

ADDITIONAL INFORMATION

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.

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

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.

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>

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.

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.

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.

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.

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.

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

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.

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.

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. 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.

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.

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>

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>

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.

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.

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)

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.

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%.

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>

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.

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.

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 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

<TABLE>
<CAPTION>
<S> <C>
Page
Available Information 2
Prospectus Summary 3
Risk Factors 6
Market for the Company's
Common Stock and
Related Shareholder Matters 10
Use of Proceeds 11
Proforma Financial Statements 12
Management's Discussion and Analysis 13
Business 19
Management 29
Principal Shareholders 33
Description of Securities 34
Plan of Distribution 38
Legal Matters 40
Experts 40
Additional Information 40
Financial Statements F-1
</TABLE>

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 $ 1,370
NASD fees 897
Nasdaq listing fees 10,300
Blue sky fees and expenses 5,000
Printing expenses 10,000
Fees and expenses of counsel for the Company 50,000
Fees and expenses of accountants for the Company 4,000
Transfer Agent and Registrar, Warrant Agent and
Escrow Agent fees 4,000
Miscellaneous 4,433
Total $90,000

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

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 to purchase 30,000
shares of such stock at $1.50 per share to one investor for a purchase price of
$45,000. The exercise price of this warrant and the number of shares issuable
thereunder are subject to adjustment in the event that the Company sells shares
of its Common Stock at a price of less than $1.50 per share prior to December
31, 1995. 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 1995, an aggregate of 75,000 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 representing the right
to acquire up to 400,000 shares of the Company's common stock at $.30 per share
in part consideration for services to be rendered. The warrant is to be acquired
for investment and will be subject to appropriate transfer restrictions and is
to be issued without registration under the Act in reliance upon Section 4(2)
thereof.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

1.1 Form of Agency Agreement for participating broker-dealers
-- previously filed.

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 Warrant Agreement dated October 30, 1991 between the
Company and Corporation Stock Transfer, Inc. (3).

4.3 Form of Warrant Certificate for Class A and Class B
Warrants -- see Exhibit A to Exhibit 4.2.

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

4.5 Form of Incentive Stock Option Agreement (3).

4.6 Form of Nonstatutory Stock Option Agreement (3).

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

4.8 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).

4.9 Subscription and Purchase Agreement dated August 31, 1993
between the Company and Redwood Microcap Fund, Inc., the
Rockies Fund, Inc. and associated investors of such funds,
including as an appendix thereto, the form of warrant
certificates (5).

4.10 Subscription and Purchase Agreement dated October 1993
between the Company and Sogevalor S.A., including as an
appendix thereto, the form of warrant certificate (5).

4.11 Subscription and Purchase Agreement dated December 1993 by
and between the Company and Universal Solutions, Inc.,
including as an appendix thereto a form of the warrant
certificate (5).

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

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

4.14 Warrant Agreement dated _____, 1995 between the Company and
Corporate Stock Transfer, Inc. - previously filed.

4.15 Warrant Agreement dated November 30, 1994 between the
Company and investor - previously filed.

4.16 Form of Warrant Certificate -- see Exhibit A to Exhibit
4.14.

4.17 Form of Loan and Standby Purchase Agreement - previously
filed.

4.18 Exchange Agreement for Preferred Stock and Stock Purchase
Warrant - filed herewith.

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

10.1 Lease dated October 24, 1986, including amendments thereto,
between Broomfield Properties, Inc. and the Company (5).

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

10.3 Purchase and Sale Agreement between American National Bank
and Trust Company of Chicago and the Company (1).

10.4 Agreement and Plan of Merger dated September 28, 1990 by and
among HealthWatch, Inc., HealthWatch Technologies, Inc. and
Life Sciences, Inc., including the exhibits thereto (6).

10.5 Stock Purchase Agreement between HealthWatch, Inc. and
Bowthorpe Holdings PLC dated as of December 28, 1990 and
Settlement Agreement dated September 13, 1991 (3).

10.6 Agreement for Purchase of Assets dated February 1, 1993
between T.H. Lehman & Co., Inc. and the Company (7).

10.7 Agreement for Purchase of Assets dated March 31, 1993 among
Medfin Management of Colorado, Inc., Colorado Occupational
Health Associates, PA and the Company (7).

10.8 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 (8).

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

10.10 Employment Agreement dated September 13, 1993 between the
Company and Howard R. Everhart (5).

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

10.12 Consulting Agreement dated June 14, 1994, between the
Company and Kent T. Allen (9).

10.13 Consulting Agreement dated June 14, 1994, between the
Company and Charles S. Arnold (9).

10.14 Impoundment Agreement dated May 18, 1995 between the Company
and National City Bank of Minneapolis--filed herewith.

10.15 Second Amendment to License Agreement dated May 9, 1995
between Howard R. Everhart and HealthWatch Technologies,
Inc. - filed herewith.

10.16 Consultancy Agreement dated May 1, 1995 between HealthWatch,
Inc. and Boulder Financial Group - 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 page II-9 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 Current Report, Form 8-K dated
October 12, 1990 (File No. 0-11476).

(7) Incorporated herein by reference to Current Report, Form 8-K dated March
31, 1993 (File No. 0-11476).

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

(9) Incorporated herein by reference to Registration Statement, Form S-8,
filed with the Commission on July 7, 1994.

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

In accordance with 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 authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Vista, State of California, on May 18, 1995.

HEALTHWATCH, INC.

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

In accordance with the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below on the 18th day of
May, 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

* Director
Sanford L. Schwartz

* . Director
Kenneth A. Selzer, M.D.

* By /s/ John D. Greenbaum

GP:189973 v1

HEALTHWATCH, INC.

INDEX TO EXHIBITS
FILED WITH AMENDMENT NO. 2 TO
REGISTRATION STATEMENT ON FORM SB-2
Registration No.: 33-88126

Exhibit No. Description Page No.

<S> <C> <C>
1.1 Form of Agency Agreement for participating broker-dealers --
previously filed. --

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 Warrant Agreement dated October 30, 1991 between the Company and
Corporation Stock Transfer, Inc. (3). --

4.3 Form of Warrant Certificate for Class A and Class B Warrants --
see Exhibit A to -- Exhibit 4.2.

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

4.5 Form of Incentive Stock Option Agreement (3). --

4.6 Form of Nonstatutory Stock Option Agreement (3). --

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

4.8 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).

4.9 Subscription and Purchase Agreement dated August 31, 1993 between --
the Company and Redwood Microcap Fund, Inc., the Rockies Fund,
Inc. and associated investors of such funds, including as an
appendix thereto, the form of warrant certificates (5).

4.10 Subscription and Purchase Agreement dated October 1993 between the --
Company and Sogevalor S.A., including as an appendix thereto,
the form of warrant certificate (5).

4.11 Subscription and Purchase Agreement dated December 1993 by and --
between the Company and Universal Solutions, Inc., including as
an appendix thereto a form of the warrant certificate (5).

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

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

4.14 Warrant Agreement dated _____, 1995 between the Company and --
Corporate Stock Transfer, Inc. -- previously filed.

4.15 Warrant Agreement dated November 30, 1994 between the Company and --
investor -- previously filed.

4.16 Form of Warrant Certificate -- see Exhibit A to Exhibit 4.14. --

4.17 Form of Loan and Standby Purchase Agreement -- previously filed. --

4.18 Exchange Agreement for Preferred Stock and Stock Purchase Warrant --
-- filed herewith.

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

10.1 Lease dated October 24, 1986, including amendments thereto, --
between Broomfield Properties, Inc. and the Company (5).

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

10.3 Purchase and Sale Agreement between American National Bank and --
Trust Company of Chicago and the Company (1).

10.4 Agreement and Plan of Merger dated September 28, 1990 by and among --
HealthWatch, Inc., HealthWatch Technologies, Inc. and Life
Sciences, Inc., including the exhibits thereto (6).

10.5 Stock Purchase Agreement between HealthWatch, Inc. and Bowthorpe --
Holdings PLC dated as of December 28, 1990 and Settlement
Agreement dated September 13, 1991 (3).

10.6 Agreement for Purchase of Assets dated February 1, 1993 between --
T.H. Lehman & Co., Inc. and the Company (7).

10.7 Agreement for Purchase of Assets dated March 31, 1993 among Medfin --
Management of Colorado, Inc., Colorado Occupational Health
Associates, PA and the Company (7).

10.8 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 (8).

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

10.10 Employment Agreement dated September 13, 1993 between the Company --
and Howard R. Everhart (5).

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

10.12 Consulting Agreement dated June 14, 1994, between the Company and --
Kent T. Allen (9).

10.13 Consulting Agreement dated June 14, 1994, between the Company and --
Charles S. Arnold (9).

10.14 Impoundment Agreement dated May 18, 1995 between the Company and
National City Bank of Minneapolis-- filed herewith.

10.15 Second Amendment to License Agreement dated May 9, 1995 between
Howard R. Everhart and HealthWatch Technologies, Inc. -- filed
herewith.

10.16 Consultancy Agreement dated May 1, 1995 between HealthWatch, Inc.
and Boulder Financial Group -- 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 page II-9 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 Current Report, Form 8-K dated
October 12, 1990 (File No. 0-11476).

(7) Incorporated herein by reference to Current Report, Form 8-K dated
March 31, 1993 (File No. 0-11476).

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

(9) Incorporated herein by reference to Registration Statement, Form
S-8, filed with the Commission on July 7, 1994.

Exhibit 4.18

HEALTHWATCH, INC.
INVESTOR RESOURCES/SMI CAPITAL

SETTLEMENT TERMS
May 10, 1995

HealthWatch, Inc. (the "Company"), Investor Resources, Inc., SMI
Capital Corporation and Chuck Arnold agree as follows:

1. Investor Resources and SMI Capital agree to convert their 400,000
shares of HealthWatch common stock to 400,000 shares of HealthWatch Preferred
Stock with a cash redemption price of $1.50 per share and a fixed dividend of
10%, commencing on October 1, 1994. Dividend to accrue, with quarterly dividend
payments to commence on October 1, 1995 and to be paid on each succeeding
January 1, April 1, July 1 and October 1 until the Preferred Stock is either
redeemed or converted. The initial dividend payment will be for the full year
ended September 30, 1995. Dividends may be paid at the option of the Company in
cash or, in whole or in part, in shares of the Company's common stock. In the
event that the Company elects to pay the dividend in shares of its common stock,
the stock will be deemed to have a per-share value of 50% of the then market
value* for the Company's common stock, provided that such price shall not be
less than $.25. A warrant for 100,000 shares at $.42 per share (the mean between
the bid and ask price on May 9, 1995) will be granted, such warrant to be
exercisable at any time from October 1, 1995 to December 31, 1996.

2. Preferred Stock shall initially be convertible into common stock at
holders' option at $1.50 per share. HealthWatch shall be given 15 days notice of
any intent to convert, during which period, HealthWatch has the right to redeem
for cash the shares of Preferred Stock to be converted. Conversion price subject
to revision as described below.

3. HealthWatch has the right to redeem all or any portion of Preferred
Stock at any time prior to conversion.

4. If HealthWatch doesn't redeem the Preferred Stock, one-half of
Preferred Stock shall become convertible into common stock at holder's option at
a reduced conversion price at the earlier of eight months after the completion
of the Company's Unit offering or March 12, 1996. The balance of such Preferred
Stock shall likewise become convertible at holders' option into common stock on
August 12, 1996. At such times, the conversion price for such portions of the
Preferred Stock shall be adjusted and shall be converted at the lesser of $1.00
per share or 50% of the then market value* for the Company's common stock,
provided that the conversion price shall not be less than $.25 per share (the
price at which the common stock is to be sold in the Unit offering) or, if less,
the lowest price at which HealthWatch has sold its common stock following the
date hereof to the date of conversion.

5. The Company will proceed to register the shares of its common stock
subject to issuance upon conversion of the Preferred Stock, the payment of
dividends on the Preferred Stock and the exercise of the warrant, the
registration statement for such shares to be filed by July 31, 1995.

6. Investor Resources, SMI Capital and Chuck Arnold and his affiliates
and associates agree that at no time during the period that the Preferred Stock
is outstanding will they engage in short sales of the Company's common stock.

7. The Company, Investor Resources, SMI Capital and Chuck Arnold agree
to release and waive any and all claims of any nature whatsoever that they or
any of their respective officers, employees, directors or affiliates have with
respect to the others' officers, employees, directors or affiliates.

8. Any disagreements or claims will be settled by binding arbitration
in California in accordance with the terms of the American Arbitration
Association.

Each of the undersigned represent and agree that the foregoing
correctly sets forth the basis upon which they have agreed to resolve all of
their respective issues relating to the issuance by the Company and the purchase
by Investor Resources and SMI Capital in 1994 of an aggregate of 400,000 shares
(200,000 shares each) of the Company's common stock. The parties agree to work
cooperatively with one another to complete the definitive agreements
incorporating such terms. Investor Resources, SMI Capital and Chuck Arnold agree
that they shall provide their comments with respect to the Company's drafts of
such agreements within two business days of the receipt thereof, such drafts to
be delivered to them, by mail or by fax, care of James M. Cassidy, 1504 R Street
N.W., Washington, D.C. 20000, fax number (202) 745-1920. The parties further
acknowledge that it is their intent that such agreements be executed and
delivered as soon thereafter as possible.

_______________

* The "then market value" for the Company's common stock shall be the average
of the mean between the high and low bid prices for the Company's common
stock during the 20-day period prior to the date that the common stock is
to be issued in the case of the payment of dividends or the holder's notice
of election to the Preferred Stock.

Dated: May 11, 1995.

HEALTHWATCH, INC.

By
John D. Greenbaum
Its President

INVESTOR RESOURCES, INC.

By
Its

SMI CAPITAL CORPORATION

By
Its

Chuck Arnold

Exhibit 10.14

IMPOUNDMENT AGREEMENT

THIS IMPOUNDMENT AGREEMENT made and entered into this 18th day of May,
1995, by and between HealthWatch, Inc. (hereinafter called the Issuer), and
National City Bank of Minneapolis (a national or state) banking association or
trust company with principal offices in Minneapolis, Minnesota (hereinafter
called the Impoundment Agent).

WITNESS THAT:

WHEREAS, Issuer has applied to the commissioner of commerce for the
State of Minnesota (hereinafter called the commissioner) for registration of
Units, each consisting of four shares of common stock and two Common Stock
Purchase Warrants. (description of securities) for sale to the residents of the
State of Minnesota; and

WHEREAS, as a condition of registration of such offering under the
Securities Laws of the State of Minnesota the commissioner requires that the
Issuer provide for the impoundment of the proceeds to be received from such
offering of securities; and

WHEREAS, the Issuer, and the Impoundment Agent desire to enter into an
agreement with respect to the said impoundment of proceeds;

NOW, THEREFORE, in consideration of the premises and agreements set
forth herein, the parties hereto agree as follows:

1. PROCEEDS TO BE PLACED IN ESCROW:

All proceeds received from the sale of the securities subject to this
Impoundment Agreement on or after the date hereof shall be paid to the
Impoundment Agent within two business days from the date of sale and deposited
by Impoundment Agent in an escrow account. During the term of this Impoundment
Agreement, the Issuer shall cause all checks received by it in payment for such
securities to be either payable to the Impoundment Agent or endorsed forthwith
to the Impoundment Agent.

2. IDENTITY OF SUBSCRIBERS:

The Issuer shall cause to be delivered to the Impoundment Agent two
signed counterparts of each Subscription Agreement which shall contain, among
other things, the name and address of such subscriber thereto, the date and
amount subscribed, and the amount paid, or, in the alternative, shall furnish to
the Impoundment Agent with each deposit of funds in the impoundment a list of
the persons who have subscribed the money, showing the name, address, date and
amount of subscription, and amount of money paid. All proceeds so deposited
shall remain the property of the subscriber and shall not be subject to any
liens or charges by the Impoundment Agent, or judgments or creditors' claims
against the Issuer until released to the Issuer as hereinafter provided.

3. DISBURSEMENT OF FUNDS:

Upon the receipt by Impoundment Agent of amounts paid in of not less
than $750,000.00 the Impoundment Agent shall forthwith notify the commissioner
in writing of the impoundment of such amounts. Upon receipt by Impoundment Agent
of written authorization from the commissioner, then said Impoundment Agent, on
demand of the issuer, shall pay over to the Issuer all impounded funds. If the
specified minimum amount of proceeds have not been impounded during the term of
impoundment, then, within three business days after the last day of the term of
impoundment, the Impoundment Agent shall notify the commissioner in writing that
the conditions of impoundment have not been satisfied, and shall within a
reasonable time, but in no event not more than thirty (30) days after the last
day of the term of impoundment, refund to each subscriber at the address
appearing on the Subscription Agreement or list of subscribers, or at such other
address as shall be furnished the Impoundment Agent by the subscriber in
writing, all sums paid by him pursuant to his subscription, and shall then
notify the commissioner in writing of such refund.

4. TERM OF IMPOUNDMENT:

This impoundment shall terminate on the 90th day following the
effective date of the registration of the Issuer's securities in the State of
Minnesota, unless extended by the consent in writing of the parties hereto and
all subscribers to the securities subscribed to date and the commissioner. Upon
termination hereof, whether after extension or otherwise, the Impoundment Agent
shall disburse the funds in the impoundment account in the manner and upon the
terms directed in paragraph three hereof. The Issuer may abandon the sale of
securities anytime prior to the date above. Upon the receipt of a copy of the
Resolution authorizing said abandonment, duly attested to by the Secretary of
the Issuer, accompanied by the written consent of the commissioner, Impoundment
Agent shall be authorized to refund the moneys received from the subscribers.

5. TERMINATION BY REVOCATION OR SUSPENSION:

If at any time prior to the termination under paragraph four of this
impoundment, said Impoundment Agent is advised by the commissioner that the
registration to sell securities has been revoked or suspended, said Impoundment
Agent shall thereupon return all funds to the respective subscribers.

6. CONSENT OF COMMISSION TO RELEASE FUNDS:

No funds shall be released to the Issuer hereunder except upon the
express written authorization of the commissioner. If the commissioner finds
that any conditions of this Agreement have not been satisfied, or that any
provisions of the Minnesota Securities Laws or regulations have not been
complied with, then he may withhold such authorization for release of funds by
the Impoundment Agent to the Issuer and may direct the Impoundment Agent to
return the funds to the subscribers. In making his determination hereunder, the
commissioner may require from the Issuer a statement of all expenses and/or all
amounts paid into the escrow, certified by an independent certified public
accountant or an officer of the Issuer and any further financial or other
information as the commissioner may deem appropriate or helpful in making such
determination.

7. INSPECTION OF RECORDS:

The commissioner may, at any time, inspect the records of the
Impoundment Agent, insofar as they relate to this Impoundment Agreement, for the
purpose of determining compliance with and conformance to the provisions of this
Impoundment Agreement.

8. DUTY AND LIABILITY OF THE IMPOUNDMENT AGENT:

The sole duty of the Impoundment Agent, other than as herein specified,
shall be to receive said funds and hold them subject to release, in accordance
with the written instructions of the commissioner, and the Impoundment Agent
shall be under no duty to determine whether the Issuer is complying with
requirements of the commissioner in tendering to the Impoundment Agent said
proceeds of the sale of said securities.

The Impoundment Agent may conclusively rely upon and shall be protected
in acting upon any statement, certificate, notice, request, consent, order or
other document believed by it to be genuine and to have been signed or presented
by the proper party or parties. The Impoundment Agent shall have no duty or
liability to verify any such statement, certificate, notice, request, consent,
order or other document and its sole responsibility shall be to act only as
expressly set forth in this Impoundment Agreement. The Impoundment Agent shall
be under no obligation to institute or defend any action, suit or proceeding in
connection with this Impoundment Agreement unless first indemnified to its
satisfaction. The Impoundment Agent may consult counsel in respect of any
question arising under this Impoundment Agreement and the Impoundment Agent
shall not be liable for any action taken or omitted in good faith upon advice of
such counsel. All funds held by Impoundment Agent pursuant to this Impoundment
Agreement shall constitute trust property for the purposes for which they are
held and the Impoundment Agent shall not be liable for any interest thereon.

9. IMPOUNDMENT AGENT'S FEE:

The Impoundment Agent shall be entitled to reasonable compensation for
its services. The fee agreed upon for services rendered hereunder is intended as
full compensation for the Impoundment Agent's services as contemplated by this
Agreement; provided, however, in the event that the conditions of this
Impoundment Agreement are not fulfilled, or the Impoundment Agent renders any
material service not contemplated in this Agreement, or there is any assignment
of interest in the subject matter of this Impoundment Agreement, or any material
modification hereof, or if any material controversy arises hereunder, or the
Impoundment Agent is made a party to or justifiably intervenes in any litigation
pertaining to this Impoundment Agreement, or the subject matter hereof, the
Impoundment Agent shall be reasonably compensated for such extraordinary
services and reimbursed for all costs and expenses, including reasonable
attorney's fees, occasioned by any delay, controversy, litigation, or event, and
the same may be recoverable form the Issuer only.

10. BINDING AGREEMENT AND SUBSTITUTION OF IMPOUNDMENT AGENT:

The terms and conditions of this Agreement shall be binding on the
heirs, executors and assigns, creditors or transferees, or successors in
interest, whether by operation of law or otherwise, of the parties hereto. If,
for any reason, the Impoundment Agent named herein should be unable or unwilling
to continue as such Impoundment Agent, then the other parties to this Agreement
may substitute, with the consent of the commissioner, another Impoundment Agent.
Any apportionment of the fees provided for in paragraph nine will be subject to
agreement of the parties.

11. ISSUANCE OF CERTIFICATES:

Until the terms of this Agreement have been met and the funds hereunder
released to the Issuer, the Issuer may not issue any certificates or other
evidences of securities, except subscription agreements.

IN WITNESS WHEREOF, the parties hereto have executed this Impoundment
Agreement on the date first above written.

Issuer: HealthWatch, Inc.

By
Its President

Impoundment Agent: National City
Bank of Minneapolis

Its
(an authorized signature)

Accepted for filing:

_____________________________
Commissioner of Commerce

Exhibit 10.15

SECOND AMENDMENT TO LICENSE AGREEMENT

This amendment agreement is made as of the ___ day of _______, 1995, by
and between Howard Richard Everhart ("Licensor") and HealthWatch Technologies,
Inc., a Minnesota corporation ("Licensee").

WHEREAS, Licensor has granted Metamed, Inc., a California corporation
("Metamed"), a license with respect to certain technology and related patent
rights necessary to engineer, design, construct and manufacture products
incorporating the technology (the "Technology") pursuant to a License Agreement
dated February 27, 1992 (the "Agreement");

WHEREAS, the Agreement was amended pursuant to an Amendment to License
Agreement dated September 13, 1993, between Licensor and Metamed and the rights
and obligations of Metamed in the Agreement then transferred and assigned to the
Licensee upon the merger of Metamed into the Licensee; and

WHEREAS, Licensor and Licensee desire to further amend the Agreement as
set forth below:

NOW THEREFORE, in consideration of the rights and obligations herein
set forth, and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:

1. Article 2 shall be amended by adding two new sections as
follows:

2.9 Foreign Patent Rights and Information. Licensor and
Licensee believe it is in their mutual best interests for the
Technology to be subject to patent protection in countries in
addition to the U.S. During the term of this Agreement,
Licensor and Licensee shall each have the right to seek patent
protection for the Technology in countries other than the U.S.
Licensor shall at Licensee's request provide Licensee such
information and assistance, including execution and delivery
to Licensee of patent applications and such other documents,
as may be reasonably required to enable Licensee to cause to
be filed and successfully prosecuted patent applications in
countries other than the U.S. and such foreign countries as
Licensor has previously filed patent applications. Licensee
shall at Licensor's request provide Licensor such information
and assistance, including execution and delivery of all such
documents, as may be reasonably required to enable Licensor to
cause to be filed and successfully prosecuted patent
applications in countries other than the U.S. and such foreign
countries as Licensee has previously filed patent
applications. The entire right, title and ownership of all
such patent applications and patents issued thereon, whether
pursuant to applications by Licensor or Licensee, shall remain
with Licensor, and shall be subject to the terms and
conditions of the Agreement. As of the date of this amendment
to the Agreement, Licensor has filed foreign patent
applications as set forth on Schedule I hereto and Licensee
has not filed any such patent applications. Licensee agrees
that concurrently with the execution and delivery of this
amendment to the Agreement it shall reimburse Licensor for the
expenses he has incurred in connection with such applications
as is set forth on such Schedule I. Licensee further agrees
that during the term of the Agreement it shall pay directly or
reimburse Licensor forthwith upon presentation of an invoice
therefor for all reasonable additional expenses either
Licensor or Licensee shall incur with respect to the making of
any such applications, provided that if such expenses are
incurred by Licensor, Licensee shall have approved such
expenses in writing prior to the incurrence thereof.

2.10 Maintenance of U.S. Patents. Annually during the term of
the Agreement, in connection with the payment of license fees
by Licensee for the quarter ending in July in accordance with
Article 3 hereof, Licensor shall provide to Licensee such
evidence as is reasonably required to demonstrate that he is
paying all fees and expenses required to maintain the U.S.
patent for the Technology. In the event that Licensor has not
paid such fees, Licensee may pay such fees as they become due,
any such payments by Licensee to be deducted from the license
fees to be paid to Licensor.

2. Article 3, as previously amended, shall be further amended by
adding two new sections as follows:

3.3 Units Sold. For purposes of this Article 3, a unit shall
be deemed to have been 'sold' in any of the following events:
(i) a sale of the unit, regardless of the amount or nature of
the consideration therefor; (ii) a lease of the unit, again
regardless of the amount or nature of consideration therefor
and regardless of whether or not the lessee has the right to
acquire ownership of the unit at the end of the lease; (iii)
making the unit available for use in consideration for which
the user agrees to acquire IV sets or other items from
Licensee; and (iv) any other similar event which is intended
to substitute for an outright sale or lease of the unit. It is
understood that making units available for not longer than 120
days for the purpose of evaluating whether or not to purchase
or lease units does not constitute a sale of the units so long
as Licensee receives no consideration for such evaluation,
other than for the reimbursement of Licensee's direct
expenses, not including the production cost for the units,
incurred in connection with such evaluation.

3.4 Independent Verification. Licensee shall permit a
certified public accountant chosen by Licensor that is
reasonably satisfactory to Licensee (Licensee agreeing not to
unreasonably withhold acceptance of any such accountant
selected by Licensor) to examine its books and records to the
extent necessary to verify that the license fees to be paid to
Licensor pursuant to Section 3.1 hereof have, in fact, been
paid. Licensee shall not be required to permit any such
inspection more than once in any calendar quarter. In
addition, any such independent verification shall be done
during normal business hours and in a manner that does not
disrupt Licensee's normal operations and shall be paid for by
Licensor.

3. For purposes of Section 6.4 of the Agreement, Licensor's
address shall be 725 Southgate Court, Oceanside, California, 92057 and
Licensee's address shall be 2445 Cades Way, Vista, California, 92083.

4. Section 6.11 of the Agreement shall be amended to read as
follows:

6.11 Termination By Licensor. Licensor may, at its election,
terminate this Agreement forthwith by written notice to
Licensee, without refunding to Licensee any royalty or license
fee payments already received, if (a) Licensee discontinues
business or becomes insolvent or bankrupt and such default
shall continue unremedied for ten (10) days after written
notice thereof given by Licensor; (b) any payment required to
be made by Licensee under this Agreement shall not be made
when due and such default shall continue unremedied for thirty
(30) days after written notice thereof given by Licensor; or
(c) Licensee shall make or suffer to exist any other default
on its part under the provisions of this Agreement, and such
other default shall continue unremedied for sixty (60) days
after written notice thereof given by Licensor. In the event
that Licensor has given Licensee notice of a default pursuant
to clause (a) above, Licensee shall permit a certified public
accountant chosen by Licensor that is reasonably satisfactory
to Licensee (Licensee agreeing not to unreasonably withhold
acceptance of any such accountant selected by Licensor) to
examine its books and records to the extent necessary to
determine whether or not Licensee is in such default. Any such
review shall be done during normal business hours and in a
manner that does not disrupt Licensee's normal operations and
shall be paid for by Licensor.

5. All terms and conditions of the Agreement not expressly
amended in this amendment to the Agreement shall be as set forth in the
Agreement dated February 27, 1992, as amended on September 13, 1993.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly exercised as of the day and year first above written.

LICENSOR:

___________________________
Howard Richard Everhart

LICENSEE:

HealthWatch Technologies, Inc.

By _________________________
Its President

Schedule I

Foreign Patent Applications

Country Date Filed Current Status Expenses Incurred(1)

___________________

(1) Evidence showing payment of all such expenses is attached to this Schedule
and shall be deemed to be a part of the Schedule.

Exhibit 10.16

CONSULTANCY AGREEMENT

This Consultancy Agreement effective as of May 1, 1995, is entered into by and
between HealthWatch of 2445 Cades Way Vista, CA 92083, (hereinafter referred to
as the "Company") and Boulder Financial Group of 595 Utica Avenue, Boulder, CO
80304 (hereinafter referred to as the "Consultant").

RECITALS

WHEREAS, the Company is a publicly held Corporation with its common stock traded
as a listed NASDAQ security (HEAL) in the over-the-counter exchange; and

WHEREAS, the Company believes it is important at this time to enhance
shareholder value and keep both existing shareholders and the general investing
public informed of the Company's current and proposed activities; and

WHEREAS, the Consultant has experience in the area of investor communications
and public relations;

NOW THEREFORE, in consideration of the premises and the mutual covenants and
Agreement hereinafter set forth, the parties hereto covenant and agree as
follows:

1. Term of Consultancy. The Company hereby retains the Consultant to act in a
consultancy capacity to the Company. The Consultant hereby agrees to provide
services to the Company, in accordance with the terms and conditions of this
Agreement, for a period of Six (6) months, commencing on the effective date of
this Agreement.

2. Duties of Consultant. The Consultant agrees to provide, as directed by the
Company, the following specified consulting services:

A. Financial investor relations for the Company, including
dissemination of current information about the Company to the
relevant public markets;

B. Advice to the Company, as requested, regarding its relations
with the investment community;

C. Such other services as reasonably requested by the Company
that are within the scope of services contemplated hereby.

In rendering the above consulting services, the Consultant agrees to utilize the
best of its ability and experience. The Consultant also agrees to perform
loyally and conscientiously all duties and obligations required of it expressly
or implicitly by the terms of this Agreement. The Company further represents and
warrants that it is current in its filing with the Securities and Exchange
Commission as required under the Securities Exchange Act of 1933.

3. Allocation of Time and Energies. The Consultant shall diligently and
thoroughly provide the consulting set forth above. Although no specific hours
per day requirement will be utilized, the Consultant and Company agree that the
Consultant will perform the duties set forth herein above in a diligent and
professional manner and the parties will allocate the necessary time to carry
out the terms of this Agreement.

4. Remuneration. As full and complete compensation for the services described in
Section 2, the Company agrees to pay the Consultant as follows:

A. $1,500.00 Dollars per month for Six (6) months. Company has
the right to terminate the agreement and must give written
notice Ninety (90) days prior to the termination date. Upon
execution of this agreement the first months payment shall be
made, payable to Boulder Financial Group. Payment thereafter
shall be made on the First (1st) of each month, starting June
1, 1995.

B. In addition to the foregoing payments, upon execution of this
agreement, the Company agrees to issue to the Consultant
400,000 Warrants, with an exercise price of $.30. These
Warrants will be registered to Boulder Financial Group, by the
Company, at the expense of the Company.

5. Expenses. The Consultant is responsible for its own regular business expenses
such as phones and labor. The Company shall be responsible for printing,
postage, Federal Express or other courier bills, press releases and broadcast
faxes, distribution of promotional materials, travel, luncheons and broker
meetings.

6. Termination. Either party shall have the right to terminate the agreement
without cause upon ninety (90) days written notice.

7. Confidential and Proprietary Information. The Consultant acknowledges that
all financial information, records, documents, materials, specifications,
business or investment strategies or ideas and similar items relating to the
business of the Company (referred to herein as "Confidential Information")
whether prepared or generated by the Consultant pursuant to this Agreement or
otherwise coming into the possession or knowledge of the Consultant, shall
remain the exclusive, confidential property of the Company except to the extent
authorized for public dissemination by the Company. The Consultant further
acknowledges and agrees that all such Confidential Information constitutes trade
secrets of the Company.

The Consultant shall not disclose any of such Confidential Information to any
third party without prior written consent of the Company and shall take all
reasonable steps and actions necessary to maintain the confidentiality of such
information. The Consultant shall not use any of such Confidential Information
in competition with the Company nor with any of its officers, directors, or
affiliates or for Consultant's personal financial benefit during the term of
this agreement.

8. Representations. The Consultant represents that it is not required to
maintain any license and registrations under either Colorado or Federal laws or
regulations necessary to perform the services set forth herein. The Consultant
acknowledges that, to the best of its knowledge, the performance of the services
set forth under this Agreement will not violate any rule or provision of any
regulatory agency having jurisdiction over Consultant. Nor do such services to
the Company represent any conflict to Consultant's other clients or business
affairs.

9. Indemnification. If any claim or action should be brought against the
Consultant by a third party relating to this Agreement or any of the services
contemplated herein, the Consultant hereby agrees to indemnify and hold Company
harmless for all costs, expenses and liabilities resulting from any such action
or claim.

10. Conflict of Interest. In performing the services contemplated by this
Agreement, if the Consultant should at any time have a direct or indirect
interest, be it financial, professional or otherwise, in the performance of this
Agreement, the Consultant hereby agrees to advise the Company of such interest
immediately.

11. Legal Representation. The Company and the Consultant represent that they
have consulted with independent legal counsel and/or tax, financial and business
advisor, to the extent they deemed necessary.

12. Attorneys' Fees. In the event an action is commenced between the parties
regarding the enforcement or interpretation of the Agreement, the prevailing
party shall be entitled to recover all reasonable legal expenses including, but
not limited to, attorney's fees and court costs.

13. Waiver. The waiver by the Company of a breach of any provision of this
Agreement by the Consultant shall not operate or be construed as a waiver of any
subsequent breach by the Consultant.

14. Notices. All notes, requests, and other communications hereunder shall be
deemed to be duly given if sent by U.S. Mail, postage prepaid, addressed to the
other party at the address set forth herein below:

To the Company:

HealthWatch
2445 Cades Way
Vista, California 92083
(619) 598-4333

To the Consultant:

Boulder Financial Group
595 Utica Avenue
Boulder, Colorado 80304-0776
(303) 442-6075

15. Non-Exclusive Activities. The Company hereby agrees and acknowledges that
during the term of this Agreement and the one year subsequent to the termination
of this Agreement, the Consultant shall be permitted to pursue and participate
in other consulting, financial or investment activities for parties and concerns
other than the Company so long as such activities do not violate this Agreement
or create actual or potential conflict of interest in rendering of services of
this Agreement.

16. Choice of Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Colorado.

17. Arbitration. Any controversy or claim arising out of or relating to this
Agreement, or the alleged breach thereof, or relating to the Consultant's
activities or remuneration under this Agreement, shall be settled by binding
arbitration of the American Arbitration Association. The judgment on the award
rendered by the arbitrator(s) shall be binding on the parties and may be entered
in any court having jurisdiction thereof.

18. Complete Agreement. This Agreement contains the entire understanding between
the parties and shall not be modified or changed except by a writing executed by
the parties hereto.

WITNESS the following signatures as of the date first above written.

/s/ John D. Greenbaum 5/4/95
HEALTHWATCH President and CEO Date
John D. Greenbaum

/s/ Elizabeth Rodman-Mandel 5/4/95
BOULDER FINANCIAL GROUP Managing Partner Date
Elizabeth Rodman-Mandel

Exhibit 23.2

INDEPENDENT AUDITOR'S CONSENT

We hereby consent to the use of our reports dated August 12, 1994, except for
Note 11 which is dated August 31, 1994, accompanying the consolidated financial
statements of HealthWatch, Inc. as of June 30, 1994 and 1993, included in the
Company's Amendment No. 2 to the Registration Statement on Form SB-2 and to the
reference made to our firm under the caption "Experts" in the Registration
Statement on Form SB-2 expected to be filed by HealthWatch, Inc. on or about May
19, 1995.

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

May 18, 1995

GP:189973 v1