SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                                  ANNUAL REPORT
                       PURSUANT TO SECTION 13 or 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended                            Commission file number
    JUNE 30, 1999                                           0-11476

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

          MINNESOTA                                            84-0916792
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)

              9040 ROSWELL ROAD, SUITE 470
                     ATLANTA, GA                              30350
        (Address of principal executive offices)            (Zip Code)

               Registrant's telephone number, including area code:
                                 (770) 641-5555

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months and (2) has been  subject  to such  filing  requirements  for the past 90
days. Yes X No

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained,  to
the  best  of  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB [___].

     Registrant's revenues for fiscal year ended June 30, 1999: $1,220,803.

     Aggregate market value of voting stock held by non-affiliates of registrant
as of October 1, 1999:  Approximately  $2,038,210 based on 4,498,170 shares with
an average bid and ask price of $0.45312.

     Number of shares  outstanding  as of October 1, 1999:  5,046,211  shares of
Common Stock, $.01 par value.

      Documents incorporated by reference:  None.

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

*  Registrant  intends  to  ask  stockholders  at its  next  Annual  Meeting  of
Stockholders  to  approve a change in  Registrant's  name to MERAD  Technologies
Corporation.


<PAGE>

                                     PART I
Item 1.  BUSINESS.

INTRODUCTION

         HealthWatch,  Inc., d/b/a MERAD Technologies  Corporation,  is still in
the process of changing from a company primarily involved in the manufacture and
marketing of medical  products to a company  primarily  involved in the software
information  technology  ("IT")  business.  The Company  acquired  Paul Harrison
Enterprises,  Inc. ("PHE") on October 1, 1998. PHE owned the MERAD Technology, a
sophisticated   software  application   utility.   MERAD  utilizes  an  advanced
multi-media object and relational  database which creates knowledge objects that
can be used and  reused  in a  virtually  unlimited  number of  combinations  to
provide  efficient  applications  that can be accessed and  processed in both an
Internet  and  Intranet  environment.  See a  description  of MERAD  below.  The
acquisition of PHE also increased the Company's ownership of the common stock of
HALIS, Inc. ("HALIS"), a health care IT company, from approximately 5% to 18% of
HALIS' outstanding shares of common stock. Subsequent acquisitions of additional
HALIS stock has increased the Company's interest to slightly greater than 21% of
the outstanding  shares thereby  allowing the Company to account for HALIS using
the equity method of accounting.

         Prior  to the PHE acquisition, the Company was primarily in the medical
products business. Certain of the Company's products contained both hardware and
software  components.  While the hardware  components are  classified  more as a
device,  the  completed  medical  equipment  including  software,  include an IT
component as the equipment  analyzes  information and reports diagnostic results
to users.  This IT software  ran on  device-oriented  hardware  regulated by the
Federal Food and Drug Administration  ("FDA") whereas the Company's new software
will run on computer-oriented hardware that does not fall under FDA regulations.

         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.  Except for historical  information  contained in this report
and in the documents incorporated by reference, the matters discussed herein and
therein contain forward-looking  statements that involve risks and uncertainties
that could cause actual results to differ materially from those suggested in the
forward-looking  statements,   including,  without  limitation,  the  effect  of
economic  conditions,  product  demand,  competitive  products  and other  risks
detailed  herein and in the  Company's  other  filings with the  Securities  and
Exchange Commission.

BACKGROUND

         During fiscal 1997,  the Company  determined  to expand its business to
include healthcare  information software products and services. The decision was
based on the  Company's  desire to improve  margins  for its  medical  products,
particularly its Life Sciences peripheral vascular diagnostic  products,  and to
expand its product and service  offerings  in order to increase  revenues and to
return the Company to  profitability.  In this  connection,  the Company entered
into a business collaboration  agreement with HALIS during FYE 1998, pursuant to
which the Company and HALIS agreed to share sales  prospects and the Company was
to develop an  integration  database  engine  designed to  monitor,  capture and
manage medical information at the point of care.

         HALIS, based in Atlanta,  Georgia,  supplies information technology and
services  focused on the  healthcare  industry.  Utilizing  advanced  healthcare
models and  information  technology,  HALIS has developed  the HALIS  Healthcare
Enterprise  System  ("HES"),  a single system which  integrates all of the major
functions needed by clinics, hospitals,  healthcare practices, payors, long-term
care facilities,  laboratories,  pharmacies and home healthcare facilities.  See
Business of HALIS below.

         In addition  to the agreement with HALIS,  the Company  entered into an
agreement with Paul Harrison  Enterprises,  Inc.,  pursuant to which PHE's MERAD
subsidiary  would  develop  proprietary  software  technology  to be used by the
Company. At that time, Paul W. Harrison,  Chairman of the Board, Chief Executive

<PAGE>

Officer  and  President  of HALIS and Chief  Executive  Officer of PHE and Larry
Fisher, a Director and Executive Vice President,  Chief  Administrative  Officer
and Secretary of HALIS, joined the Company's Board of Directors.

         In  connection  with  these  transactions,  PHE,  Mr.  Fisher  and  two
non-affiliated  shareholders  of HALIS  exchanged  1,100,000  of their shares of
HALIS common stock for 880,000 shares of the Company's  Common Stock and PHE was
granted an option to exchange an additional 400,000 shares of HALIS common stock
for an additional 320,000 shares of HealthWatch Common Stock, the exchange ratio
being based on the market value for each company's common stock at the time that
the transaction was  negotiated,  and HALIS invested  $125,000 in the Company in
consideration  for which HALIS  acquired  83,334 shares of the Company's  Common
Stock. In furtherance of the business  collaboration  with HALIS, the PHE option
was exercised by PHE and its assigns and PHE  exchanged an additional  1,262,000
shares of HALIS common stock for 378,000 shares of HealthWatch Common Stock.

         Based on the  foregoing and the  Company's  determination  that  the IT
business offered  significantly  greater  opportunities for the Company than did
its existing medical products  business,  the Company's focus during fiscal 1998
was  increasingly  on the  development of its IT business.  In an effort to gain
direct control over these efforts,  the Company  acquired PHE on October 1, 1998
through a merger of PHE into MERAD Software, Inc., a wholly owned  subsidiary of
the Company.

         At  the time of the merger,  PHE held 6,177,010  shares of common stock
in HALIS and owned the MERAD  technology.  As a result of its acquisition of PHE
and the MERAD  technology,  the Company has diverted its attention away from the
expansion  of its  medical  device  business,  and has  decided to use the newly
acquired MERAD technology to develop expanded applications in the healthcare and
other  industries.  Accordingly,  the  use of  this  technology  to  expand  the
Company's medical device business is uncertain.  As a result of the merger,  the
Company increased its ownership  interest in HALIS to 8,939,010 shares of HALIS'
common stock as of October 1, 1998,  representing  approximately  19% of HALIS'
outstanding shares. In January 1999, the Company converted outstanding debt owed
by HALIS to the Company  into  1,824,645  additional  shares of common  stock of
HALIS,  bringing the number of HALIS  shares held by the Company to  10,763,655,
representing  approximately 21% of HALIS' outstanding shares. The Company is now
the single largest shareholder of HALIS and due to the size of its holdings, now
accounts for its  investment  under the equity  method of accounting  (i.e.,  it
recognizes its proportionate amount of HALIS' income or loss each month).

         During  fiscal  year ended June 30,  1999,  the  Company  continued  to
emphasize  the IT  business  by acting  as a  reseller  of the HALIS  Enterprise
Systems while putting  development of new products using the MERAD technology on
hold.  However, as a result of its limited resources and a general reluctance on
the part of customers to accept new and  innovative  software  technology due to
concerns  surrounding  the  entering of the year 2000,  the Company has not been
successful in integrating the HALIS products into its customer base. The Company
will  continue its efforts to be a reseller of the HALIS  software to the extent
possible  and hopes to grow this  business  through a  combination  of licensing
partners  (which may have the  resources  to assist in the  distribution  of the
HALIS  products),  selected  strategic  acquisitions (if possible the hope is to
identify system  integration  firms in need of software  products to distribute)
and internal  sales of its software and services to its existing  customer base.
The Company also will explore the possibility of developing  information systems
utilizing the MERAD technology for other  information-intensive  industries such
as financial services,  insurance and real estate.  However,  due to the limited
resources available to the Company,  the Company does not expect to move forward
in this regard in the near term. In  recognition  of the change in the Company's
business focus, the Company will ask its stockholders at its next Annual Meeting
of Stockholders to approve a change in the Company's name to MERAD  Technologies
Corporation.

MERAD/BUSINESS DEVELOPMENT STRATEGY

         MERAD  is an Internet software application utility that uses artificial
intelligence  and a database  approach to specify,  store,  process,  and manage
software applications as flexible database programs rather than hard coded rigid
programming  code. This improved approach allows programs to be compressed at up
to a 100:1 efficiency,  which requires far less Internet  bandwidth or computing
power to  process  the  program  instructions.  In  addition  to the  additional

<PAGE>

processing  speed, a program  utilizing the MERAD  technology  will be easier to
maintain and support because changes are made to a database table verses parsing
through  millions of lines of rigid  computer  code.  The Company  believes that
MERAD's ability to efficiently replace  applications  program code with end-user
database  applications  represents a significant  competitive  advantage for the
Company's products. The HALIS Enterprise System was designed and build using the
MERAD technology.

         The  MERAD technology can potentially  handle the 83 standard  industry
classifications  (SIC codes), by using its unique generic processing  algorithms
to handle a  significant  portion of the  software  code which is common to many
information  processing  programs  and by  making  rapid,  low cost  changes  to
complete the balance of the coding required to meet a particular company's or an
industry's  needs.  The MERAD software utility utilizes an open systems approach
by  incorporating  industry  standard  technology  tools,  and can be run on the
Internet as well as on local networks or single  computers.  Utilizing the MERAD
technology,   the  Company  can  standardize   and  regularly   update  software
applications or industry specific  information  content.  The Company expects to
also offer complementary technology to capture and integrate digital information
and provide IT services.

         The Company's plan is to initially focus  on three or four of the major
information  intensive  industries  that have similar  needs and SIC codes (e.g.
healthcare, insurance, financial services, and real estate). The Company's first
industry focus is healthcare.  The healthcare industry is expected to spend over
$20 billion  annually on information  technology  over the next five years.  The
Company intends to cross-sell the new HALIS  Healthcare  Enterprise  System into
the Company's established base of over 1000 healthcare customers.

         The  Company  also  intends  to market  information  systems  in  other
industries with its more generic Business Enterprise System (the "BES"). The BES
can be sold to any industry with  consulting  made  available for special needs,
ranging from advising  customers on how to customize  content for their specific
requirements, to providing technology expertise and customizations.  The Company
intends to use the Internet to distribute and support its IT products.

         If the  resources  are  available,  the Company  hopes  to  selectively
acquire other  companies to help build  critical  mass and to obtain  additional
customer base and distribution in each focused industry,  into which the Company
can further  cross-sell  its  software  products.  The acquired  companies  will
primarily be service-based  companies that need new or replacement  software and
information technology solutions, and companies such as system integrators, that
can provide IT services to help implement  additional systems requirements after
software installation.

         It is important  to note,  however,  that due to the limited  resources
available to the Company  during fiscal year ended 1999,  the Company was unable
to deploy its  intended  business  strategy  to any  measurable  degree.  As the
Company heads into calendar  year 2000,  it is hoped that  potential  customer's
fears of the Year 2000  concern  will  subside and that the  efforts  undertaken
during  fiscal  1999 will  enable the  Company to make a positive  impact on the
Company's finances during fiscal year 2000. Obviously no guaranty of success can
be made and it is clear that the  Company  will need an  infusion of cash during
fiscal  1999 in order for it to make any  significant  in roads in its  business
plan. The Company's  auditors have given the Company a going concern opinion for
the last two  years  indicating  that  there is a  substantial  doubt  about the
Company's ability to continue as a going concern.


THE COMPANY'S MEDICAL DEVICE BUSINESS

         Historically the Company,  through  its Life Sciences division,  was in
the  business  of  manufacturing  and  selling  medical  devises and the related
supplies, and providing technical support for its products. See a description of
those  products  below.  Since fiscal 1998 the Company has been  refocusing  its
direction  on the  information  technology  segment of its business as disclosed
above, and sold its Cambridge Medical Equipment subsidiary to an unrelated third
party in the third quarter of fiscal 1998. The following is a description of the
medical products that the Company has historically sold:

         Peripheral   Vascular   Products.   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

<PAGE>

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   historically   marketed  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
1998,  the Company  re-designed  the MVL so that it could be run with  Microsoft
Windows based software.  The Company began shipping the  re-designed  version of
the MVL during the third quarter of fiscal 1998.

         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.

         There  is currently an installed base of over 350 MVL'S.  The price for
a basic system, was approximately $25,000.

         The  second  product  was  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 was 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.

         While the Company has  reorganized  to focus its  business  more on its
information  technology software business,  it intends to maintain its more than
1,000 customer  relationships that have purchased its PVR and MVL products.  The
PVR active  product  has been  replaced to a large  extent by the MVL  products,
which requires upgrades,  as well as service and supply contracts.  Although the
Company has  stopped  manufacturing  and selling new MVL or PVR units,  it still
continues  to provide  supplies  and  technical  services  to the Life  Sciences
customer base.

         IV Product.  The Pacer,  the Company's  only IV product,  a controller,
         ----------
which was approved for marketing by the FDA in April 1994,  was  introduced  and
initial marketing efforts commenced in fiscal 1997. Due to the Company's lack of
working  capital and the  difficulty  it  encountered  in  marketing a single IV
product  in a  market  increasingly  dominated  by large  entrenched  healthcare
companies  offering a complete line of IV products,  often on a "bundled"  basis
whereby healthcare  institutions  contract for all of their IV products from one
or a limited number of vendors,  the Company discontinued its sales efforts with
respect to the Pacer during fiscal 1998.

         Cardiology Products.   HealthWatch's  cardiology  products included the
         -------------------
Cambridge   lines  of  ECG  and  cardiac  stress  test  systems  which  included
proprietary  systems  developed by Cambridge and systems  manufactured  by other
companies.  During fiscal 1998, the Company  discontinued sales of its Cambridge
ECG  equipment  and  sold  its  wholly-owned   subsidiary,   Cambridge   Medical
Equipments,  Ltd.  recognizing  a loss on the  transaction  in fiscal 1998.  The
Company's  decision  to  discontinue  the  Cambridge  business  was based on the
determination  that the market  opportunity  available  to the  Company  did not
justify the investment that would have been required for the Company to continue
to offer this product line. In addition, the Company determined that its limited
working  capital  made it  difficult  for  management  to oversee the  Cambridge
Medical Equipments, Ltd. operations which are located in England.

         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

<PAGE>

such equipment.  During fiscal 1999 and 1998 sales of supplies and revenues from
service and  maintenance  activities  accounted for  approximately  62% and 65%,
respectively,  of  HealthWatch's  revenues  from its medical  products  business
segment.

RESEARCH AND DEVELOPMENT

During the years ended June 30, 1999 and 1998,  the  Company  spent  286,921 and
$231,169  respectively,  on research and development  activities.  During fiscal
1999, the Company's  research and development  activity was primarily related to
enhancements of the MERAD  Technology and providing  technical  support to HALIS
under the business  collaboration  agreement.  During  fiscal 1998,  the Company
incurred research and development  expenses for design and software work related
to its enhanced  MVL product and to expand its product and service  offerings to
include the monitoring, capturing and management of medical information.

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.  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.

COMPETITION

         There are many companies that offer products and services which compete
with the  Company's  current  and planned  products  and  services.  Many of the
Company's   competitors  have  substantially  greater  financial  and  marketing
resources than the Company.

         The information  technology software industry is highly competitive and
subject to  continuing  change in the manner in which  products and services are
marketed and vendors are selected by customers.  The primary competitive factors
are scope and quality of products and service and support  capabilities.  Due to
Year 2000 concerns many customers have been delaying their  commitments to large
scale software acquisitions.  Many of the Company's competitors have experienced
the same reluctance from potential customers.  The Company believes that once we
pass into calendar 2000 customer support of its products will increase.

GOVERNMENT REGULATION

         The medical devices that were  manufactured and marketed by the Company
are subject to  regulation  by the  Federal  Food and Drug  Administration  (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
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).

         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 Good  Manufacturing  Procedure ("GMP")  regulations which impose


<PAGE>

certain process,  procedure and documentation requirements upon the Company with
respect to manufacturing and quality assurance activities.  The Company believes
that its manufacturing and quality control procedures  substantially  conform to
the requirements of FDA regulations.

         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.

         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.

         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 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.

EMPLOYEES

         At October 1, 1999, the Company had 9 employees.

RISK FACTORS - FACTORS AFFECTING FUTURE RESULTS

         In addition to the factors set forth elsewhere herein, investors should
consider the following risk factors regarding HealthWatch:

         WORKING CAPITAL REQUIREMENT; NEED FOR ADDITIONAL FINANCING. The Company
         ----------------------------------------------------------
will require  additional  capital to finance its ongoing  operations and planned
growth.  The Company's cash position is at a critically low level.  There can be
no assurance  that the Company will be able to obtain such financing if and when
needed,  or that if obtained,  it will be sufficient or on terms and  conditions
acceptable to the Company. Any such future equity financing could be dilutive to
the Company's  shareholders.  In its report  accompanying the audited  financial
statements for the years ended June 30, 1999,  and 1998, the Company's  auditors
expressed  substantial  doubt about the Company's ability to continue as a going
concern.

         HALIS  INVESTMENT.  As part of  HealthWatch's  decision  to expand  its
         -----------------
business into information technology,  the Company entered into a joint venture
and co-marketing arrangement with HALIS and has made a significant investment in
HALIS  through  the  acquisition  of PHE and the  exchange  with  certain  HALIS
shareholders  of shares of the  Company's  common  stock for a portion  of their
shares of HALIS common stock. As a result of these  purchases,  HealthWatch owns
10,763,655  shares  of  HALIS'  common  stock   (approximately   21%  of  HALIS'
outstanding  shares of common  stock) which had a market value of  approximately
$1,345,456 at October 1, 1999. The Company is currently carrying this investment
on its books at $1,769,671.  The Company's  investment in HALIS was made for the
long term in  connection  with the  Company's  decision  to expand  its  product

<PAGE>
offerings to include healthcare  information  technology products.  Accordingly,
the Company has decided that it should not write down the HALIS investment as it
concluded  that  the  decline  in  the  value  of  the  HALIS  shares  was  only
"temporary."  There can be no assurance that the Company's HALIS investment will
not need to be written down in the future.

         HALIS'  common  stock is traded on the OTC  Bulletin  Board,  under the
symbol  "HLIS."  The  Company's  ability  to sell its  shares of HALIS  could be
adversely  affected by the limited  trading  volume for HALIS'  stock and by the
requirement  that the Company sell its HALIS shares in accordance  with Rule 144
promulgated by the Commission, since Paul W. Harrison, a member of the Company's
Board of Directors,  is also  Chairman of the Board of Directors of HALIS.  Rule
144 could limit the amount of HALIS' shares which  HealthWatch could sell during
any three-month  period to approximately  550,000 shares.  Further,  there is no
assurance that a public market for HALIS' securities will continue to be made or
that the Company will be able to avail itself of a public trading market for the
HALIS  common  stock in the  future.  Moreover,  sales  and  potential  sales of
substantial  amounts of HALIS' common stock in the public market could adversely
effect the  prevailing  market  prices for the HALIS common stock and impair the
Company's  ability to raise  additional  capital  through  the sale of the HALIS
common stock.  While the Company  intends its  investment in HALIS to be for the
long-term, the Company will need to raise significant additional working capital
to fund its  operations and it may,  therefore,  be necessary for the Company to
sell the HALIS shares to raise required working capital if the Company is unable
to raise working capital from other sources.

         NEW BUSINESS VENTURES;  UNPROVEN PRODUCTS. In October 1998, the Company
         -----------------------------------------
acquired  PHE. A major factor in the  Company's  decision to acquire PHE was the
desire to own the MERAD  software  technology  in order to  further  expand  its
business to include information  technology  software.  This business represents
significant new business venture for the Company,  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. The Company had not previously been engaged
in the information technology business.

         ACQUISITIONS  AND  INTEGRATION.  An important  element of the Company's
         ------------------------------
business  strategy for fiscal 1999 was to expand  through  acquisitions.  Due to
limited  resources,  the Company did not make any additional  acquisitions other
than the acquisition of PHE. The Company's  future success may be dependent upon
its  ability  to  finance   acquisitions  and  effectively   integrate  acquired
businesses  with the  Company's  operations  during  fiscal  2000.  Although the
Company believes that it will be able to affect such  integration,  there can be
no assurance that the Company will be able to affect any such  acquisitions,  or
that  such  acquisitions  will be  successfully  integrated  or that  they  will
otherwise be successful.

         DEPENDENCE  ON NEW OR  IMPROVED  PRODUCTS;  TECHNOLOGICAL  CHANGES.  In
         ------------------------------------------------------------------
general, the information  technology and medical products industries are 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 enterprise information software is often an enterprise-wide
decision    and   may   require   the   Company   to   engage   in   a   lengthy
evaluation/purchase-sales  cycle.  The sales  cycle 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  experienced a delay in customer's  willingness  to
<PAGE>

commit to a purchase  of its  software  products  because of  concerns  with the
software  handling  the four  year  date  code  commonly  known as the Year 2000
concern. Although the Company's products are Year 2000 compliant, there has been
a general slow down in the information  technology sector until this contingency
passes.

         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. 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.

         DEPENDENCE  ON MANAGEMENT  AND KEY  PERSONNEL.  The  Company's  success
         ---------------------------------------------
depends to a  significant  degree upon the  personal  efforts and ability of its
Chief  Executive  Officer,  Paul W.  Harrison.  The loss of the  services of Mr.
Harrison would have a materially adverse effect on the Company. The Company does
not maintain key man life insurance on any of its executives.  Additionally, due
to limited  resources,  the Company has  reduced its  executive  staff to a bear
minimum.

         As the Company  progresses  into fiscal 2000,  it will be necessary for
the  Company to obtain  resources  that will allow it to retain the  services of
competent  individuals to supplement its executive  ranks.  The Company's future
operating results also depend in significant part upon its continuing ability to
attract  and  retain  highly  qualified  technical  and  managerial   personnel.
Competition  for such  personnel is intense,  and there can be no assurance that
the Company will retain its key  managerial  or  technical  personnel or attract
such personnel in the future.  The Company has at times  experienced  difficulty
recruiting qualified  personnel,  and there can be no assurance that the Company
will not experience such difficulties in the future. If the Company is unable to
hire and retain qualified  personnel in the future,  such inability could have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

         NASDAQ  LISTING  REQUIREMENTS;  LIMITATIONS ON  BROKER-DEALER  SALES OF
COMPANY AND HALIS  COMMON  STOCK;  APPLICABILITY  OF "PENNY  STOCK  RULES".  The
--------------------------------------------------------------------------
Company's  stock is  currently  listed  on the  Nasdaq  Small  Cap  Market.  Two
requirements  to remain  listed are that the  Company's  stock price  maintain a
closing  bid of $1.00  or  greater  for a  certain  period  of time and that the
Company's tangible net worth equal or exceed $2,000,000. As of June 30, 1999 the
Company's tangible net worth was below $2,000,000.  Additionally,  the Company's
stock price has fallen below the necessary price maintenance  level. As a result
the Company has been warned by Nasdaq that it will be delisted if the  Company's
closing  bid price  does not  equal or  exceed  $1.00 per share for at least ten
consecutive  trading days ending on or before  December 23, 1999.  Additionally,
there is no  guaranty  that the Company  will be able to improve  its  financial
condition  in order to exceed the  required  minimum  tangible  net worth during
fiscal  2000  even  if  the  minimum  price  maintenance  levels  are  achieved.
Accordingly,   if  immediate  actions  are  not  taken  to  meet  the  necessary
requirements,  there is a  significant  risk that the  Company's  stock  will be
delisted  during fiscal 2000.  The Company is taking  actions and using its best
efforts to meet the needed requirements to maintain its listing.

         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
<PAGE>

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
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 Small Cap 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.
HALIS' common stock is currently traded on the OTC Bulletin Board and is subject
to 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.

BUSINESS OF HALIS

         HALIS is a supplier of information technology and services, focusing on
the healthcare  industry.  Utilizing advanced  healthcare models and information
technology,  including  the  MERAD  technology,  HALIS has  developed  the HALIS
Healthcare  Enterprise  System  ("HES"),  a  single  system  for the  healthcare
industry.  This  Healthcare  Enterprise  System  integrates  all  of  the  major
functions  needed by  clinics,  hospitals,  practices,  payers,  long-term  care
facilities,  laboratories,  pharmacies and home healthcare facilities, the eight
major  markets into which HALIS  competes.  HALIS is currently  building out the
specific features required by each of these eight markets.  Subsets of or all of
the Healthcare Enterprise System can be used by each of these markets and can be
combined  to provide a complete  solution  for  Integrated  Healthcare  Delivery
Networks.  These  Networks  are being  formed  by  hospitals,  clinics,  payers,
practice management companies,  individual  practices,  and other entities which
are involved in the delivery  and  management  of  healthcare  services.  HALIS'
systems  business  is  targeted  to  healthcare  industry  participants  such as
physician  practices,  HMO's,  home  healthcare  providers and hospitals.  HALIS
expects to  capitalize  on the  healthcare  industry's  demand for more software
variety, updates, convenience, lower pricing, and better support services.

         The Company has entered into a business  collaboration  agreement  with
HALIS  pursuant  to which the Company is able to market the HALIS HES product to
the Company's  customer base.  Under this  agreement,  the Company has agreed to
split any revenue from the sale of the HALIS HES products  with HALIS on a 50/50
basis. MERAD software, the Company's  wholly-owned  subsidiary in turn, would be
entitled to 10% of any amounts paid or payable to HALIS thereunder. From time to
time,  the Company has obtained the services of HALIS to assist it in developing
the Company's  healthcare  information  technology business.  Additionally,  the
Company and HALIS have shared  resources and personnel and have  allocated  such
costs  between the two  companies on a reasonable  basis.  The Company and HALIS
have entered into a letter of intent pursuant to which they have indicated their
intent  to  merge  the two  companies.  As of the  date of  this  report,  it is
uncertain whether or not the merger will occur.  However, the Company expects to
work closely with HALIS in  connection  with the  development  of the  Company's
healthcare IT business.  The HALIS HES product was developed utilizing the MERAD
technology  which was acquired by the Company in connection with the acquisition
of PHE.  Sales by HALIS which are based on the MERAD  technology  are subject to
license  fees  payable to the Company  equal to 10% of HALIS'  revenues for such
sales.

         HALIS  is  subject  to  certain   informational   requirements  of  the
Securities Exchange Act of 1934 and, in accordance therewith,  files reports and
other   information   with  the   Securities   and  Exchange   Commission   (the
"Commission"). Such reports and other information can be inspected and copied at
the public reference  facilities  maintained by the Commission at Room 1024, 450
Fifth Street,  N.W.,  Washington,  D.C. 20549 and at the  Commission's  regional
offices  located at Seven World Trade  Center,  13th Floor,  New York,  New York
10048 and  Citicorp  Center,  500 West  Madison  Street,  Suite  1400,  Chicago,
Illinois 60661. Copies of such material can also be obtained at prescribed rates
by writing to the Securities and Exchange Commission,  Public Reference Section,
450 Fifth Street,  N.W.,  Washington,  D.C. 20549.  In addition,  the Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding HALIS at http://www.sec.gov.

<PAGE>

HEALTHWATCH KEY EMPLOYEES; DIRECTORS

         The directors and executive officers of HealthWatch are as follows:

                         Director
      Name                Since     Age          Positions With The Company
      ----                -----     ---          --------------------------

Paul W. Harrison          1997      44           Chairman, Chief Executive
                                                  Officer and Director

Richard T. Case           1997      50           Director

Sanford L. Schwartz       1983      49           Director

         Paul W.  Harrison has  extensive  experience  in the United  States and
         -----------------
internationally  managing  information  technology  companies.  He has  been the
Chairman  and CEO of the  Company  since  June 1998,  and  Chairman & CEO of the
Company's  affiliate,  HALIS,  Inc.,  since November 1996. Mr.  Harrison was the
President and Managing Member of AUBIS, LLC from February 1995 to December 1997,
which  owned two  information  system  companies  that were merged into HALIS in
November 1996. Mr.  Harrison was an executive with and advisor to HBO & Company,
a leading healthcare  information systems company, from June 1993 until December
1994. Prior to HBOC, Mr. Harrison was the CEO of BIVEN,  Inc. from April 1991 to
June 1993,  which sold software and other  technology-related  assets to HBOC in
June 1993.

          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.

FORWARD-LOOKING STATEMENTS

         This report  contains  certain  forward-looking  statements  within the
meaning of Section 27A of the  Securities  Act and Section 21E of the Securities
and  Exchange Act of 1934,  as amended,  which are intended to be covered by the
safe harbors created thereby.  These statements include the plans and objectives
of HealthWatch and HALIS for future operations.  The forward-looking  statements
included herein are based on current  expectations  that involve  numerous risks
and uncertainties.  HealthWatch plans and objectives are based on the assumption
that their respective businesses will be successful, that competitive conditions
within the healthcare  industry will not change materially or adversely and that
there will be no  material  adverse  change in either  company's  operations  or
business.  Assumptions  relating to the foregoing involve judgments with respect
to, among other things,  future economic,  competitive and market conditions and
future business  decisions,  all of which are difficult or impossible to predict
accurately  and many of which are beyond the  control of  HealthWatch  or HALIS.
Although   the   Company   believes   that  the   assumptions   underlying   the
forward-looking statements included herein are reasonable, the inclusion of such
information  should not be regarded as a representation  by the Company,  or any
other person, that the objectives and plans of the Company will be achieved.

Item 2.  PROPERTIES.

         The Company's  corporate  headquarters is located at 9040 Roswell Road,
Suite 470,  Atlanta,  Georgia,  where it shares office space with HALIS, Inc. as
part of its  business  collaboration  agreement  with HALIS.  Additionally,  the
Company leases office and warehouse  space in Vista,  California,  under a lease
that  commenced  January 1, 1999 and  continues for a three year term with total
rents of $49,200. These payments escalate at a rate of 4% each year.


<PAGE>

Item 3.  LEGAL PROCEEDINGS.

         The  Company  is  presently  involved  in three  legal  proceedings  or
administrative   hearings  that  are  considered   routine  litigation  that  is
incidental to its business.  None of the proceedings  individually  are material
and adequate reserves have been accrued in the Company's financial statements to
cover any amounts allegedly owed to third parties thereunder.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         None.


                                     PART II

Item 5.  MARKET  FOR  THE  REGISTRANT'S  COMMON  EQUITY AND RELATED  STOCKHOLDER
         MATTERS.

         The  number  of  record   holders of  the  Company's  Common  Stock  on
October  1,1999 was 785.  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-five  reverse stock split  effective  February 1998).  These  quotations
represent prices between dealers,  and do not include retail markups,  markdowns
or commissions.

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

             1997
             ----
             September 30              $6.093                $1.718
             December 31                4.844                 1.250

             1998
             ----
             March 31                   2.655                 0.938
             June 30                    1.250                 0.625
             September 30               1.625                 0.625
             December 31                1.031                 0.375

             1999
             ----
             March 31                   1.312                 0.375
             June 30                    2.218                 0.875
             September 30               1.031                 0.406

         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.  The
Company's 6% Series A Preferred  Stock and Series P Preferred Stock restrict the
Company's  ability to pay  dividends on the Common Stock until all  dividends on
the Preferred Stock has been paid.

         During  June  1998,  the  Company  sold to a limited  number of private
investors  pursuant  to Section  4(2) of the  Securities  Act and  Regulation  D
promulgated  thereunder,  1,145,000  shares of its 6% Series A Preferred  Stock,
stated value $1.00 per share (the "Series A Preferred").  The Series A Preferred
Stock is convertible  into Common Stock of the Company at the lesser of $.52 per
share  or 70%  of the  price  of the  Company's  Common  Stock  at the  time  of
conversion.  Alexander  Wescott & Co.,  Inc.  served as placement  agent for the
offering  and was paid  expenses and  commissions  of $151,850 and was granted a
warrant  representing  the right to acquire  1,145,000  shares of the  Company's
Common  Stock at a purchase  price of $1.20 per share for placing the  Preferred
Stock.  The shares of Common Stock  issuable  upon  conversion  of the Preferred
Stock  have  not  been  registered  under  the  Securities  Act of  1933. As  of
October 1, 1999  (but  subsequent  to  the  year-ended  June 30, 1999),  567,000
shares of the Series A Preferred Stock had been converted into 1,384,438  shares
of common stock.


<PAGE>

         During the  three-month  period ended  September 30, 1998,  the Company
completed a stock exchange with PHE whereby the Company issued 448,400 shares of
common stock to PHE in exchange for 1,400,000 shares of HALIS common stock.

         Pursuant to  previously  executed  agreements,  during the  three-month
period ended  December 31, 1998, the Company  completed the  acquisition of PHE.
The  Shareholders  of PHE  received  334,443  shares of the  Company's  Series P
Preferred Stock,  stated value $10.00 per share, and other  consideration in the
merger. PHE was merged into MERAD Software,  Inc., a Nevada  corporation,  and a
wholly-owned  subsidiary  of the  Company.  At the time of the merger,  PHE held
6,177,010  shares of HALIS common stock.  As a result of the acquisition of PHE,
888,400 shares of the Company's common stock was cancelled and retired.

         During the three-month  period ended March 31, 1999, the Company issued
a total of 1,000,804  shares of common stock for an aggregate  purchase price of
$425,000 pursuant to private placement of its securities, and an equal number of
warrants at exercise  prices  ranging from $0.49 to $0.86 per share expiring two
years after their issuance.

         During the three-month period ended June 30, 1999, the Company issued a
total of  209,152  shares of common  stock for an  aggregate  purchase  price of
$200,000 pursuant to private  placement of its securities,  and 100,000 warrants
at an exercise price of $1.59 per share expiring two years after their issuance.

         During the year ended June 30,  1999,  a total of 55,000  options  were
exercised for a total of $36,300.

         On September 30, 1999 Sanford Schwartz,  a director of the Company, was
issued 89,468  shares of common stock in lieu of consulting  fees owed to him or
his  affiliated  company  for  services   provided  to  the  Company.   Also  on
September 30, 1999,  50,000 shares of common stock was issued to Richard Case, a
director of the Company, in lieu of fees due to Mr. Case for consulting services
provided to the Company.

         The  Company  issued  all  of  the   securities   noted  above  without
registration  under the Securities Act of 1933, as amended,  in reliance upon an
exemption from the  registration  requirements  of such Act contained in Section
4(2) thereof.


Item 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

The following  discussion  should be read in conjunction  with the  consolidated
financial  statements of the Company and its  subsidiaries  contained  elsewhere
herein.

GENERAL

         During  fiscal 1997,  the Company  determined to expand its business to
include healthcare  information software products and services. The decision was
based on the  Company's  desire to improve  margins  for its  medical  products,
particularly its Life Sciences peripheral vascular diagnostic  products,  and to
expand its product and service  offerings  in order to increase  revenues and to
return the Company to  profitability.  To  implement  this  change,  the Company
entered  into  various  agreements  during  fiscal  1998  with  HALIS,  Inc.,  a
healthcare information technology company, and Paul Harrison Enterprises,  Inc.,
an affiliate of HALIS and the owner of certain software  development  technology
known as MERAD.

         During fiscal 1998,  the Company  began efforts to develop  proprietary
technology utilizing MERAD and to market HALIS' healthcare  enterprise system to
the Company's  customers.  In addition,  the Company sold its Cambridge  Medical
Equipment, Ltd. subsidiary located in England, terminated sales of its Cambridge
product line and initiated  efforts to sell the Pacer,  its new IV product.  The
decision to terminate the Cambridge  business was made in fiscal 1997,  based on
declining  sales  of  these  products  and the  Company's  conclusion  that  the
prospects for this product line did not justify the additional  investment  that
would be required to maintain  this product  line.  The decision to seek a buyer
for the Pacer  product  followed  efforts begun in late fiscal 1997 to establish
distribution  channels for this  product.  While these  efforts  were  initially
favorable,  the Company did not have the resources required to sustain the sales
and  marketing  effort  needed to market this  product in a market  dominated by
large  international  companies with a wide range of IV equipment and disposable
products.  As a consequence,  the Company discontinued its efforts to distribute
the  PACER  and  focused  its  efforts  on the  development  of its  information
technology  line of the business  and  maintaining  the  supplies and  technical
support operations for its medical products.


<PAGE>
         Based on the foregoing  developments  and the  Company's  determination
that the software  information  technology (IT) business  offered  significantly
greater  opportunities  for the Company than did its existing  medical  products
business,  the  Company's  focus  during  fiscal  1998 was  increasingly  on the
development  of its IT business.  During fiscal 1999,  the Company  continued to
emphasize  the IT business and is  attempting  to grow this  business  through a
combination of licensing partners,  selected strategic acquisitions and internal
sales of its software and services. In an effort to gain direct control over its
efforts to develop the IT business, the Company acquired PHE on October 1, 1998.
As a result of the PHE acquisition,  the Company obtained ownership of the MERAD
technology and increased its ownership of HALIS common stock from  approximately
5% to 18% of  HALIS'  outstanding  shares  of  common  stock.  The  Company  has
subsequently  increased  its  interest in HALIS to  approximately  21% of HALIS'
outstanding common stock.

         The Company  expects to continue  to expand its  collaborative  efforts
with HALIS  during  fiscal  2000 and to expand  its  efforts to market the HALIS
healthcare  enterprise  system to the Company's  customer base. The Company also
intends to develop  information systems utilizing the MERAD technology for other
information intensive industries such as financial services,  insurance and real
estate,  however,  due to its limited  resources  these efforts will be deferred
until late 2000 or early 2001.

         The Company has incurred  significant  operating losses during the past
several  years  and  at  June  30,  1999  had a  retained  earnings  deficit  of
$19,986,327.  The Company  will  require  additional  debt or equity  capital to
sustain operations and to continue its business  development efforts. The report
of the Company's  independent  public  accountants  for the years ended June 30,
1999 and 1998,  contained a paragraph  noting  substantial  doubt  regarding the
Company's ability to continue as a going concern.

FINANCIAL CONDITION

         Total assets of the Company increased  $1,078,976 during the year ended
June 30, 1999 due  primarily to the  acquisition  of PHE. As a result of the PHE
acquisition  the Company's  assets  increased  $1,194,042  relating to the HALIS
stock  owned by PHE and  $922,036  relating  to the  MERAD  technology.  These
increases were offset by decreases in cash, accounts  receivable,  and inventory
of  $832,544,  $86,507,  and  $288,409,   respectively.  Cash  was  utilized  in
operations  and to repay  debt of the  Company,  receivables  have been  reduced
reflecting the discontinuance of the sale of medical products, and inventory has
been  reduced  to  write-down  the  carrying cost to  market  as a result of the
discontinuance  of the sale of medical products.  Additionally,  the Company has
been amortizing  intangible assets related to its Life Sciences division over 10
years,  which  resulted  in a decrease  of  $239,898.  The  investment  in HALIS
increased due to a stock swap of 488,400  shares with former HALIS  shareholders
and a subsequent  increase in the carrying  value due to a change in  accounting
for the  long-term  investment  from  the  cost to the  equity  method.  Lastly,
receivables from HALIS increased by $150,364 mainly reflecting  royalty payments
due from HALIS on sales of software  containing the MERAD  technology and shared
operating costs that have not yet been reimbursed by HALIS.

         Total liabilities  decreased by $131,109 during the year ended June 30,
1999. This net decrease is composed of decreases in accounts payable and accrued
compensation  and payroll  taxes of $179,043 and $83,792 and  increases in other
accrued liabilities of $240,160.  Additionally, the Company paid $100,000 of the
debentures payable - unrelated parties that were outstanding at the beginning of
the year.

         Total stockholders'  equity increased  $1,210,085 during the year ended
June 30, 1999 due primarily to the  acquisition  of PHE, which resulted in a net
increase of $1,854,820.  Other  additions  were the result of private  placement
funds due to the sale of common shares of the Company of $625,000,  the exercise

<PAGE>

of stock  options by former  employees  of $36,300,  and the  issuance of common
shares to PHE prior to its acquisition,  in exchange for shares in HALIS, valued
at approximately $448,000.  Decreases were the result of a net loss for the year
of $1,748,931.


RESULTS OF OPERATIONS

1999 COMPARED TO 1998
---------------------

         Revenues  for the 1999  fiscal  year  decreased  11.7%  compared to the
similar  period in 1998.  The decrease is the result of a shift of the Company's
revenues  from its Pacer  product to its MVL  product  and a movement  away from
revenues  generated from a former  subsidiary based in the United Kingdom (which
was sold last fiscal year).  Additionally,  during the fourth  quarter of fiscal
year 1999, MVL sales were minimal and almost all of the revenues  generated were
the result of supplies, service and repair work.

         Cost of products sold were 31% lower in fiscal 1999 due to  operational
improvements  and decreased  equipment sales. The gross margin was 22.9% in 1999
compared to 1.8% for 1998.  The higher gross  margins in 1999 were due primarily
to  maturation  of the MVL  product  and  lower  costs  associated  with it,  an
increased percentage of revenues from supplies, service and repair work, and the
reduction of costs associated with downsizing the Company.

         Selling, general and administrative expenses as a percent of sales were
108.3% for the 1999 period compared to 115.8% for 1998. The decrease in the 1999
period  is  due  primarily  to  the  downsizing  of the  Company.  Research  and
development  expenses  increased  24.1% in 1999 due primarily to a change in the
business  focus to service and  providing  technical  support to HALIS under the
business collaboration agreement.

         Depreciation and amortization  increased 19.4% for 1999 period compared
to a 3.7% decrease for 1998.  The increase is almost  entirely due to additional
amortization expense related to the Company's acquisition of PHE.

         Equity  loss of  $23,702  during  1999  is the  result  of the  Company
changing its method of accounting  for its long-term  investment in HALIS to the
equity  method  during  1999,  as  required  by  generally  accepted  accounting
principles. The $23,702 represents the Company's pro-rata share of the income of
HALIS  for the  Company's  fiscal  year  less a $62,674  charge  for the  excess
carrying  value of the  investment  over its  underlying  net asset  value.  The
unrealized loss on marketable equity securities - related party of $1,824,605 in
1998 was a one time write down of the investment in HALIS under FAS 115 that was
deemed to be other than temporary.

         Primarily  due to a shift  in  products  from  the  Pacer  to  MVL,  an
increased  focus on service and repair work,  and the downsizing of the Company,
which resulted in increased margins and decreased  overhead,  respectively,  the
Company was able to reduce its net loss from  $4,084,474  or $2.45 per share for
fiscal 1998 to $1,748,941  or $0.65 per share for fiscal 1999.  Exclusive of the
one-time  write down on marketable  equity  securities in 1998, the net loss was
reduced by $510,938, or 23%.

         The Company has  discontinued  the sale of its medical  products (i.e.,
the MVL and Pacer) and will continue to focus on the sale of the HES software to
its customer base and the supplies and technical  support offered to it customer
base  relating  to  its  medical  products  in  service.  As  a  result  of  the


<PAGE>
restructuring  during 1999, the Company has improved its financial condition and
is poised to take advantage of the market  acceptance of the HES product that is
anticipated to take place during fiscal 2000.


1998 COMPARED TO 1997
---------------------

         Revenues for the 1998 period  decreased  33.8%  compared to the similar
period in 1997.  The decreased  revenues were  primarily due to a lower level of
sales of the Company's MVL system  pending the upgrade of this product which was
completed  in the third  quarter of fiscal 1998,  the sale of Cambridge  Medical
Equipments,  Ltd.,  the  discontinuance  of the  Cambridge  product line and the
continued  inability  of the  Company  to  establish  a market for its new Pacer
product.  In  addition,  the  Company's  sales and  marketing  efforts have been
limited due to its lack of adequate working capital.

         Costs of  products  sold  were  26.1%  lower in 1998 due  primarily  to
decreased equipment sales. The gross margin was 1.8% in 1998 compared to 12% for
1997.  The lower gross margins in 1998 were due primarily to increased  costs of
parts and  materials  and lower initial  selling  prices in connection  with the
introduction of the upgraded MVL product and to the generally lower revenues.

         Selling, general and administrative expenses as a percent of sales were
115.8% for the 1998 period  compared to 79.3% for 1997. The increase in the 1998
period was due  primarily  to lower  revenues  and an increase in  restructuring
costs.  Research and development  expenses decreased 45.5% in 1998 due primarily
to Reduction in the development cost for the Company's Pacer product and related
tooling.

         The Company  recorded a loss of $102,885 in connection with the sale of
its Cambridge Medical Equipments,  Ltd.  subsidiary.  Interest expense increased
6.5% in 1998.

LIQUIDITY AND CAPITAL RESOURCES

         At June 30,  1999,  the  Company  had  $119,654  of cash  and  accounts
receivable. Due to the Company's operating losses, it has been required to raise
additional equity capital to fund its operations.  Capital  expenditures  during
this period have been very  limited.  During  fiscal  1999,  the Company  raised
$661,300 of additional  working  capital through the issuance of its securities.
The  Company's 10%  Convertible  Secured  Debentures in the principal  amount of
$480,000  were past due as of June 30,  1999.  The Company  believes it needs to
raise or generate  through new business  additional  working  capital to sustain
operations during the next twelve months and to pay the Debentures.

         Until such time as the  Company  is  successful  in making  significant
sales of the HES products  into its  customer  base,  or that the Company  earns
royalties  because HALIS has  successfully  started to deploy its products,  the
Company's  operations will continue to be financed,  in large part, from outside
sources.  There can be no assurance that the Company will be able to obtain such
financing if and when needed,  or that if obtained,  it will be sufficient or on
terms and conditions acceptable to the Company.

         In the event that the Company is unable to raise additional capital, it
may be required to sell shares of the HALIS common stock. The HALIS common stock
is  traded  in the  over-the-counter  market  on the  OTC  Bulletin  Board.  The
Company's  ability to sell its HALIS shares  could be adversely  affected by the
limited  trading  volume for HALIS' stock and the  requirement  that the Company
sell its HALIS shares in accordance  with Rule 144 promulgated by the Commission
which  could  limit  the  number  of  HALIS  shares  which  could be sold in any

<PAGE>

three-month period to approximately 550,000 shares. There can be no assurance as
to the price that the Company  could  receive for the HALIS  common  stock if it
were required to sell the stock to raise additional working capital.


YEAR 2000 COMPLIANCE

         Software  applications  that use only two digits to  identify a year in
the date field may cause fatal errors in the  processing of data (the "Year 2000
Concern").  The  Company  acknowledges  that  the  failure  of its  software  to
recognize the proper date codes could cause  substantial harm to the Company and
its  customers.  However,  the HALIS HES  software  developed by HALIS and being
marketed by the Company was developed with the Year 2000 Concern in mind and has
been designed to be Year 2000  compliant.  This means that HALIS has  indicated,
and the  Company  believes,  that the  HALIS  HES  software  being  marketed  to
customers will accept and recognize date codes for the Year 2000 and beyond, and
process  that  information  recognizing  the  correct  year in the  date  field.
Further,  the MERAD Technology was also designed to be Year 2000 compliant.  The
Company  does  not  believe  that the  failure  of any of the  software  that it
utilizes in its operations  from  third-party  vendors to be Year 2000 compliant
will have a  material  effect  on the  Company.  Nonetheless,  the  Company  has
undertaken a review of its business systems to make a determination whether this
belief is sound and  justified  and has queried  those vendors whose systems the
Company  employs that may be material to its operations to determine  their Year
2000 readiness.  The Company believes that even if the software it utilizes from
vendors is not Year 2000 compliant,  there are sufficient alternatives available
that the  Company can resolve any issues  expeditiously  without  incurring  any
material amounts to resolve any Year 2000 Concerns.


Item 7.  FINANCIAL STATEMENTS.

         The  following  financial  statements  and  reports  of  the  Company's
independent auditors are at the end of this report beginning at Page F-1:

         (1)    Report of Independent Public Accountants - Tauber & Balser, P.C.

         (2)    Consolidated Balance Sheet - June 30, 1999

         (3)    Consolidated  Statements  of  Operations  For  The Years  Ended
                June 30, 1999 and 1998

         (4)    Consolidated  Statements  of  Cash Flows  For The  Years  Ended
                June 30, 1999 and 1998

         (5)    Consolidated  Statements  of  Stockholders' Equity (Deficit) For
                The Years Ended June 30, 1999 and 1998

         (6)    Notes to Consolidated Financial Statements


Item 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE.

         On June 4,  1999,  the  Company  dismissed  its  independent  auditors,
Silverman Olson  Thorvilson & Kaufman LTD ("Silverman  Olson"),  and on the same
date authorized the engagement of Tauber & Balser,  P.C.  ("Tauber & Balser") as
its  independent  auditors for the fiscal year ended June 30, 1999.  The Company
formally  engaged Tauber & Balser on June 4, 1999. The Board of Directors of the
Company approved each of these actions.  Because the Company recently  relocated
its corporate headquarters to Atlanta, Georgia, the Board of Directors concluded
that it would be more  economical to use a regional firm based in Atlanta,  such
as Tauber & Balser,  to perform its audit for the current fiscal year.  Tauber &
Balser also acts as  independent  auditors for HALIS,  Inc., an affiliate of the
Company,  and  in  which  the  Company  owns  in  excess  of 20  percent  of its
outstanding common stock.

         Silverman  Olson audited the financial  statements  for the Company for
the fiscal  year  ended June 30,  1998.  The  report of  Silverman  Olson on the
financial  statements  of the Company  for the fiscal  years ended June 30, 1998
contained  an  additional  paragraph  which  modified  each  of the  reports  to
emphasize that Silverman  Olson believed there was  substantial  doubt about the
Company's  ability to  continue as a going  concern.  Except as set forth in the
preceding  sentence,  the  reports on those  audits did not  contain any adverse
opinions or a disclaimer  of opinions,  nor was it qualified as to  uncertainty,
audit scope, and accounting principles.

<PAGE>

         In connection with the audit of the fiscal year ended June 30, 1998 and
through the period ended June 4, 1999 there were no disagreements with Silverman
Olson on any matter of  accounting  principle or practice,  financial  statement
disclosure, or audit procedure or scope.  Additionally,  Silverman Olson did not
advise the Company that (i) the internal  controls  necessary for the Company to
develop reliable  financial  statements did not exist; (ii) information had come
to its  attention  that  led it to no  longer  be able  to rely on  management's
representations,  or that made it unwilling to be associated  with the financial
statements  prepared  by  management;  (iii)  there  existed  a need  to  expand
significantly  the  scope  of its  audit,  or that  information  had come to the
attention  of  Silverman  Olson  during the fiscal  periods,  which,  if further
investigated, may (a) materially impact the fairness or reliability of either: a
previously issued audit report or the underlying  financial  statements,  or the
financial  statements  issued  or  to  be  issued  covering  the  fiscal  period
subsequent  to the date of the most recent  financial  statements  covered by an
audit  report  (including  information  that may  prevent it from  rendering  an
unqualified audit report on those financial statements),  or (b) cause Silverman
Olson to be unwilling to rely on management's  representations  or be associated
with the Company's financial  statements,  and due to the dismissal of Silverman
Olsen,  did not so  expand  the  scope of its  audit  or  conduct  such  further
investigation;  or (iv) information had come to the attention of Silverman Olson
that it concluded materially impacts the fairness or reliability of either (a) a
previously issued audit report or the underlying  financial  statements,  or (b)
the  financial  statements  issued or to be issued  covering  the fiscal  period
subsequent  to the date of the most recent  financial  statements  covered by an
audit report (including information that, unless resolved to the satisfaction of
Silverman  Olson would prevent it from rendering an unqualified  audit report on
those financial  statements),  and due to the dismissal of Silverman  Olson, the
issue has not been resolved to the  satisfaction of Silverman Olson prior to its
dismissal.

         Further,  during the  fiscal  year ended  June 30,  1999,  neither  the
Company or any of its representatives sought the advice of Tauber & Balser, P.C.
regarding the  application of accounting  principles to a specific  completed or
contemplated  transaction or the type of audit opinion that might be rendered on
the  Company's  financial  statements,  which  advice  was an  important  factor
considered by the Company in reaching a decision as to the accounting,  auditing
or financial reporting issue.


                                    PART III

Item 9.  DIRECTORS  AND  EXECUTIVE  OFFICERS,  PROMOTERS  AND  CONTROL  PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

         The directors and executive officers of HealthWatch are as follows:

                            Director
         Name                Since         Age       Positions With The Company
         ----                -----         ---       --------------------------

  Paul W. Harrison            1997         44       Chief Executive  Officer and
                                                    Director

  Richard T. Case             1997         50       Director

  Sanford L. Schwartz         1983         49       Director

<PAGE>

         Paul W.  Harrison has  extensive  experience  in the United  States and
         -----------------
internationally  managing  information  technology  companies.  He has  been the
Chairman & CEO of HALIS,  Inc. since  November 1996, and a significant  owner in
PHE, a privately-held  information  technology  management company. Mr. Harrison
was the  President  and  Managing  Member of AUBIS,  LLC from  February  1995 to
December 1997,  which owned two  information  system  companies that were merged
into HALIS in November 1996.  Mr.  Harrison was an executive with and advisor to
HBO & Company, a leading healthcare  information systems company, from June 1993
until December 1994.  Prior to his involvement in HBOC, Mr. Harrison was the CEO
of BIVEN,  Inc. from April 1991 to June 1993, which sold all of its software and
other technology-related assets to HBOC in June 1993.

         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, from July 1992 until
1999, and is presently a consultant with CBSI, LLC. He served as Chief Executive
Officer of the  Company  from June 1983 to  September  1993.  Mr.  Schwartz is a
director of Renaissance Entertainment Corporation.

RECENT CHANGES IN MANAGEMENT
----------------------------

         In  September  1998  Brian L.  Schleicher  was  elected by the Board to
serve as the chief  financial  officer of the Company on an interim  basis.  Mr.
Schleicher also serves as the Company's general counsel.  Effective as of August
15, 1999, Mr.  Schleicher  resigned his position as chief financial  officer but
remains the general counsel to the Company.

         Larry  Fisher  served as a director of the Company  from 1997 until his
resignation effective June 1999. At the time of his resignation,  Mr. Fisher and
the Company did not have any disagreement  relating to the Company's Operations,
policies or practices.


COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------------------------------------------

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  the
Company's directors, executive officers and persons who own more than 10% of the
outstanding  Common  Stock  of the  Company,  to file  with the  Securities  and
Exchange  Commission  reports of changes in ownership of the Common Stock of the
Company  held  by  such  persons.  Officers,  directors  and  greater  than  10%
shareholders  are also  required to furnish the Company with copies of all forms
they file under this regulation.  To the Company's knowledge,  based solely on a
review  of  the  copies  of  such   reports   furnished   to  the   Company  and
representations  that no other  reports  were  required,  during the fiscal year
ended June 30, 1999,  all Section  16(a) filing  requirements  applicable to its
officers, directors and greater than 10% shareholders were filed as required.

         Although it is not the Company's obligation to make filings pursuant to
Section 16 of the  Securities  Exchange  Act of 1934,  the  Company has a policy
requiring  all  Section  16  reporting  persons  to report  monthly to the Chief
Executive Officer of the Company as to whether any transactions in the Company's
Common Stock occurred during the previous month.

<PAGE>

Item 10.   EXECUTIVE COMPENSATION.

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,  1999,  1998,  and 1997,  respectively,  to the  Company's
Presidents and Chief Executive  Officers and Chairman of the Board of Directors.
No officer or director of the Company received  compensation of $100,000 or more
in fiscal 1997.

<TABLE>
<CAPTION>

Name and Principal          Fiscal                                    Options            Restricted
     Position                Year         Salary        Bonus     (No. of Shares)       Stock Awards
     --------                ----         ------        -----     ---------------       ------------

<S>                          <C>         <C>           <C>         <C>                       <C>
Paul W. Harrison             1999        $12,500 <F3>     --            --                   --
Chairman, President          1998           --            --       250,000 shs. <F1>         --
and CEO <F1>                 1997           --            --            --                   --


Daniel J. Kelly              1999           --            --            --                   --
Former President             1998        $132,500      $13,200     120,000 shs.<F2>          --
and CEO <F1>                 1997         $80,770         --       120,000 shs.              --
------------
<FN>
<F1>     Mr.  Harrison replaced  Mr. Kelly as  President and CEO of  the Company
         effective  June 1, 1998.  Mr.  Harrison was  granted 150,000 options in
         October 1997 and 100,000 options in May 1998.
<F2>     Represents  repricing of options originally granted during fiscal  year
         1997.
<F3>     Mr. Harrison entered a consulting  arrangement in February 1999 whereby
         he was to receive a monthly  fee of $12,500 per month  effective  as of
         January 1, 1999. As of June 30, 1999 Mr. Harrison received only $12,500
         of this amount.
</FN>
</TABLE>

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.
Non-statutory  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.

         As part of the  acquisition of Paul Harrison  Enterprises,  Inc. by the
Company on October 2, 1998, the Company agreed to assume 600,000 options for PHE
outstanding  at the time of the merger,  and converted such options into 625,000
non-statutory  stock options of the Company.  Paul W. Harrison  holds 583,333 of
these options which have an exercise  price of $.96 per share  exercisable on or
before December 31, 2003.

         The Company has, from time to time, also provided  non-statutory  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  non-statutory  options generally have had a
term of three to seven  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.
As of October 1, 1999, the Company had an aggregate of 720,982  shares  reserved
for issuance  pursuant to  outstanding  stock  options under the Plans and other
stock option grants, and an additional 1,195,000 shares reserved for outstanding
warrants  (exclusive  of the  625,000  shares  issuable to the former PHE option
holders).

<PAGE>

         DIRECTORS'  REPORT.  On August 25, 1997 and May 27, 1998,  the Board of
Directors  unanimously  approved repricing all outstanding stock options held by
current  employees  and directors of the Company (a total of 348,714 and 445,380
shares,  respectively),  including  120,000  and  40,000  shares,  respectively,
subject to options held by Daniel J. Kelly to $0.66 per share.  It was the Board
of Directors'  opinion that the repricing of these  options was  appropriate  in
view  of  the  Company's   inability  to  provide  adequate  cash  compensation,
particularly to its officers and directors, due to the Company's lack of working
capital.

         The following table shows option grants during fiscal 1999 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 1999          Options Granted           Price             Date
--------------------     --------------------    ---------------------    --------------    --------------

<S>                             <C>                      <C>                    <C>               <C>
Paul W. Harrison                583,333 <F1>             93.3%                  $0.96             0/15/03

<FN>
<F1>     These shares were issued  pursuant to the  acquisition of Paul Harrison
         Enterprises,  Inc. in  replacement  of options then  outstanding to Mr.
         Harrison by PHE.
</FN>
</TABLE>

         The  following  table  shows the  number  of options  exercised  during
fiscal 1999 and the 1999 fiscal year-end value of the options held at the end of
the fiscal year by the named executive officer.

<TABLE>
<CAPTION>
                                                                                    Value of Unexercised
                                                 Number of Unexercised Options      in-the-money Options
                           Shares Acquired on           at June 30, 1999              at June 30, 1999
         Name              Exercise of Options     Exercisable/Unexercisable      Exercisable/Unexercisable
         ----              -------------------     -------------------------      -------------------------

<S>                            <C>                       <C>                              <C>
Paul W. Harrison                  None                   799,999/33,334 shs. <F2>         $-0-/$-0-
Daniel J. Kelly                40,000 <F1>                      None                      $-0-/$-0-

<FN>
<F1>      On March 29, 1999,  Mr. Kelly  exercised all 40,000 options for shares
          in the Company at an exercise price of $0.66 per share.  An additional
          80,000 options have been cancelled during the year.

<F2>      Mr.  Harrison  also holds 72,727  warrants  exercisable  at a price of
          $0.45 per share,  75,472 warrants  exercisable at a price of $0.86 per
          share, and 16,666 warrants  exercisable at a price of $1.72 per share.
          All of these warrants are immediately exercisable.
</FN>
</TABLE>
<PAGE>

Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The  following  table sets  forth as of October 1, 1999,  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  and nominee for  election to the Board of Directors of the Company and
as to all  executive  officers and directors as a group.  All persons  indicated
have (unless  indicated to the  contrary)  sole or shared with spouse voting and
dispositive power over such shares.

<TABLE>
<CAPTION>
Name and Address of Beneficial
Owner, Name of Director or              Title
Nominee or Identity of Group           of Class                    Amount Beneficially Owned            Percentage
----------------------------           ---------                   -------------------------            ----------
<S>                                    <C>                           <C>                                 <C>
Paul W. Harrison                       Common                        1,464,094 <F1><F2>                  29.0%
9040 Roswell Road                      Series P Preferred              125,088.4                         37.4%
Suite 470
Atlanta, Georgia  30350

Larry Fisher                           Common                          266,666 <F1>                      5.28%
9040 Roswell Road
Suite 470
Atlanta, Georgia  30350

Richard T. Case                        Common                           86,134 <F1>                      1.7%
Sanford L. Schwartz                    Common                          138,368 <F1><F3>                  2.7%


All Officers, Directors and Nominees                                 1,688,596 <F1><F2><F3>               33.4%
  as a Group (5 persons)

--------------------
<FN>

<F1>     Includes  for the  following  persons  the  number of shares  set forth
         opposite  their  name which are  issuable  within 60 days of the record
         date upon exercise of outstanding stock purchase options or warrants or
         conversion  of  outstanding  debentures:   Harrison--1,113,063  shares;
         Fisher--126,666 shares;  Case--35,334 shares;  Schwartz--48,334 shares;
         and all officers and directors as a group--832,879 shares.

<F2>     Includes  83,333 shares owned by HALIS,  Inc.  ("HALIS"),  of which Mr.
         Harrison is the Chairman of the Board of Directors and Chief  Executive
         Officer and a major  shareholder.  Does not include 125,088.4 shares of
         Series P Preferred  Stock which,  subject to approval of the  Company's
         shareholders,  would  be  convertible  into  1,250,884  shares  of  the
         Company's Common Stock.

<F3>     Includes shares owned by Creative Business Strategies, Inc. ("CBS") and
         CBSI, LLC ("CBSI).  Mr. Schwartz is an officer,  director and principal
         shareholder of CBS and a member and manager of CBSI.
</FN>
</TABLE>
<PAGE>

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Since  August   1997,   the  Company  has  entered  into  a  number  of
transactions with HALIS, Inc., an Atlanta, Georgia, publicly-traded company (OTC
Bulletin Board Symbol: "HLIS"), and a number of its affiliates and shareholders.
HALIS supplies  information  technology  and services  focused on the healthcare
industry and has developed the HALIS Health Care Enterprise  System  ("HES"),  a
single system which  integrates  all of the major  functions  needed by clinics,
hospitals,    healthcare   practices,   payers,   long-term   care   facilities,
laboratories,  pharmacies and home healthcare facilities.  The HES was developed
by HALIS  utilizing  the MERAD  technology,  an advanced  virtual  software  and
information  media  utility  developed  by Paul W.  Harrison  and  owned by Paul
Harrison  Enterprises,  Inc., a Georgia corporation ("PHE"), that was controlled
by Paul W. Harrison prior to its  acquisition by the Company on October 2, 1998.
PHE was also a significant shareholder of HALIS.

          During  the  first  quarter  of  fiscal  year  1998  and  prior to its
acquisition by the Company, PHE, Mr. Fisher and two non-affiliated  shareholders
of HALIS  exchanged  1,100,000 of their shares of HALIS common stock for 880,000
shares of the Company's  Common Stock,  and PHE was granted an option to acquire
320,000  additional shares of the Company's Common Stock in exchange for 400,000
additional  shares of HALIS common stock.  The exchange ratio was based upon the
market value for each  company's  common stock at the time that the  transaction
was negotiated.  Additionally, the agreements provided that HALIS was to acquire
83,333  shares of the Company's  Common Stock for a purchase  price of $125,000.
During  February  1998,  the option was exercised by PHE and its assigns and PHE
exchanged  an  additional  1,262,000  shares of HALIS  common  stock for 378,000
shares of HealthWatch  Common Stock. The exchange ratio for the shares exchanged
in February was based on the market value for each company's common stock at the
time that the exchange was  negotiated.  As a result of these  transactions,  at
September 30, 1998 PHE held 888,400 shares of the Company's  common stock.  As a
result of the acquisition of PHE by the Company on October 2, 1998, these shares
became treasury shares and are deemed cancelled and not outstanding.

         These  transactions  followed  the  execution  by the Company and HALIS
during  August  1997 of a letter of intent  which  contemplated  a merger of the
Company and HALIS.  The two companies have not consummated the merger due to the
relative  volatility in each company's stock price and certain accounting issues
that may affect the  Company's  ability to maintain the  $2,000,000  minimum net
worth required by The Nasdaq Stock Market,  Inc. for the Company to maintain its
listing on Nasdaq.  While  consummation  of the merger has not been ruled out by
each company's respective Board of Directors, the Company is presently uncertain
if it will proceed with the merger.

         In October  1997,  the  Company  entered  into a software  license  and
development  agreement with MERAD,  Corporation (MERAD), a company owned by Paul
Harrison  Enterprises  (PHE),  an entity  controlled by an  officer/director  of
HealthWatch.  Pursuant  to the  agreement,  HealthWatch  was to license  certain
computer architecture,  concepts,  algorithms and processes from MERAD which the
Company  originally  planned  to  integrate  into line of  noninvasive  vascular
diagnostic equipment. In addition,  MERAD was to develop healthcare software for
the Company. In exchange for these licenses and services,  the Company agreed to
pay MERAD a development  fee of $15,000 per month during the period January 1998
through January 2000. In addition, HealthWatch was to pay MERAD a fee based on a
variable rate of gross software revenues as follows:

     Rate                    Gross Aggregate Software Revenues
     ----                    ---------------------------------
     5.0%                    $0 to $5,000,000
     2.5%                    $5,000,001 to $10,000,000
     1.0%                    In excess of $10,000,000

         During 1998, the Company had incurred  $90,000 of development  fees, of
which $90,000 remained unpaid at June 30, 1998 and was included in other accrued
liabilities - related  parties as of such date.  No software  revenue was earned
during 1998 and accordingly,  no variable rate license fees were incurred.  This
agreement was effectively  cancelled  effective June 30, 1999 as a result of the
acquisition of PHE by the Company, and no additional amounts were accrued during
fiscal 1999.

<PAGE>

        Following  the  initial  merger  discussions,  the  Company  and  HALIS
determined  that it would be preferable for the two companies,  at that time, to
adopt a shared business development  strategy.  To implement this strategy,  the
Company and HALIS entered into a business  collaboration  agreement  whereby the
Company and HALIS share sales  prospects  and the Company  acts as a reseller of
the HES software.  Additionally,  the Company  obtained a non-exclusive  license
from PHE to the  MERAD  technology,  and  retained  PHE to  develop  proprietary
software  technology  which originally was contemplated to be used to expand the
Company's  product  offerings  to include  products  and  services  specifically
focused on monitoring,  capturing and managing medical  information at the point
of care. Due to the Company's limited  resources,  the Company has not proceeded
to develop software that would be used in conjunction with its medical devices.

         During  October 1998,  the Company agreed to acquire PHE and caused its
newly  created  wholly  owned   subsidiary   MERAD  Software,   Inc.,  a  Nevada
corporation,  to merge with PHE. In the merger, the shareholders of PHE received
334,432 shares of the Company's  Series P Preferred  Stock,  stated value $10.00
per share (the  "Preferred  Stock").  Subject to prior approval by the Company's
shareholders,  the Preferred Stock will be convertible  into 3,344,320 shares of
the Company's  common stock.  The Company plans to ask its shareholders to grant
this  right  at its next  annual  meeting  of  shareholders.  Paul W.  Harrison,
Chairman, President and Chief Executive Officer of the Company, received 125,088
of the Series P Preferred Stock and Brian L. Schleicher, Chief Financial Officer
and Chief  Administrative  Officer of the Company  from  September  1998 through
August 15,  1999  received  7,812 of the Series P  Preferred  Stock.  All of the
Preferred  Stock is non-voting,  except in certain  circumstances.  The Series P
Preferred  Stock has a cumulative  dividend  feature of 12%,  which adjusts to a
maximum  of 24% if the shares  are not  granted  the right to convert by certain
target dates. As of February 1, 1999, the Series P Preferred Stock dividend rate
was  adjusted to 18% per annum.  Dividends  shall only be payable if declared by
the Company's Board of Directors.  No dividends have been declared during fiscal
year ended  June 30,  1999 and  through  the date  hereof.  In  addition  to the
issuance of the Series P Preferred  Stock,  the PHE  shareholders  shall be paid
additional  consideration  based  on the  percentage  of the  revenues  that the
Company receives in connection with the sale of software developed utilizing the
MERAD  technology,  up to a maximum of $7 million,  and certain PHE shareholders
received options for approximately  625,000 shares of the Company's common stock
with an exercise price of $.96 per share in exchange for previously  outstanding
options  of PHE.  Of the  outstanding  options  issued  in the PHE  acquisition,
583,333  were  issued  to  Paul  W.  Harrison.   During  fiscal  1999,  the  PHE
Shareholders,  as a group,  earned $94,437 as additional  consideration,  50% of
which  will be paid in cash and the  balance  to be paid in common  stock of the
Company. None of this amount has been paid as of year-end.

          At the time of the merger,  PHE held 6,177,010  shares of common stock
in HALIS and owned the MERAD  technology.  As a result of its acquisition of PHE
and the MERAD  technology,  the Company has diverted its attention away from the
expansion  of its  medical  device  business,  and has  decided to use the newly
acquired MERAD technology to develop expanded applications in the healthcare and
other  industries.  Accordingly,  the  use of  this  technology  to  expand  the
Company's  medical device business is unlikely.  As a result of the merger,  the
Company increased its ownership  interest in HALIS to 8,939,010 shares of HALIS'
common stock,  representing  approximately  19% of its  outstanding  shares.  In
January  1999,  the  Company  converted  outstanding  debt  owed by HALIS to the
Company into 1,824,645 additional shares of common stock of HALIS,  bringing the
number  of  HALIS  shares  held  by  the  Company  to  10,763,655,  representing
approximately 21% of HALIS'  outstanding  shares.  The Company is now the single
largest  shareholder of HALIS and due to the size of its holdings,  now accounts
for its investment  under the equity method of accounting  (i.e.,  it recognizes
its proportionate amount of HALIS' income or loss each month).

          Further,  as a result of the merger of PHE into MERAD Software,  Inc.,
the MERAD technology is now owned by the Company.  HALIS is obligated to pay the
Company 10% of the gross revenues  generated by HALIS from products and services
utilizing the MERAD  technology.  During fiscal 1999, the Company earned $66,087
in  royalties  from  HALIS  none of which  has been  paid to the  Company  as of
year-end.  Additionally, the Company and HALIS  currently share office space and
have a cost sharing  arrangement  relating to key personnel under an arrangement
that requires the Company to pay HALIS a calculated amount each month based upon
a reasonable cost basis of services provided.
<PAGE>

         Effective  October 10, 1997,  PHE and Paul W.  Harrison  entered into a
consulting  agreement  with the Company which expired on December 31, 1998.  The
agreement  provided for,  among other things,  the payment to PHE  commencing on
January 1, 1998 of $15,000 per month  through June 30,  1998,  the granting of a
five-year  non-statutory stock option to Mr. Harrison  representing the right to
acquire up to 150,000  shares of the  Company's  Common  Stock at  $2.65625  per
share, the then fair market value for the Company's Common Stock, and to loan to
Mr.  Harrison  up to $200,000  payable in four equal  annual  installments  with
interest  to accrue at 7% per annum to cover tax  liabilities  arising  from the
stock swaps with PHE. As of the date hereof,  $0 had been  borrowed  pursuant to
the loan  commitment.  In May 1998 the exercise price for the stock options were
repriced  to $0.66  per  share.  None of the  options  have been  exercised.  In
February 1999,  the  consulting  agreement was modified to remove PHE as a party
and to provide for the payment of $12,500 to Paul W. Harrison on a monthly basis
to manage the  Company,  effective  as of January 1, 1999.  As of June 30,  1999
$12,500 was paid under the revised consulting agreement to Mr. Harrison.

         Effective  October 10,  1997,  Larry  Fisher  entered into a consulting
agreement  with the Company,  which expired on December 31, 1998.  The agreement
provided,  among other things, for the grant of a five-year  non-statutory stock
option  representing  the right to acquire 80,000 shares of the Company's Common
Stock at $2.65625 per share, the then fair market value for the Company's Common
Stock.  In May 1998 the exercise  price for the stock  options were  repriced to
$0.66 per share.

         On  December  18,  1996,  Daniel J. Kelly  entered  into an  employment
agreement with the Company to become the Company's  President and CEO. Under the
employment  agreement he was to be paid $150,000 per annum, and was eligible for
a bonus of up to one-third of his base salary and received an option to purchase
120,000  shares of the  Company's  Common Stock.  The  Agreement  provided for a
severance  payment equal to five months salary if his  employment was terminated
before  December 31, 2000.  Effective  June 1, 1998 Mr.  Kelly's  employment was
terminated,  and the Company  entered into a separation  agreement that provided
for the payment of $71,500 and  acknowledgment by the Company that 40,000 of his
options were deemed to be fully vested at an exercise  price of $0.66 per share.
On March 29, 1999, Mr. Kelly exercised all of the outstanding options.

          On January 22,  1998,  Paul W.  Harrison,  Larry Fisher and Lindley S.
Branson (the  Secretary of the Company,  and a former  Director and President of
the Company) each loaned the Company  $17,000 for a period of 90 days. The loans
were to bear interest at 7% per annum. As additional compensation for making the
loans,  each was  granted a warrant to acquire  16,666  shares of the  Company's
Common  Stock at $1.71875  per share,  the fair market  value for the  Company's
Common Stock on January 22, 1998.  In addition,  during  January 1998, a $35,000
loan which Mr.  Branson made during the fourth quarter of calendar 1997 was paid
by the issuance to Mr. Branson of 20,000 shares of the Company's Common Stock.

         Paul W. Harrison,  Chairman of the Board,  Chief Executive  Officer and
President of the Company,  is also the Chairman,  President and Chief  Executive
Officer of HALIS. Larry Fisher was a Director of both the Company and HALIS, but
resigned from HALIS effective  December 31, 1999 and from the Company  effective
June 1,  1999.  Brian L.  Schleicher,  the  Chief  Financial  Officer  and Chief
Administrative  Officer of the Company from  September 1, 1998 until he resigned
on August  15,  1999,  was also the Chief  Administrative  Officer of HALIS from
February 1, 1999 until he resigned on July 27, 1999.

<PAGE>

Item 13.  EXHIBITS, LISTS AND REPORTS ON FORM 8-K.

(a)      Listing of Exhibits:

          3.1     Articles of Incorporation, as amended, of the Company (1).
          3.2     Bylaws, as amended, of the Company (2).
          4.1     Specimen form of the Company's Common Stock certificate (2).
          4.2     HealthWatch, Inc. Stock Option Plan of 1989 (3).
          4.3     Form of Incentive Stock Option Agreement (3).
          4.4     Form of Nonstatutory Stock Option Agreement (3).
          4.5     HealthWatch, Inc. Stock Option Plan of 1993 (4).
          4.6     HealthWatch, Inc. Stock Option Plan of 1995 (5).
          4.7     HealthWatch, Inc. 1995 Stock Grant 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     Subscription and Purchase Agreement between HealthWatch,  Inc.
                  and HALIS, Inc.(7).
          4.10    Certificate  of   the  Designation,  Preferences,  Rights  and
                  Limitations  of  the  6%  Series A Convertible Preferred Stock
                  of HealthWatch, Inc. (10)
          4.11    Certificate of the Designation, Preferences, Rights and
                  Limitations of the Series P Preferred Stock of HealthWatch,
                  Inc. (10)
         10.1     Business Collaboration Agreement dated as of October 10, 1997
                  between the Company and HALIS, Inc. (8).
         10.2     Consulting Agreement dated as of October  10, 1997 among  the
                  Company,  Paul Harrison  Enterprises,  Inc. and Paul Harrison
                  (8).
         10.3     Consulting Agreement dated as of October 10, 1997 between the
                  Company and Larry Fisher (8).
         10.4     Agreement and Plan of Merger dated as of September 30, 1998
                  among HealthWatch, Inc., MERAD Software, Inc. and Paul
                  Harrison Enterprises, Inc. (9).
         10.5     Letter of Intent between HealthWatch, Inc. and HALIS, Inc.
                  dated July 14, 1998 -- previously filed.
         16.1     Letter on Change in Certifying Accountant (11).
         21       Subsidiaries of the Company at June 30, 1999 (6).
         23.1     Consent of Silverman Olson Thorvilson & Kaufmann, Ltd.
         23.2     Consent of Tauber  & Balser, P.C.
         27.1     Financial Data Schedule.

-----------------------
<PAGE>

(1)      Incorporated  herein by  reference  to the  Company's  Annual  Report,
         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 the Company's  Annual Report,  Form
         10-KSB,  for the year ended June 30, 1994 (File No. 0-11476).
(5)      Incorporated  herein  by reference  to  the  Company's  Annual  Report,
         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 the Company's  Annual Report, Form
         10-KSB,  for the year ended June 30, 1997 (File No. 0-11476).
(8)      Incorporated  herein  by reference to the Company's  Quarterly  Report,
         Form 10-QSB,  for the quarter ended  December 31, 1997.
(9)      Incorporated  herein by reference to the Company's Current Report, Form
         8-K, dated October 1, 1998.
(10)     Incorporated herein by reference to the Company's Annual Report on Form
         10-KSB, for the year ended June 30, 1998 (File No. 0-11475).
(11)     Incorporated  herein by reference to the  Company's  Current  Report on
         Form 8-K, dated June 29, 1999.



(b)      During the quarter ended June 30, 1999,  Registrant filed one report on
Form 8-K dated June 29, 1999 relating to the change of its auditor.



<PAGE>




                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION


                              FINANCIAL STATEMENTS
                              --------------------

                                TABLE OF CONTENTS


                                                                           Page
                                                                           ----
Independent Auditors' Report................................................F-1

Consolidated Balance Sheet..................................................F-2

Consolidated Statements of Operations.......................................F-4

Consolidated Statements of Cash Flows.......................................F-5

Consolidated Statements of Shareholders' Equity ............................F-7

Notes to Consolidated Financial Statements..................................F-8




<PAGE>
                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholders
HealthWatch, Inc. d/b/a MERAD Technologies Corporation

We have audited the accompanying consolidated balance sheet of HealthWatch, Inc.
and subsidiaries as of June 30, 1999, and the related consolidated statements of
operations,  shareholders' equity, and cash flows for the year then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our  audit.   HealthWatch,   Inc.'s   consolidated   statements  of  operations,
shareholders'  equity,  and cash  flows for the year  ended  June 30,  1998 were
audited by other  auditors  whose report dated August 14, 1998 and September 30,
1998  included  an  explanatory  paragraph  describing  conditions  that  raised
substantial doubt about the Company's ability to continue as a going concern.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion,  the 1999 consolidated  financial  statements  referred to above
present fairly, in all material respects, the financial position of HealthWatch,
Inc. and  subsidiaries as of June 30, 1999, and the results of their  operations
and their  cash  flows  for the year then  ended in  conformity  with  generally
accepted accounting principles.

As discussed in Note B to the consolidated  financial statements,  the Company's
recurring  losses,   negative  working  capital  and  negative  cash  flow  from
operations  raises  substantial  doubt  about its ability to continue as a going
concern.  Management's  plans as to these matters are also  described in Note B.
The 1999 financial  statements do not include any adjustments  that might result
from the outcome of this uncertainty.


                                        /s/ Tauber & Balser, P.C.

Atlanta, Georgia
October 12, 1999


                                      F-1

<PAGE>


                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                           CONSOLIDATED BALANCE SHEET
                                  JUNE 30, 1999

<TABLE>
<CAPTION>


                                     ASSETS

CURRENT ASSETS
<S>                                                           <C>
     Cash                                                     $   21,746
     Accounts receivable, net of allowance for
        doubtful accounts of $26,310                              97,908
     Inventory                                                    83,864
     Other current assets                                          9,931
                                                              ----------
         TOTAL CURRENT ASSETS                                    213,449
                                                              ----------
OTHER ASSETS
     Investment in HALIS, Inc.                                 1,769,671
     Due from HALIS, Inc.                                        150,364
     Property and equipment, net                                  22,796
     Intangible assets, net                                    1,357,682
     Other assets                                                 34,010
                                                              ----------

         TOTAL OTHER ASSETS                                    3,334,523
                                                              ----------



              TOTAL ASSETS                                    $3,547,972
                                                              ==========

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                      F-2
<PAGE>
<TABLE>
<CAPTION>

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

<S>                                                                             <C>
     Accounts payable                                                           $    136,724
     Accrued compensation and payroll taxes                                          198,068
     Other accrued liabilities - related parties                                     206,196
     Other accrued liabilities - unrelated parties                                   594,351
     Deferred revenue                                                                 28,530
     Debentures payable - related party                                               15,000
     Debentures payable - unrelated parties                                          465,000
                                                                                ------------

         TOTAL CURRENT LIABILITIES                                                 1,643,869
                                                                                ------------
Contingencies and commitments

SHAREHOLDERS' EQUITY
     Cumulative preferred stock, Series A, $.01 par value; 5,000,000
        shares authorized, 1,145,000 shares issued and outstanding                    11,450
     Cumulative preferred stock, Series P, $.01 par value; 334,432
        shares authorized, issued and outstanding                                      3,344
     Common stock, $.01 par value, 50,000,000 shares authorized,
        3,285,677 issued and outstanding                                              32,857
     Additional paid-in capital                                                   21,842,779
     Accumulated deficit                                                         (19,986,327)
                                                                                ------------

         TOTAL SHAREHOLDERS' EQUITY                                                1,904,103
                                                                                ------------

              TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $  3,547,972
                                                                                ============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                      F-3
<PAGE>

                                           HEALTHWATCH, INC.
                                 d/b/a MERAD TECHNOLOGIES CORPORATION
                                 CONSOLIDATED STATEMENT OF OPERATIONS
                              FOR THE YEARS ENDED JUNE 30, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                             1999             1998
                                                                         -----------      -----------
<S>                                                                              <C>              <C>
Product sales                                                            $ 1,220,803      $ 1,383,335
Product cost of sales                                                        940,950        1,359,028
                                                                         -----------      -----------
     Gross Profit                                                            279,853           24,307

OPERATING COSTS AND EXPENSES
     Selling, general and administrative - related parties                   294,976          261,906
     Selling, general and administrative - unrelated parties               1,026,697        1,340,675
     Depreciation and amortization                                           330,002          276,332
     Research and development                                                286,921          231,169
                                                                         -----------      -----------
         TOTAL OPERATING COSTS AND EXPENSES                                1,938,596        2,110,082
                                                                         -----------      -----------
OPERATING LOSS                                                            (1,658,743)      (2,085,775)

OTHER INCOME (EXPENSE)
     Equity loss in HALIS, Inc.                                              (23,702)            -
     Loss on marketable equity securities - related party                       --         (1,824,605)
     Loss from disposition of subsidiary                                        --           (102,885)
     Interest expense - related parties                                       (1,835)          (2,659)
     Interest expense - unrelated parties                                    (65,824)         (65,560)
     Loss on disposal of equipment                                              --             (4,043)
     Miscellaneous                                                             1,173            1,053
                                                                         -----------      -----------
         TOTAL OTHER INCOME (EXPENSE)                                        (90,188)      (1,998,699)
                                                                         -----------      -----------

NET LOSS                                                                 $(1,748,931)     $(4,084,474)
                                                                         ===========      ===========

BASIC AND DILUTED NET LOSS PER SHARE                                     $     (0.65)     $     (2.45)
                                                                         ===========      ===========

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                              2,689,859        1,669,325
                                                                         ===========      ===========

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


</TABLE>
                                                 F-4
<PAGE>


                                           HEALTHWATCH, INC.
                                 d/b/a MERAD TECHNOLOGIES CORPORATION
                                 CONSOLIDATED STATEMENT OF CASH FLOWS
                              FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
                                                                                      1999              1998
                                                                                 --------------    --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                <C>               <C>
     Net loss                                                                      $ (1,748,931)     $(4,084,474)
     Adjustments to reconcile net loss to net cash used in
        operating activities:
         Depreciation and amortization                                                  330,002          276,332
         Equity loss from HALIS, Inc.                                                    23,702             -
         Common stock issued for payment of expenses                                       -             120,783
         Loss on disposal of equipment                                                     -               4,043
         Loss on marketable equity securities                                              -           1,824,605
         Loss from disposition of subsidiary                                               -             102,885
         (Increase) decrease in assets:
              Accounts receivable                                                        86,507           52,009
              Inventory                                                                 288,409          240,909
              Other current assets                                                       13,782           (5,820)
              Due from HALIS, Inc.                                                     (150,364)            -
              Other assets                                                              (24,759)          35,032
         Increase (decrease in liabilities)
              Accounts payable                                                         (179,043)          63,093
              Other accrued liabilities - related parties                                 3,304          158,574
              Other accrued liabilities - unrelated parties                             140,920          226,766
              Deferred revenue                                                           (8,434)         (28,291)
                                                                                   ------------      -----------
           Net cash used in operating activities                                     (1,224,905)      (1,013,554)
                                                                                   ------------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of property and equipment                                                 (11,198)            -
     Purchase of HALIS, Inc. stock                                                     (157,741)            -
     Cash forfeited in sale of subsidiary                                                  -             (12,008)
                                                                                   ------------      -----------
         Net cash used in investing activities                                         (168,939)         (12,008)
                                                                                   ------------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Repayment of debentures payable                                                   (100,000)            -
     Net proceeds from issuance of preferred stock                                         -           1,113,952
     Net proceeds from issuance of common stock                                         661,300          742,496
     Issuance costs paid in common stock swap                                              -             (19,250)
                                                                                   ------------      -----------
              Net cash provided by financing activities                                 561,300        1,837,198
                                                                                   ------------      -----------
Effect of exchange rate changes on cash                                                    -              (1,980)
                                                                                   ------------      -----------

(Decrease) Increase in cash                                                            (832,544)         809,656
Cash, beginning of year                                                                 854,290           44,634
                                                                                   ------------      -----------

Cash, end of year                                                                  $     21,746     $    854,290
                                                                                   ============     ============

       The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>


                                                 F-5
<PAGE>

                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                   FOR THE YEARS ENDED JUNE 30, 1999 AND 1998


                                                          1999           1998
                                                       ----------     ---------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

     Cash paid during the year for interest            $  25,601     $    2,770
                                                       ==========    ==========

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

During the year ended June 30, 1999:

     The Company  issued  488,400  shares of common  stock valued at $448,436 to
     MERAD Software,  Inc. (formerly Paul Harrison  Enterprises,  Inc.) prior to
     its  acquisition by the Company in exchange for 1,400,000  shares of HALIS,
     Inc. common stock.

     The Company  issued  334,432  shares of Series P preferred  stock valued at
     $2,560,000  for  6,177,010  shares of HALIS,  Inc.  common  stock valued at
     $868,488,  888,400  shares of its own common stock valued at $710,720 which
     was  retired,  other  assets  valued at $80,628,  and the MERAD  Technology
     valued at $900,164 in connection  with the  acquisition of MERAD  Software,
     Inc. (formerly Paul Harrison Enterprises, Inc.)

     The Company accrued liabilities of $92,772 and increased its carrying value
     of the MERAD  Technology for additional  consideration  associated with the
     acquisition of MERAD Software, Inc.

     The Company received 1,824,645 shares of HALIS, Inc. common stock valued at
     $157,741 in exchange for a note receivable from HALIS, Inc.

During the year ended June 30, 1998:

     The  Company  issued  29,848  shares of common  stock  valued at $83,163 in
     exchange for services.

     The Company  issued  17,100  shares of common  stock  valued at $37,620 for
     employee bonuses.

     The  Company  issued  1,089,600  shares of  common  stock in  exchange  for
     1,362,000 shares of issued and outstanding HALIS, Inc. common stock.


     The Company  converted  20,834 shares of Series H preferred stock valued at
     $120,802 to 83,334 shares of common stock.


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


                                      F-6
<PAGE>

<TABLE>

                                                         HEALTHWATCH, INC.
                                                d/b/a MERAD TECHNOLOGIES CORPORATION
                                           CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                             FOR THE YEARS ENDED JUNE 30, 1999 AND 1998

<CAPTION>

                                                                                                                        Additional
                                                                        Preferred Stock              Common Stock         Paid-In
                                                                      Shares       Amount        Shares        Amount     Capital
                                                                      ------       ------        ------        ------     -------
<S>                                                                 <C>         <C>            <C>          <C>       <C>
Balance at June 30, 1997                                                 -      $      -         702,018    $  7,020  $ 14,823,100
   Net loss                                                              -             -            -           -             -
   Equity adjustment from foreign currency
     translation - sale of subsidiary                                    -             -            -           -             -
Series A preferred stock issued in private offering                 1,145,000        11,450         -           -          981,700
Series H preferred stock issued in private offering                    20,834           208         -           -          120,594
Common stock issued for conversion of Series H preferred stock        (20,834)         (208)      83,334         833          (625)
Common stock issued in exchange for marketable equity securities         -             -       1,089,600      10,896     2,113,167
Common stock issued in private offerings                                 -             -         441,866       4,419       657,631
Common stock issued for services                                         -             -          29,848         298        82,865
Common stock options exercised                                           -             -          15,600         156        46,944
Common stock warrants exercised                                          -             -          41,355         414        32,932
Common stock bonuses                                                     -             -          17,100         171        37,449
                                                                    --------    -----------   ----------    --------  ------------

Balance at June 30, 1998                                            1,145,000        11,450    2,420,721      24,207    18,895,757
   Net loss                                                              -             -            -           -             -
Series P preferred stock issued in private offering                   334,432         3,344         -           -        2,556,656
Common stock  purchased and retired                                      -             -        (888,400)     (8,884)     (701,836)
Common stock issued                                                      -             -       1,209,956      12,100       612,900
Common stock issued in stock exchange                                    -             -         488,400       4,884       443,552
Common stock options exercised                                           -             -          55,000         550        35,750
                                                                    ---------   -----------   ----------    --------  ------------
Balance at June 30, 1999                                            1,479,432   $    14,794    3,285,677    $ 32,857  $ 21,842,779
                                                                    =========   ===========    =========    ========  ============
</TABLE>

<TABLE>

                                                 [WIDE TABLE CONTINUED FROM ABOVE]

<CAPTION>

                                                                                                     Total
                                                              Accumulated        Comprehensive    Shareholders'
                                                               Deficit               Income          Equity
                                                             -------------       -------------    -------------
<S>                                                          <C>                  <C>              <C>
BALANCE AT JUNE 30, 1997                                     $(14,152,922)        $ (49,887)       $  627,311
   Net loss                                                    (4,084,474)             -           (4,084,474)
   Equity adjustment from foreign currency
      translation - sale of subsidiary                              -                49,887            49,887
Series A preferred stock issued in private offering                 -                  -              993,150
Series H preferred stock issued in private offering                 -                  -              120,802
Common stock issued for conversion of Series H preferred stock      -                  -                 -
Common stock issued in exchange for marketable equity securities    -                  -             2,124,063
Common stock issued in private offerings                            -                  -               662,050
Common stock issued for services                                    -                  -                83,163
Common stock options exercised                                      -                  -                47,100
Common stock warrants exercised                                     -                  -                33,346
Common stock bonuses                                                -                  -                37,620
                                                               ----------        -----------        ----------
BALANCE AT JUNE 30, 1998                                      (18,237,396)             -               694,018
   Net loss                                                    (1,748,931)             -            (1,748,931)
Series P preferred stock issued in private offering                 -                  -             2,560,000
Common stock purchased and retired                                  -                  -             (710,720)
Common stock issued                                                 -                  -               625,000
Common stock issued in stock exchange                               -                  -               448,436
Common stock options exercised                                      -                  -                36,300
                                                             ------------         ---------         ----------
BALANCE AT JUNE 20, 1999                                     $ 19,986,327         $    -            $1,904,103
                                                             ============         =========         ==========


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                      F-7
<PAGE>
                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Organization
----------------------

HealthWatch,   Inc.  d/b/a  MERAD  Technologies   Corporation  ("MERAD"  or  the
"Company")  was founded in 1983 and has evolved  from a supplier of  noninvasive
vascular diagnostic medical  instruments  including a proprietary device used to
monitor and control  intravenous  ("IV") drug  infusion to hospitals and medical
clinics  throughout  the United  States into  primarily  a software  information
technology ("IT") company.  The Company's virtual software  application  utility
(the "MERAD Technology")  utilizes an advanced multi-media object and relational
database  which  creates  knowledge  objects  that  can be used  and  reused  in
virtually  unlimited  number of combinations to provide  efficient  applications
that can be accessed in both an Internet and Intranet environment. Headquartered
in Atlanta,  Georgia, MERAD has research and development,  marketing,  sales and
support capabilities in the healthcare IT sector.

Principles of Consolidation and Accounting for Investees
--------------------------------------------------------

The consolidated financial statements include the accounts of HealthWatch,  Inc.
d/b/a MERAD Technologies Corporation and the Company's wholly owned subsidiaries
MERAD Software, Inc. and HealthWatch  Technologies,  Inc. and their wholly owned
subsidiaries,  respectively. MERAD's investment in a company in which it has the
ability to exercise significant  influence over operating and financial policies
is accounted  for by the equity  method.  Accordingly,  MERAD's share of the net
earnings of this company is included in consolidated net loss. As of January 29,
1999,  MERAD's  investment in HALIS,  Inc.  ("HALIS") is accounted for under the
equity   method.   Prior  to  this  date,   the   Company   accounted   for  its
available-for-sale  investment in HALIS, Inc. at its fair value. All significant
intercompany balances and transactions are eliminated in consolidation.

Concentration of Credit Risk
----------------------------

Financial instruments that potentially subject the Company to concentration risk
consist  principally  of  cash,  amounts  due  from  HALIS,  Inc.  and  accounts
receivable.  The Company  maintains  cash in a bank deposit  account  which,  at
times, may exceed federally insured limits. The Company believes it has its cash
deposits  at high  quality  financial  institutions.  The  Company  believes  no
significant credit risk exists with respect to these deposits.

Due from HALIS, Inc.  represents amounts advanced to HALIS, Inc. for its portion
of shared administrative and office expenses and amounts owed to the Company for
unpaid royalties due on the MERAD Technology.  The ultimate  collection of these
unsecured  advances is uncertain based on the financial  position of HALIS, Inc.
and therefore the Company believes it is impracticable to estimate fair value at
June 30, 1999.

                                      F-8
<PAGE>

Accounts receivable arise from the sale of medical supplies and the provision of
technical support to hospitals and medical clinics. 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.

Inventory
---------

Inventory is recorded at the lower of cost (determined on a first-in,  first-out
basis) or market.  During fiscal 1999,  approximately  $188,000 of inventory was
charged to  operations - cost of sales as the  products  were  determined  to be
obsolete.

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.

Long-Lived Assets
-----------------

MERAD evaluates the carrying value of  long-lived assets,  including intangibles
and technology,  whenever events or changes in  circumstances  indicate that the
carrying  value of the asset may be impaired.  An impairment  loss is recognized
when  estimated  future cash flows  expected to result from the use of the asset
including  disposition  is less than the  carrying  value of the  asset.

                                      F-9
<PAGE>

                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Net Loss Per Share
------------------

In February 1997, the Financial  Accounting Standards Board ("FASB") issued SFAS
No. 128 which requires dual presentation of basic earnings per share ("EPS") and
diluted EPS on the face of all income  statements issued after December 15, 1997
for all entities with complex capital  structures.  The adoption of SFAS No. 128
had no effect on the Company's  financial  statements.  Basic EPS is computed as
net income  (loss)  available  to common  shareholders  divided by the  weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the  potential  dilution that could occur from common  shares  issuable  through
stock options,  warrants, and convertible debt and stock. As the Company's stock
options,  warrants,  and  convertible  debt and stock are  antidilutive  for all
periods  presented  dilutive loss per share is the same as basic loss per share.
At June 30,  1999  and  1998,  outstanding  options  and  warrants  to  purchase
3,628,645 and 2,357,612 shares, respectively, of the Company's common stock were
not included in the  computation of diluted loss per share as their effect would
be antidilutive.

Revenue Recognition
-------------------

MERAD recognizes  revenue from product sales at the time ownership  transfers to
the customer,  principally,  at shipment.  Revenues  from service  contracts are
generally  recognized on the straight-line basis over the life of the contracts,
which are principally 12 months. Deferred revenue represents amounts received on
service contracts but not yet earned.

Stock Based Compensation
------------------------

The  Company  follows  adopted  the  disclosure  requirements  of SFAS No.  123,
"Accounting  for  Stock-Based  Compensation".  SFAS No. 123  establishes  a fair
value-based method of measuring stock-based  compensation,  but does not require
an entity to adopt the fair  value  method  for  preparing  its basic  financial
statements.  For entities not using the fair value method, SFAS No. 123 requires
disclosures  in the  footnotes  of pro forma net earnings and earnings per share
information as if the fair value-based method had been adopted.


                                      F-10
<PAGE>
                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New Accounting Pronouncements
-----------------------------

In June 1998 and 1999, the Financial  Accounting  Standards  Board (FASB) issued
SFAS 133,  "Accounting for Derivative  Instruments  and Hedging  Activities" and
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the  Effective  Date of FASB  Statement  No. 133." These  statements  require
companies to record  derivatives on the balance sheet as assets or  liabilities,
measured at fair value.  Gains or losses resulting from changes in the values of
those  derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge  accounting.  MERAD does not use  derivatives
and  accordingly,  these  statements  will not have an impact  on our  financial
results.

In March 1998, the American Institute of Certified Public Accountants  ("AICPA")
issued  Statement  of Position  ("SOP") No. 98-1,  "Accounting  for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires
that entities  capitalize  certain costs related to  internal-use  software once
certain  criteria have been met. SOP 98-1 will be effective  for MERAD's  fiscal
year  ending  June 30,  2000.  The Company  believes  that the  adoption of this
statement will not have a significant impact on its financial results.

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.

                                      F-11
<PAGE>

                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE B - MANAGEMENT'S OPERATING PLANS

During 1999 and 1998, respectively,  MERAD incurred a net loss of $1,748,931 and
$4,084,474 and negative cash flow from  operations of $1,224,905 and $1,013,554,
resulting  in a net  working  capital  deficit of  $1,430,420  and  $340,287  an
accumulated  deficit of $19,986,327  and  $18,237,396 at June 30, 1999 and 1998,
respectively. Given these results combined with the Company's defaults under its
debenture  agreements,  and the Company's commitments to loan a related party up
to $200,000, additional capital will be needed to sustain MERAD's operations.

Management's  plans in this  regard  include  acting as a reseller  of the HALIS
Enterprise  System and its  derivatives to its healthcare  customer base and the
continued  sale of supplies and  provision of technical  support to the users of
the medical products it previously sold. If resources are available, the Company
hopes to use the MERAD Technology to develop additional  applications,  Also, as
HALIS  continues  its  efforts  to sell  the  HALIS  Enterprise  System  and its
derivatives,  MERAD will collect royalties because such products incorporate the
MERAD Technology. The Company believes that the MERAD Technology will contribute
greatly  toward the future  operations  of the  Company,  although no  assurance
regarding the commercial success of the Technology can be provided at this time.
Additionally,  the Company will  continued  its efforts to raise the  additional
capital required to fund planned 2000 activities.

In the event that  Management's  plans as  described  above are not  successful,
MERAD could be forced to further reduce its operations,  curtail acquisitions or
other  projects,  liquidate any excess  inventory,  liquidate its  investment in
HALIS, and sell any non-performing  operating lines.

The actions  described  above may not be  sufficient to prevent the Company from
liquidating.   The  consolidated   financial   statements  do  not  contain  any
adjustments, which might be necessary, if MERAD is unable to continue as a going
concern.


NOTE C - INVESTMENT IN HALIS, INC.

During  fiscal  1998,  MERAD  issued  1,089,600  shares of its  common  stock in
exchange  for  1,362,000   shares,  or  approximately  2%,  of  the  issued  and
outstanding  registered  shares of HALIS,  Inc. at that time.  In addition,  the
Company paid $19,250 of costs directly  related to this  transaction.  The HALIS
shares  received  were  recorded at their fair market  value as of the  exchange
dates of $2,143,313,  with MERAD recording net equity related to the issuance of
its shares of  $2,124,063  (net of issuance  costs).  As of June 30,  1998,  the
Company  had  classified  all  common  shares  of HALIS  as  available-for-sale.
Throughout 1998, the investment in HALIS' common stock  experienced a decline in
value and during the fourth quarter of 1998, management deemed the decline to be
"other-than-temporary."  As a result, an unrealized loss aggregating  $1,824,605
was reflected as a separate  component in the  statement of  operations  and the
amortized  cost was been  written  down to its new cost basis of  $318,708 as of
June 30, 1998.

                                      F-12
<PAGE>

                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE C - INVESTMENT IN HALIS, INC. (Continued)

During  fiscal 1999,  MERAD  acquired  additional  shares in HALIS  bringing its
ownership  to  approximately  21%,  and  accordingly,  the  Company  changed its
accounting  from fair value to the equity method of  accounting.  This change in
accounting  principle  resulted in a cumulative  effect adjustment during fiscal
1999 to MERAD's  beginning  accumulated  deficit to reflect  the  balance of the
investment in HALIS as of July 1, 1999. Due to the Company's  determination that
a decline in market  value at June 30,  1998 was other than  temporary,  and the
related  unrealized  loss of $1,824,605  was included in  operations  for fiscal
1998,  the Company did not restate the value of the shares held at June 30, 1998
above the fair market value at that date of $318,708.

The carrying value of the investment with HALIS under the equity method exceeded
the 21% equity in the  underlying  net assets of HALIS at the date of conversion
to the equity method by $1,845,329.  This excess of the investment  over the 21%
equity  in the  underlying  net  assets  of  HALIS  is  being  amortized  on the
straight-line method over ten years.


A summary of  financial  information  for HALIS,  Inc. as of June 30, 1999 is as
follows:
<TABLE>

<S>                                                                 <C>
Current assets                                                      $ 1,418,713
Noncurrent assets                                                     2,433,233
                                                                    -----------
         Total assets                                               $ 3,851,946
                                                                    ===========

Current liabilities                                                 $ 3,319,376
Noncurrent liabilities                                                  223,354
                                                                    -----------
         Total liabilities                                          $ 3,542,730
                                                                    ===========

Shareholders' equity                                                $   309,216
                                                                    ===========

MERAD's equity investment                                           $ 1,832,345
                                                                    ===========
Year ended June 30, 1999
   Net revenues                                                     $ 6,071,574
   Cost of goods sold                                                 1,876,267
                                                                    -----------
      Gross profit                                                  $ 4,195,307
                                                                    ===========

Operating loss                                                      $(1,032,346)
                                                                    ===========

Cash operating loss <F1>                                            $  (154,546)
                                                                    ============

Net loss                                                            $  (257,349)
                                                                    ============

MERAD's equity income <F2>                                          $    38,972
                                                                    ============
<FN>
<F1> Cash  operating  loss is defined as  operating  loss plus depreciation and
     amortization expense and other noncash operating expenses.

<F2> MERAD's equity income is based upon  ownership  percentages  that began at
     approximately 4.9% and increased to approximately 21% during the year
     ended June 30, 1999.
</FN>
</TABLE>

                                      F-13
<PAGE>

                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998

NOTE C - INVESTMENT IN HALIS, INC. (Continued)

If valued at the June 30, 1999 quoted  closing  price of publicly  traded  HALIS
shares, the calculated value of MERAD's  investment in HALIS is $1,342,082.  The
calculated  value  exceeds  the  Company's   carrying  value  by  $424,103.   In
Management's  opinion,  this decline is temporary in nature,  and therefore,  no
adjustment is necessary to the carrying value of HALIS by the equity method.

The Company has a significant  investment in HALIS and considers its  investment
in HALIS to be a long-term investment. However, in the event that the Company is
unable to raise  additional  capital,  it may be  required to sell shares of the
HALIS common  stock.  The HALIS  common stock is traded in the  over-the-counter
market on the NASDAQ Bulletin Board. The 10,763,655 shares of HALIS common stock
owned by the Company represent approximately 21% of the total outstanding shares
of HALIS common  stock.  Due to the fact that the Company may be  considered  an
affiliate  of HALIS,  the  Company's  ability to sell its HALIS  shares could be
adversely  affected by the requirement of Rule 144 promulgated by the Securities
and Exchange Commission, which would limit the number of HALIS shares that could
be sold in any three-month period. There can be no assurance as to the price the
Company could receive for the HALIS common stock if it were required to sell the
stock to raise additional working capital.


NOTE  D  -  ACQUISITION  OF  MERAD  SOFTWARE,   INC.   (FORMERLY  PAUL  HARRISON
ENTERPRISES, INC.) ("PHE")

During fiscal 1999, the Company  completed the  acquisition  of MERAD  Software,
Inc. (formerly Paul Harrison  Enterprises,  Inc.) and subsidiaries.  The Company
issued  334,443  shares of Series P Preferred  Stock in exchange  for all of the
issued and outstanding  common stock of PHE. In addition,  MERAD will pay to the
shareholders of PHE additional  consideration  based on a variable rate of gross
revenues related to the MERAD Technology. The additional consideration,  payable
quarterly in equal increments of the Company's common stock and cash,  equals 5%
of the first $1,000,000 gross revenues related to the MERAD Technology  acquired
and 10% of revenues thereafter in any fiscal year. The additional  consideration
is  payable  for a period  of ten  years or until  the  Company  has paid in the
aggregate $7,000,000 in additional consideration.


                                      F-14
<PAGE>

                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998



NOTE  D  -  ACQUISITION  OF  MERAD  SOFTWARE,   INC.   (FORMERLY  PAUL  HARRISON
ENTERPRISES, INC.) ("PHE") (Continued)

The Series P preferred  stock is  non-voting  with a stated  value of $10.00 per
share.  The preferred  stock is  convertible  into ten shares of fully-paid  and
non-assessable  common share, provided the conversion feature is approved by the
vote of the  Company's  shareholders;  and provided,  through  March 2000,  that
immediately  following the conversion the PHE  shareholders own less than 45% of
MERAD's then  outstanding  shares of common stock.  Dividends are cumulative and
payable semi-annually,  if declared, at a variable rate, $1.20 per share through
January 1999  increasing  to $1.80 on February 1, 1999 and to $2.40 per share on
August 1, 1999 if not converted  into common stock on or before such dates.  The
Series P preferred  stock has  dividend  and  liquidation  preferences  over all
common  stock,  and is on an equal  liquidation  and dividend  (other than rate)
basis with the Series A preferred stock of the Company (See Note J).  Management
has determined  the fair market value of these shares to be $2,560,000  based on
the  approximate  trading  price  for  MERAD's  common  stock at the date of the
transaction,  discounted to factor in the  reduction in value  stemming from the
non-marketable restrictions of the preferred shares issued.

The  Company  has accounted for the  acquisition  under the  purchase  method of
accounting  whereby the assets and liabilities of PHE are recorded at their fair
market value as of the date of the  acquisition.  The $900,164  excess  purchase
price over the fair market  value of the net tangible  assets  acquired has been
identified  as the MERAD  Technology acquired and is being amortized  over a ten
year period.

Summarized below is the unaudited condensed and pro forma consolidated statement
of operations as if the acquisition had taken place at the beginning of the year
ended June 30, 1999.

<TABLE>
<CAPTION>
                             Proforma Condensed Consolidated Statement of Operations (Unaudited)
                         ----------------------------------------------------------------------------
                                               Paul Harrison       Proforma            Proforma
                         HealthWatch, Inc.   Enterprises, Inc.   Consolidating     HealthWatch, Inc.
                           Consolidated        Consolidated         Entries          Consolidated
                         -----------------   -----------------   -------------     -----------------

<S>                          <C>                 <C>             <C>                  <C>
Sales                        $ 1,220,803         $ 157,024       $ (117,024) <F2>     $ 1,260,803
Cost of sales                    940,050                 -                -               940,950
                             -----------         ---------       ----------           -----------

       Gross profit              279,853           157,024         (117,024)              319,853

Operating expenses             1,938,596            80,737           24,823  <F1>       2,044,156
                             -----------         ---------       ----------           -----------
    Loss from operations      (1,658,743)           76,287         (141,847)           (1,724,303)
    Other income (expense)       (90,188)                -                -               (90,188)
                             -----------         ---------       ----------           -----------

       Net income (loss)     $(1,748,931)         $(76,287)      $ (141,847)          $(1,814,491)
                             ===========          ========       ==========           ===========

Net loss per share           $     (0.65)                                           $      (0.67)
                             ============                                             ============

Weighted average
   Number of shares
   outstanding                 2,689,859                                                2,689,859
                               =========                                                =========

<FN>
<F1>  To record amortization of MERAD Technology.
<F2>  To eliminate intercompany sales of investments.
</FN>
</TABLE>

                                       F-15
<PAGE>
                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE  D  -  ACQUISITION  OF  MERAD  SOFTWARE,   INC.   (FORMERLY  PAUL  HARRISON
ENTERPRISES, INC.) ("PHE") (Continued)

Summarized below is the unaudited  condensed and proforma  consolidated  balance
sheet and statement of operations as if the  acquisition  had taken place at the
beginning  of the year ended June 30,  1998.  It was assumed that the 334,443 of
preferred  shares issued in connection with this acquisition were outstanding at
the beginning of the proforma period.

<TABLE>
<CAPTION>
                                               Proforma Condensed Consolidated Balance Sheet (Unaudited)
                               ------------------------------------------------------------------------------------------

                                                    Paul Harrison                        Proforma            Proforma
                                HealthWatch, Inc. Enterprises, Inc.   Acquisition     Consolidating     HealthWatch, Inc.
                                Consolidated        Consolidated      Adjustment         Entries           Consolidated
                                ------------        ------------      ----------         -------           ------------
<S>                              <C>                 <C>             <C>                <C>                 <C>
Current assets                   $ 1,434,691         $   129,120     $      --          $   (95,000)<F4>    $ 1,468,811
Marketable equity                                                                          (710,720)<F3>
Securities - related party           318,708             525,000            --            1,149,332           1,282,320
Technology and other
   intangible assets                 715,597             255,038            --              938,064           1,908,699
Investment in
  Subsidiary                            --                  --         2,560,000<F1>     (2,560,000)<F2>           --
                                 -----------         -----------     -----------       ------------         -----------
Total assets                     $ 2,468,996         $   909,158     $ 2,560,000        $(1,278,324)        $ 4,659,830
                                 ===========         ===========     ===========        ===========         ===========

Current liabilities              $ 1,774,978         $   436,604            --          $   (95,000)<F4>    $ 2,116,582
Long-term debt                          --                  --              --             (710,720)<F3>           --
Shareholders' equity                 694,018             472,554       2,560,000<F1>       (472,604)<F2>      2,543,248
                                 -----------         -----------     -----------       ------------         -----------
Total liabilities and equity     $ 2,468,996         $   909,158     $ 2,560,000        $(1,278,324)        $ 4,659,830
                                 ===========         ===========     ===========        ===========         ===========

<FN>
<F1>
         To reflect the acquisition of Paul Harrison Enterprises,  Inc. (PHE) on
         HealthWatch,  Inc.  consolidated  as if the acquisition had occurred on
         June 30, 1998

<F2>     To record net assets  purchased at fair market value and  eliminate the
         intercompany investment and PHE's equity.

<F3>      To retire  HealthWatch,  Inc.'s  common stock  purchased as part of the
         acquisition of PHE.

<F4>     To eliminate intercompany balances as of June 30, 1998.
</FN>
</TABLE>

                                      F-16
<PAGE>
                               HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE  D  -  ACQUISITION  OF  MERAD  SOFTWARE,   INC.   (FORMERLY  PAUL  HARRISON
ENTERPRISES, INC.) ("PHE") (Continued)

<TABLE>
<CAPTION>

                                         Proforma Condensed Consolidated Statement of Operations (Unaudited)
                               ------------------------------------------------------------------------------------------

                                                    Paul Harrison                        Proforma            Proforma
                                HealthWatch, Inc. Enterprises, Inc.   Acquisition     Consolidating     HealthWatch, Inc.
                                Consolidated        Consolidated      Adjustment         Entries           Consolidated
                                ------------        ------------      ----------         -------           ------------
<S>                             <C>                <C>                <C>             <C>                  <C>
Sales                           $ 1,383,335        $   105,000        $   --          $    95,000<F1>      $ 1,393,335
Cost of sales                     1,359,028               --              --                --               1,359,028
                                  ---------        -----------        ----------      -----------          -----------
Gross profit                         24,307            105,000            --               95,000               34,307
Operating expenses                2,110,082            495,902            --              (95,000)<F1>       2,510,984
                                  ---------        -----------        ----------      -----------          -----------
Loss from operations            (2,085,775)          (390,902)            --                --              (2,476,677)
Other income (expense)          (1,998,699)           129,265             --                --              (1,869,434)
                                  ---------        -----------        ----------      -----------          -----------
Net loss                       $(4,084,474)       $  (261,637)        $   --          $     --             $(4,346,111)
                               ===========        ===========         ==========      =============        ===========
Net loss per share             $     (2.45)                                                                $     (2.60)
                               ===========                                                                 ===========


Weighted average number
of shares outstanding            1,669,325                                                                   1,669,325
                                 =========                                                                   =========

<FN>
<F1> To eliminate intercompany activity during the year ended June 30, 1998.
</FN>
</TABLE>

                                      F-17
<PAGE>

                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE E - INVENTORY

Inventory consisted of the following at June 30, 1999


              Raw materials                                $    59,000
              Work in process                                      --
              Finished goods                                    24,864
                                                           -----------
              Total inventory                              $    83,864
                                                           ===========

NOTE F - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at June 30, 1999

         Furniture and equipment                  $  635,569
           Less accumulated depreciation            (612,773)
                                                  ----------
               Property and equipment, net        $   22,796
                                                  ==========

NOTE G - INTANGIBLE ASSETS


Intangible  assets arising from the  acquisition of Life Sciences,  Inc. and the
acquisition of MERAD Software,  Inc. (formerly Paul Harrison Enterprises,  Inc.)
and subsidiaries  consists of technology  known as the Life Sciences  Technology
and the MERAD Technology,  respectively,  and are being amortized over ten years
on the  straight-line  method.  Life Sciences  Technology  and MERAD  Technology
consists of the following as of June 30, 1999:

Life Sciences Technology                                   $ 2,716,987
Less accumulated amortization                               (2,281,333)
                                                           -----------
Life Sciences Technology, net                                  435,654

MERAD Technology                                           $   992,936
Less accumulated amortization                                  (70,908)
                                                           -----------
MERAD Technology, net                                          922,028
                                                           -----------
Intangible assets, net                                     $ 1,357,682
                                                           ===========

The Life Sciences  Technology includes  technology,  drawings and documentation,
name,  applications and customer base. MERAD Technology  includes the technology
and virtual software application utility.

                                      F-18
<PAGE>

                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE H - DEBENTURES PAYABLE

Debentures  payable accrue interest at an annual rate of 10%, payable  quarterly
and are secured by  substantially  all assets of the Company.  The debentures
matured  March 1, 1998 and are  presently in default.  As of June 30, 1999,  the
debentures  had not been  extended  and the  Company  is in  default  under  the
debenture  agreements.  The debentures  are convertible into common stock, at
the option of the holder,  at a conversion rate of one share of common stock for
every $70.00 of debentures  converted.  During 1999 and 1998, no debentures were
converted into common stock.

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

At June 30,  1998,  the Company  believed  that the  carrying  value of the debt
approximated  its  fair  value,  as  MERAD's  borrowing  terms  had not  changed
substantially  since the  issuance  of its  debentures.  At June 30,  1999,  the
Company does not believe that it is  practicable  to estimate the carrying value
because of the operating difficulties of the Company.


NOTE I - CONTINGENCIES AND COMMITMENTS

Operating Leases
----------------

The Company has entered into an operating lease for office and warehouse,  which
began on January 1, 1999 and is for a period of three years. The lease agreement
calls for total annual rent of $49,200,  with a 4% increase each year.  Prior to
the  execution of this lease,  the Company  subleased  its office and  warehouse
space on a month-to-month basis.

Rent expense for 1999 and 1998 was $59,055 and $152,899, respectively.

                                      F-19
<PAGE>

                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          ENDED JUNE 30, 1999 AND 1998


NOTE J - PREFERRED STOCK

Convertible Series A Preferred Stock
------------------------------------

In June 1998, the Company issued 1,145,000  shares of non-voting  Series A, $.01
par value,  6% cumulative and  convertible  preferred  stock for net proceeds of
$993,150.  Series A preferred shareholders have the option to convert the Series
A preferred stock,  which has a stated value of $1.00 per share, into fully-paid
and  non-assessable  shares of $.01 par value common stock at a conversion  rate
equal to the lesser of $.52 per share or 70% of the  market  value of the common
stock  at the  time of  conversion.  Dividends  are  payable  semi-annually,  if
declared.  No dividends  were declared  during the years ended June 30, 1999 and
1998.  At June 30, 1999,  the amount of  dividends  in arrears was $68,700.  The
Series A preferred  stock has dividend and liquidation  preferences  over common
stock, and is an equal liquidation and dividend (other than rate) basis with the
Series P preferred stock of the Company. The stated liquidation preference value
is  $1,145,000.  As of October 1, 1999 (but after the year ended June 30, 1999),
567,000  shares  of the  Series A  preffered  stock  have  been  converted  into
1,384,438 shares of the Company's common stock.

Convertible Series H Preferred Stock
------------------------------------

During 1998, the Company  issued 20,834 shares of non-voting  Series H, $.01 par
value convertible preferred stock to HALIS for net proceeds of $120,802.  Series
H  preferred  shareholders  had the  option to  convert  each  share of Series H
preferred stock into four fully-paid and  non-assessable  shares of the $.01 par
value common stock.

During 1998,  HALIS converted its 20,834 shares of Series H preferred stock into
83,334 shares of common stock in accordance with the conversion policy.

                                      F-20
<PAGE>

                                HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE J - PREFERRED STOCK (Continued)

Convertible Series P Preferred Stock
------------------------------------

During  1999,  the  Company  issued  334,432  shares of $.01 par value  Series P
Preferred Stock in exchange for all of the issued and  outstanding  common stock
of PHE. The Series P Preferred Stock is non-voting with a stated value of $10.00
per share.  The preferred stock is convertible into ten shares of fully-paid and
non-assessable  common stock, provided the conversion feature is approved by the
vote of the  Company's  shareholders;  and provided,  through  March 2000,  that
immediately  following the conversion the PHE  shareholders own less than 45% of
the Company's then outstanding shares of common stock.  Dividends are cumulative
and payable  semi-annually,  if declared,  at a variable rate of $1.20 per share
through  January 1999  increasing  to $1.80 per share on February 1, 1999 and to
$2.40 per share on August 1, 1999 if not  converted  into  common  stock by such
dates.  At June 30, 1999,  the amount of dividends in arrears was $384,597.  The
Series P Preferred  Stock has  dividend  and  liquidation  preferences  over all
common  stock,  and is on an equal  liquidation  and dividend  (other than rate)
Basis with the Series A Preferred Stock of the Company.  The stated  liquidation
preference value of $3,344,320.  Management has determined the fair market value
of these shares to be $2,560,000 based on the approximate  trading price for the
Company's common stock at the date of the  transaction,  discounted to factor in
the reduction in value  stemming  from the  non-marketable  restrictions  of the
preferred shares issued.

NOTE K - SHAREHOLDERS' EQUITY

Private Placement of Common Stock
---------------------------------

During 1999, the Company offered and issued  1,209,956 shares of common stock at
various  prices per share in private  offerings.  Net  proceeds  to the  Company
aggregated $625,000.

During  1999,  55,000  shares of common stock were issued as a result of options
being exercised by former employees of the Company.

During 1998,  the Company  offered and issued  20,000  shares of common stock at
$1.75 per share to an existing  shareholder of the Company.  Net proceeds to the
Company aggregated $35,000.

During  1998,  the Company  offered up to 360,000  shares of its common stock at
$1.50 per share. Pursuant to the offering,  the Company issued 349,333 shares of
common stock to HALIS shareholders resulting in proceeds, net of direct expenses
(aggregating $4,760) of $519,240.

Additionally,  in 1998, the Company offered 30 units of its securities at $6,000
per unit.  Each unit  consisting of 4,000 shares of common stock and 2,000 stock
purchase  warrants,  representing  the right to  purchase  additional  shares of
common  stock at $.75 per share.  Pursuant to the  offering,  the  Company  sold
18.133 units or 72,533  shares of common  stock and 36,267  warrants to purchase
common stock to HALIS  shareholders,  resulting in proceeds,  net of commissions
and other expenses (aggregating $990), of $107,810.

                                      F-21
<PAGE>
                               HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998



NOTE K - SHAREHOLDERS' EQUITY (Continued)

Securities Offerings - HALIS, Inc.

During 1998, the Company  pursued a joint venture and  co-marketing  arrangement
with HALIS, a publicly traded Georgia corporation. Pursuant to this arrangement,
MERAD entered into the following  series of transactions  with HALIS and certain
shareholders and affiliates of HALIS.

    *    The  Company  offered  and issued  20,834  shares of Series H preferred
         stock to HALIS at $6.00 per share resulting in proceeds,  net of direct
         expenses  (aggregating  $4,202),  of  $120,802.  The Series H Preferred
         Stock was converted during 1998 into 83,334 shares of common stock.

    *    The Company  approved the exchange of up to 1,258,000  shares of issued
         and outstanding HALIS common stock with various HALIS  shareholders and
         affiliates.   All  such  shares  of  HALIS  common  stock  received  by
         MERAD  pursuant  to  this  exchange  have  been registered with the SEC
         and are marketable by the Company  pursuant to Rule 144  promulgated by
         the Securities and Exchange  Commission.  In  addition,  MERAD  granted
         an  option  to  exchange  an additional 400,000  shares of HALIS common
         stock for 320,000 shares of  the Company's  common  stock provided that
         immediately  following any such exchange  HALIS and its  affiliates own
         less  than  48%  of  MERAD's  then outstanding  shares of common stock.
         During 1998,  the Company  issued  1,089,600  shares of common stock in
         exchange for 1,362,000  shares of HALIS' issued and outstanding  common
         stock.

   *     As of June 30, 1998, the Company had entered into two  subscription and
         exchange agreements with Paul Harrison Enterprises ("PHE"). Pursuant to
         these agreements, MERAD agreed to issue an additional 488,400 shares of
         its common stock in exchange for 1,400,000 shares of HALIS common stock
         owned by PHE.  During  fiscal  1999,  the  exchanges  under  these  two
         subscription agreements were completed.

Stock Options
-------------

At June 30,  1999,  425,000  shares of common  stock were  reserved for issuance
under the Company's  1995 Stock Option Plan.  Pursuant to the plan, 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. The options vest over a period of one to three years.

                                      F-22
<PAGE>
                               HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE K - SHAREHOLDERS' EQUITY (Continued)

A summary of the status of the Company's stock options plans as of June 30, 1999
and 1998 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
                                                              1999                                1998
                                                 -----------------------------      ------------------------------
                                                                   Weighted                           Weighted
                                                                    Average                            Average
                                                   Shares       Exercise Price        Shares       Exercise Price
                                                   ------       --------------        ------       --------------
          <S>                                                                          <C>          <C>
          Outstanding at beginning of year         859,695        $  1.29              354,600      $   11.09
          Granted                                  626,000        $   .96              831,714      $    1.01
          Exercised                                (55,000)       $   .66              (15,600)     $    3.02
          Expired                                   (6,553)       $ 15.30                 -         $     -
          Cancelled                               (161,302)       $  1.91             (311,019)     $   10.59
                                                 ---------        -------             --------      ---------

          Outstanding at end of year             1,262,840        $   .90              859,695       $   1.29
                                                 =========        =======             ========       ========

          Options exercisable at end of year     1,194,508        $   .91              337,572       $   1.22
                                                 =========        =======             ========       ========

          Weighted-average fair value of
             options granted during the year                      $   .07                            $    .51
                                                                  =======                            ========
</TABLE>

The following table summarizes  information  about stock options  outstanding at
June 30, 1999:
<TABLE>
<CAPTION>

                                      Options Outstanding                             Options Exercisable
                      -------------------------------------------------         -------------------------------
                                           Weighted-          Weighted-                               Weighted-
                         Number              Average            Average             Number              Average
   Exercise           Outstanding          Remaining          Exercise           Outstanding          Exercise
    Prices            at 6/30/99       Contractual Life         Price            at 6/30/99             Price
    ------            ----------       ----------------         -----            ----------             -----
 <C>                    <C>                <S>                <C>                  <C>                  <C>
 $13.30                  1,428              .8 Years          $13.30                 1,428              $13.30
 $ 6.75                 15,000             2.5 Years          $ 6.75                15,000              $ 6.75
 $ 2.80                  3,000             3.2 Years          $ 2.80                 3,000              $ 2.80
 $  .96                626,000             4.3 Years          $  .96               626,000              $  .96
 $  .66                617,412             3.5 Years          $  .66               549,000              $  .66
                     ---------                                                   ---------
                     1,262,840                                                   1,194,508
                     =========                                                   =========
</TABLE>


Various  officers and directors  have been granted a total of 1,178,475  options
under the  Company's  Stock  Options Plans which are included in the above table
(see Note L).


SFAS No. 123, "Accounting for Stock-Based Compensation," equires the Company to
provide  pro-forma  information  regarding  net loss  and  loss per  share as if
compensation  cost for the Company's  stock option plans had been  determined in
accordance  with the fair value based  method  prescribed  in SFAS No. 123.  The
Company estimates the fair value of each stock option at the grant date by using
the  Black-Scholes  option-pricing  model with the  following  weighted  average
assumptions  used for grants in 1999 and 1998,  respectively:  no dividend yield
for each year;  expected  volatility of 136.25% and 147.50%,  respectively;  and
risk free interest rates of 4.72% and 5.98%, respectively.



                                      F-23
<PAGE>
                               HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE K - SHAREHOLDERS' EQUITY (Continued)
                                                1999               1998
                                           --------------     --------------

         Net loss:
              As reported                   $(1,748,931)        $(4,084,474)
              Pro forma                     $(1,849,368)        $(4,892,134)

         Net loss per share:
              As reported                   $     (0.65)        $     (2.45)
              Pro forma                     $     (0.69)        $     (2.93)


The Company has issued stock warrants in conjunction with the issuance of common
stock. Activity related to stock warrants was as follows:

                                                                Weighted Average
                                               Warrants         Exercise Price
                                               --------         --------------

     Outstanding at June 30, 1997              300,000               $10.00
        Granted                              1,239,252               $ 1.21
        Exercised                              (41,335)              $  .81
        Expired                                   -                  $  -
                                             ----------              -------
     Outstanding at June 30, 1998            1,497,917               $ 2.98
        Granted                              1,170,804               $  .63
        Exercised                                 -                  $  -
        Expired                               (302,916)              $ 9.91
                                             ---------               ------
     Outstanding at June 30, 1999            2,365,805               $  .93
                                             =========               ======

At June 30, 1999, the Company had warrants outstanding as follows:

          Common Shares                   Exercise                Expiration
          Under Warrant                Price Per Share               Date
          -------------                ---------------           -------------
               145,455                     $  .45                January 2001
               666,670                     $  .49                January 2001
               188,680                     $  .86                March 2001
                70,000                     $  .38                April 2001
               100,000                     $ 1.59                April 2001
                50,000                     $ 1.72                January 2003
             1,145,000                     $ 1.20                June 2003
             ---------
             2,365,805
             =========


                                      F-24
<PAGE>
                               HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998



NOTE L - RELATED PARTY TRANSACTIONS

Officer and Director Options
----------------------------

At June 30,  1999,  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
         -------------               ---------------              -------------
              1,428                      $13.30                   May 2000
             15,000                      $ 6.75                   December 2001
            110,714                      $  .66                   August 2002
              3,000                      $ 2.80                   August 2002
            150,000                      $  .66                   October 2002
             80,000                      $  .66                   November 2002
            235,000                      $  .66                   May 2003
            583,333                      $  .96                   October 2003
          ---------
          1,178,475
          =========

                                      F-25
<PAGE>
                               HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998



NOTE L - RELATED PARTY TRANSACTIONS (Continued)

Of the total outstanding  options granted to officers and directors as discussed
above, options to acquire up to an aggregate of 1,110,143 shares of common stock
are exercisable at June 30, 1999.

Officer and Director Warrants
-----------------------------

At June 30, 1999, the Company had  outstanding to officers and directors,  stock
warrants to purchase  308,663 shares of common stock at prices ranging from $.45
per share to $1.72 per  share.  These  warrants  expire at  various  dates  from
January 2001 through January 2003.

Software License and Development Agreement
------------------------------------------

In October 1997,  the Company  entered into a software  license and  development
agreement with MERAD Corporation,  a company owned by Paul Harrison  Enterprises
(PHE), an entity controlled by an officer/director  of the Company.  Pursuant to
the  agreement,  the  Company  was to  license  from MERAD  Corporation  certain
computer  architecture,  concepts,  algorithms  and processes  which the Company
originally planned to integrate into its line of noninvasive vascular diagnostic
equipment. In addition, MERAD Corporation was to develop healthcare software for
the Company. In exchange for these licenses and services,  the Company agreed to
pay MERAD  Corporation a development  fee of $15,000 per month during the period
January 1998 through  January  2000.  In addition,  the Company was to pay MERAD
Corporation  a fee  based on a  variable  rate of  gross  software  revenues  as
follows:

Rate                    Gross Aggregate Software Revenues
----                    ---------------------------------
5.0%                    $0 to $5,000,000
2.5%                    $5,000,001 to $10,000,000
1.0%                    In excess of $10,000,000

During 1998,  the Company had incurred  $90,000 of  development  fees,  of which
$90,000  remained  unpaid at June 30,  1998 and was  included  in other  accrued
liabilities - related  parties as of such date.  No software  revenue was earned
during 1998 and accordingly,  no variable rate license fees were incurred.  This
agreement was effectively  cancelled  effective June 30, 1999 as a result of the
acquisition of PHE by the Company, and no additional amounts were accrued during
fiscal 1999.

Technology and Patent Agreement
-------------------------------

The Company had an agreement with a former  officer/director  to license certain
technology  and patent  rights  through June 1999 in exchange for a fee. The fee
was based on a variable rate based on unit sales.  For 1999 and 1998,  licensing
fee expense in accordance with this agreement was $40,000,  of which $40,000 and
$5,000, respectively,  remained unpaid at June 30, 1999 and 1998 and is included
in other accrued liabilities - related parties.

Employment Agreement
--------------------

During 1998,  the Company  entered into a termination  agreement with an officer
under which the officer is  entitled  to receive a  severance  package  totaling
$71,500  payable over a  five-month  period.  At June 30,  1998,  $59,000 of the
balance  remained  unpaid and was included in accrued  compensation  and payroll
taxes. The balance of this liability was paid in full during 1999.

                                      F-26
<PAGE>
                               HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998



NOTE L - RELATED PARTY TRANSACTIONS (Continued)



Consulting Agreements
---------------------

During 1997, the Company entered into an agreement with an officer/director  and
an entity owned by the officer, PHE. Pursuant to the agreement,  the officer and
PHE provided the Company with various consulting services through December 1998,
in exchange for a  nonstatutory  option to purchase up to 150,000  shares of the
Company's common stock at $.66 per share. In addition, the Company agreed to pay
PHE a monthly fee of $15,000 beginning in January 1998 and committed to loan the
officer/director up to $200,000 at 7% with a maturity in July 2002. During 1998,
the  Company had  incurred  $30,000 of  consulting  expenses,  of which  $30,000
remained unpaid at June 30, 1998 and were included in other accrued  liabilities
- related  parties.  This liability was eliminated  during 1999 when the Company
acquired PHE. No amounts had been loaned to this officer as of June 30, 1999.

During 1997, the Company entered into an agreement with an  officer/director  of
the  Company.  Pursuant to the  agreement,  the  officer/director  provided  the
Company with various consulting  services through December 1998, in exchange for
a  nonstatutory  option to purchase up to 80,000 shares of the Company's  common
stock  at  $.66  per  share.  In  addition,   the  Company  agreed  to  pay  the
officer/director  a monthly fee of $5,000  beginning in March 1998.  During 1999
and 1998,  the  Company  had  incurred  $45,000 and  $20,000,  respectively,  of
consulting  expense of which none and $10,000,  remained unpaid at June 30, 1999
and 1998 and was included in other accrued liabilities - related parties.

Creative  Business  Strategies,  Inc.  (CBS),  a  company  owned  by  a  current
director/shareholder  of the  Company and a former  director/shareholder  of the
Company,  provides the Company with business development  consulting services in
exchange for a fee.  During 1999 and 1998, the Company had incurred  $29,674 and
$31,906,   respectively,   of  fees  to  CBS,  of  which  $45,000  and  $15,326,
respectively, remained unpaid at June 30, 1999 and 1998 and is included in other
accrued liabilities - related parties.

Consulting Agreement
--------------------

During  1999,  the  Company   entered  into  a  consulting   agreement  with  an
officer/director under which the officer is entitled to receive a consulting fee
of $12,500 per month  payable  over a one-year  period.  During  fiscal 1999 the
Company  incurred  $75,000 of these  consulting  fees, of which $62,500 remained
unpaid as of June 30, 1999 and were  included  in other  accrued  liabilities  -
related parties. This liability was paid in full during fiscal 1999.

Purchased Services
------------------

During 1998, the Company  purchased systems  integration  services and marketing
support  services from HALIS.  Total  purchased  services from HALIS  aggregated
$50,000,  all of which  remained  unpaid at June 30,  1998 and were  included in
other accrued  liabilities - related  parties.  This  liability was paid in full
during fiscal 1999.

MERAD Royalty
-------------

As a result  of  acquiring  the MERAD  Technology  in the PHE  acquisition,  the
Company earns a royalty equal to 10% of the gross revenues generated by HALIS on
sale of the HALIS Healthcare  Enterprise  System and any derivative  products or
services  associated  therewith.  The Company earned $66,087 in royalties during
fiscal 1999.



                                      F-27
<PAGE>
                               HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998



NOTE L - RELATED PARTY TRANSACTIONS (Continued)


Letter of Intent to Acquire HALIS, Inc.
---------------------------------------

On July 14, 1998, the Company  entered into a letter of intent to acquire all of
the issued and  outstanding  shares of HALIS's  common stock.  As of the date of
this report,  consummation  of the  transaction  is  uncertain.  Pursuant to the
letter of intent the Company committed to loan HALIS up to $250,000 ($50,000 per
month),  in exchange for a 6% convertible  debenture  maturing in February 2000.
During fiscal 1999, the Company made loans aggregating approximately $157,000 to
HALIS, which was converted into 1,824,645 shares of HALIS' common stock.

NOTE M - INCOME TAXES

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

                                                                                       1999              1998
                                                                                  --------------    --------------

<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               2.0
              Unrealized loss on marketable equity securities                           -                15.0
         Loss to be carried forward                                                    28.0              17.0
                                                                                     ------             -----
              Income tax provision                                                      0.0%              0.0%
                                                                                     ======             =====
</TABLE>


Deferred  income  taxes and the  related  valuation  allowances  result from the
potential  tax  benefits  of tax  carryforwards.  The  Company  has  recorded  a
valuation  allowance to reflect the  uncertainty of the ultimate  utilization of
the deferred tax assets as follows:

                                                   1999                1998
                                               -----------         -----------
     Deferred tax assets                       $ 3,887,000         $ 3,229,000
     Less valuation allowance                   (3,887,000)         (3,229,000)
                                               -----------         -----------
       Net deferred tax assets                 $      -            $      -
                                               ===========         ===========

                                      F-28
<PAGE>
                               HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE M - INCOME TAXES (Continued)

For financial statement  purposes,  no tax benefit has been reported in 1999 and
1998 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
$658,000 and $886,000 for the years ended June 30, 1999 and 1998, respectively.

At  June  30,  1999,  the  Company  had  net  operating  loss  carryforwards  of
approximately  $11,476,000  and unused  investment tax credits of  approximately
$28,000.  The net operating loss carry forwards expire beginning in 2002 through
2018 and the investment tax credits expire beginning in 2000 through 2002.

        Carryforward                Net Operating                  Investment
           Expires                      Loss                       Tax Credits
           June 30                  Carryforwards                 Carryforwards
         -----------               ---------------               --------------
            2000                      $         -                    $ 9,634
            2001                                -                      3,798
            2002                          627,889                     14,560
            2003                           11,744                          -
            2004                          122,457                          -
            2005                            1,371                          -
            2006                          235,901                          -
            2007                        1,461,790                          -
            2008                          281,054                          -
            2009                        1,644,839                          -
            2010                        1,666,725                          -
            2011                        1,815,490                          -
            2012                        1,881,569                          -
            2013                        1,725,000                          -
                                     ------------                -----------

                                      $11,475,829                    $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 N - SALE OF CAMBRIDGE MEDICAL EQUIPMENTS LIMITED

During March 1998, the Company sold all of the issued and outstanding  shares of
stock in its wholly  owned  subsidiary,  Cambridge  Medical  Equipments  Limited
(Cambridge),  located in Great Britain. In connection with the sale, the Company
sold net assets of  Cambridge  with a net book value  aggregating  $102,886  for
$1 and recognized a loss on sale of the subsidiary of $102,885.


                                      F-29
<PAGE>
                               HEALTHWATCH, INC.
                      d/b/a MERAD TECHNOLOGIES CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998


NOTE P - GEOGRAPHICAL SEGMENT INFORMATION


                                                 1999               1998
                                             -----------         ----------
     Revenues:
        United Stated                        $ 1,220,803         $1,169,629
        Great Britain                                  -            213,706
        Elimination's                                  -                  -
                                             -----------         ----------
             Consolidated                    $ 1,220,803         $1,383,335
                                             ===========         ==========

     Operating profit (loss):
         United States                       $(1,658,743)        $(2,034,418)
         Great Britain                                 -             (51,357)
         Elimination's                                 -                   -
                                             ------------        ------------
             Consolidated                    $(1,658,743)        $(2,085,775)
                                             ===========         ===========

                                      F-30
<PAGE>


                                  SIGNATURES

         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                  HEALTHWATCH, INC.



Date:  October 15, 1999           By  /s/ Paul W. Harrison
                                     --------------------------------------
                                      Paul W. Harrison (Chief Executive Officer)

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities and on the dates indicated.



/s/ Paul W. Harrison                                           October 15, 1999
-----------------------------------------------------
Paul W. Harrison, (Chief Executive Officer)
(Principal Executive Officer and Principal Financial
 and Accounting Officer)


/s/ Richard T. Case                                            October 15, 1999
-----------------------------------------------------
Richard T. Case
(Director)



/s/ Sanford L. Schwartz                                        October 15, 1999
-----------------------------------------------------
Sanford L. Schwartz
(Director)