HEALTHWATCH INC, SB-2, 1997-06-03

HEALTHWATCH INC
SB-2, 1997-06-03
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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As filed with the Securities and Exchange Commission on June 3, 1997.

Registration No. __________

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

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

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

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)

Daniel J. Kelly
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 /

<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE

- --------------------------------------------------------------------------------------------------------------------------
Title of securities Amount Proposed maximum Proposed maximum aggregate Amount of
to be registered to be registered offering price per share (1) offering price (1) registration fee (1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.07 1,500,000 $1.15625 $1,734,375 $525.57
par value Shares
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and (h) of Regulation C as of the close of the market on
May 29, 1997.

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

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.

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

Subject to Completion, dated June 3, 1997

HEALTHWATCH, INC.

1,500,000 Shares of Common Stock

The shares offered hereby are 1,500,000 shares (the "Shares") of Common
Stock, $.07 par value ("Common Stock"), of HealthWatch, Inc. ("HealthWatch" or
the "Company"), issued upon exercise of outstanding stock purchase warrants (the
"Warrants") of the Company, which may be sold from time to time by various
selling shareholders (the "Selling Shareholders") for their own accounts. The
Company has been advised that the Selling Shareholders may from time to time
sell the Shares to or through brokers or dealers in one or more transactions, on
the Nasdaq Small Cap Market or otherwise, at market prices prevailing at the
time of sale, at prices relating to such prevailing market prices, or at
negotiated prices. The Warrants represent the right to purchase shares of Common
Stock at any time on or before 5:00 p.m., California time, November 14, 1998.
The Company has granted the Warrant holders the right to exercise the Warrants
at a reduced exercise price of $.____ per share if the Warrants are exercised
prior to August 31, 1997. Warrants not exercised prior to August 31, 1997, will
again be exercisable at $2.00 per share, the original exercise price of the
Warrants.

The Company's Common Stock is listed on the Nasdaq Small Cap Market
under the symbol HEAL. On June __, 1997, the last reported sale price of Common
Stock, as reported on the Nasdaq Small Cap Market, was $______ per share.

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 NOR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

Since the Common Stock registered hereunder is being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Act"), the Company cannot include herein information
about the price to the public of the Common Stock or the proceeds to the Selling
Shareholders. The Company will receive no proceeds from any sales of Common
Stock by the Selling Shareholders, and the Company is obligated to pay the
expenses of this offering, which are estimated at $8,000. The Selling
Shareholders will pay their own expenses in connection with sales of the Common
Stock. The Selling Shareholders and any brokers or dealers executing selling
orders on their behalf may be deemed "underwriters" within the meaning of the
Act, in which event the usual and customary selling commissions which may be
paid to the brokers or dealers may be deemed to be underwriting commissions
under the Act. There can be no assurance that any or all of the Shares
registered hereunder will be sold. See "PLAN OF DISTRIBUTION."

The date of this Prospectus is __________ __, 1997.

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 (the "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 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. In addition, the Commission maintains a web site
(address http://www.sec.gov) on the Internet that contains reports, proxy
statements and other information for companies like HealthWatch which file
electronically.

The Company has filed with the Commission a Registration Statement on
Form S-B2 under the Securities Act of 1933, as amended (the "Act"), with respect
to the securities offered hereby. This Prospectus omits certain information
included in such Registration Statement. For further information about the
Company and its securities, reference is made to such Registration Statement and
to the exhibits filed as part thereof or otherwise incorporated therein. Each
summary in this Prospectus of information included in the Registration Statement
or any exhibit thereto is qualified in its entirety by this reference to such
information or exhibit.

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS HAS
BEEN ADJUSTED TO REFLECT A ONE-FOR-SEVEN REVERSE SPLIT OF THE COMPANY'S COMMON
STOCK EFFECTIVE AS OF MAY 13, 1996.

THE COMPANY

HealthWatch develops, manufactures and markets medical products,
including the Pacer, a new infusion therapy ("IV") device, Cambridge
electrocardiograph stress test systems and Life Sciences vascular diagnostic
systems. The Company's primary focus since 1993 has been on the development of
the Pacer. The Pacer, which is less expensive, smaller and lighter and easier to
use than most competing infusion therapy devices, was introduced to the
marketplace during fiscal 1996.

Prior to the introduction late in the 1980's of diagnostic-related
groups ("DRGs"), health-care providers were generally compensated for their
services on a cost-plus basis. In this environment, product features and
technology drove product purchase decisions, even if the benefits derived from
the added features and higher technology did not justify the higher cost. With
the advent of DRGs and managed care, third-party payors shifted their payment
policies toward fixed fees for services rendered or capitated payment
arrangements whereby providers were reimbursed a fixed amount for patients
serviced by their organizations. In today's health-care environment, providers
are required to focus on cost, to carefully match patient benefits with the cost
of the services provided.

HealthWatch's strategy is to develop and market medical products
designed to improve the cost-effective delivery of high-quality health care. The
Pacer, the Company's first infusion therapy product, enables hospitals,
long-term care facilities, home-care agencies and others to maintain the quality
of the IV therapy they provide while also reducing significantly the cost of
such services. These cost savings are achieved both due to the Pacer's lower
price than the price of most competing IV systems and because the Pacer can be
used with generic IV tubing which usually is substantially less expensive than
proprietary dedicated IV tubing required to be used with many competing systems.

Markets for the Company's Cambridge and Life Services 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. 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 less expensive and easier to use than most competing products.

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

THE OFFERING

Securities Offered ................... 1,500,000 shares Common Stock

Common Stock Outstanding.............. 3,510,670 shares(1)

Common Stock Outstanding Following
Offering......................... 5,010,670(2)

Use of Proceeds....................... The Company will receive no proceeds
from any sales of Common Stock by the
Selling Shareholders. The Company will,
however, receive proceeds upon the
exercise of the Warrants prior to the
sale of any of the shares subject
thereto. Proceeds received upon the
exercise of the Warrants, if any, will
be used for working capital purposes and
potentially for the payment of certain
outstanding Convertible Debentures.

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

(1) Shares outstanding at May 31, 1997. Does not include shares of Common
Stock reserved for issuance upon the exercise of stock purchase
warrants and options or the conversion of the Company's 10% Convertible
Senior Debentures (the "Debentures").

(2) Assumes all of the Warrants are exercised.

SELECTED FINANCIAL DATA

STATEMENT OF INCOME DATA:

NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
---------------------------- --------------------------------------------
1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Product sales ................. $ 1,611,658 $ 1,531,833 $ 2,041,464 $ 3,516,252 $ 4,070,146
Gross margin .................. 278,634 358,371 438,010 1,116,709 1,118,656
Loss from continuing operations (1,416,941) (1,196,671) (1,198,547) (1,843,239) (2,000,959)
Total other income (expense) .. (48,818) (32,656) (58,166) 12,785 (839,654)
Gain from reduction in debt
obligation .................... -- -- 7,974 61,603 24,328
Net (loss) .................... $(1,465,759) $(1,229,327) $(1,968,739) $(1,768,851) $(2,816,285)
=========== =========== =========== =========== ============
Net (loss) per share .......... $ (0.66) $ (1.05) $ (1.67) $ (4.40) $ (10.31)
=========== =========== =========== =========== ============
Weighted average number of
shares outstanding ............ 2,237,659 1,169,871 1,175,434 402,310 273,274

</TABLE>

BALANCE SHEET DATA:

March 31, 1997
----------------------------
Current Assets $1,405,585
Total Assets 2,577,680
Current Liabilities 1,337,080
Accumulated Deficit (13,429,421)
Shareholders' Equity 1,240,600
Working Capital 68,505

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors in
evaluating the Company and its business before purchasing the Shares of Common
Stock offered hereby.

DECLINE IN REVENUES; RECENT OPERATING LOSSES. The Company's product
sales have declined in each of the past three fiscal years, compared to the
prior fiscal year, 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
on the marketing of the PACER, its first IV product.

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.
There can be no assurance that the Company will be able to operate at a profit
in the future.

NEED FOR ADDITIONAL FINANCING. The Company will need at least $800,000
of additional debt or equity capital to sustain its operations during the next
twelve months and $580,000 to pay the Debentures which are due and payable in
September 1997. 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.

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.

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; LIMITED SALES AND MARKETING EXPERIENCE. 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.

The Company has limited experience in the areas of sales, marketing and
distribution. The Company's sales and marketing staff will require additional
personnel in the future. There can be no assurance that the Company will be able
to build an adequate sales and marketing staff, that establishing such a sales
and marketing staff will be cost-effective, or that the Company's sales and
marketing efforts will be successful.

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.

Disputes regarding the Company's intellectual property could force the
Company into expensive and protracted litigation or costly agreements with third
parties. An adverse determination in a judicial or administrative proceeding or
failure to reach an agreement with a third party regarding intellectual property
rights could prevent the Company from manufacturing and selling certain of its
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations.

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 four 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 that these
competitors will continue to compete aggressively with tactics such as offering
volume discounts based on "bundled" purchases of a broader-range of medical
equipment and supplies, a tactic that the Company is unable to pursue except on
a joint venture basis. There can be no assurance that such competition will not
adversely affect the Company's results of operations or its ability to maintain
or increase sales and market share. Competition could require that the Company
commit significantly greater resources to the introduction of its IV products
than would otherwise be required.

The market for infusion therapy products is affected by continuing
improvements and enhancements in technology. There can be no assurance that the
Company's competitors or potential competitors will not succeed in developing or
marketing products that provide more desirable characteristics, or are more
effective or less expensive than those developed or marketed by the Company. In
addition, technological advances in drug delivery systems, the development of
therapies that can be administered by methods other than infusion therapy, and
the development of new medical treatments that cure certain complex diseases or
reduce the need for infusion therapy could adversely impact the Company's
business.

LIMITED ASSEMBLY EXPERIENCE. The Company's products are currently
assembled by the Company at its facility. To be successful, the Company must
assemble its products in compliance with regulatory requirements, in sufficient
quantities and on a timely basis, while maintaining product quality and
acceptable assembly costs. The Company has limited experience assembling its
products in large commercial quantities. There can be no assurance that the
Company will be able to assemble products in large commercial quantities on a
timely basis and at an acceptable cost. If the Company becomes unable to
assemble the Pacer at its facility in a timely and efficient manner, the
Company's ability to supply product to its customers may be adversely affected
until such time as the Company is able to establish alternative assembly
arrangements.

DEPENDENCE ON THIRD-PARTY REIMBURSEMENT. The Company's products are
generally purchased by health-care providers, which then seek reimbursement from
various public and private third-party payors, such as Medicare, Medicaid and
indemnity insurers, for health-care services provided to patients. Government
and private third-party payors are increasingly attempting to contain health
care costs by limiting both the extent of coverage and the reimbursement rate
for new diagnostic and therapeutic products and services. The Health Care
Financing Administration of the United States Department of Health and Human
Services ("HCFA"), which administers Medicare, and most private insurance
companies do not provide reimbursement for services that they determine to be
experimental in nature or that are not considered "reasonable and necessary" for
diagnosis or treatment. Many private insurers are influenced by HCFA actions in
making their own coverage decisions on new products or services. There can be no
assurance that third-party reimbursement for the services provided using the
Company's products will continue to be available to its customers or that any
such reimbursement will be adequate. Disapproval of, or limitations in, coverage
by HCFA or other third-party payors could materially and adversely affect market
acceptance of the Company's products which could, in turn, have a material
adverse affect on the Company's business, financial condition and results of
operations.

GOVERNMENT REGULATION. The medical devices manufactured and marketed by
the Company are subject to regulation by the FDA and, in some instances, by
state and foreign authorities. Pursuant to the Federal Food, Drug, and Cosmetic
Act (the "FFDCA") and the regulations promulgated thereunder, the FDA regulates
the clinical testing, manufacture, packaging, labeling, distribution and
promotion of medical devices.

Pursuant to the FFDCA, medical devices intended for human use are
classified into three categories, Classes I, II and III, on the basis of the
controls deemed necessary by the FDA to reasonably assure their safety and
effectiveness. Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to good manufacturing practice
("GMP") regulations) and Class II devices are subject to general and special
controls (for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval ("PMA") from the FDA to ensure their safety and
effectiveness (for example, life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices). Electronic infusion devices are classified by the FDA
as Class II medical devices.

The Company received 510(k) clearance to begin marketing the Pacer in
the United States in April 1994.

The FFDCA requires the filing of a new 510(k) Submission when, among
other things, there is a major change or modification in the intended use of the
device or a change or modification, including product enhancements, to a legally
marketed device that could significantly affect its safety or effectiveness. A
device manufacturer is responsible for making the initial determination as to
whether a proposed change to a cleared device or to its intended use
necessitates the filing of a new 510(k) Submission. The Company does not believe
that changes made to the PACER since the original 510(k) Submission require a
new 510(k) Submission for the PACER. However, there can be no assurance that the
FDA would agree with the Company's determination.

Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. Device manufacturers are required to register their establishments and
list their devices with the FDA, and are subject to periodic inspections by the
FDA and certain state agencies. The FFDCA requires devices to be manufactured in
accordance with GMP regulations which impose certain process, procedure and
documentation requirements upon the Company with respect to manufacturing and
quality assurance activities. The FDA has proposed changes to the GMP
regulations which, if finalized, would likely increase the cost of complying
with GMP requirements. The Company believes that its manufacturing and quality
control procedures substantially conform to the requirements of FDA regulations.

In addition, the Medical Device Reporting ("MDR") regulation obligates
the Company to inform the FDA whenever there is reasonable evidence to suggest
that one of its devices may have caused or contributed to death or serious
injury, or where one of its devices malfunctions and, if the malfunction were to
recur, the device would be likely to cause or contribute to a death or serious
injury.

Labeling and promotion activities are also subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.

If, as a result of FDA inspections, MDR reports or information derived
from any other source, the FDA believes the Company is not in compliance with
the law, the FDA can refuse to clear pending 510(k) Submissions; withdraw
previously cleared 510(k) Submissions; require notification to users regarding
newly found unreasonable risks; request repair, refund or replacement of faulty
devices; request corrective advertisements, formal recalls or temporary
marketing suspension; impose civil penalties; or institute legal proceedings to
detain or seize products, enjoin future violations, or seek criminal penalties
against the Company, its officers or employees. Civil penalties for FFDCA
violations may be assessed by the FDA in lieu of or in addition to instituting
legal action. Civil penalties may range up to $15,000 per violation for
violations of the FFDCA, and a maximum of $1,000,000 per proceeding. Civil
penalties may not be imposed for GMP violations, unless the violations involve a
significant or knowing departure from the requirements of the FFDCA or a risk to
public health. The FDA provides manufacturers with an opportunity to be heard
prior to the assessment of civil penalties. If civil penalties are assessed,
judicial review is available.

The Company intends to export its products to Europe, Japan and other
foreign countries. Exports of products that have market clearance from the FDA
in the United States do not require FDA authorization for export. However,
foreign countries often require, among other things, an FDA certificate for
products for export (a "CPE"). To obtain a CPE the device manufacturer must
certify to the FDA that the product has been granted clearance in the United
States and that the manufacturing facilities appeared to be in compliance with
GMPs at the time of the last FDA inspection. The FDA will refuse to issue a CPE
if significant outstanding GMP violations exist.

International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from country
to country. Many countries also impose product standards, packaging and labeling
requirements, and import restrictions on devices. In addition, each country has
its own tariff regulations, duties and tax requirements. The Company plans to
use distributors to assist in obtaining any necessary foreign governmental and
regulatory approvals. The Company does not currently have its products
registered or approved in any countries requiring an extensive registration or
approval process and has, therefore, not sold any products in such countries.

The Company has received Underwriters Laboratory, Inc. product
recognition under UL 544, Standard for Medical and Dental Equipment for the
Pacer. To maintain "UL" status, the Company will be subject to quarterly
inspections by Underwriters Laboratory, Inc.

The Company and its products are also subject to a variety of state and
local laws and regulations in those states or localities where its products are
or will be marketed. Use of the Company's products is subject to inspection,
quality control, quality assurance, proficiency testing, documentation and
safety reporting standards promulgated by JCAHO. Various states and
municipalities may also have similar regulations.

Manufacturers are also subject to numerous federal, state and local
laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance that
the Company will not be required to incur significant costs to comply with such
laws and regulations.

PRODUCT LIABILITY EXPOSURE. Manufacturers of medical devices face the
possibility of substantial liability for damages in the event that the use of
their products is alleged to have resulted in adverse effects to a patient. The
Company maintains product liability insurance with coverage limits of $1.0
million per occurrence with an annual aggregate policy limit of $1.0 million.
The Company's product liability insurance provides coverage only for products
currently manufactured and distributed. There can be no assurance that liability
claims will not exceed the limits of such coverage or that such insurance will
continue to be available on commercially reasonable terms or at all.
Furthermore, the Company does not maintain insurance that would provide coverage
for any costs or losses resulting from any required recall of its products due
to alleged defects, whether instituted by the Company or a regulatory agency.

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.

LIMITATIONS ON BROKER-DEALER SALES OF COMPANY COMMON STOCK;
APPLICABILITY OF "PENNY STOCK RULES". Federal regulations under the Securities
and Exchange Act of 1934, as amended, (the "Exchange Act") regulate the trading
of so-called "penny stocks" (the "Penny Stock Rules"), which are generally
defined as any security not listed on a national securities exchange or Nasdaq,
priced at less than $5.00 per share and offered by an issuer with limited net
tangible assets and revenues. In addition, equity securities listed on Nasdaq
which are priced at less than $5.00 are deemed penny stocks for the limited
purpose of Section 15(b)(6) of the Exchange Act. Therefore, during the time in
which the Common Stock is quoted on the Nasdaq SmallCap Market and is priced
below $5.00 per share, trading of the Common Stock is subject to the provisions
of Section 15(b)(6) of the Exchange Act which make it unlawful for any
broker-dealer to participate in a distribution of any penny stock without the
consent of the Securities and Exchange Commission if, in the exercise of
reasonable care, the broker-dealer is aware of or should have been aware of the
participation of a previously sanctioned person. In such event, it may be more
difficult for broker-dealers to sell the Company's Common Stock and purchasers
of the shares of Common Stock may have difficulty in selling their shares in the
future in the secondary trading market.

In the event that the Company's Common Stock is delisted from the
Nasdaq SmallCap Market and the Company fails other relevant criteria, trading of
the Common Stock would be subject to the full range of the Penny Stock Rules.
Under these rules, broker-dealers must take certain steps prior to selling a
"penny stock," which steps include: (i) obtaining financial and investment
information from the investor; (ii) obtaining a written suitability
questionnaire and purchase agreement signed by the investor; and (iii) providing
the investor a written identification of the shares being offered and in what
quantity. If the Penny Stock Rules are not followed by the broker-dealer, the
investor has no obligation to purchase the shares. Accordingly, delisting from
the Nasdaq SmallCap Market and the application of the comprehensive Penny Stock
Rules may make it more difficult for broker-dealers to sell the Company's Common
Stock and purchasers of the shares of Common Stock may have difficulty in
selling their shares in the future in the secondary trading market.

POSSIBLE DILUTIVE EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND
CONVERTIBLE DEBENTURES. As of May 31, 1997, there were 3,311,144 shares of
Common Stock reserved for issuance upon the exercise of stock purchase warrants
or options or the conversion of Debentures. To the extent the trading price of
the Company's Common Stock at the time of exercise or conversion of any such
warrants, options or Debentures exceeds the exercise or conversion prices, any
such exercise or conversion will have a dilutive effect on the Company's
shareholders.

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

The number of record holders of the Company's Common Stock on April 30,
1997 was 723. The high and low sale prices as reported on the Nasdaq Small Cap
Market are shown in the table below (adjusted to reflect the one-for-seven
reverse stock split effective May 13, 1996). These quotations represent prices
between dealers, and do not include retail markups, markdowns or commissions.

QUARTER ENDED HIGH LOW
- ------------- ---- ---

1995

March 31 2.84375 2.625
June 30 3.28125 1.96875
September 30 4.8125 2.1875
December 31 4.375 2.1875

1996

March 31 3.9375 2.1875
June 30 4.188 2.00
September 30 4.50 3.1875
December 31 3.50 1.75

1997

March 31 3.21875 2.0625
April 1 - May 29 3.03125 1.0625

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

USE OF PROCEEDS

The Company will receive no proceeds from any sales of Common Stock by
the Selling Shareholders. The Company will, however, receive proceeds equal to
the exercise price of the Warrants upon any exercise of the Warrants by the
Selling Shareholders prior to their sale of Shares pursuant to this Prospectus.
The net proceeds, if any, from the exercise of the Warrants will be used by the
Company primarily for working capital purposes. In addition, up to $580,000 of
such proceeds may be used for the repayment of the Company's 10% Convertible
Subordinated Debentures which are due September 1, 1997. The Debentures were
issued in 1994 to various private investors. The Company has had preliminary
discussions with representatives of holders of certain of the Debentures and
believes it may be possible to either extend the due date for the Debentures or
have them converted into shares of the Company's Common Stock if the Company
would reduce the conversion price (currently $14.00 per share) of the
Debentures. The Company believes that it needs to raise from $800,000 to
$1,000,000 to fund its operations through the end of fiscal 1998. This is in
addition to any funds which may be required to pay the Debentures.

The Company's estimate that it needs from $800,000 to $1,000,000 of
additional capital to fund its operations through fiscal 1998 is based upon
various assumptions regarding the working capital that will be required to
introduce the Pacer, overall working capital requirements, the amount required
to be paid on accounts payable and revenues from product sales. 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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. 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. During the quarter ended March 31, 1997, the
Company reported the first sales of the PACER, its new IV product.

RESULTS OF OPERATIONS

FIRST NINE MONTHS OF FISCAL 1997 COMPARED TO FIRST NINE MONTHS OF
FISCAL 1996. The following table compares the results of operations for the
first nine months of fiscal 1997 and the first nine months of fiscal 1996 to
present a comparative basis for the analysis of the differences in operating
results for those periods.

Nine Months Ended March 31, 1997 vs 1996
----------------------------------------
1997 1996 Increase (Decrease)
------------------- --------------------
<S> <C> <C> <C> <C>
Product sales $ 1,611,558 $ 1,531,833 $ 79,825 5.2%
Product cost of sales 1,333,024 1,173,462 159,562 13.6
----------- -----------
Gross profit 278,634 358,371 (79,737) (22.2)

Selling, general & administrative 1,208,509 1,030,246 178,263 17.3
Research & development 267,426 263,200 4,226 1.6
Depreciation & amortization 219,640 261,596 (41,956) (16.0)
----------- -----------
Total operating costs & expenses 1,695,575 1,555,042 140,533 9.0
----------- -----------
Loss from continuing operations (1,416,941) (1,196,671) 220,270 18.4
Other income (expenses):
Interest income -- 7,998 (7,998) N/M
Interest expense (48,818) (50,756) (1,938) (3.8)
Miscellaneous -- 10,102 (10,102) N/M
----------- -----------
Total other income (expenses) (48,818) (32,656) 16,162 49.5
----------- -----------
Net (loss) ($1,465,759) ($1,229,327) $ 237,432 19.3%
=========== ===========

</TABLE>

Revenues for the 1997 period increased 5.2% compared to the similar
period in 1996. The increased revenues were primarily due to sales of the
Company's first IV product, the Pacer. The Company believes that sales of its
Life Sciences and Cambridge products 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.

Gross margins were 17% for the 1997 nine-month period compared to 23%
for the similar 1996 period. The lower gross margins in 1997 were due primarily
to increased cost of parts and materials and increased salary expenses.

Selling, general and administrative expenses as a percent of sales were
75% for the 1997 period compared to 67% for the similar 1996 period. The
increase in the 1997 period was due primarily to planned expenditures associated
with the introduction of the new IV product, increased promotional expenses, and
increased salary expenses. The decrease in net loss per share in the 1997 period
is due to the increase in the number of outstanding shares.

1996 COMPARED TO 1995. The following table compares the results of
operations for fiscal 1996 fiscal 1995 to present a comparative basis for the
analysis of the differences in operating results for those periods.

<TABLE>
<CAPTION>
1996 vs 1995
------------------- ----------------------
1996 1995 Increase (Decrease)
------------------- ----------------------
<S> <C> <C> <C> <C>
Product sales. . . . . . . . . . . . $ 2,041,464 $ 3,516,252 ($1,474,788) (41.9%)
Product cost of sales. . . . . . . . 1,603,454 2,399,543 (796,089) (33.2)
----------- -----------
Gross profit . . . . . . . . . . . 438,010 1,116,709 (678,699) (60.8)

Selling, general & administrative. . 1,685,445 2,105,148 (419,703) (19.9)
Research & development . . . . . . . 345,240 499,099 (153,859) (30.8)
Depreciation & amortization. . . . . 325,872 355,701 (29,829) (8.4)
----------- -----------
Total operating costs & expenses . 2,356,557 2,959,948 (603,391) (20.4)
----------- -----------
Loss from continuing
operations. . . . . . . . . . . (1,918,547) (1,843,239) (75,308) (4.1)
Other income (expenses):
Interest income. . . . . . . . . . 8,030 4,546 3,484 76.6
Interest expense . . . . . . . . . (66,196) (76,943) (10,747) (14.0)
Miscellaneous. . . . . . . . . . . 0 85,182 85,182 100
----------- -----------
Total other income (expenses). . (58,166) 12,785 (70,951) (555.0)
----------- -----------
Extraordinary Item . . . . . . . . 7,974 61,603 (53,629) (87.1)
----------- -----------
Net Loss. . . . . . . . . . . . . . ($1,968,739) ($1,768,851) $ 199,888 11.3%
=========== ===========
</TABLE>

Revenues declined 41.9% during 1996, compared to 1995, due primarily 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.

Cost of products sold were 33.2% lower in 1996, compared to 1995, due
primarily to lower sales and to reduced operating costs. Gross margin was 21.5%
in 1996, compared to 31.8% for 1995. The lower gross margin in 1996 was due
primarily to the decreased sales revenues during the period.

Selling, general and administrative expenses as a percent of sales were
82.6% in 1996, compared to 59.9% in the prior year. This increase was due
primarily to the lower sales level and to planned expenditures associated with
the introduction of the new IV product and increased promotional expenses.

Research and development expenses decreased 30.8% in 1996, compared to
1995, 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.

Interest expenses decreased 14% in 1996, compared to 1995, due to a
lower level of borrowing. Miscellaneous income decreased 100% in 1996, compared
to 1995, due primarily to the sale in 1995 of the Telemed interpretive software.

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) (101.5)
---------- ----------
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.

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.

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.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1997, the Company had $557,935 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. During fiscal
1997, the Company raised $1,352,100 of additional working capital primarily
through the issuance of 500,000 Units of its securities, each Unit consisting of
one share of Preferred Stock and three Warrants. The Preferred Stock has been
converted into an aggregate of 1,500,000 shares of Common Stock.

The Company believes that with the proceeds from the sale of the
500,000 Units during fiscal 1997, it has sufficient working capital to fund
operations through the balance of fiscal 1997. However, the Company believes
that it needs to raise from $800,000 to $1,000,000 of additional capital to fund
the sales and marketing expenses for the rollout of its new IV product and for
general working capital purposes during the next twelve months. In addition, the
Company will either have to raise an additional $580,000 to pay the Debentures
which are due and payable September 1, 1997, or enter into agreements with the
holders of such securities to extend the due date thereof or to convert them
into shares of the Common Stock at a reduced conversion rate (current conversion
rate is $14.00 per share).

SAFE HARBOR STATEMENT

Information and statements in this report, other than historical
information, should be considered forward looking and reflect management's
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to, the items discussed under the
"Risk Factors" and "Business" sections of this Prospectus.

BUSINESS

INTRODUCTION

Prior to the introduction late in the 1980s of diagnostic-related
groups ("DRGs"), health-care providers were generally compensated for their
services on a cost-plus basis. In this environment, product features and
technology drove product purchase decisions, even if the benefits derived from
the added features and higher technology did not justify the higher cost. With
the advent of DRGs and managed care, third-party payors shifted their payment
policies toward fixed fees for services rendered or capitated payment
arrangements whereby providers were reimbursed a fixed amount for patients
serviced by their organizations. In today's health-care environment, providers
are required to focus on cost, to carefully match patient benefits with the cost
of the services provided.

BUSINESS SEGMENTS

HealthWatch's business consists of one business segment: medical
products. Revenues for the Company's medical products for the nine months ended
March 31, 1997 and 1996 and past three fiscal years are as follows:

<TABLE>
<CAPTION>
Nine Months
Ended March 31, Year ended June 30,
------------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Revenues:
Medical Products
IV $78,020 -- -- -- --
Cardiology $392,665 $368,381 $564,993 $610,623 $863,904
Peripheral Vascular $376,188 $292,404 $472,497 $1,206,772 $1,409,528
Supplies & Technical
Services $764,785 $871,048 $1,003,974 $1,698,857 $1,796,714
---------- ---------- ---------- ---------- ----------
TOTAL $1,611,658 $1,531,833 $2,041,464 $3,516,252 $4,070,146

</TABLE>

For the year ended June 30, 1996, the Company reported a decline in
revenues of $45,630 for cardiology products, $734,275 for peripheral vascular
products and $694,883 for supplies and technical services when compared with
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. 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 $451,624, $406,122, $566,427, $1,318,233
and $1,228,205 of the Company's medical product revenues during the first nine
months of fiscal 1997 and 1996 and fiscal 1996, 1995 and 1994, 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 $342,013, $271,114,
$381,739, $561,364 and $433,369 for the first nine months of fiscal 1997 and
1996 and the three years ended June 30, 1996, 1995 and 1994, respectively.
International product sales are primarily through distributors. For additional
information regarding the Company's business segments see Note 16 of the Notes
to the Consolidated Financial Statements. Neither HealthWatch nor any of its
affiliates does business with the government of Cuba or any person or affiliate
located in Cuba.

MEDICAL PRODUCTS

HealthWatch's goal has been to build a medical products business, with
an emphasis on cardiac and vascular diagnostic products and IV instrumentation
products for hospital, physician and home care use. HealthWatch's primary
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 customer base.

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.

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

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.

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).

IV PRODUCTS. The concept of automated intravenous 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 concept of drop counting systems and
applied computer technology to develop a system which determines the flow rate
and volume based on the input through a flow sensor. 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, including most 10, 15, 20 and 60
drop sets, the standard drop sizes for IV tubing used in the United States,
compared to other devices which generally can be used only with proprietary IV
sets designed for the particular controller or pump being used. The 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'S list price is $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 often 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.

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. The Company expects to discontinue producing the Cambridge product
line within the next several months.

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.

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 first nine months of fiscal 1997 and fiscal 1996 and
1995, sales of supplies and revenues from service and maintenance activities
accounted for approximately 61, 49 and 44 percent, respectively, of
HealthWatch's revenues from its medical products business segment.

SALES AND MARKETING

The Company has a Vice President of Marketing, a Director of IV Sales,
one full-time field sales representative and one customer service
representative. 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.

Initially, HealthWatch intends to distribute the PACER, its first IV
product, through independent dealers or 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. 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 instrument's lower cost 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.

HealthWatch is in the beginning stages of producing the PACER, its
first IV product. 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. 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.

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 system.
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 nine months ended March 31, 1997 and 1996 and the
years ended June 30, 1996, 1995 and 1994, the Company spent $267,426, $263,200,
$345,240, $499,099 and $201,713, respectively, on research and development
activities.

PROPRIETARY INFORMATION

The Company seeks protection of its proprietary interest in software
products and trade secrets. The Company historically has not relied on patents
to protect the proprietary aspects of its products. 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 generally 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
four companies, including, Baxter Healthcare Corporation and Abbott
Laboratories. 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.
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

The medical devices manufactured and marketed by the Company are
subject to regulation by the FDA and, in some instances, by state and foreign
authorities. Pursuant to the Federal Food, Drug, and Cosmetic Act and the
regulations promulgated thereunder, the FDA regulates the clinical testing,
manufacture, packaging, labeling, distribution and promotion of medical devices.

Pursuant to the FFDCA, medical devices intended for human use are
classified into three categories, Classes I, II and III, on the basis of the
controls deemed necessary by the FDA to reasonably assure their safety and
effectiveness. Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to good manufacturing practice
regulations) and Class II devices are subject to general and special controls
(for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval from the FDA to ensure their safety and
effectiveness (for example, life-sustaining, life-supporting and implantable
devices, or new devices which have not been found substantially equivalent to
legally marketed devices). Electronic infusion devices are classified by the FDA
as Class II medical devices.

If a new Class II medical device is substantially equivalent in terms
of safety and effectiveness to a medical device already legally marketed in the
United States, the FDA requirements may be satisfied through a procedure known
as a "510(k) Submission," in which the applicant provides product information
supporting its claim of substantial equivalency. "Substantial equivalence" means
that a device has the same intended use and the same technological
characteristics as the legally marketed device, or the same intended use and
different technological characteristics, provided that it can be demonstrated
that the device is as safe and effective as the legally marketed device, and
does not raise different questions regarding safety and effectiveness. A
"legally marketed device" to which a new device may be compared for a
determination regarding substantial equivalence is a device that was legally
marketed prior to May 28, 1976, when the Medical Device Amendments were added to
the FFDCA, or a device which has been reclassified from Class III to Class II or
I, or a device which has been found to be substantially equivalent through the
510(k) premarket notification process.

Commercial distribution of a device for which a 510(k) Submission is
required can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a legally marketed device. The FDA has recently
been requiring a more rigorous demonstration of substantial equivalence than in
the past. This may include a requirement for clinical testing of the device. It
generally takes from four to twelve months from submission of a 510(k) to obtain
a 510(k) clearance, but it may take longer. The FDA may determine that a
proposed device is not substantially equivalent to a legally marketed device, in
which case a PMA may be required, or that additional information is needed
before a substantial equivalence determination can be made, in which case data
from safety and effectiveness tests, including clinical tests, may be required.
A "not substantially equivalent" determination or a request for additional
information could delay the market introduction of new products that fall into
this category.

The Company received 510(k) clearance to begin marketing the PACER in
the United States in April 1994.

The Company does not believe that changes made to the PACER since the
original 510(k) Submission require a new 510(k) Submission for the PACER.
However, there can be no assurance that the FDA would agree with the Company's
determination. If in the future the FDA concluded that the changes required a
new 510(k) Submission, the FDA could prohibit the Company from marketing the
PACER until the Company files a new 510(k) Submission and obtains clearance from
the FDA. The FDA could also take regulatory action against the Company for any
prior distribution of the PACER which incorporated changes. Alternatively, the
FDA could use its discretion not to take any regulatory steps with regard to
this issue.

The Company has filed a new 510(k) Submission for the PACER in order to
incorporate an increased rate range for infusions. Additional product
modifications, including new software features, that the Company may develop in
the future will likely require 510(k) clearance if the modifications could
affect the safety or efficacy of the Company's products. If the Company
determines that any modifications that it may make to its cleared devices do not
require a new 510(k) Submission, there can be no assurance that the FDA would
agree with the Company's determinations and would not require a new 510(k)
Submission for any modifications made to the devices. If the FDA requires the
Company to file a new 510(k) Submission for any modification to the device, the
Company may be prohibited from marketing the device as modified until it obtains
clearance from the FDA. There can be no assurance that the Company will obtain
510(k) clearance on a timely basis, if at all, for any device modification for
which it files a future 510(k) Submission. If 510(k) clearance is granted, there
can be no assurance that it will not contain significant limitations in the form
of warnings, precautions or contraindications with respect to conditions of use.

In addition, the Medical Device Reporting regulation obligates the
Company to inform the FDA whenever there is reasonable evidence to suggest that
one of its devices may have caused or contributed to death or serious injury, or
where one of its devices malfunctions and, if the malfunction were to recur, the
device would be likely to cause or contribute to a death or serious injury.

The Company intends to export, its products to Europe, Japan and other
foreign countries. Exports of products that have market clearance from the FDA
in the United States do not require FDA authorization for export. However,
foreign countries often require, among other things, an FDA certificate for
products for export. To obtain a CPE the device manufacturer must certify to the
FDA that the product has been granted clearance in the United States and that
the manufacturing facilities appeared to be in compliance with GMPs at the time
of the last FDA inspection. The FDA will refuse to issue a CPE if significant
outstanding GMP violations exist.

International sales of medical devices are subject to the regulatory
requirements of each country. The regulatory review process varies from country
to country. Many countries also impose product standards, packaging and labeling
requirements, and import restrictions on devices. In addition, each country has
its own tariff regulations, duties and tax requirements. The Company plans to
use its distributors to assist in obtaining any necessary foreign governmental
and regulatory approvals. The Company does not currently have its products
registered or approved in any countries requiring an extensive registration or
approval process and has, therefore, not sold any products in such countries.

The Company has received Underwriters Laboratory, Inc. product
recognition under UL 544, Standard for Medical and Dental Equipment for the
PACER. To maintain "UL" status, the Company will be subject to quarterly
inspections by Underwriters Laboratory, Inc.

EMPLOYEES

At May 31, 1997, the Company had 25 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:

<TABLE>
<CAPTION>
Director
Name Since Age Positions With The Company
---- ----- --- --------------------------
<S> <C> <C> <C>
Daniel J. Kelly -- 46 President and Chief Executive Officer

Stephen R. Hessel -- 52 Vice President of Operations

George T. Mier -- 45 Vice President of Marketing

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

Annette D. Agner -- 39 Treasurer/Controller

Lindley S. Branson 1997 54 Director

Richard T. Case 1997 46 Director

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

Kenneth A. Selzer, M.D. 1988 43 Director

</TABLE>

Daniel J. Kelly has been President of the Company since December 1996.
From 1994 to 1996, Mr. Kelly was an officer of Block Medical (President and
Chief Executive Officer 1995 to 1996 and Executive Vice President--Sales
1994-1995), a manufacturer of intravenous infusion devices; and from 1980 to
1994 was employed by IMED Corporation, a manufacturer of infusion devices and
disposable administration sets. From 1991 to 1994, Mr. Kelly was Vice President
Worldwide Sales IMED Corporation.

Stephen R. Hessel has been employed by the Company since January 1997
and has been Vice President of Operations since March 1997. From 1990 to 1994,
Mr. Hessel was Vice President, Operations of O.B. Tech, Inc., a manufacturer of
surgical products; and 1994 to present, he has been an independent inventor and
consultant, most recently providing consulting services to Block Medical, Inc.
(from 1995 to 1997), a manufacturer of intravenous infusion devices.

George T. Mier was Director of Sales and Marketing of the Company from
March 1996 to November 1996 when he became Vice President of Marketing. Prior to
joining the Company, he was Vice President--Sales and Customer Care and Senior
Consultant for Innotech, Inc., a manufacturer of ophthalmic equipment and
disposables, from 1993 to 1995; National Sales Director, World Learning, Inc.,
an educational company from 1992 to 1993; and National Sales Manager or Regional
Manager for American Optical Corp., a medical products company, from 1988 to
1992.

Douglas C. 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.

Annette D. Agner has been Treasurer/Controller of the Company since
1993 and has been employed by the Company for more than ten years.

Lindley S. Branson has been a Principal with the law firm of Gray,
Plant, Mooty, Mooty & Bennett, P.A., for more than five years. From October of
1995 to April 1997, Mr. Branson served as interim Chief Executive and Chief
Financial Officer of the Company.

Richard T. Case has been President of Benchmark Associates, a business
consulting firm since 1985. Mr. Case was President of Polymedica Industries,
Inc., a medical products company from May 1990 to July 1992. Mr. Case also
served as a Director of the Company from 1990 to 1994.

Sanford L. Schwartz 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. is President and Chief Executive Officer of
Integrated Neuroscience Consortium, Inc., a trial management organization formed
in September 1996 and is a physician with North County Neurology Associates, a
medical group, which position he has held since 1993. Dr. Selzer was a Resident
in Neurology at Vanderbilt University from January 1991 to May 1993.

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, 1996, to the Company's former interim President and Chief
Executive Officer, former President and Chief Executive Officer and Chairman of
the Board of Directors. No officer or director of the Company received
compensation of $100,000 or more in fiscal 1996.

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>
Lindley S. Branson 1996 $54,000 -- 18,571shs. -- --
President and CEO 1995 -- -- -- -- --
1994 -- -- -- -- --

John D. Greenbaum, 1996 $49,405 -- 1,429shs. 4,286shs. --
President and CEO 1995 $101,207 -- 3,571shs.(1) -- $6,818
1994 $150,000 -- -- -- $7,200

Sanford L. Schwartz, 1996 $ 36,247(2) -- -- -- --
Chairman of the 1995 $ 33,250(2) -- 11,035shs.(1) 35,714shs.(2) --
Board of Directors 1994 $ 25,000(2) -- -- 2,142shs. --
- ------------

</TABLE>

(1) Includes for Messrs. Greenbaum and Schwartz, 3,928 and 3,892 shares,
respectively, subject to previously granted options which were repriced
during the fiscal year.

(2) Includes amounts paid to Creative Business Strategies, Inc. 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.

During fiscal 1995, Kenneth A. Selzer, M.D., a director of the Company,
received a stock award of 3,571 shares of Common Stock (fair market value at
date of grant of $9,500) and was granted options for 10,714 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. The foregoing table does not include the following
options granted in December 1996: Mr. Branson--250,000 shares; Mr.
Schwartz--100,000 shares; and Dr. Selzer--100,000 shares. All such options were
at an exercise price of $2.0625 per share, the fair market value for the
Company's Common Stock on the date the options were granted.

STOCK BASED COMPENSATION

The Company has a 1989 Incentive Stock Option Plan and 1993 and 1995
Stock Option Plans ("the Plans") for its key employees directors and consultants
to purchase shares of the Company's Common Stock. The 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 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 and has
awarded stock grants to officers, directors, employees and consultants in
consideration for services. 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. At
February 14, 1997, the Company had an aggregate of 2,104,275 shares reserved
under the Plans and its 1995 Stock Bonus and Salary Deferral Plan, including an
aggregate of 1,649,562 shares reserved for issuance pursuant to outstanding
stock options under the Plans.

The following table shows option grants during fiscal 1996 to the named
executive officers of the Company. Reference is also made to the information
included above under "Compensation."

<TABLE>
<CAPTION>
Options Granted Percent of Total Exercise Expiration
Name in Fiscal 1996 Options Granted Price Date
----------------------------- -------------------- ---------------------- ------------ --------------
<S> <C> <C> <C> <C>
Lindley S. Branson 18,571 shs. 14.8% $3.29 12/11/00

John D. Greenbaum 1,429 shs. 1.1% $3.29 2/6/97

Sanford L. Schwartz None - - -

</TABLE>

The following table shows the number of options exercised during fiscal
1996 and the 1996 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.

Value of Unexercised
Shares Acquired on Number of Unexercised Options at in-the-money Options
Exercise June 30, 1996 at June 30, 1996
Name of Options Exercisable/Unexercisable Exercisable/Unexercisable
---- ---------- ------------------------- -------------------------
<S> <C> <C> <C>
Lindley S. Branson None 18,571/-0- shs. $-0-/$-0-
John D. Greenbaum None 5,000/-0- shs. $ -0-/$-0-
Sanford L. Schwartz None 6,472/4,564 shs. $ 21,422/$15,107

</TABLE>

OTHER TRANSACTIONS

During fiscal years 1996, 1995 and 1994, the Company paid certain
directors or affiliated companies fees for services rendered. For information
regarding amounts paid in fiscal 1996 and 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 36,492 and 34,820 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 being 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, $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. Actual amounts paid for the three years ended April 24, 1997,
1996 and 1995 were $41,720, $40,000 and $40,000, respectively.

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 May 31, 1997, 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, Name of Amount
Director or Identity of Group Beneficially Owned Percentage
- ----------------------------- ------------------ ----------

Roseann Wexler 300,000 (1) 7.9%
36 Stonewall Drive
Livingston, New Jersey

Republic National Trading, Inc. 200,000 (1) 5.4%
2015 East 19th Street
Brooklyn, New York

RTM Investments, LTD. 200,000 (1) 5.4%
50 Broad Street
New York, New York

Lindley S. Branson 177,142 (1) 4.9%

Richard T. Case 1,928 (1) *

Sanford L. Schwartz 90,440 (1)(2) 2.5%

Kenneth A. Selzer, M.D. 61,408 (1) 1.7%

All Officers, Directors
as a Group (9 persons) 388,317 (1) 10.2%

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

* 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: Wexler--300,000
shares; Republic National Trading--200,000 shares; RTM
Investments--200,000 shares; Branson--118,571 shares; Case--1,214
shares; Schwartz--58,841 shares; Selzer--57,837 shares; and all
officers and directors as a group--286,242 shares.

(2) Includes shares owned by Creative Business Strategies, Inc. ("CBS").
Mr. Schwartz is an officer, director and principal shareholder of CBS.

DESCRIPTION OF SECURITIES

COMMON STOCK

The Company is authorized to issue up to 14,285,714 shares of Common
Stock, $.07 par value. At May 31, 1997, 3,510,670 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 are exercisable anytime prior to 5:00 p.m. California time
November 14, 1998, at $2.00 per share. The Company has reduced the exercise
price of the Warrants in certain events to $.___ per share if they are exercised
prior to August 31, 1997.

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. The Warrants are
redeemable by the Company prior to their exercise or expiration by giving 30
days notice of redemption. The redemption price of the Warrants is $.50 per
Warrant. Any Warrantholder who does not exercise prior to the redemption date,
will forfeit the right to purchase shares of Common Stock underlying the
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.

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 May 31,
1997, $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
$14.00 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.

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.

PREFERRED STOCK

The Company is authorized to issue up to 1,428,571 shares of Preferred
Stock in series to be designated by the Board of Directors. No shares of
Preferred Stock are expected to be issued by the Company in the immediate
future; however, the Board may use its authority to issue Preferred Stock to
effect the business purposes of the Company. Material provisions concerning the
terms of any series of Preferred Stock such as dividend rate, conversion
features and voting rights, will be determined by the Board of Directors of the
Company at the time of such issuance. The ability of the Board to issue
Preferred Stock also could be used by the Company as a means of resisting a
change of control of the Company and, therefore, could be considered an
"anti-takeover" device.

SELLING SHAREHOLDERS

The following table sets forth certain information with respect to the
offering and the ownership of Common Stock by the Selling Shareholders as of May
31, 1997.

- ----------------------------------------------------------------------------------------------------------------------
Shares of Common Shares of Common
Stock Owned Percentage of Shares Stock Owned
Name of Selling Beneficially Common Stock Offered Beneficially
Shareholder Before Offering(1) Owned Beneficially(1) Hereby After Offering(1)
----------- ------------------ --------------------- ------- -----------------
<S> <C> <C> <C> <C>
Roseann Wexler 300,000 7.9% 300,000 None
Republic National
Trading, Inc. 200,000 5.4% 200,000 None
RTM Investments, LTD 200,000 5.4% 200,000 None
Sunpack, LLC 181,666 4.9% 181,666 None
Jasminville Corporation N.V. 173,733 4.7% 173,733 None
Dave Lilja 166,800 4.5% 85,000 81,800(2)
Galaxy Investments, Inc. 100,000 2.8% 100,000 None
Briarwood Investments, Inc. 50,000 1.4% 50,000 None
Wellington Corporation N.V. 39,999 1.1% 39,999 None
Richgrove N.V. 39,999 1.1% 39,999 None
Lanter Investment
Corporation N.V. 39,999 1.1% 39,999 None
Swifton Capital
Corporation N.V. 39,999 1.1% 39,999 None
Varooge Yerganian 25,000 * * None
Allen Brutman 25,000 * * None

</TABLE>
- ---------------------

* Less than one percent.
(1) Includes shares subject to issuance upon conversion of outstanding
shares of Preferred Stock and exercise of outstanding Warrants to Purchase
Common Stock.

(2) Represents 1.6% of the outstanding shares following the offering of
the Shares, assuming all of the Warrants are exercised.

PLAN OF DISTRIBUTION

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

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. A member of such firm owns
58,571 shares of Common Stock and warrants and stock options representing the
right to acquire an aggregate of 268,571 shares of Common Stock.

EXPERTS

The audited financial statements of the Company for the years ended
June 30, 1996 and 1995, included in this Prospectus have been audited by
Silverman Olson Thorvilson & Kaufmann, Ltd., certified public accountants, as
indicated in their reports thereon appearing elsewhere in the Registration
Statement. Such financial statements are included in reliance upon the authority
of said 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, 1996 and 1995 F-3

Consolidated Statement of Operations for the Years Ended
June 30, 1996 and 1995 F-4

Consolidated Statement of Shareholders' Equity for the
Years Ended June 30, 1996 and 1995 F-5

Consolidated Statement of Cash Flows for the Years Ended
June 30, 1996 and 1995 F-6

Notes to Consolidated Financial Statements for the Years
Ended June 30, 1996 and 1995 F-8

Consolidated Balance Sheet at March 31, 1997 (unaudited) F-21

Consolidated Statement of Operations for the nine months
ended March 31, 1997 and 1996 (unaudited) F-22

Consolidated Statement of Cash Flows for the nine months
ended March 31, 1997 and 1996 (unaudited) F-23

Notes to Consolidated Financial Statements for the nine
months ended March 31, 1997 and 1996 (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, 1996 and 1995, 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, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

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

August 16, 1996

HEALTHWATCH, INC.

CONSOLIDATED BALANCE SHEET

June 30, 1996 and 1995

ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 79,083 $ 742,981
Accounts receivable, net of allowance for doubtful
accounts of $11,567 and $29,487, respectively 229,543 285,956
Inventory (Note 3) 818,935 927,201
Subscription receivable (Note 4) 104,568 --
Other current assets 27,134 104,587
------------ ------------
Total current assets 1,259,263 2,060,725

Property and equipment, net (Note 5) 72,086 138,769
Intangible assets, net (Note 6) 1,169,232 1,416,072
Other assets 117,971 138,553

Total assets $ 2,618,552 $ 3,754,119
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 215,804 $ 481,438
Accrued compensation and payroll taxes 235,241 214,978
Other accrued liabilities - related parties 34,154 143,799
Other accrued liabilities - unrelated parties 298,304 354,415
Note payable - related party (Note 7) -- 160,000
Notes payable - unrelated parties (Note 8) -- 125,000
Deferred revenue 171,202 177,506
Current portion of long-term debt (Note 9) -- 3,948
------------ ------------
Total current liabilities 954,705 1,661,084

Debentures payable - related parties (Note 10) 15,000 40,000
Debentures payable - unrelated parties (Note 10) 565,000 540,000
------------ ------------
Total liabilities 1,534,705 2,241,084
------------ ------------

Contingencies and commitments (Note 11) -- --

Shareholders' equity:
Cumulative preferred stock, $.07 par value; 1,428,571 shares authorized,
200,000 and 0 shares issued
and outstanding, respectively (Notes 11 and 17) 14,000 --
Common stock, $.07 par value; 14,285,714
shares authorized, 1,624,581 and 720,060
issued and outstanding, respectively (Note 17) 113,720 50,404
Additional paid-in capital 12,958,348 11,442,003
Accumulated deficit (11,963,662) (9,942,423)
Equity adjustment from foreign currency translation (38,559) (36,949)
------------ ------------
Total shareholders' equity 1,083,847 1,513,035
------------ ------------
Total liabilities and shareholders' equity $ 2,618,552 $ 3,754,119
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.

</TABLE>

HEALTHWATCH, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 1996 AND 1995

1996 1995
----------- -----------
<S> <C> <C>
Product sales $ 2,041,464 $ 3,516,252
Product cost of sales 1,603,454 2,399,543
----------- -----------
Gross profit 438,010 1,116,709

Operating costs and expenses:
Selling, general and administrative - related parties 173,413 149,100
Selling, general and administrative - unrelated parties 1,512,032 1,956,048
Depreciation and amortization 325,872 355,701
Research and development - related parties -- 54,047
Research and development - unrelated parties 345,240 445,052
----------- -----------
Total operating costs and expenses 2,356,557 2,959,948
----------- -----------
Loss from continuing operations (1,918,547) (1,843,239)

Other income (expense):
Interest income 8,030 4,546
Interest expense - unrelated parties (64,621) (72,395)
Interest expense - related parties (1,575) (4,548)
Miscellaneous -- 85,182
----------- -----------

Total other income (expense) (58,166) 12,785
----------- -----------
Loss from continuing operations before
extraordinary item (1,976,713) (1,830,454)

Extraordinary item - gain from
extinguishment of debt (Note 15) 7,974 61,603
----------- -----------
Net loss $(1,968,739) $(1,768,851)
=========== ===========

Income (loss) per share of common stock:
Continuing operations $ (1.68) $ (4.55)
Extraordinary item .01 .15
----------- -----------

Net loss per share $ (1.67) $ (4.40)
=========== ===========
Weighted average number of shares outstanding 1,175,434 402,310
=========== ===========

</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, 1996 AND 1995
<TABLE>
<CAPTION>

ADDITIONAL
PREFERRED STOCK (NOTE 17) COMMON STOCK (NOTE 17) PAID-IN
SHARES AMOUNT SHARES AMOUNT EQUITY
------- -------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>

Balances at June 30, 1994 -- $ -- 371,791 $ 26,025 $10,700,887

Receipt of subscription -- -- -- -- --
Common stock issued in public offering (Note 12) -- -- 313,627 21,954 387,650
Common stock issued for services -- -- 29,286 2,050 294,800
Common stock issued in private placement -- -- 4,285 300 44,700
Common stock issued for conversion of debentures (Note 10) -- -- 1,071 75 13,966
Contractual dividend (Note 11) -- -- -- -- --
Equity adjustment from foreign currency translation -- -- -- -- --
Net loss -- -- -- -- --
------- -------- --------- -------- -----------

Balances at June 30, 1995 -- -- 720,060 50,404 11,442,003

Common stock issued in public offering (Note 12) -- -- 218,372 15,286 226,532
Common stock bonuses -- -- 8,844 619 32,786
Common stock issued for accrued stock bonuses -- -- 47,856 3,350 106,450
Preferred stock issued for conversion
of common stock (Note 11) 400,000 28,000 (57,143) (4,000) (24,000)
Common stock issued for conversion
of preferred stock (Note 11) (200,000) (14,000) 171,428 12,000 2,000
Common stock issued for services -- -- 55,127 3,859 178,267
Common stock issued in settlement of liabilities -- -- 93,648 6,555 301,540
Common stock warrants exercised -- -- 303,532 21,247 587,170
Common stock issued for conversion of notes payable -- -- 62,857 4,400 105,600
Contractual dividend (Note 11) -- -- -- -- --
Equity adjustment from foreign currency translation -- -- -- -- --
Net loss -- -- -- -- --
------- -------- --------- -------- -----------

Balances at June 30, 1996 200,000 $ 14,000 1,624,581 $113,720 $12,958,348
======= ======== ========= ======== ===========

[WIDE TABLE CONTINUED FROM ABOVE]

PREFERRED STOCK (NOTE 17) ACCUMULATED CAPITAL SUBSCRIPTION TOTAL SHAREHOLDERS'
DEFICIT ADJUSTMENT RECEIVABLE EQUITY
------------ -------- --------- -----------

<S> <C> <C> <C> <C>
Balances at June 30, 1994 $ (8,128,572) $(39,560) $(225,000) $ 2,333,780

Receipt of subscription -- -- 225,000 225,000
Common stock issued in public offering (Note 12) -- -- -- 409,604
Common stock issued for services -- -- -- 296,850
Common stock issued in private placement -- -- -- 45,000
Common stock issued for conversion of debentures (Note 10) -- -- -- 14,041
Contractual dividend (Note 11) (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 (9,942,423) (36,949) -- 1,513,035

Common stock issued in public offering (Note 12) -- -- -- 241,818
Common stock bonuses -- -- -- 143,205
Common stock issued for accrued stock bonuses -- -- -- --
Preferred stock issued for conversion
of common stock (Note 11) -- -- -- --
Common stock issued for conversion
of preferred stock (Note 11) -- -- -- --
Common stock issued for services -- -- -- 182,126
Common stock issued in settlement of liabilities -- -- -- 308,095
Common stock warrants exercised -- -- -- 608,417
Common stock issued for conversion of notes payable -- -- -- 110,000
Contractual dividend (Note 11) (52,500) -- -- (52,500)
Equity adjustment from foreign currency translation -- (1,610) -- (1,610)
Net loss (1,968,739) -- -- (1,968,739)
------------ -------- --------- -----------

Balances at June 30, 1996 $(11,963,662) $(38,559) $ -- $ 1,083,847
============ ======== ========= ===========

</TABLE>

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

<PAGE>

HEALTHWATCH, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 1996 AND 1995

1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,968,739) $(1,768,851)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 325,872 355,701
Stock issued as payment of expenses 215,531 296,850
Extraordinary gain on extinguishment of debt (7,974) (61,603)
Discount on note receivable -- 13,639
(Increase) decrease in assets:
Accounts receivable 56,413 467,109
Inventory 108,266 279,108
Other current assets 77,453 51,702
Other assets 20,582 (15,705)
Increase (decrease) in liabilities:
Accounts payable 12,560 (161,619)
Accrued liabilities - related parties 36,842 78,025
Accrued liabilities - unrelated parties 2,840 (127,702)
Deferred revenue (6,304) 4,197
----------- -----------

Net cash used in operating activities (1,126,658) (589,149)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (12,349) (2,649)
Payments received on note receivable -- 110,485
----------- -----------
Net cash provided by (used in) investing activities (12,349) 107,836
----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 745,667 454,604
Proceeds from subscriptions receivable -- 450,000
Proceeds from issuance of note payable - related party -- 150,000
Repayment of note payable - related party (15,000) --
Proceeds from issuance of note payable - unrelated parties -- 125,000
Repayment of note payable - unrelated party (160,000) --
Repayment of long-term debt (3,948) (7,855)
Dividends to preferred stockholders (90,000) --
----------- -----------

Net cash provided by financing activities 476,719 1,171,749
----------- -----------
Effect of exchange rate changes on cash (1,610) 2,611
----------- -----------
Increase (decrease) in cash (663,898) 693,047

Cash - beginning of year 742,981 49,934
----------- -----------
Cash - end of year $ 79,083 $ 742,981
=========== ===========

</TABLE>

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

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1996 1995
---- ----

Cash paid during the year for interest $ 64,986 $75,724
========== =======

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

During the year ended June 30, 1996:
The Company had $7,974 of accounts payable forgiven (Note 15),
resulting in an extraordinary gain.

Notes payable holders converted $110,000 of notes to 62,857 shares of
common stock valued at $110,000 (Note 8).

Shareholders converted 57,143 shares of common stock valued at $600,000
to 400,000 shares of preferred stock (Note 11).

Shareholders converted 200,000 shares of preferred stock valued at
$300,000 to 171,428 shares of common stock (Note 11).

The Company paid $270,250 of accounts payable and $37,845 of accrued
liabilities - related parties by issuing 93,648 shares of common stock
(Note 13).

The Company issued 55,127 shares of common stock valued at $182,126 in
exchange for services.

The Company issued 40,713 shares of common stock valued at $97,400 as
payment of accrued related party stock grants (Note 13) and 7,143
shares of common stock valued at $12,400 as payment of accrued
unrelated party stock grants.

The Company issued 8,844 shares of common stock valued at $33,405 as
payment of employee bonuses.

In June 1996, warrants to purchase 46,461 shares of common stock were
exercised and the corresponding shares were issued in exchange for a
receivable aggregating $104,568 (Note 4).

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 15),
resulting in an extraordinary gain.

Debenture holders converted $15,000 of debentures to 1,071 shares of
common stock valued at $14,041, net of $959 of debenture issuance costs
written-off.

The Company issued 29,286 shares of common stock valued at $296,850 in
exchange for services.

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, 1996 AND 1995

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Organization:

HealthWatch, Inc. (HealthWatch or the Company) has
developed an intravenous ("I.V.") product that it expects
to begin selling during fiscal year 1997 to hospitals and
medical clinics throughout the United States. In addition,
the Company manufactures and distributes cardiovascular,
noninvasive diagnostic medical instruments to hospitals
and medical clinics worldwide with the majority of sales
occurring in the United States and Great Britain. 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. All significant
intercompany accounts and transactions have been
eliminated.

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 1996. 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 1996 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 Cambridge Medical Equipment
Limited's activity from British pounds to U.S. dollars.

Revenue Recognition:

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

Stock-Based Compensation:

The Company has not adopted Statement of Financial
Accounting SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123) in fiscal 1996. SFAS 123 is
effective for years beginning after December 15, 1995 and
prescribes accounting and reporting standards for all
stock-based compensation plans. Since the Company intends
to elect continued recognition of certain stock-based
compensation using the intrinsic value method prescribed
under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, no effect on the
Company's expense recognition is expected.

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.

Use of Estimates:

The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.

Reclassifications:

Certain reclassifications have been made in the 1995
financial statements in order to conform with 1996
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 the Company's ability to
continue in existence.

Management's plans in this regard, include the commencement of
sales of the "PACER", the Company's new proprietary IV
infusion device. During 1996, the Company conducted marketing
evaluations of the PACER, which resulted in refinements being
made to the product. These marketing evaluations and Company
refinements limited the PACER'S 1996 marketing and sales
efforts. Management plans to implement a full marketing and
sales effort for this product in the second and third quarters
of fiscal 1997. Management believes that sales of PACER will
contribute greatly toward future operations of the Company,
although no assurance regarding the commercial success of this
product can be provided at this time.

In addition, management has commenced efforts to raise,
through the sales of securities, the additional capital
required to fund planned 1997 activities. In the event that
PACER is not commercially successful and/or the Company is not
able to raise additional working capital, management plans to
trim general and administrative expenses, and sell or
discontinue any non-performing operating lines and focus its
attentions and resources on the remaining business.

NOTE 3: INVENTORY

Inventory consisted of the following at June 30:
1996 1995
-------- --------
Raw materials $728,852 $655,960
Work in process 81,894 135,235
Finished goods 8,189 136,006
-------- --------
Total inventory $818,935 $927,201
======== ========
NOTE 4: SUBSCRIPTION RECEIVABLE

In June 1996, warrants to purchase 46,461 shares of common
stock were exercised and the corresponding shares issued in
exchange for a $104,568 receivable. The receivable was paid to
the Company in July 1996.

NOTE 5: PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at June 30:
Estimated
Useful Life
1996 1995 In Years
--------- --------- ------------
<S> <C> <C> <C>
Furniture and equipment $ 859,120 $ 846,771 5
Leasehold improvements 29,197 29,197 5-6
--------- ---------
Total property and equipment 888,317 875,968
Less accumulated depreciation (816,231) (737,199)
--------- ---------

Property and equipment, net $ 72,086 $ 138,769
========= =========

Depreciation expense was $79,032 and $98,503 for 1996 and
1995, respectively.

</TABLE>

NOTE 6: INTANGIBLE ASSETS

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

Estimated
Useful Life
1996 1995 In Years
----------- ----------- -----------
<S> <C> <C> <C>
Technology $ 1,594,838 $ 1,594,838 10
Drawings & documentation 347,149 347,149 10
Life Sciences name 300,000 300,000 10
Applications 250,000 250,000 10
Customer base 225,000 225,000 10
----------- -----------
2,716,987 2,716,987
Less accumulated amortization (1,547,755) (1,300,915)
----------- -----------

Intangible assets, net $ 1,169,232 $ 1,416,072
=========== ===========

</TABLE>

Amortization expense was $246,840 and $257,198 for 1996 and
1995, respectively.

NOTE 7: NOTE PAYABLE - RELATED PARTY

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

1996 1995
---- ----
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 8: 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 12). The notes are
secured by substantially all corporate assets. In August 1995,
the Company repaid $125,000 of the notes payable - unrelated
parties, of which $110,000 was retired by the issuance of
62,857 shares of common stock.

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 142,857 shares of the
Company's common stock at $1.75 per share (Note 11). The
warrants expire in April 1997 and are redeemable by the
Company after April 1, 1996 for $.35 per share.

NOTE 9: LONG-TERM DEBT

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

1996 1995
---- ----
Note payable - secured by computer and
software with interest at 15.2%. The note
was repaid in May 1996. $ - $ 3,948
Less current portion - (3,948)
------ ---------
Long-term debt $ - $ -
====== =========
NOTE 10: 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 $14.00 of debentures converted.

During 1996, no debentures were converted to common stock.
During 1995, debentures aggregating $15,000 were converted to
1,071 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 1996, as the
result of changes in board membership, $25,000 of the June 30,
1995 debentures payable - related parties has been
reclassified as debentures payable - unrelated parties at June
30, 1996.

Debentures payable to related parties consist of debentures
issued to a director/shareholder of HealthWatch.

NOTE 11: 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 57,143 shares of the Company's common stock
purchased for $600,000 into 400,000 shares of the
Company's Series A $1.50 stated value, 10% - cumulative
and convertible preferred stock. These stockholders are
entitled to cumulative dividends accruing from October
1994 aggregating $52,500 and $45,000, respectively, for
the years ended June 30, 1996 and 1995. At June 30, 1996
and 1995, accrued and unpaid dividends aggregating $7,500
and $45,000, respectively, are included in accrued
liabilities - unrelated parties. As of June 30, 1995, the
preferred stock had been authorized but not issued, and
accordingly, these shares were still reflected as common
stock.

In June 1996, 200,000 shares of preferred stock were
converted to 171,428 shares of common stock in accordance
with the conversion option. Subsequent to year end, the
remaining 200,000 shares of preferred stock were converted
to 157,192 shares of common stock in accordance with the
agreement's conversion option.

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:

1997 $ 210,288
1998 210,025
1999 91,025
2000 4,519
2001 -
----------
$ 515,857
==========

Rent expense for 1996 and 1995 was $204,000 and $204,523,
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 $7,529 and $19,327, at June
30, 1996 and 1995, respectively, for estimated future
warranty claims. These amounts are included in other
accrued liabilities - unrelated parties.

Stock Options:

At June 30, 1995, an aggregate of 50,000 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, 1996, the Company had qualified and
nonqualified options outstanding as follows:

Common Shares Exercise Expiration
Under Option Price Per Share Date
------------ --------------- ----
1,071 $ 68.32 December 1996
4,762 $ 2.66 January 1997
47,182 $ 2.10 February 1997
18 $ 45.50 April 1997
42,858 $ 2.10 May 1997
6,257 $ 2.66 August 1997
5,123 $ 15.76 August 1997
1,677 $ 22.75 November 1997
821 $ 2.66 November 1997
107 $ 15.76 November 1997
179 $ 15.76 December 1997
3,571 $ 2.94 September 1998
1,786 $ 2.66 December 1998
536 $ 19.32 December 1998
1,429 $ 3.29 February 1997
47,142 $ 3.06 March 1999
3,400 $ 3.00 June 1999
55,571 $ 3.29 December 2000
3,571 $ 7.42 January 2000
3,571 $ 2.66 January 2000
28,571 $ 2.66 May 2000
7,142 $ 3.71 February 2001
14,286 $ 3.00 May 2001
-------
280,631
=======

Various officers and directors have been granted a total
of 63,534 options under the Company's Stock Option Plans
(Note 13) which are included in the above table.

Options to purchase a total of 280,631 common shares were
outstanding, of which 167,848 are exercisable at June 30,
1996.

Stock Warrants:

At June 30, 1996, the Company had warrants outstanding as
follows:

Common Shares Exercise Expiration
Under Warrant Price Per Share Date
------------- --------------- ----------

9,286 $ 3.50 July 1996
297,425 $ 5.25 December 1996
14,286 $ 2.94 December 1996
65,714 $ 1.75 April 1997
14,285 $ 3.50 May 1997
13,392 $ 14.00 August 1997
-------
414,388
=======

Additionally, in July 1996, the Company issued warrants to
purchase 280,000 shares of common stock with an exercise
price of $2.70 per share. The warrants were sold for, in
aggregate, $14,000 and expire in November 1996.

The following warrants have redemption rights:

Warrants that represent the right to acquire 297,425
shares at $5.25 per share are redeemable by the Company
after November 15, 1995 for $.35 per share, warrants that
represent the right to acquire 14,286 shares at $2.94 per
share are redeemable by the Company after April 1, 1996
for $.35 per share, and warrants that represent the right
to acquire 65,714 shares at $1.75 per share are redeemable
by the Company after April 1, 1996 for $.35 per share.

Advisory Board:

In May and July 1996, the Company entered into a
thirteen-month agreement with four individuals ("the
Advisory Board") to provide consultation and advice
relating to the introduction of the Company's new
proprietary product into the health-care market. Upon
commencement of the agreement, the Company agreed to pay
the Advisory Board a total of $5,000, issue 1,910 shares
of common stock and non-statutory stock options to
purchase an additional 14,440 shares of common stock at a
per share price ranging from $3.00 to $3.625. In addition,
the Company will pay the advisors a total of $2,000 and
issue common stock totaling $52,500 over the term of the
agreement.

Investment Banking Agreement:

During June 1996, the Company entered into an investment
banking service agreement. Pursuant to the agreement, the
Company will receive certain investment banking services
including advice on investment and shareholder matters in
exchange for 15,000 shares of the Company's common stock.
In addition, for any shareholder transactions introduced
by the investment banker, the Company will pay fees based
on a sliding scale from 1% to 5% of the dollar value of
the transaction.

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 required the
Company to pay $65,000 to the landlord. Pursuant to the
settlement, the $65,000 accrued interest at 11% and was
payable in installments through November 1995. As of June
30, 1995, $50,000 of the settlement is included in accrued
liabilities - unrelated parties. The liability was paid
during 1996.

NOTE 12: PUBLIC SECURITIES OFFERING

At June 30, 1995, the Company was offering up to 200,000 units
of its securities for sale to the public at $7.00 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 313,627 shares of common stock and 156,813
warrants to purchase shares of common stock, resulting in
proceeds net of commission and other direct expenses
(aggregating $139,244) of $409,604.

During 1996, the Company completed the offering and sold an
additional 218,372 shares of common stock and 109,186 warrants
to purchase shares of common stock resulting in additional
proceeds net of commissions and other direct expenses
(aggregating $140,333) of $241,818.

NOTE 13: RELATED PARTY TRANSACTIONS

Stock Options:

At June 30, 1996, 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
------------ --------------- ----

5,036 $ 2.66 August 1997
642 $ 2.66 November 1997
3,571 $ 2.66 January 2000
3,571 $ 7.42 January 2000
25,000 $ 2.66 May 2000
25,714 $ 3.29 December 2000
------
63,534
======

Of the total outstanding options granted to officers and
directors as discussed above, options to acquire up to an
aggregate of 37,840 shares of common stock are exercisable
at June 30, 1996.

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 rate
based on unit sales. The maximum and minimum fees to be
paid for each of the years are as follows:

Year Ending Minimum Maximum
June 30, Fee Fee
----------- ---------- ----------
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
---------- ----------
$ 200,000 $1,415,000
========== ==========

During 1996 and 1995, licensing fee expense was $40,000,
of which $10,000 remains unpaid at June 30, 1996 and 1995
and is included in other accrued liabilities - related
parties.

Consulting Agreements:

Creative Business Strategies, Inc. (CBS), a company owned
by two persons, a current director of the Company and a
former director, provides the Company with business
development consulting services in exchange for a fee.
During 1996 and 1995, the Company had incurred $37,147 and
$31,100, respectively, of fees to CBS, of which $15,900
and $34,813, remained unpaid at June 30, 1996 and 1995,
respectively, and are included in other accrued
liabilities - related parties. In addition, during 1996,
the Company paid $37,845 of fees by issuing 11,506 shares
of common stock.

A former officer/director and current shareholder of the
Company provided general and current business consulting
services to the Company. During 1996, the Company incurred
and paid $52,000 of fees, of which $16,000 was paid
through the issuance of 4,286 shares of common stock.

For the year ended June 30, 1996, the Company incurred
legal fees aggregating $68,332 to an entity in which one
of its principals became an officer of the Company on
October 1, 1995. As of June 30, 1996, $7,875 of the 1996
fees remains unpaid and is included in other accrued
liabilities - related party.

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.

Stock Grants:

During 1995, two members of the Company's Board of
Directors were granted an aggregate of 39,285 shares of
the Company's common stock as a bonus valued at $72,400.
During 1994, two members of the Company's Board of
Directors were granted 1,428 shares of the Company's
common stock as a bonus valued at $25,000.

As of June 30, 1995, none of the shares underlying these
grants had been issued, and accordingly the value of these
bonuses ($97,400 at June 30, 1995) are included in other
accrued liabilities - related parties. During 1996, the
40,713 shares of common stock were issued in accordance
with these grants.

NOTE 14: INCOME TAXES

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

1996 1995
---- ----
<S> <C> <C>
Tax benefit computed at the maximum
federal statutory rate 34.0)% (34.0)%
Increase in taxes resulting from amortization
of intangible assets 6.0 6.0
Loss to be carried forward 28.0 28.0
---- ----
Income tax provision - % - %
==== ====
Deferred taxes consisted of the following at June 30:
1996 1995
---- ----
Asset:
Net operating loss carryforward $ 1,759,000 $ 1,400,000
Other 138,000 100,000
----------- -----------
Net deferred tax asset 1,897,000 1,500,000
Less valuation allowance (1,897,000) (1,500,000)
----------- -----------

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

</TABLE>

For financial statement purposes, no tax benefit has been
reported in 1996 and 1995 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.

The net change in the deferred tax valuation allowance was an
increase of $397,000 and $100,000 for the years ended June 30,
1996 and 1995, respectively.

At June 30, 1996, 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 $ -- $ 9,634
2001 -- 3,798
2002 -- 14,560
2003 322,286 --
2004 122,457 --
2005 318,718 --
2006 235,901 --
2007 1,461,790 --
2008 281,054 --
2009 1,644,839 --
2010 1,666,725 --
2011 1,650,000 --
---------- ----------
$7,703,770 $ 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 to offset future taxable
income may be significantly limited due to ownership changes
as defined in the Internal Revenue Code.

NOTE 15: EXTRAORDINARY ITEM - GAIN FROM EXTINGUISHMENT OF DEBT

During 1996, the Company negotiated with trade creditors to
settle $16,684 of past due accounts payable for $8,710. The
transactions resulted in an extraordinary gain of $7,974.

NOTE 16: GEOGRAPHICAL SEGMENT INFORMATION

1996 1995
----------- -----------
Revenues:
United States $ 1,659,725 $ 2,954,888
Great Britain 381,739 561,364
Eliminations -- --
----------- -----------
Consolidated $ 2,041,464 $ 3,516,252
=========== ===========
Operating profit (loss):
United States $(1,933,324) $(1,893,411)
Great Britain 14,777 50,172
Eliminations -- --
----------- -----------

Consolidated $(1,918,547) $(1,843,239)
=========== ===========
Identifiable Assets:
United States $ 2,404,559 $ 3,491,948
Great Britain 213,993 262,171
Eliminations -- --
----------- -----------

Consolidated $ 2,618,552 $ 3,754,119
=========== ===========

Exports of U.S. produced medical products were $184,688 and
$756,869 during 1996 and 1995, respectively.

NOTE 17: REVERSE STOCK SPLIT

On May 13, 1996 the Board of Directors approved a
one-for-seven reverse stock split of the Company's common
stock. Accordingly, all share, per share, weighted average
share, stock option and stock warrant information in these
financial statements have been restated to reflect the split.

HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)

March 31,
ASSETS 1997
------------
Current assets:
<S> <C>
Cash $ 272,929
Accounts receivable, net of allowance for doubtful
accounts of $11,057 and $11,567, respectively 285,006
Inventory (Note 4) 790,609
Subscription receivable -0-
Other current assets (Note 5) 57,041
------------

Total current assets 1,405,585

Property and equipment, net (Note 5) 138,802
Intangible assets, net 984,090
Other assets 49,203
------------

Total assets $ 2,577,680
============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 160,421
Accrued compensation and payroll taxes 230,889
Other accrued expenses - related parties 5,001
Other accrued expenses - unrelated parties 215,185
Deferred revenue 145,584
Debentures payable - related parties 15,000
Debentures payable - unrelated parties 565,000
------------

Total current liabilities 1,337,080

Debentures payable - related parties -0-
Debentures payable - unrelated parties -0-
------------

Total liabilities 1,337,080
------------

Shareholders' equity:
Cumulative preferred stock, $.07 par value; 1,428,571 shares
authorized, 100,000 and 200,000 shares issued and
out-standing, respectively (Note 6) 7,000
Common stock, $.07 par value; 14,285,714 shares authorized,
3,096,173 and 1,624,581 issued and outstanding,
respectively (Notes 5 & 7) 216,732
Additional paid-in capital 14,487,209
Accumulated deficit (13,429,421)
Equity adjustment from foreign currency translation (40,920)
------------

Total shareholders' equity 1,240,600
------------

Total liabilities and shareholders' equity $ 2,577,680
============

</TABLE>

HEALTHWATCH , INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)

Nine Months
1997 1996
----------- -----------
<S> <C> <C>
Product sales $ 1,611,658 $ 1,531,833
Product cost of sales 1,333,024 1,173,462
----------- -----------

Gross profit 278,634 358,371

Operating costs and expenses:
Selling, general and administrative 1,208,509 1,030,246
Depreciation and amortization 219,640 261,596
Research and development 267,426 263,200
----------- -----------

Total operating costs and expenses 1,695,575 1,555,042
----------- -----------

Loss from continuing operations (1,416,941) (1,196,671)
Other income (expense):
Interest income -0- 7,998
Interest expense (48,818) (50,756)
Miscellaneous -0- 10,102
----------- -----------
Total operating costs and expenses (48,818) (32,656)
----------- -----------

Net loss $(1,465,759) $(1,229,327)
=========== ===========

Net loss per share $(0.66 ) $ (1.05)
=========== ===========

Weighted average number of shares outstanding
2,237,659 1,169,871
=========== ===========

</TABLE>

HEALTHWATCH , INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)

Nine Months

1997 1996
-------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,465,759) $(1,229,327)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Stock issued as payment of expenses 155,544 140,125
Depreciation and amortization 219,640 261,596
Gain on extinguishment of debt -0- (10,102)

Decrease (increase) in assets:
Accounts receivable (55,463) 73,506
Inventory 28,326 (58,549)
Other current assets (16,782) 104,928
Other assets (2,899) 2,733
Increase (decrease) in liabilities:
Accounts payable (55,383) (66,088)
Accrued expenses - related (33,505) 9,818
Accrued expenses - unrelated 31,481 (176,495)
Deferred revenue (25,618) (55,901)
-------------------------------
Net cash used in operating activities (1,220,418) (1,003,756)
-------------------------------

Cash flows from investing activities:
Purchase of property and equipment (29,547) (8,461)
Increase in intangible assets
-------------------------------
Net cash provided by (used in) investing (29,547) (8,461)
activities
-------------------------------

Cash flows from financing activities:
Proceeds (repayment) of note payable -0- (285,000)
Repayment of long-term debt -0- (3,230)
Net costs of issuance of common stock 291,604 701,127
Payments received on stock subscriptions 1,154,568 -0-
-------------------------------
Net cash provided by (used in) financing 1,446,172 412,897
activities
-------------------------------

Effect of exchange rate changes on cash (2,361) (27,810)
-------------------------------

Increase (decrease) in cash and cash equivalents 193,846 (627,130)
Cash and cash equivalents-beginning of period 79,083 742,981
-------------------------------
Cash and cash equivalents-end of period $ 272,929 $ 115,851
===============================

</TABLE>

HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)

Note 1: Principles of Presentation

The accompanying unaudited financial statements reflect all adjustments which in
the opinion of management are necessary for a fair presentation of the Company's
financial position as of March 31, 1997, and it's results of operations and cash
flows for the nine months ended March 31, 1997 and 1996. This report should be
read in conjunction with the Company's Financial Statements and Notes thereto
for the year ended June 30, 1996.

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 the
Company's 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.

Note 3: Net Income (Loss) per Share

The net income (loss) per share in the fiscal 1997 and 1996 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 March 31, 1997and June 30, 1996:

03/31/97 6/30/96
-------- -------
Raw materials $592,956 $728,852
Work in process 158,122 81,894
Finished goods 39,531 8,189
-------- -------
$790,609 $818,935
-------- -------

Note 5: Supplemental schedule of non-cash operating, investing and financing
activities during the nine months ended March 31, 1997.

The Company issued an aggregate of 86,581 shares valued at $283,269 during the
nine month period ended March 31, 1997. Of this amount, 30,000 shares valued at
$114,600 were included in accrued liabilities unrelated parties as of June 30,
1996, 15,000 shares valued at $52,500 were issued in exchange for certain
investment banking services of which $13,125 remains in prepaid expense as of
March 31, 1997, 35,781 shares valued at $104,569 were issued for other
consulting services and 5,800 shares valued at $11,600 were issued as employee
stock bonuses. Other assets with a fair market value of $71,667 were placed in
service as equipment during the quarter ended March 31, 1997.

Note 6: Preferred Stock/Warrants

In May 1995, as settlement of a dispute with certain common stockholders, the
Company contractually committed to convert 57,143 shares of the Company's Common
Stock purchased for $600,000 into 400,000 shares of the Company's Series A,
$1.50 stated value, 10% cumulative and Convertible Preferred Stock. In June
1996, 200,000 shares of Preferred Stock were converted to 171,428 shares of
Common Stock in accordance with the conversion option. In August 1996, the
remaining 200,000 shares of Preferred Stock were converted to 157,192 shares of
Common Stock in accordance with the agreement's conversion option. Accrued and
unpaid dividends of $7,500 at June 30, 1996 were paid in August 1996.

On November 14, 1996, the Company agreed to issue an aggregate of 500,000 Units
of its securities, for a purchase price of $2.25 per Unit ($1,125,000 in the
aggregate). Each Unit consisted of one share of Series B Preferred Stock and
three Warrants, each Warrant representing the right to acquire one share of the
Company's Common Stock at $2.00 per share. Each share of Preferred Stock was
convertible into three shares of the Company's Common Stock. During the nine
months ended March 31, 1997, the Company issued 466,666 Units. As of March 31,
1997, 366,666 shares of Series B Convertible Preferred Stock had been converted
into 1,100,000 shares of the Company's Common Stock. Subsequent to the end of
the third quarter of fiscal 1997, the remaining 33,334 Units were issued and the
remaining shares of Preferred Stock converted into 400,000 shares of Common
Stock.

Note 7: Common Stock

During the nine months ended March 31, 1997, the Company issued an aggregate of
127,238 shares of Common Stock for $302,100 as the result of option and warrant
exercises.

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

TABLE OF CONTENTS
Page
Available Information..............................
Prospectus Summary.................................
Risk Factors.......................................
Market for the Company's
Common Stock and
Related Shareholder Matters......................
Use of Proceeds....................................
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........................
Business
Management.........................................
Principal Shareholders.............................
Description of Securities..........................
Selling Shareholders...............................
Plan of Distribution...............................
Legal Matters......................................
Experts
Financial Statements...............................F-1

HEALTHWATCH, INC.

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

_______________, 1997

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

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

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

Item 25. Other Expenses of Issuance and Distribution.

SEC registration fee $ 526
Printing expenses 500
Fees and expenses of counsel for the Company 4,000
Fees and expenses of accountants for the Company 800
Transfer Agent and Registrar, Warrant Agent and
Escrow Agent fees 500
Miscellaneous 1,674
------------
Total $8,000

All of the above expenses, other than the SEC fee, are estimated.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

1. During June 1994, the Company agreed to issue an aggregate of 57,142
shares of the Company's Common Stock in June and July 1994, to two institutional
investors at a purchase price of $600,000. The purchase of these shares was
completed in October, 1994. The agreements pursuant to which the shares were
purchased provided that the investors were acquiring such shares for investment
purposes and would not sell or transfer such shares except pursuant to a
registration under the Act or pursuant to an exception therefrom. The shares
were not registered under the Act in reliance upon Section 4(2) thereof and
Regulation 505 of Regulation D promulgated thereunder. During May 1995, the
57,142 shares of Common Stock were agreed to be converted into 400,000 shares of
Series A Convertible Preferred Stock and warrants representing the right to
acquire 14,286 shares at anytime from July 31, 1995 to December 31, 1996 were
issued. The Preferred Stock was converted into 228,571 shares of Common Stock
and the warrant expired without being exercised.

2. During November 1994, the Company issued 25,714 shares of the
Company's Common Stock and warrants representing the right to purchase 25,714
shares of such stock at $1.75 per share to one investor for a purchase price of
$45,000. The warrant was exercised during December 1995. The securities were
acquired for investment purposes and were not registered under the Act in
reliance upon Section 4(2) thereof and Regulation 505 of Regulation D
promulgated thereunder.

3. During November 1994, 714 shares of the Company's Common Stock were
authorized for issuance to one employee in lieu of a cash bonus. The shares,
which were taken for investment and were subject to appropriate transfer
restrictions, were issued without registration under the Act in reliance upon
Section 4(2) thereof.

4. During April and May 1995, seven qualified investors loaned to the
Company on a short-term basis an aggregate of $125,000 and provided standby
commitments to purchase certain of the Company's securities if necessary for the
Company to complete an offering of its securities. As part consideration for the
making of the loans and the granting of the standby commitments, these investors
were granted two-year warrants representing the right to purchase up to 142,857
shares of the Company's Common Stock at $1.75 per share. Protective Group
Securities Corporation assisted the Company in arranging for the loans and the
standby commitments and was paid a fee of $6,500 in connection therewith. The
warrants, which were taken for investment and were subject to appropriate
transfer restrictions, were issued without registration under the Act in
reliance upon Section 4(2) thereof.

5. During May 1995, an aggregate of 10,714 shares of the Company's
common stock were authorized for issuance to two directors in lieu of cash
compensation for services rendered. The shares, which were taken for investment
and were subject to appropriate transfer restrictions and were issued without
registration under the Act in reliance upon Section 4(2) thereof.

6. Effective May 1, 1995, the Company entered into a Consultancy
Agreement pursuant to which it agreed to issue a warrant representing the right
to acquire up to 57,142 shares of the Company's common stock at $2.10 per share
in part consideration for services to be rendered. The warrant was acquired for
investment and was subject to appropriate transfer restrictions and were issued
without registration under the Act in reliance upon Section 4(2) thereof.

7. During July 1996, the Company issued warrants representing the right
to acquire 280,000 shares of the Company's Common Stock at an exercise price of
$2.70 per share to four investors. The investors paid an aggregate of $14,000
for the warrants. All of the warrants expired without being exercised, except
for the exercise by one investor of warrants to acquire 29,000 shares of the
Company's Common Stock. The securities were acquired for investment and were
subject to appropriate transfer restrictions and were issued without
registration under the Act in reliance upon Section 4(2) thereof.

8. On November 14, 1996, the Company agreed to issue an aggregate of
500,000 Units of its securities, for a purchase price of $2.25 per Unit. Each
Unit consisted of one share of Series B Preferred Stock and three Warrants, each
Warrant representing the right to acquire one share of the Company's Common
Stock. Each share of Preferred Stock was convertible into three shares of the
Company's Common Stock. As of the date of this Registration Statement, all of
the Units have been purchased and all of the Preferred Stock acquired in
connection therewith have been converted. The Units were acquired by a total of
fourteen investors who acquired the Units for investment purposes and pursuant
to agreements which provided that the securities would be sold or transferred
only pursuant to a registration under the Act or pursuant to an exemption
therefrom. The securities were issued without registration under the Act in
reliance upon Section 4(2) thereof and Rule 505 of Regulation D promulgated
thereunder.

Item 16. Exhibits and Financial Statement Schedules.

3.1 Articles of Incorporation, as amended, of the Company (1).
3.2 Bylaws, as amended, of the Company (1).
4.1 Specimen form of the Company's Common Stock certificate (2).
4.2 HealthWatch, Inc. Stock Option Plan of 1989 (3).
4.3 Form of Incentive Stock Option Agreement (3).
4.4 Form of Nonstatutory Stock Option Agreement (3).
4.5 HealthWatch, Inc. Stock Option Plan of 1993 (4).
4.6 HealthWatch, Inc. Stock Option Plan of 1995 (5).
4.7 HealthWatch, Inc. 1995 Stock Bonus and Salary Deferral Plan (5).
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) (6).
4.9 Exchange Agreement for Preferred Stock and Stock Purchase Warrant (7).
4.10 Form of Subscription and Purchase Agreement, including form of Warrant
(8)
4.11 Form of Preferred Stock Subscription and Purchase Agreement dated
November 13, 1996, including exhibits thereto (9).
5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A. - filed herewith.
10.1 Lease Agreement dated November 19, 1993, between Steven P. Cade and
Wyeth W. Cade and the Company (6).
10.2 Agreement and Plan of Merger dated July 27, 1993, by and among the
Company, HealthWatch Technologies, Inc., Metamed, Inc., John D.
Greenbaum and Howard R. Everhart (8).
10.3 License Agreement dated February 27, 1992, as amended September 13,
1993, between Howard R. Everhart and Metamed, Inc. (6).
10.4 Second Amendment to License Agreement dated May 9, 1995, between Howard
R. Everhart and HealthWatch Technologies, Inc. (7).
10.5 Form of Exclusive Distributor Agreement (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.
- ----

(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
10-KSB, for the year ended June 30, 1996 (File No. 0-11476).

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

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

(8) Incorporated herein by reference to Registration Statement, Form SB-2
(File No. 333-09107).

(9) Incorporated herein by reference to Registration Statement, Form S-3
(File No. 333-21929).

ITEM 28. UNDERTAKINGS.

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

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

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

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

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

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

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

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Vista, State of California, on June 2, 1997.

HEALTHWATCH, INC.

By /s/ Daniel J. Kelly
---------------------
Daniel J. Kelly
President and Chief Executive Officer

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

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 2nd day of June, 1997, by
the following persons in the capacities indicated:

/s/ Daniel J. Kelly President and Chief Executive Officer
- ------------------------
Daniel J. Kelly

/s/ Annette D. Agner Chief Financial Officer and Chief Accounting
- ------------------------ Officer
Annette D. Agner

/s/ Lindley S. Branson Director
- ------------------------
Lindley S. Branson

/s/ Richard T. Case Director
- ------------------------
Richard T. Case

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

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

HEALTHWATCH, INC.

INDEX TO EXHIBITS FILED WITH
REGISTRATION STATEMENT ON FORM SB-2

Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
<S> <C> <C>
3.1 Articles of Incorporation, as amended, of the Company (1). --

3.2 Bylaws, as amended, of the Company (1). --

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

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

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

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

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

4.6 HealthWatch, Inc. Stock Option Plan of 1995 (5). --

4.7 HealthWatch, Inc. 1995 Stock Bonus and Salary Deferral Plan (5). --

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) (6).

4.9 Exchange Agreement for Preferred Stock and Stock Purchase Warrant (7). --

4.10 Form of Subscription and Purchase Agreement, including form of Warrant (8) --
4.11 Form of Preferred Stock Subscription and Purchase Agreement dated November --
13, 1996, including exhibits thereto (9).

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

10.1 Lease Agreement dated November 19, 1993, between Steven P. Cade and Wyeth W. --
Cade and the Company (6).

10.2 Agreement and Plan of Merger dated July 27, 1993, by and among the Company, --
HealthWatch Technologies, Inc., Metamed, Inc., John D. Greenbaum and Howard
R. Everhart (8).
10.3 License Agreement dated February 27, 1992, as amended September 13, 1993, --
between Howard R. Everhart and Metamed, Inc. (6).

10.4 Second Amendment to License Agreement dated May 9, 1995, between Howard R. --
Everhart and HealthWatch Technologies, Inc. (7).

10.5 Form of Exclusive Distributor Agreement (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.
- ----------------

</TABLE>

(1) Incorporated herein by reference to Registration Statement, Form 10-K
for the year ended June 30, 1990 (File No. 0-11476). (2) Incorporated
herein by reference to Registration Statement, Form S-18 (File No.
2-85688D).

(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
10-KSB, for the year ended June 30, 1996 (File No. 0-11476).

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

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

(8) Incorporated herein by reference to Registration Statement, Form SB-2
(File No. 333-09107).

(9) Incorporated herein by reference to Registration Statement, Form S-3
(File No. 333-21929).

Exhibit 5.1

Lindley S. Branson
612 343-2827

June 2, 1997

HealthWatch, Inc.
2445 Cades Way
Vista, California 92083

RE: Registration Statement on Form SB-2

Gentlemen:

This opinion is furnished in connection with the registration, pursuant
to the Securities Act of 1933, as amended ("Act"), of an aggregate of 1,500,000
shares of the Common Stock, $.07 par value (the "Shares"), of HealthWatch, Inc.
(the "Company").

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

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

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

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

Very truly yours,

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

By /s/ Lindley S. Branson
-------------------------
Lindley S. Branson

Exhibit 23.2

INDEPENDENT AUDITORS' CONSENT

We hereby consent to the use of our report dated August 16, 1996, accompanying
the consolidated financial statements of HealthWatch, Inc. as of June 30, 1996
and 1995, included in the Company's Registration Statement on Form SB-2 and to
the reference made to our firm under the caption "Experts" in the aforementioned
Registration Statement expected to be filed by HealthWatch, Inc. on or about
June 3, 1997.

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

June 2, 1997