HEALTHWATCH INC, POS AM, 1996-04-10

HEALTHWATCH INC
POS AM, 1996-04-10
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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Registration No. 33-88126

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Post Effective Amendment No. 1
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 (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)

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)

Lindley S. Branson
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.

HEALTHWATCH, INC.

This Prospectus, as amended, relates to the offer and sale from time to
time by HealthWatch, Inc. ("HealthWatch" or the "Company") of up to 2,081,974
shares of its Common Stock, par value $.01 per share (the "Common Stock"),
pursuant to the exercise of 2,081,974 outstanding Redeemable Common Stock
Purchase Warrants (the "Warrants"). Each Warrant entitles the holder to purchase
one share of Common Stock at a price of $.75 per share until December 31, 1996.
The Warrants may be redeemed by the Company at a price of $.05 per Warrant at
any time upon at least 30 days prior written notice to the Warrantholders.

This Prospectus also relates to the offer and sale from time to time of
up to 112,615 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 April 4, 1996, the last reported sale price of
the Common Stock, as reported on the Nasdaq Small Cap Market was $.53125 per
share. See "Price Range of Common Stock."

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

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

THE DATE OF THIS PROSPECTUS IS APRIL __, 1996.

AVAILABLE INFORMATION

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

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

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the
more detailed information and financial statements appearing elsewhere in this
Prospectus.

THE COMPANY

HealthWatch develops, manufactures and markets cardiovascular
noninvasive diagnostic instruments, accessories and services. The Company's
diagnostic instruments include non-invasive doppler and ultrasound imaging
systems designed to diagnose peripheral vascular (blood vessel) disease and
electrocardiograph and stress-testing equipment and interpretive software. In
1993, HealthWatch acquired Metamed, Inc. ("Metamed"), a development-stage
company which was engaged in the development of products for the infusion
therapy ("IV") industry. Infusion therapy generally involves the delivery of one
or more fluids, primarily pharmaceuticals or nutritionals, to a patient by means
of an infusion line inserted into the circulatory system. The Pacer, the
Company's first IV product, has recently been introduced to the market.

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 two years has been on
the development of the Pacer.

The Company's licensed IV technology utilizes proprietary optics and
computer technology to determine the size 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. 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
<TABLE>
<CAPTION>

<S> <C>
Securities Offered................ 2,194,589 shares of Common Stock.(1)
Warrant Terms:
Exercisable for................ One share of Common Stock.
Exercise Price................. $.75 per share.
Expiration..................... December 31, 1996
Redemption..................... The Warrants are subject to redemption by the Company at any
time on not less than 30 days notice, at $.05 per Warrant.

Securities Outstanding:
Common Stock................... 9,073,884 shares(2)

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

Warrants....................... 2,081,974 warrants

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
</TABLE>

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

(1) As of date of this Prospectus, as amended. Includes shares issuable upon
exercise of the Warrants (2,081,974 shares) and to creditors (112,615
shares) in payment of all or a portion of amounts owed such persons.

(2) Shares outstanding at March 31, 1996. Does not include from 6,092,038 to
7,292,038 shares of Common Stock reserved for issuance upon the exercise
of stock purchase warrants (including the Warrants) and options or the
conversion of the Company's 10% Convertible Senior Debentures (the
"Debentures") or Series A Preferred Stock ("Preferred Stock").

(3) The Preferred Stock currently is convertible into from 1,200,000 shares
to up to 2,400,000 shares of Common Stock. One-half of the Preferred
Stock is currently convertible into Common Stock at the holders' option
at a conversion rate of one share of Preferred Stock for six shares of
Common Stock. The balance (which is currently convertible at a rate of
one share of Common Stock for each share of Preferred Stock) becomes
convertible into Common Stock at the holders' option beginning August
12, 1996, at a conversion rate equal to $1.50 divided by the lesser of
$1.00 or 50% of the market value (but not less than $.25) of the
Company's Common Stock on the conversion date. The Preferred Stock is
redeemable at the option of the Company at a redemption price of $1.50
per share.

SELECTED FINANCIAL DATA

STATEMENT OF INCOME DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------------- -----------------------------------------
1995 1994 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Product sales $ 996,716 $ 1,963,625 $ 3,516,252 $ 4,070,146 $ 6,094,862
Gross margin 237,481 525,836 1,116,709 1,118,656 2,774,040
Loss from continuing (801,106) (975,462) (1,843,239) (2,000,959) (1,571,138)
operations
Total other income (expense) (18,322) (29,177) 12,785 (839,654) (54,764)
Loss from continuing
operations before
discontinued operations
and extraordinary item (819,428) (1,004,639) (1,830,454) (2,840,613) (1,625,902)
Discontinued operations:
Income from discontinued
operations of medical
services segment -- -- -- -- 186,797
Gain on sale of medical
services segment -- -- -- -- 288,697
(Loss) before
extraordinary item (819,428) (1,004,639) (1,830,454) (2,840,613) (1,150,408)
Gain from reduction in
debt obligation -- -- 61,603 24,328 102,433
Net income (loss) $ (819,428) $(1,004,639) $(1,768,851) $(2,816,285) $(1,047,975)
=========== =========== =========== =========== ===========
Income (loss) per share
of Common Stock:
Continuing operations $ (.10) $ (.38) $ (.65) $ (1.48) $ (1.33)
Discontinued operations -- -- -- -- .39
Extraordinary item -- -- .02 .01 .08
----------- ----------- ----------- ----------- -----------
Net income (loss) per share $ (.10) $ (.38) $ (.63) $ (1.47) $ (.86)
=========== =========== =========== =========== ===========

Weighted average number
of shares outstanding 7,842,432 2,656,731 2,816,173 1,912,915 1,211,591

</TABLE>

BALANCE SHEET DATA:

December 31, 1995
Current Assets $ 1,393,248
Total Assets 2,922,525
Current Liabilities 678,671
Long-Term Debt 580,000
Accumulated Deficit (10,791,853)
Shareholders' Equity 1,663,854
Working Capital $ 714,577

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 six months, compared to the prior fiscal year or similar
six-month 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 diagnostic products, HealthWatch intends to concentrate its efforts
and limited working capital on the marketing of the Pacer, its first IV product.
While sales of the Pacer are expected to begin within several months, the
Company does not expect to be able to produce and ship significant quantities of
the Pacer for several more months. 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. The Company expects to continue to incur losses from
operations until it is able to generate significant sales of the Pacer. The
Pacer is in the initial marketing stage and there can be no assurance that the
Company will be able to 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 December 31, 1995, the Company had an
accumulated deficit of ($10,791,853). There can be no assurance that the Company
will be able to operate at a profit in the future. The Company is not able to
finance current working capital requirements from operations.

NEED FOR ADDITIONAL FINANCING

The Company estimates that it needs approximately $800,000 of additional
debt or equity capital to sustain its operations during the next twelve months.
In addition to the $800,000 required to sustain operations, the Company
estimates that it will need to obtain from $800,000 to $1,400,000 of 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.

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 Company's infusion therapy products are expected to be not
only easier to use but also less costly than existing competing products. While
the first IV 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 proprietary 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 IV products. There can be no assurance that the Company will be able
to obtain necessary governmental approvals for additional IV products or that
any products based on the proprietary 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 generally 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 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.

LENGTH OF SALES CYCLE

The decision to purchase IV equipment is often an enterprise-wide
decision by prospective hospitals or other health-care customers and may require
the Company to engage in a lengthy evaluation/purchase-sales cycle. The sales
cycle for IV instruments can range from three to nine months or more. The sales
cycle may also be subject to a prospective customer's budgetary constraints and
internal acceptance reviews, over which the Company has little or no control.
Consequently, if sales forecasted from a specific customer for a particular
quarter are not realized in that quarter, the Company is unlikely to be able to
generate revenue from alternate sources in time to compensate for the shortfall.
If a larger order is delayed or lost to a competitor, the Company's revenues for
that quarter could be materially diminished.

LIMITED AVAILABILITY OF PROPRIETARY PROTECTION

The Company historically has relied upon a combination of copyright,
trade secret and nondisclosure and other contractual provisions to protect its
proprietary rights. While the Company's licensed IV technology includes a U.S.
patent, this patent may not provide significant protection with respect to the
development of a competing product with capabilities similar to the Company's
initial IV product. Notwithstanding the Company's efforts to protect its
proprietary rights, it may be possible for competitors of the Company to imitate
the Company's products or develop independently competing products.

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 a few companies account for over 80% of the U.S.
market for infusion therapy systems. All of such companies are substantially
larger than HealthWatch. The Company expects to encounter intense competition in
the market for its IV products. This could require that the Company commit
significantly greater resources to the introduction of its IV products than
would otherwise be required.

GOVERNMENT REGULATION

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

BROKER-DEALER SALES OF COMPANY COMMON STOCK

Securities and Exchange Commission Rule 15g-9 imposes additional sales
practice requirements on brokers-dealers who sell certain low-priced securities
to persons other than established customers. So long as the Company's Common
Stock continues to be quoted on the Nasdaq Small Cap Market, sales of its stock
are exempt from the application of this rule. In order for securities to
continue to be quoted on the Nasdaq Small Cap Market, they must meet certain
maintenance requirements, including a minimum bid price of at least $1.00 per
share or a market value of the public float for its common stock of at least
$1,000,000 and $2,000,000 in capital and surplus. The bid price for the
Company's Common Stock is below $1.00 per share and its capital and surplus is
currently less than $2,000,000. Nasdaq has advised the Company that if the bid
price for its Common Stock is not at least $1.00 per share or its capital and
surplus is not at least $2,000,000 by May 28, 1996, that it will be required to
show why it should be granted an exception to these rules or have its Common
Stock removed from the Nasdaq Small Cap Market. The Company intends to request
that its shareholders approve a reverse split of the Company's Common Stock so
that it will comply with the $1.00 per share bid price requirements. In the
event that the Company's Common Stock should cease to be traded on the Nasdaq
Small Cap Market, or it should otherwise cease to be exempt from the application
of Rule 15g of the Securities Exchange Act of 1934, it would become subject to
Rule 15g-9. In this event, prior to effecting transactions in the Company's
Common Stock, brokers-dealers would be required to make a special suitability
determination for the purchaser and receive the purchaser's written agreement to
the transaction prior to the sale. These requirements could adversely affect the
ability of brokers-dealers to sell the Company's securities. In addition, in the
event that the Company's securities ceased to be traded on the Nasdaq Small Cap
Market, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the price of, the Company's securities.

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

As of March 31, 1996, there were up to 7,290,038 shares of Common Stock
reserved for issuance upon the exercise of stock purchase warrants or options or
the conversion of Debentures and Preferred Stock, at exercise or conversion
prices ranging from $.25 to $9.76 per share. To the extent the trading price of
the Company's Common Stock at the time of exercise or conversion of any such
warrants, options, Debentures or Preferred Stock exceeds the exercise or
conversion prices, any such exercise or conversion will have a dilutive effect
on the Company's shareholders.

The Company's Articles of Incorporation, as amended, authorize the
issuance of up to 100,000,000 shares of Common Stock, of which 9,073,884 shares
were outstanding on March 31, 1996. The Company's Board of Directors has the
authority to issue additional shares of Common Stock and to issue options and
warrants to purchase shares of the Company's Common Stock without shareholder
approval.

AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK

HealthWatch is authorized to issue up to 10,000,000 shares of Preferred
Stock. The Board of Directors has the power to establish the dividend rates,
liquidation preferences, voting rights, redemption and conversion terms and
privileges with respect to any series of Preferred Stock. The issuance of any
shares of Preferred Stock having rights superior to those of HealthWatch's
Common Stock may result in a decrease in the value or market price of the Common
Stock and could further be used by the Board as a device to prevent a change in
control of HealthWatch. Holders of Preferred Stock may have the right to receive
dividends, certain preferences in liquidation and conversion rights. There
currently are 400,000 authorized and outstanding shares of Series A 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,
1996, was 718. The high and low sale prices as reported on the Nasdaq Small Cap
Market (National Market through May 12, 1994) are shown in the table below.
These quotations represent prices between dealers, and do not include retail
markups, markdowns or commissions.

QUARTER ENDED HIGH LOW

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

1995
March 31 13/32 3/8
June 30 15/32 9/32
September 30 11/16 5/16
December 31 5/8 5/16

1996
March 31 9/16 5/16

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, if any, from the exercise of the Warrants will be used
by the Company primarily for working capital purposes, including the purchase of
raw materials required to build product inventory for the first IV product,
marketing and sales expenses related to the introduction of this product and
product development. The Company estimates that it needs approximately $800,000
of additional debt or equity capital to sustain its operations during the next
12 months. In addition to the $800,000 required to sustain operations, the
Company estimates that it will need to obtain from $800,000 to $1,400,000 of
additional working capital to implement its marketing plan for the Pacer and to
provide adequate working capital to fund a rapid increase in product sales. In
the event that the Company is unable to raise additional capital, it will be
required to defer producing IV or other products, to sell certain assets or
enter into joint ventures with or grant licenses to other companies with respect
to one or more of its products and/or further reduce its operations in order to
sustain operations. There can be no assurance that the Company could, if it were
required to do so to sustain operations, sell any such assets or enter into any
such joint venture or grant any such license, if at all, on terms acceptable to
the Company.

The Company's estimate regarding the need for additional capital to fund
its operations for the next 12 months is based upon various assumptions
regarding the working capital that will be required to introduce the Pacer,
overall working capital requirements and revenues from product sales, including
sales of the Company's existing products as well as the Pacer product. There can
be no assurance that these assumptions will prove to be correct. In the event
that they are not correct, the Company may be required to obtain additional
capital, delay certain product development and sales and marketing activities,
sell certain assets or enter into one or more joint ventures with other
companies and/or reduce its level of operations.

PROFORMA FINANCIAL STATEMENTS

On September 13, 1993, HealthWatch purchased 100% of the common stock of
Metamed, Inc. The total purchase price was $755,724 and consisted of 625,000
shares of HealthWatch Common Stock valued at $700,000 in exchange for $9,819 of
property and equipment, $3,406 of intangible assets, net of $33,081 of accounts
payable assumed and $55,724 of professional fees incurred.

HealthWatch accounted for the acquisition under the purchase method
whereby the assets and liabilities of Metamed are recorded at their net book
value, which approximated fair market value as of the date of acquisition as
estimated by management. The $775,580 excess purchase price over the fair market
value of tangible assets and liabilities acquired has been identified as
Technology/Product Development acquired and was expensed at the date of
acquisition.

Summarized below are the unaudited condensed and proforma statements of
operations as if the Metamed acquisition had taken place at the beginning of the
year ended June 30, 1994. All adjustments, which in the opinion of management,
are necessary for a fair proforma presentation have been made in the following
proforma consolidated financial statements. These financial statements are
intended to present consolidated results of operations for the period presented.
Had the acquisition actually taken place at the beginning of the period,
operating results may have differed from the proforma results posted below and
accordingly, the proforma results are not intended to be indicative of future
results.

YEAR ENDED JUNE 30, 1994
ACTUAL PROFORMA

Sales $ 4,070,146 $ 4,070,146
Cost of sales 2,951,490 2,951,490
Operating expenses 3,119,615 3,120,407
----------- -----------
Loss from continuing operation (2,000,959) (2,001,751)
Other income (expense) (839,654)(1) (839,654)(1)
----------- -----------
Loss before extraordinary item (2,840,613) (2,841,405)
Extraordinary item - gain from
extinguishment of debt 24,328 24,328
----------- -----------
Net loss $(2,816,285) $(2,817,077)
=========== ===========
Net loss per share $ (1.47) $ (1.40)
=========== ===========

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

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

MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

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 has focused 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 six months. 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 business

RESULTS OF OPERATIONS

FIRST SIX MONTHS OF FISCAL 1996 COMPARED TO FIRST SIX MONTHS OF FISCAL
1995. The following table compares the results of operations for the first six
months of fiscal 1996 and the first six months of fiscal 1995 to present a
comparative basis for the analysis of the differences in operating results for
those periods.
<TABLE>
<CAPTION>
Six Months Ended December 31,
----------------------------------- 1996 vs 1995
1995 1994 Increase (Decrease)
---------------- ------------------ ----------------------
<S> <C> <C> <C> <C>
Product sales .............. $ 996,718 $ 1,963,625 ($966,907) (49.2%)
Product cost of sales ...... 759,237 1,437,789 (678,552) (47.2)
------- ---------
Gross profit ............. 237,481 525,836 (288,355) (54.8)

Selling, general &
administrative ............ 666,380 1,056,119 (389,739) (36.9)
Research & development ..... 197,809 257,898 (60,089) (23.3)
Depreciation & amortization 174,398 187,281 (12,883) (6.9)
---------- ----------
Total operating costs &
expenses ............... 1,038,587 1,501,298 (462,711) (30.8)
---------- ----------
Loss from continuing
operations ............. (801,106) (975,462) (174,356) (17.9)
Other income (expenses):
Interest income .......... 7,200 4,052 3,148 77.7
Interest expense ......... (35,624) 0 35,624 N/M
Miscellaneous ............ 10,102 (33,229) 43,331 N/M
----------- ------------
Total other income
(expenses) ........... (18,322) (29,177) (10,855) (37.2)
----------- -----------
Net income (loss) ($819,428) ($1,004,639) ($185,211) (18.4%)
=========== ===========

</TABLE>

Revenues declined 50.8% during the 1996 first six months, compared to the 1995
period, primarily due to a decline in product sales. The Company believes that
product sales continue to be depressed as a result of the Company's lack of
adequate working capital which has adversely affected its level of sales as the
Company has not been able to support both the development of its new IV product
and selling efforts and enhancements to its existing products. In addition, the
Company believes that 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 also contribute to depressed sales.

Completion of the Company's first IV product was delayed 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.

Cost of products sold were 47.2% lower in the six-month period ended December
31, 1995, compared to the similar fiscal 1995 period, due primarily to lower
sales and to reduced operating costs. Gross margin was 23.8% in the six-month
period ended December 31,1995, compared to 26.8% for the similar fiscal 1995
period. The lower gross margin in the six-month fiscal 1996 period was primarily
due to the decreased sales revenues during the period.

Selling, general and administrative expenses as a percent of sales were 66.9% in
the six-month period ended December 31, 1995, compared to 53.8% in the prior
year period. This increase was due primarily to the lower sales level and to
planned expenditures associated with the introduction of the new IV product.

Research and development expenses decreased 23.3% in the fiscal 1996 period
compared to the fiscal 1995 period as development efforts on the Company's IV
controller have declined as the Company's efforts with the new IV product shift
to production of the initial units.

1995 COMPARED TO 1994. The following table compares the results of
operations for fiscal 1995 and fiscal 1994 to present a comparative basis for
the analysis of the differences in operating results for those periods.

----------------------------------- 1995 vs 1994
1995 1994 Increase (Decrease)
---------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Product sales.............. $3,516,252 $4,070,146 ($553,894) (13.6%)
Product cost of sales 2,399,543 2,951,490 (551,947) (18.7)
------------ -----------
Gross profit............. 1,116,709 1,118,656 (1,947) (0.2)

Selling, general &
administrative............. 2,105,148 2,513,458 (408,310) (16.2)
Research & development..... 499,099 201,713 297,386 147.4
Depreciation & amortization 355,701 404,444 (48,743) (12.1)
------------ -----------
Total operating costs &
expenses................ 2,959,948 3,119,615 (159,667) (5.1)
------------ -----------
Loss from continuing
operations............. (1,843,239) (2,000,959) (157,720) (7.9)
Other income (expenses):
Interest income.......... 4,546 14,084 (9,538) (67.7)
Interest expense......... (76,943) (88,976) (12,033) (13.5)
Metamed Product
Development......... -- (775,580) (775,580) (100.0)
Gain on sales of assets -- 14,298 (14,298) (100.0)
Miscellaneous............ 85,182 (3,480) 88,662 N/M
------------ -----------
Total other income
(expenses).............. 12,785 (839,654) (852,439) (100.5)
------------ -----------
Loss before
extraordinary item....... (1,830,454) (2,840,613) (1,010,159) (35.6)
Extraordinary item:
Gain from reduction
in debt obligation....... 61,603 24,328 37,275 153.2
------------ -----------
Net loss................. ($1,768,851) ($2,816,285) ($1,047,434) (37.2%)
=========== ===========
</TABLE>

Revenues declined 13.6% during 1995 compared to 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, third and fourth quarters of fiscal 1995,
compared to the second, third and fourth quarters of fiscal 1994. At June 30,
1994, the backlog of booked but not shipped orders was $238,000 compared to
$50,750 at June 30, 1995. 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 fiscal 1995 were 18.7% lower than in
fiscal 1994, due primarily to the lower levels of sales. Gross margins were
31.8% and 27.5% for fiscal 1995 and fiscal 1994, 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
59.9% in fiscal 1995 compared to 61.8% in the prior year. This decrease was due
primarily to costs incurred in fiscal 1994 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 fiscal 1996 due to planned expenditures associated
with the introduction of the new IV product.

Research and development expenses increased 147.4% in fiscal 1995
compared to fiscal 1994 as development efforts on the Company's IV controller
increased.

The decrease in the Company's other expense in fiscal 1995 compared to
fiscal 1994 was a result primarily 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 & 404,444 490,145 (85,701) (17.5)
amortization............
Research & development 201,713 281,918 (80,205) (28.4)
--------- ---------
Total operating costs &
expenses.............. 3,119,615 4,345,178 (1,225,563) (28.2)
---------- ----------
Loss from continuing
operations............ (2,000,959) (1,571,138) 429,821 27.4
Other income (expense):
Metamed Product
Development costs...... (775,580) 0 (775,580) N/M
Gain on sale of
Investment............ 84,799 0 84,799 N/M
Interest income........ 14,084 12,302 1,782 14.5
Interest expense....... (88,976) (80,533) 8,443 10.5
Miscellaneous.......... (3,480) 13,467 (16,947) (125.8)
Loss on disposal of
fixed assets.......... (70,501) 0 (70,501) N/M
--------- -------
Total other income
(expense)........... (839,654) (54,764) (784,890) (1433.2)
Loss from continuing
operations before
discontinued
operations and
extra-ordinary item (2,840,613) (1,625,902) 1,214,711 74.7
Discontinued operations:
Income from
discontinued operations
of medical services
segment............... 0 186,797 (186,797) (100.0)
Gain on sale of medical
services segment...... 0 288,697 (288,697) (100.0)
---------- ----------
Loss before
extra-ordinary Item (2,840,613) (1,150,408) 1,690,205 146.9
Extraordinary item-gain
from extinguishment of
debt.................... 24,328 102,433 (78,105) (76.2)
----------- -----------
Net loss................. ($2,816,285) ($1,047,975) $1,768,310 168.7%
============ ============
</TABLE>

The decrease of $2,024,716 or 33.2% in product sales in 1994 compared to
1993 is primarily due, the Company believes, to the continued uncertainty in the
medical community regarding the effects of the health care reform proposed by
the Administration, particularly with respect to the Company's business,
uncertainty with how the proposals may affect reimbursement for diagnostic
procedures, as well as to generally lower sales due to personnel changes,
reductions in list prices for many of the Company's products throughout fiscal
1994 and discontinuation of sales of licensed products produced by other
companies. In December 1993, the Company hired a new Vice President of Sales and
Marketing in an effort to improve sales of the Company's products and to better
position the Company for the introduction of its first Metamed infusion therapy
products. 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.

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 development of the IV controller.

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.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1995, the Company had $288,675 of cash and accounts
receivable. Due to the Company's operating losses, 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. In August
1995, the Company completed the sale of 1,040,987 Units of its securities, at a
purchase price of $1.00 per Unit. Each Unit consisted of four shares of Common
Stock and two redeemable Common Stock Purchase Warrants. During the first six
months of fiscal 1996, the Company also issued an aggregate of 847,528 shares of
its Common Stock in payment of trade accounts payable and for services.

The Company believes it needs to raise approximately $800,000 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 $800,000 - $1,400,000 of such capital to better fund the sales and
marketing expenses for the roll-out of the new IV product, to continue the
development of additional IV products and for general working capital purposes
during the next twelve months.

In the event that the Company is unable to raise additional capital, it
will be required to defer shipment of the initial IV products and/or to sell
certain assets or enter into joint ventures with or grant licenses to other
companies with respect to one or more of its products in order to sustain
operations. There can be no assurance that the Company could, if it were
required to do so to sustain operations, sell any such assets or enter into any
such joint venture or grant any such license, if at all, on terms acceptable to
the Company. If the Company is unable to obtain additional working capital, it
will be necessary for the Company to attempt to further reduce operating
expenses and/or curtail certain of its operations and product development
activities.

BUSINESS

INTRODUCTION

The Company's IV technology utilizes proprietary optics and computer
technology to determine the size 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.
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'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 proprietary 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.

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 past three fiscal years and six months ended
December 31, 1995 and 1994 are as follows:

Six Months
Ended December 31, Year Ended June 30,
---------------------------- ----------------------------------------
1995 1994 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Medical Products
Cardiology $ 171,775 $ 395,194 $ 610,623 $ 863,904 $ 1,301,974
Peripheral Vascular $ 137,876 $ 706,356 $ 1,206,772 $ 1,409,528 $ 2,417,951
Supplies &

Technical Services $ 687,067 $ 862,075 $ 1,698,857 $ 1,796,714 $ 2,374,937
---------- ----------- ---------- ----------- -----------

TOTAL $ 996,718 $ 1,963,625 $ 3,516,252 $ 4,070,146 $ 6,094,862

Medical Services:
Management $ 0 $ 0 $ 0 $ 0 $ 437,894
Billing $ 0 $ 0 $ 0 $ 0 $ 239,454
---------- ----------- ---------- ----------- -----------
TOTAL $ 0 $ 0 $ 0 $ 0 $ 677,348

Operating Profit(Loss)
Medical Products $ (801,106) $ (975,462) (1,843,239) (2,000,959) (1,344,523)
Medical Services $ 0 $ 0 $ 0 $ 0 $ 186,797

</TABLE>

For the six months ended December 31, 1995, the Company reported a
decline in revenues of $223,419 for cardiology products, $568,480 for peripheral
vascular products, and $175,008 for supplies and technical services when
compared to the first six months of fiscal 1995. For the year ended June 30,
1995, the Company reported a decline in revenues of $253,281 for cardiology
products, $202,756 for peripheral vascular products and $97,857 for supplies and
technical services when compared with fiscal 1994. 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 $337,475, $803,877, $1,318,233, $1,228,205
and $1,529,752 of the Company's medical product revenues during the first six
months of fiscal 1996 and 1995 and fiscal 1995, 1994 and 1993, 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 $194,006, $250,199,
$561,364, $476,856 and $628,183 for the six months ended December 31, 1995 and
1994 and for the three years ended June 30, 1995, 1994 and 1993, 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 18 of the Notes
to the Consolidated Financial Statements for the years ended June 30, 1995 and
1994. 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.

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
considered Metamed's primary value to be its proprietary 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 more recent years 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 to four 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 from $4,500 to $13,500.

HealthWatch sold the Telemed interpretive software in January 1995.
HealthWatch retained a license to use the Telemed software with its Cambridge
products.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company has adopted the older concept of drop counting systems and
applied computer technology to develop a system which determines the size 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 proprietary technology. The Company's 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 Company's 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 Company's system easier to use and to lower total
costs incurred in providing IV therapy to patients.

The Pacer, the Company's first IV product, a controller, which was
approved for marketing by the FDA in April 1994, has recently been introduced
and initial marketing efforts commenced. The Pacer is expected to sell for
$1,200, 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.

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 the six-month period ended December 31, 1995 and fiscal
1995, sales of supplies and revenues from service and maintenance activities
accounted for approximately 69 and 44 percent, respectively, of HealthWatch's
revenues from its medical products business segment.

SALES AND MARKETING. The Company has a Director of Sales and Marketing,
one field sales support representative and one customer service representative.
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.

During fiscal 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.

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

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

HealthWatch is in the beginning stages of producing the Pacer, its first
IV product. Current plans call for producing approximately 100 units of the
Pacer during April and May 1996, increasing production to 300 units per month by
September 1996. 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 July 1996. Due to the difficulty of obtaining
the original microprocessor chip to be used in the Pacer, the Company redesigned
the Pacer so that it uses a different microprocessor chip which is more readily
available to the Company. Several of the key components for the Pacer must be
ordered 60 or more days in advance of their anticipated need in order to assure
their availability on a timely basis. This need substantially increases the
Company's working capital requirements and may limit its ability to rapidly
increase production capabilities for the Pacer should this be required in order
to meet rapidly increasing order rates for this product.

Certain raw materials for the Company's products, particularly its new
IV product, are available from only one or a limited number of suppliers and may
be available to the Company only if it places significant orders which represent
several months or more of the Company's projected needs for such materials. The
need to purchase significant quantities of these materials in advance of their
use, substantially increases the Company's working capital requirements. There
can be no assurance that the Company's current suppliers for these products will
continue to supply them to the Company. While alternative sources for such items
are generally 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 additional
expenses 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 may make certain enhancements to its Modular
Vascular Laboratory, a product sold under the Life Sciences name. During the six
months ended December 31, 1995 and 1994 and the years ended June 30, 1995, 1994
and 1993, the Company spent $197,809, $257,898, $499,099, $201,713 and $281,918,
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. While
the Company's licensed IV technology includes a U.S. patent, the patent may not
provide significant protection with respect to development of a competing
product with capabilities similar to the Company's initial IV product.
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 certain technology for
its IV products from Howard R. Everhart, a former officer and director of the
Company, and licenses the technology for certain components of its other
products from unrelated persons for which it pays license or royalty fees.

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

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

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

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

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

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

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

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

MEDICAL SERVICES

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

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

EMPLOYEES

At March 31, 1996, the Company employed 32 persons, consisting of 6
general administrative, 7 sales and marketing, 7 manufacturing, 5 service, 4
engineering and research and product development personnel and 3 service related
persons at Cambridge Medical Equipments LTD. No retirement or pension or similar
program is in effect for the benefit of the Company's employees.

PROPERTIES

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

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

MANAGEMENT

The directors and executive officers of HealthWatch are as follows:

Director
Name Since Age Positions With The Company

Lindley S. Branson -- 53 President and Chief Executive and
Chief Financial Officer

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

Sanford L. Schwartz 1983 46 Chairman of the Board of Directors

Kenneth A. Selzer, M.D. 1988 41 Director

Lindley S. Branson has been President and Chief Executive and Chief
Financial Officer of the Company since September 1995. Mr. Branson has been a
partner with the Minneapolis, Minnesota law firm of Gray, Plant, Mooty, Mooty &
Bennett, P.A. for more than the last five years. Mr. Branson currently devotes
approximately 50% of his time to the Company.

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

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

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

COMPENSATION

The following table sets forth, on an accrual basis, the aggregate cash
compensation paid by the Company and its subsidiaries during the three fiscal
years ended June 30, 1995, to the Company's former President and Chief Executive
Officer, Chairman of the Board of Directors, former Vice President of Sales and
Marketing and former Vice President of Operations (the only executive officers
whose aggregate remuneration exceeded $100,000 in any of such years):
<TABLE>
<CAPTION>
Name and Principal Fiscal Options Restricted All Other
Position Year Salary Bonus (No. of Shares) Stock Awards Compensation
<S> <C> <C> <C> <C> <C> <C>
John D. Greenbaum, 1995 $101,207 -- 27,500shs.(1) -- $6,818
President and CEO 1994 $150,000 -- 25,000shs. -- $7,200
1993 $ 22,653 -- 2,500shs. 1,250shs. $600

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

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

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

</TABLE>

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

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

(2) Includes sales commissions.

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

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

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

STOCK OPTIONS

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

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

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

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

Name Options Granted Percent of Total Exercise Expiration
Options Granted Price Date
------------------------ ---------------- ------------------ ---------- -------------
<S> <C> <C> <C> <C>
John D. Greenbaum 2,500 shs. (1) 0.5% $.42 5/24/98
25,000 shs. (1) 5.5% $.42 9/13/98

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

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

Howard R. Everhart None -- -- --

</TABLE>

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

The following table shows the number of options exercised during fiscal
1995 and the 1995 fiscal year-end value of the options held at the end of the
fiscal year by the named executive officer and by the groups indicated.
<TABLE>
<CAPTION>
Value of Unexercised
Shares Acquired Number of Unexercised in- the-money Options
on Exercise Options at June 30, 1995 at June 30, 1995
Name of Options Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C>
John D. Greenbaum None 10,833/16,667 shs. $ -0-/$-0-
William B. Bevan None 2,083/129,167 shs. $ -0-/$-0-
Sanford L. Schwartz None 26,500/50,750 shs. $ -0-/$-0-
Howard R. Everhart None None --
</TABLE>

OTHER TRANSACTIONS

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

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

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

PRINCIPAL SHAREHOLDERS

The following table sets forth as of March 31, 1996, 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.

Name and Address of
Beneficial Owner, Amount Percentage Percent After Offering
Name of Director Beneficially Before Assuming All
or Identity of Group Owned Offering of the Shares are Sold
<S> <C> <C> <C>
Lindley S. Branson 510,000 (1) 5.6% 4.5%
Profit Sharing Trust
3400 City Center
Minneapolis, MN 55402

Sanford L. Schwartz 255,942 (1)(2) 2.8% 2.3%

Kenneth A. Selzer, M.D. 37,500 (1) * *

All Officers and Directors 921,505 (1) 9.9% 8.0%
as a Group (5 persons)
</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: Branson--100,000 shares;
Schwartz--34,750 shares; Selzer--12,500 shares; and all officers and
directors as a group--214,063 shares.

(2) Includes 163,838 shares owned by Creative Business Strategies, Inc., a
company with which Mr. Schwartz is affiliated.

DESCRIPTION OF SECURITIES

COMMON STOCK

The Company is authorized to issue up to 100,000,000 shares of Common
Stock, $.01 par value. At March 31, 1996, 9,073,884 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 initially at a price of $.75 per share anytime 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.

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. 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 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.

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,
1996, $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. 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 issuance of the Preferred
Stock. The ability of the Board to issue Preferred Stock could be used by the
Company as a means of resisting a change of control of the Company and,
therefore, could be considered an "anti-takeover" device.

The Series A Convertible Preferred Stock is currently convertible into
from 1,200,000 to 2,400,000 shares of Common Stock and is redeemable at the
option of the Company at a $1.50 per share. The initial conversion rate for the
Preferred Stock was one share of Preferred Stock for each share of Common Stock.
Assuming that the Warrants are not redeemed by the Company, one-half of the
Preferred Stock is now convertible into Common Stock at the holder's option at
an improved conversion rate and the balance becomes convertible into Common
Stock at the holder's option at an improved conversion rate on August 12, 1996.
In both cases, the number of shares of Common Stock issuable upon conversion of
one share of Preferred Stock is or will be equal to $1.50 divided by the lesser
of $1.00 or 50% of the then market value (but not less than $.25) of the Common
Stock. Each share of this Preferred Stock has equal voting rights and has one
vote per share in all matters to be voted upon by shareholders. These shares of
Preferred Stock have no preemptive or subscription rights.

PLAN OF DISTRIBUTION

OFFERING OF WARRANT SHARES

This Prospectus, as amended, relates to the offer and sale of 2,081,874
shares of Common Stock to the holders of the Warrants at a Warrant exercise
price of $.75 per share. The Warrants were issued in connection with the
Company's offering of Units of its securities during 1995. The shares are being
offered and sold pursuant to a continuing offer over the period ending on
December 31, 1996 or, if earlier, the Redemption Date for the Warrants, by
officers of the Company, without special compensation. 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.

OFFERING TO CREDITORS

This Prospectus, as amended, also relates to the offer and sale from
time to time of up to 112,615 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. The shares will be
offered by the officers of the Company to such persons at a price of $.47 per
share. 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 410,000 shares of Common Stock and options and Warrants
representing the right to acquire an aggregate of 230,000 shares of Common Stock
at $.53 and $.75 per share.

EXPERTS

The audited financial statements of the Company for the fiscal years
ended June 30, 1995 and 1994 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.

INDEX TO FINANCIAL STATEMENTS

HEALTHWATCH, INC.
Page

Independent Auditors' Report F-2

Consolidated Balance Sheet at June 30, 1995 and F-3
1994

Consolidated Statement of Operations for the
Years Ended June 30, 1995 and 1994 F-4

Consolidated Statement of Shareholders' Equity
for the Years Ended June 30, 1995 and 1994 F-5

Consolidated Statement of Cash Flows for the
Years Ended June 30, 1995 and 1994 F-6

Notes to Consolidated Financial Statements for
the Years Ended June 30, 1995 and 1994 F-8

Consolidated Balance Sheet at December 31, 1995
(unaudited) F-21

Consolidated Statement of Operations for the
six months ended December 31, 1995 and 1994
(unaudited) F-22

Consolidated Statement of Cash Flows for the
six months ended December 31, 1995 and 1994
(unaudited) F-23

Notes to Consolidated Financial Statements for
the six months ended December 31, 1995 and 1994
(unaudited) F-24

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

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, 1995 and 1994, 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, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

/s/ Silverman Olson Thorvilson & Kaufmann LTD
SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota

August 18, 1995

HEALTHWATCH, INC.

CONSOLIDATED BALANCE SHEET

JUNE 30, 1995 AND 1994

<TABLE>
<CAPTION>
ASSETS 1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 742,981 $ 49,934
Accounts receivable, net of allowance for doubtful
accounts of $29,487 and $95,143, respectively 285,956 753,065
Inventory (Note 3) 927,201 1,206,309
Current portion of note receivable (Note 4) -- 114,189
Subscriptions receivable (Note 13) -- 225,000
Other current assets 104,587 156,289
------------ ------------
Total current assets 2,060,725 2,504,786

Note receivable (Note 4) -- 9,935
Property and equipment, net (Note 5) 138,769 234,623
Intangible assets, net (Note 6) 1,416,072 1,673,270
Other assets 138,553 123,807
------------ ------------

Total assets $ 3,754,119 $ 4,546,421
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 481,438 $ 699,060
Accrued compensation and payroll taxes 214,978 255,395
Other accrued liabilities - related parties 149,399 76,974
Other accrued liabilities - unrelated parties 348,815 391,100
Note payable - related party (Note 8) 160,000 10,000
Notes payable - unrelated parties (Note 9) 125,000 --
Deferred revenue 177,506 173,309
Current portion of long-term debt (Note 10) 3,948 7,399
------------ ------------
Total current liabilities 1,661,084 1,613,237

Long-term debt (Note 10) -- 4,404
Debentures payable - related parties (Note 11) 40,000 85,000
Debentures payable - unrelated parties (Note 11) 540,000 510,000
------------ ------------
Total liabilities 2,241,084 2,212,641
------------ ------------

Contingencies and commitments (Note 12) -- --

Shareholders' equity:
Cumulative preferred stock, $.01 par value; 10,000,000
shares authorized, no shares issued (Note 12) -- --
Common stock, $.01 par value; 100,000,000
shares authorized, 5,040,423 and 2,602,535
issued and outstanding, respectively 11,492,407 10,726,912
Accumulated deficit (9,942,423) (8,128,572)
Equity adjustment from foreign currency translation (36,949) (39,560)
Stock subscriptions receivable (Note 13) -- (225,000)
------------ ------------
Total shareholders' equity 1,513,035 2,333,780
------------ ------------

Total liabilities and shareholders' equity $ 3,754,119 $ 4,546,421
============ ============

</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, 1995 AND 1994

1995 1994
----------- -----------
<S> <C> <C>
Product sales $ 3,516,252 $ 4,070,146
Product cost of sales 2,399,543 2,951,490
----------- -----------

Gross profit 1,116,709 1,118,656

Operating costs and expenses:
Selling, general and administrative - related parties 149,100 94,586
Selling, general and administrative - unrelated parties 1,956,048 2,418,872
Depreciation and amortization 355,701 404,444
Research and development - related parties 54,047 --
Research and development - unrelated parties 445,052 201,713
----------- -----------

Total operating costs and expenses 2,959,948 3,119,615
----------- -----------

Loss from continuing operations (1,843,239) (2,000,959)

Other income (expense):
Interest income 4,546 14,084
Interest expense - unrelated parties (72,395) (80,476)
Interest expense - related parties (4,548) (8,500)
Miscellaneous 85,182 (3,480)
Metamed product development costs (Note 19) -- (775,580)
Gain on sale of investment (Note 7) -- 84,799
Loss on disposal of fixed assets -- (70,501)
----------- -----------

Total other income (expense) 12,785 (839,654)
----------- -----------

Loss from continuing operations before
extraordinary item (1,830,454) (2,840,613)

Extraordinary item - gain from
extinguishment of debt (Note 17) 61,603 24,328
----------- -----------

Net loss $(1,768,851) $(2,816,285)
=========== ===========

Income (loss) per share of common stock:
Continuing operations $ (.65) $ (1.48)
Extraordinary item .02 .01
----------- -----------

Net loss per share $ (.63) $ (1.47)
=========== ===========

Weighted average number of shares outstanding 2,816,173 1,912,915
=========== ===========

</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, 1995 AND 1994

<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ACCUMULATED EQUITY SUBSCRIPTION SHAREHOLDERS'
SHARES AMOUNT DEFICIT ADJUSTMENT RECEIVABLE EQUITY
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 in private placement 300,000 519,364 -- -- -- 519,364
Common stock issued for stock
subscriptions (Note 13) 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

Receipt of subscription (Note 13) -- -- -- -- 225,000 225,000
Common stock issued in public
offering (Note 14) 2,195,388 409,604 -- -- -- 409,604
Common stock issued for services 205,000 296,850 -- -- -- 296,850
Common stock issued in private placement 30,000 45,000 -- -- -- 45,000
Common stock issued for conversion
of debentures (Note 11) 7,500 14,041 -- -- -- 14,041
Contractual dividend (Note 12) -- -- (45,000) -- -- (45,000)
Equity adjustment from foreign
currency translation -- -- -- 2,611 -- 2,611
Net loss -- -- (1,768,851) -- -- (1,768,851)
----------- ----------- ----------- ----------- ----------- -----------

Balances at June 30, 1995 5,040,423 $11,492,407 $(9,942,423) $ (36,949) $ -- $ 1,513,035
=========== =========== =========== =========== =========== ===========

</TABLE>

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

HEALTHWATCH, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 1995 AND 1994

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,768,851) $(2,816,285)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 355,701 404,444
Stock issued as payment of expenses 296,850 14,781
Extraordinary gain on extinguishment of debt (61,603) (24,328)
Discount on note receivable 13,639 --
Metamed product development costs -- 775,580
Loss on sale of property and equipment -- 70,501
(Increase) decrease in assets:
Accounts receivable 467,109 226,170
Inventory 279,108 458,135
Other current assets 51,702 45,820
Other assets (15,705) (57,592)
Increase (decrease) in liabilities:
Accounts payable (156,019) 174,379
Accrued liabilities - related parties 72,425 44,701
Accrued liabilities - unrelated parties (127,702) 124,611
Deferred revenue 4,197 (50,137)
----------- -----------

Net cash used in operating activities (589,149) (609,220)
----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (2,649) (66,670)
Proceeds from sale of property and equipment -- 106,656
Payments received on note receivable 110,485 89,956
----------- -----------

Net cash provided by investing activities 107,836 129,942
----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 454,604 617,975
Proceeds from subscriptions receivable 450,000 --
Proceeds from issuance of note payable - related party 150,000 10,000
Proceeds from issuance of note payable - unrelated parties 125,000 --
Repayment of long-term debt (7,855) (119,316)
----------- -----------

Net cash provided by financing activities 1,171,749 508,659
----------- -----------

Effect of exchange rate changes on cash 2,611 (24,920)
----------- -----------

Increase in cash 693,047 4,461

Cash - beginning of year 49,934 45,473
----------- -----------

Cash - end of year $ 742,981 $ 49,934
=========== ===========

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, 1995 AND 1994

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1995 1994
----------- -----------

Cash paid during the year for interest $ 75,724 $ 90,912
=========== ===========

</TABLE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

During the year ended June 30, 1995:

The Company forgave $13,639 of a note receivable in exchange for the
repayment of the note before maturity.

The Company had $61,603 of accounts payable forgiven (Note 17),
resulting in an extraordinary gain.

Debenture holders converted $15,000 of debentures to 7,500 shares of
common stock valued at $14,041, net of $959 of debenture issuance costs
written-off.

The Company issued 205,000 shares of common stock valued at $296,850 in
exchange for services.

The Company declared a contractual dividend of $45,000 (Note 12).

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 47,072 shares of common stock valued at $84,781 in
exchange for services.

The Company had $24,328 of accounts payable forgiven (Note 17),
resulting in an extraordinary gain.

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, 1995 AND 1994

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Organization:

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

Principles of Consolidation:

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

Inventory:

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

Property and Equipment:

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

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

Intangible Assets:

Intangible assets have been accounted for under the provisions
of Accounting Principles Board Opinion No. 17 "Intangible
Assets".

The Company has not adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121)
in fiscal 1995. SFAS 121 is effective for years beginning after
December 15, 1995 and requires the Company to review long lived
assets and certain identifiable intangibles for impairment, by
estimating the future cash flows expected to result from the use
and disposal of the asset in comparison with the carrying value
of the asset. The Company has not determined what effect, if
any, early adoption of SFAS 121 would have on the 1995 financial
statements.

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:

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.

Concentrations of Credit:

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade
accounts receivable. Accounts receivable arise from the sale of
medical products to hospitals and medical clinics worldwide. The
Company performs ongoing credit evaluations of its customers'
financial condition, and generally requires no collateral from
its customers. The Company's credit losses are subject to
general economic conditions of the medical industry.

Reclassifications:

Certain reclassifications have been made in the 1994 financial
statements in order to conform with 1995 financial statement
presentation. These reclassifications have no effect on
accumulated deficit or net loss, as originally reported.

NOTE 2: MANAGEMENT'S OPERATING PLANS

As a result of recurring losses and negative cash flow from operations,
management has reviewed their operational and financial plans relative
to their ability to continue in existence.

Management's plans in this regard, include the completion of development
of their new proprietary and patented product to be used in the
intravenous ("IV") drug infusion industry. Their new IV product, the
"Pacer", has received FDA approval and is currently in its final phase
of testing. Currently, management is anticipating Pacer's market release
during the second quarter of fiscal 1996 and believes the product's
profitability will contribute greatly toward the future operations of
the Company.

In the event that this new product is not commercially successful,
management plans to trim general and administrative expenses, liquidate
any excess inventory, and sell or discontinue any non-performing
operating lines in order to focus full attention and all resources in
their remaining products.

NOTE 3: INVENTORY

Inventory consisted of the following at June 30:

1995 1994
---------- ----------
Raw materials $ 655,960 $ 929,634
Work in process 135,235 204,296
Finished goods 136,006 72,379
---------- ----------

Total inventory $ 927,201 $1,206,309
========== ==========

NOTE 4: NOTE RECEIVABLE

The Company had a note receivable resulting from the 1993 sale of its
medical billing and collections services segment. During 1995, the note
was repaid in exchange for the Company's forgiveness of $13,639 of the
remaining note balance.

NOTE 5: PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at June 30:

Estimated
Useful
Life
1995 1994 In Years
-------- -------- --------
Furniture and equipment $846,771 $844,122 5
Leasehold improvements 29,197 29,197 5-6
-------- --------
Total property and equipment 875,968 873,319
Less accumulated depreciation (737,199) (638,696)
-------- --------

Property and equipment, net $138,769 $234,623
======== ========

Depreciation expense was $98,503 and $132,746 for 1995 and 1994,
respectively.

NOTE 6: INTANGIBLE ASSETS

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

Estimated
Useful Life
1995 1994 In Years
----------- ----------- -----------
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 (1,300,915) (1,043,717)

Intangible assets, net $ 1,416,072 $ 1,673,270

Amortization expense was $257,198 and $271,698 for 1995 and 1994,
respectively.

NOTE 7: INVESTMENT IN DISCOVERY TECHNOLOGIES, INC.

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

NOTE 8: NOTE PAYABLE - RELATED PARTY

Note payable - related party consisted of the following at June 30:

1995 1994
-------- --------
Note payable to an entity owned by a
shareholder/director of the Company
The note bears interest at 10%, is
unsecured and due on demand. This note
was repaid in July, 1995 $160,000 $ --

Note payable to shareholder/officer of
the Company. The note bears interest at
8%, is unsecured and due on demand
This note was repaid during fiscal 1995 -- 10,000
-------- --------

Note payable - related party $160,000 $ 10,000
======== ========

NOTE 9: NOTES PAYABLE - UNRELATED PARTIES

Notes payable - unrelated parties consist of short-term loans bearing
interest at 10%, payable at the earlier of October 7, 1995, or when the
Company's gross proceeds from the sale of equity securities achieves
$500,000 (Note 14). The notes are secured by substantially all corporate
assets and were repaid in August 1995.

In connection with these notes and certain other commitments provided by
the noteholders, the Company issued to the note holders warrants to
purchase up to 1,000,000 shares of the Company's common stock at $.25
per share (Note 12). The warrants expire in April 1997 and are
redeemable by the Company after April 1, 1996 for $.05 per share.

NOTE 10: LONG-TERM DEBT

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

1995 1994
------- -------
Note payable - secured by computer and
software with interest at 15.2%. The note
matures May 1996 $ 3,948 $ 7,908

Note payable - secured by telephone system with
interest at 10.5%. The note was repaid in 1995 -- 3,895
------- -------
3,948 11,803
Less current portion (3,948) (7,399)
------- -------

Long-term debt $ -- $ 4,404
======= =======

NOTE 11: DEBENTURES PAYABLE

Debentures payable accrue interest at an annual rate of 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 rate
of one share of common stock for every $2.00 of debentures converted.

During 1995, debentures aggregating $15,000 were converted to 7,500
shares of the Company's common stock, resulting in an increase in equity
of $14,041, net of $959 of debenture issuance costs written-off.
Additionally in 1995, as the result of changes in board membership,
$35,000 of the June 30, 1994 debentures payable - related parties has
been reclassified as debentures payable - unrelated parties at June 30,
1995.

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

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

NOTE 12: CONTINGENCIES AND COMMITMENTS

Convertible/Redeemable Preferred Stock:

In May 1995 as settlement of a dispute with certain common
stockholders, the Company contractually committed to convert
400,000 shares of the Company's common stock into 400,000 shares
of the Company's Series A 10% cumulative preferred stock. These
stockholders are entitled to cumulative dividends accruing from
October 1994 aggregating $45,000, which are included in accrued
liabilities - unrelated parties at June 30, 1995.

The preferred stock will initially be convertible into shares of
common stock at a conversion price of $1.50. If the Company does
not redeem the preferred stock, one-half of the preferred stock
becomes convertible at a reduced conversion price on March 12,
1995 and the balance becomes convertible at a reduced conversion
price on August 12, 1996. In both cases, the reduced conversion
price is the lesser of $1.00 per share or 50% of the 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
the conversion.

As of June 30, 1995, the preferred stock had been authorized but
not issued. As a result, at June 30, 1995, the 400,000 shares of
common stock to be converted are reflected as common stock
outstanding in the 1995 financial statements.

Stock Options:

At June 30, 1995, 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 may not be less than 85% of the fair market
value on the date the option is granted.

As of June 30, 1995, the Company had qualified and nonqualified
options outstanding as follows:

Common Shares Exercise Expiration
Under Option Price Per Share Date
------------ --------------- -------------
7,500 $ 9.76 December 1996
125 $ 6.50 April 1997
43,814 $ 0.38 August 1997
35,875 $ 2.25 August 1997
11,750 $ 3.25 November 1997
5,750 $ 0.38 November 1997
750 $ 2.25 November 1997
1,250 $ 2.25 December 1997
2,500 $ 0.42 May 1998
25,000 $ 0.42 September 1998
1,250 $ 0.38 September 1998
21,250 $ 0.38 December 1998
6,250 $ 2.76 December 1998
25,000 $ 0.38 December 1999
25,000 $ 1.06 January 2000
25,000 $ 0.38 January 2000
300,000 $ 0.38 May 2000
---------
538,064
=========

Various officers and directors have been granted a total of
398,500 options under the Company's Stock Option Plans (Note 15)
which are included in the above table.

Options to purchase a total of 538,064 common shares were
outstanding, of which 119,067 are exercisable at June 30, 1995.

Stock Warrants:

At June 30, 1995, the Company had warrants outstanding as
follows:

Common Shares Exercise Expiration
Under Option Price Per Share Date
------------ --------------- -------------
180,000 $ 0.25 December 1995
1,097,694 $ 0.75 December 1996
100,000 $ 0.42 December 1996
1,000,000 $ 0.25 April 1997
93,750 $ 2.00 August 1997
400,000 $ 0.30 May 2000
400,000 $ 0.30 June 2000
-----------
3,271,444
===========

The following warrants have redemption rights:

Warrants that represent the right to acquire 1,097,694 shares at
$.75 per share are redeemable by the Company after November 15,
1995, warrants that represent the right to acquire 100,000
shares at $.42 per share are redeemable by the Company after
April 1, 1996 for $.05 per share, and warrants that represent
the right to acquire 1,000,000 shares at $.25 per share are
redeemable by the Company after April 1, 1996 for $.05 per
share.

Operating Leases:

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

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

1996 $ 172,800
1997 172,800
1998 172,800
1999 158,400
----------
$ 676,800
==========

Rent expense for 1995 and 1994 was $204,523 and $229,990,
respectively.

Warranty Reserve:

The Company sells the majority of its products with repair or
replacement warranties. The Company has established an accrued
warranty reserve of $19,327 and $60,006, at June 30, 1995 and
1994, respectively, for estimated future warranty claims. These
amounts are included in other accrued liabilities - unrelated
parties.

Litigation:

During 1994, the landlord of the Company's former corporate
offices filed a claim against the Company. The claim alleged
that the Company was in breach of its lease and sought damages
aggregating approximately $200,000.

During 1995, a settlement was reached which requires the Company
to pay $65,000 to the landlord. Pursuant to the settlement, the
$65,000 accrues interest at 11% and is payable in installments
through November 1995. As of June 30, 1995, $50,000 of the
settlement is included in accrued liabilities - unrelated
parties.

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. As of June 30, 1995, total
future minimum lease payments remaining are $102,900.

NOTE 13: 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. During fiscal 1995,
these subscriptions were received.

NOTE 14: PUBLIC SECURITIES OFFERING

At June 30, 1995, the Company was offering up to 1,400,000 units of its
securities for sale to the public at $1.00 per unit; each unit
consisting of four shares of common stock and two stock purchase
warrants, representing the right to purchase additional shares of common
stock. Through June 30, 1995, the Company had sold 2,195,388 shares of
common stock and 1,097,694 warrants to purchase shares of common stock,
resulting in proceeds net of commission and other direct expenses
(aggregating $139,244) of $409,604.

Subsequent to year end, the Company completed the offering and sold an
additional 1,968,560 shares of common stock and 984,280 warrants to
purchase shares of common stock resulting in additional proceeds net of
commissions and other direct expenses (aggregating $111,862) of
$380,278.

NOTE 15: RELATED PARTY TRANSACTIONS

Stock Options:

At June 30, 1995, the Company had outstanding the following
qualified and nonqualified stock options granted to officers and
directors:

Common Shares Exercise Expiration
Under Option Price Per Share Date
------------ --------------- -------------
35,250 $0.38 August 1997
4,500 $0.38 November 1997
2,500 $0.42 May 1998
25,000 $0.42 September 1998
6,250 $0.38 December 1998
25,000 $0.38 December 1999
25,000 $0.38 January 2000
275,000 $0.38 May 2000
---------
398,500
=========

Of the total outstanding options granted to officers and
directors as discussed above, options to acquire up to an
aggregate of 51,166 shares of common stock are exercisable at
June 30, 1995.

Technology and Patent Licensing Agreement:

The Company has an agreement with a former officer/director and
current stockholder to license certain technology and patent
rights through April 2000 in exchange for a fee. The fee is
based on a variable per unit sold rate. The maximum and minimum
fees to be paid for each of the years are as follows:

Year Ending Minimum Maximum
June 30, Fee Fee
------------- ----------- -----------
1994 $ 40,000 $ 100,000
1995 40,000 450,000
1996 40,000 450,000
1997 40,000 325,000
1998 40,000 150,000
1999 40,000 40,000
----------- ----------

$ 240,000 $1,515,000
=========== ==========

During 1995 and 1994, licensing fee expense was $40,000.

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 1995 and 1994, the Company had incurred $31,100
and $61,986, respectively, of fees to CBS, of which $34,813 and
$51,586, remained unpaid at June 30, 1995 and 1994,
respectively, and are included in other accrued liabilities
related parties.

During 1995, a former officer/director and current shareholder
of the Company provided product development services to the
Company in exchange for a fee aggregating $54,047.

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 incurred and paid $18,000. As of June 30,
1994, this individual was no longer a director of the Company.

Stock Grants:

During 1995, two members of the Company's Board of Directors
were granted an aggregate of 275,000 shares of the Company's
common stock as a bonus valued at $78,000. 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.

As of June 30, 1995 and 1994, none of the shares underlying
these grants had been issued, and accordingly the value of these
bonuses ($103,000 at June 30, 1995 and $25,000 at June 30, 1994)
are included in other accrued liabilities - related parties.

NOTE 16: INCOME TAXES

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

1995 1994
---- ----
Tax benefit computed at the maximum
federal statutory rate (34.0)% (34.0)%
Increase in taxes resulting from amortization
of intangible assets 6.0 9.0
Loss to be carried forward 28.0 25.0
---- ----

Income tax provision --% --%
==== ====

Deferred taxes consisted of the following at June 30:

1995 1994
----------- -----------
Asset:
Net operating loss carryforward $ 1,400,000 $ 1,275,000
Other 100,000 125,000
----------- -----------
Net deferred tax asset 1,500,000 1,400,000
Less valuation allowance (1,500,000) (1,400,000)
----------- -----------

Net deferred tax asset $ -- $ --
=========== ===========

For financial statement purposes, no tax benefit has been reported in
1995 and 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, 1995, the Company had net operating loss carryforwards and
unused investment tax credits as follows for income tax purposes:

Carryforward Net Operating Investment
Expires Loss Tax Credits
June 30, Carryforwards Carryforward
------------ ------------- -----------
2000 $ -- $ 16,060
2001 -- 2,468
2002 -- 9,464
2003 322,286 --
2004 122,457 --
2005 318,718 --
2006 235,901 --
2007 1,461,790 --
2008 281,054 --
2009 1,644,839 --
2009 1,600,000 --
---------- -----------

$5,987,045 $ 27,992
========== ===========

The utilization of the carryforwards is dependent upon the ability to
generate sufficient taxable income during the carryforward period. In
addition, the availability of these net operating loss carryforwards
offset future taxable income is significantly limited due to ownership
changes as defined in the Internal Revenue Code.

NOTE 17: EXTRAORDINARY ITEM - GAIN FROM EXTINGUISHMENT OF DEBT

During 1995, the Company negotiated with trade creditors to settle
$99,205 of past due accounts payable for $37,602. The transactions
resulted in an extraordinary gain of $61,603.

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

NOTE 18: GEOGRAPHICAL SEGMENT INFORMATION

1995 1994
----------- -----------
Revenues:
United States $ 2,954,888 $ 3,636,777
Europe 561,364 433,369
Eliminations -- --
----------- -----------

Consolidated $ 3,516,252 $ 4,070,146
=========== ===========

Operating profit (loss):
United States $(1,893,411) $(2,007,688)
Europe 50,172 6,729
Eliminations -- --
----------- -----------

Consolidated $(1,843,239) $(2,000,959)
=========== ===========

Identifiable Assets:
United States $ 3,491,948 $ 4,327,317
Europe 262,171 219,104
Eliminations -- --
----------- -----------

Consolidated $ 3,754,119 $ 4,546,421
=========== ===========

Exports of U.S. produced medical products were $756,869 and $794,836
during 1995 and 1994, respectively.

NOTE 19: 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.

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.

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

ASSETS
Current assets:
Cash $135,928
Accounts receivable, net 152,747
Inventory (Note 4) 1,072,252
Other current assets 32,321
------

Total current assets 1,393,248

Property and equipment, net 96,259
Intangible assets, net 1,292,645
Other assets 140,373
-------

Total assets $2,922,525

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Note 5) $154,036
Accrued compensation and payroll taxes 211,221
Other accrued expenses - related parties (Note 5) 22,132
Other accrued expenses - unrelated parties (Note 5) 150,795
Note payable - related party -0-
Notes payable - unrelated parties -0-
Deferred revenue 138,669
Current portion of long-term debt 1,818

Total current liabilities 678,671

Debentures payable - related parties 40,000
Debentures payable - unrelated parties 540,000
-------

Total liabilities 1,258,671

Shareholders' equity:
Cumulative preferred stock, $.01 par value; 600,000
10,000,000 shares authorized, 400,000 and
none issued and outstanding, respectively.
(Note 6)

Common stock, $.01 par value; 100,000,000 shares
11,917,768 authorized,
8,392,694 and 5,040,423 issued and outstanding,
respectively (Notes 5,6 &7)
Accumulated deficit (10,791,853)

Equity adjustment from foreign currency translation (62,061)

Total shareholders' equity 1,663,854

Total liabilities and shareholders' equity $2,922,525

HEALTHWATCH, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
(UNAUDITED)

1995 1994
---- ----

Product sales $996,718 $1,963,625
Product cost of sales 759,237 1,437,789
------- ---------

Gross profit 237,481 525,836

Operating costs and expenses:
Selling, general and administrative 666,380 1,056,119
Depreciation and amortization 174,398 187,281
Research and development 197,809 257,898
------- -------

Total operating costs and expenses 1,038,587 1,501,298

Loss from continuing operations (801,106) (975,462)

Other income (expense):
Interest income 7,200 4,052
Interest expense (35,624) -0-
Miscellaneous (Note 5) 10,102 (33,229)
------ --------

Total other income (expense) (18,322) (29,177)
-------- --------

Net loss $(819,428) $(1,004,639)
========== ===========

Net loss per share (Note 3) ($0.10) $ (0.38)
========== ===========

Weighted average number of shares outstanding 7,842,432 2,656,731

HEALTHWATCH, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND 1994
(UNAUDITED)

1995 1994
---- ----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(819,428) $(1,004,639)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Stock issued as payment of expenses 97,436 146,700
Depreciation and amortization 174,398 187,281
Gain on Extinguishment of Debt (10,102) -0-

Decrease (increase) in assets:
Accounts receivable 133,209 426,373
Inventory (145,051) (95,451)
Other current assets 102,266 17,599
Other assets (1,820) 10,656

Increase (decrease) in liabilities:
Accounts payable (94,766) (73,880)
Accrued expense - related parties 4,946 -0-
Accrued expenses - unrelated parties (219,378) (25,732)
Deferred revenue (38,837) (23,023)
-------- --------

Net cash used in operating
activities (817,127) (434,096)
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (8,461) -0-
Payments received on note receivable -0- 55,948

Net cash provided by investing
activities (8,461) 55,948
------- ------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of note payable (285,000) (10,000)
Repayment of long-term debt (2,130) (5,839)
Net proceeds (costs) of issuance of
common stock 530,777 (13,164)
Payments received on stock
subscriptions -0- 495,000

Net cash provided by (used in)
financing activities 243,647 465,997
------- --------

Effect of exchange rate changes on cash (25,112) (39,007)
-------- --------

Increase (decrease) in cash (607,053) 48,842

Cash - beginning of period 742,981 49,934
------- ------

Cash - end of period $135,928 $ 98,776
======== ========

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

Note 1: Principles of Presentation

The accompanying unaudited financial statements reflect all adjustments which in
the opinion of management are necessary for a fair presentation of the Company's
financial position as of December 31, 1995, the results of operations and its
cash flows for the six months ended December 31, 1995 and 1994.

Note 2: Management's Operating Plans

As a result of recurring losses and negative cash flow from operations,
management has reviewed its operational and financial plans relative to their
ability to continue in existence. Management's plans in this regard, include the
completion of development of the Company's new proprietary product to be used in
the intravenous ("IV") drug infusion industry. The Company's new IV product, the
Pacer, has received FDA approval. The Company commenced the first hospital
evaluation of this product in November, 1995. Management believes the product's
profitability will contribute greatly toward the future operations of the
Company. In the event that this new product is not commercially successful,
management plans to trim general and administrative expenses, liquidate any
excess inventory, and sell or discontinue any non-performing operating lines in
order to focus full attention and all resources on its remaining products.

Note 3: Net Income (Loss) per Share

The net income (loss) per share in the fiscal 1996 and 1995 periods were
computed based on the weighted average number of shares outstanding during the
periods without taking into effect outstanding options as their effect would be
either anti-dilutive or dilutive by less than 3%.

Note 4: Inventory

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

12/31/95 6/30/95
--------------------- ---------------------

Raw Materials $643,351 $655,960
Work in process 300,231 135,235
Finished goods 128,670 136,006
------- -------
$1,072,252 $927,201
---------- --------

Note 5: Supplemental schedule of non-cash operating, investing and financing
activities during the six months ended December 31, 1995.

The Company had $10,102 of accounts payable forgiven resulting in a gain from
the extinguishment of debt. The Company issued an aggregate of 747,528 shares of
its Common Stock in payment of trade accounts payable of $351,338. The Company
issued an additional 100,000 shares valued at $40,400 in exchange for services.
The Company issued 285,000 shares of its Common Stock valued at $97,400 in
payment of shares granted as a bonus in fiscal 1994 and 1995 and 11,500 shares
valued at $5,405 in payment of shares granted as a bonus in fiscal 1996. As of
December 31, 1995, the Company declared a preferred dividend of $15,000.

Note 6: Convertible/Redeemable Preferred Stock:

In May 1995, as settlement of a dispute with certain stockholders, the Company
contractually committed to convert 400,000 shares of the Company's Common Stock
into 400,000 shares of the Company's Series A 10% - cumulative preferred stock.
During the quarter ended December 31, 1995, these stockholders were paid $60,000
of cumulative dividends which were accrued from October 1994 through September
1995. Additional accrued dividends aggregating $15,000 are included in accrued
liabilities - unrelated parties at December 31, 1995.

The preferred stock will initially be convertible into shares of Common Stock at
a conversion price of $1.50. If the Company does not redeem the preferred stock,
one-half of the preferred stock became convertible at an improved conversion
rate on March 12, 1996 and the balance becomes convertible at an improved
conversion rate on August 12, 1996. In both cases, the improved conversion rate
is the greater of $1.50 divided by the lesser of $1.00 or 50% of the market
value for the Common Stock, not to be less than $.25 per share, on the
conversion date.

Note 7: Common Stock

During the six months ended December 31, 1995, the Company issued an aggregate
of 635,000 shares of Common Stock valued at $179,000 as the result of warrants
exercised at prices ranging from $.25 to $.30 per share.

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
Page
Available Information..................... 1
Prospectus Summary........................ 2
Risk Factors.............................. 5
Market for the Company's
Common Stock and
Related Shareholder Matters............. 10
Use of Proceeds........................... 10
Proforma Financial Statements............. 11

Management's Discussion and
Analysis................................ 12
Business.................................. 19
Management................................ 32
Principal Shareholders.................... 36
Description of Securities................. 37
Plan of Distribution...................... 41
Legal Matters............................. 41
Experts................................... 42
Financial Statements......................F-1

HEALTHWATCH, INC.

-------------------
P R O S P E C T U S
-------------------

April __, 1996

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

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 - previously filed.

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 Minneapolis--previously filed.

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

10.16 Consultancy Agreement dated May 1, 1995 between HealthWatch,
Inc. and Boulder Financial Group - previously filed.

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 amended to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Vista, State of California, on April
__, 1996.

HEALTHWATCH, INC.

By /s/ Lindley S. Branson
Lindley S. Branson
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 9th day of
April, 1996, by the following persons in the capacities indicated:

/s/ Lindley S. Branson President, Chief Executive Officer and
Lindley S. Branson Chief Financial Officer (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/ Annette D. Agner

INDEX TO EXHIBITS
FILED WITH POST EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT ON FORM SB-2
Registration No.: 33-88126

<S> <C> <C>
Exhibit No. Description Page No.

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>

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