##### Table of Contents





---



FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2001

Commission File Number: 0-24635

HYPERTENSION DIAGNOSTICS, INC.
(Exact name of small business issuer as specified in its charter)

|                         |  |                                     
|------------------------ |  | ------------------------------------
|MINNESOTA                |  | 41-1618036                          
|                        
|                        
|                        
|                        
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

2915 WATERS ROAD, SUITE 108
EAGAN, MINNESOTA 55121-1562
(651) 687-9999
(Address of issuers principal executive offices and telephone number)

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.



| |            
| | -----------
| | Yes      No

The number of shares of Common Stock outstanding as of April 30, 2001 was
5,684,329.

Transitional Small Business Disclosure Format:



| |            
| | -----------
| | Yes      No





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TABLE OF CONTENTS



|                              |                                                                                               |                                                                                                     |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|Part I. Financial Information
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | Balance Sheets  March 31, 2001 and June 30, 2000                                                  
|                              |                                                                                               | Statements of Operations  Three Months and Nine Months Ended March 31, 2001 and 2000, respectively
|                              |                                                                                               | Statements of Cash Flows  Nine Months Ended March 31, 2001 and 2000                               
|                              |                                                                                               | Notes to Financial Statements                                                                      
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|Part II. Other Information   
|                              | Item 2. Changes in Securities                                                                
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                   



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##### Table of Contents



|                                     |                                                                                                           |                                                                                                     |    |          |   | 
|------------------------------------ | --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | -- | -------- | - | 
|                                     |                                                                                                           |                                                                                                     |    | Page No. |  
|                                     |                                                                                                           |                                                                                                     |    |          |  
|PART I.       FINANCIAL INFORMATION:
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     | Item 1.       Financial Statements                                                                        |                                                                                                     |    | 3        |  
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                           | Balance Sheets  March 31, 2001 and June 30, 2000                                                   |    |          | 3 | 
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                           | Statements of Operations  Three Months and Nine Months Ended
March 31, 2001 and 2000, respectively |    |          | 4 | 
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                           | Statements of Cash Flows  Nine Months Ended
March 31, 2001 and 2000                                |    |          | 5 | 
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                           | Notes to Financial Statements                                                                       |    |          | 6 | 
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     | Item 2.       Managements Discussion and Analysis of Financial Condition
      and Results of Operations |                                                                                                     |    | 7        |  
|                                    
|                                    
|                                    
|                                    
|                                    
|PART II.       OTHER INFORMATION:   
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     | Item 2.      
Changes in Securities                                                                       |                                                                                                     |    | 11       |  
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     | Item 6.       Exhibits and Reports on Form 8-K                                                            |                                                                                                     |    | 12       |  
|                                    
|                                    
|                                    
|                                    
|                                    
|SIGNATURES                           |                                                                                                           |                                                                                                     | 13 |         
|                                    
|                                    
|                                    
|                                    
|                                    

2



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##### Table of Contents









Item 1. Financial Statements

Hypertension Diagnostics, Inc.






|                                                                                                                  |                                   |                                                                                                         |                                            |             |           |           |  |  |  |  |         |            |        |           | 
|----------------------------------------------------------------------------------------------------------------- | --------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | --------- | --------- |  |  |  |  | ------- | ---------- | ------ | --------- | 
|                                                                                                                  |                                   |                                                                                                         |                                            |             | March 31, |           |  |  |  |  |         | June 30,   |       
|                                                                                                                  |                                   |                                                                                                         |                                            |             | 2001      |           |  |  |  |  |         | 2000       |       
|                                                                                                                  |                                   |                                                                                                         |                                            |             |           |           |  |  |  |  |         |            |       
|Assets                                                                                                           
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|Current Assets:                                                                                                  
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Cash and cash equivalents         |                                                                                                         | $                                          | 5,065,280   |           |           |  |  |  |  | $       | 4,018,745  |       
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Accounts receivable               |                                                                                                         |                                            | 20,059      |           |           |  |  |  |  |         | 71,022     |       
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Interest receivable               |                                                                                                         |                                            | 5,891       |           |           |  |  |  |  |         | 2,342      |       
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Inventory                         |                                                                                                         |                                            | 1,379,262   |           |           |  |  |  |  |         | 1,295,416  |       
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Prepaid expenses                  |                                                                                                         |                                            | 26,046      |           |           |  |  |  |  |         | 12,933     |       
|                                                                                                                  |                                   |                                                                                                         |                                            |             |           |           |  |  |  | 
|                                                                                                                  |                                   |                                                                                                         | Total Current Assets                       |             |           | 6,496,538 |  |  |  |  |         |            |        | 5,400,458 | 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|Property and Equipment:                                                                                          
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Leasehold improvements            |                                                                                                         |                                            | 17,202      |           |           |  |  |  |  |         | 17,202     |       
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Furniture and equipment           |                                                                                                         |                                            | 603,971     |           |           |  |  |  |  |         | 536,175    |       
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Less accumulated depreciation     |                                                                                                         |                                            | (272,295    | )         |           |  |  |  |  |         | (191,469   | )     
|                                                                                                                  |                                   |                                                                                                         |                                            |             |           |           |  |  |  | 
|                                                                                                                  |                                   |                                                                                                         | 348,878                                    |             |           |           |  |  |  |  | 361,908 |           
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|Patents, net of accumulated amortization of $33,505
and $28,405 at March 31, 2001 and June 30, 2000,
respectively |                                   |                                                                                                         | 11,900                                     |             |           |           |  |  |  |  | 17,000  |           
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|Other Assets                                                                                                      |                                   |                                                                                                         | 6,730                                      |             |           |           |  |  |  |  | 6,730   |           
|                                                                                                                  |                                   |                                                                                                         |                                            |             |           |           |  |  |  | 
|                                                                                                                  |                                   |                                                                                                         | Total Assets                               |             | $         | 6,864,046 |  |  |  |  |         |            | $      | 5,786,096 | 
|                                                                                                                  |                                   |                                                                                                         |                                            |             |           |           |  |  |  | 
|Liabilities and Shareholders Equity                                                                             
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|Current Liabilities:                                                                                             
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Accounts payable                  |                                                                                                         | $                                          | 228,431     |           |           |  |  |  |  | $       | 167,779    |       
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Accrued payroll and payroll taxes |                                                                                                         |                                            | 188,945     |           |           |  |  |  |  |         | 250,277    |       
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Other accrued expenses            |                                                                                                         |                                            | 30,563      |           |           |  |  |  |  |         | 2,857      |       
|                                                                                                                  |                                   |                                                                                                         |                                            |             |           |           |  |  |  | 
|                                                                                                                  |                                   |                                                                                                         | Total Current Liabilities                  |             |           | 447,939   |  |  |  |  |         |            |        | 420,913   | 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|Shareholders Equity:                                                                                            
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Preferred Stock, $.01 par value: 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  |                                   | Authorized shares5,000,000                                                                            
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  |                                   | Issued and outstanding sharesnone                                                                      |                                            |             |          |           |  |  |  |  |         |            |       |          
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Common Stock, $.01 par value:    
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  |                                   | Authorized shares25,000,000                                                                           
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  |                                   | Issued and outstanding shares5,684,328 and 5,173,697
at March 31, 2001 and June 30, 2000, respectively |                                            |             | 56,843    |           |  |  |  |  |         |            | 51,737 |          
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Additional paid-in capital        |                                                                                                         |                                            | 16,475,410  |           |           |  |  |  |  |         | 14,211,307 |       
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Deferred compensation             |                                                                                                         |                                            | (29,705     | )         |           |  |  |  |  |         | (83,210    | )     
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  | Accumulated deficit               |                                                                                                         |                                            | (10,086,441 | )         |           |  |  |  |  |         | (8,814,651 | )     
|                                                                                                                  |                                   |                                                                                                         |                                            |             |           |           |  |  |  | 
|                                                                                                                  |                                   |                                                                                                         | Total Shareholders Equity                 |             |           | 6,416,107 |  |  |  |  |         |            |        | 5,365,183 | 
|                                                                                                                  |                                   |                                                                                                         |                                            |             |           |           |  |  |  | 
|                                                                                                                  |                                   |                                                                                                         | Total Liabilities and Shareholders Equity |             | $         | 6,864,046 |  |  |  |  |         |            | $      | 5,786,096 | 
|                                                                                                                  |                                   |                                                                                                         |                                            |             |           |           |  |  |  | 

See accompanying notes.

3



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##### Table of Contents



Hypertension Diagnostics, Inc.








|                                      |                                     |                         |           |                    |           |   |                   |         |          |      |            |           |            |   |            |           |            |  
|------------------------------------- | ----------------------------------- | ----------------------- | --------- | ------------------ | --------- | - | ----------------- | ------- | -------- | ---- | ---------- | --------- | ---------- | - | ---------- | --------- | ---------- | -
|                                      |                                     |                         |           | Three Months Ended |           |   | Nine Months Ended |        
|                                      |                                     |                         |           | March 31           |           |   | March 31          |        
|                                      |                                     |                         |           |                    |           |   |                   |        
|                                      |                                     |                         |           | 2001               |           |   | 2000              |         |          | 2001 |            |           | 2000       |  
|                                      |                                     |                         |           |                    |           |   |                   |         |          |      |            |           |            |  
|Revenue:                             
|                                     
|                                     
|                                     
|                                     
|                                      | Equipment sales                     |                         | $         | 303,500            |           |   | $                 | 165,244 |          |      | $          | 1,956,804 |            |   | $          | 294,241   |           
|                                     
|                                     
|                                     
|                                     
|                                     
|Cost and Expenses:                   
|                                     
|                                     
|                                     
|                                     
|                                      | Cost of equipment sales             |                         |           | 64,250             |           |   |                   | 30,720  |          |      |            | 435,862   |            |   |            | 60,673    |           
|                                     
|                                     
|                                     
|                                     
|                                      | Research and development            |                         |           | 73,504             |           |   |                   | 111,413 |          |      |            | 204,208   |            |   |            | 339,371   |           
|                                     
|                                     
|                                     
|                                     
|                                      | Selling, general and administrative |                         |           | 968,011            |           |   |                   | 809,456 |          |      |            | 2,576,871 |            |   |            | 2,486,387 |           
|                                      |                                     |                         |           |                    |           |   |                   |         |          |      |            |          
|                                      |                                     | Total Cost and Expenses |           |                    | 1,105,765 |   |                   |         | 951,589  |      |            |           | 3,216,941  |   |            |           | 2,886,431  |  
|                                      |                                     |                         |           |                    |           |   |                   |         |          |      |            |          
|Operating Loss                        |                                     |                         | (802,265  | )                  |           |   | (786,345          | )       |          |      | (1,260,137 | )         |            |   | (2,592,190 | )        
|                                     
|                                     
|                                     
|                                     
|                                     
|Other Income:                        
|                                     
|                                     
|                                     
|                                     
|                                      | Interest income                     |                         |           | 45,136             |           |   |                   | 70,577  |          |      |            | 157,198   |            |   |            | 248,696   |           
|                                      |                                     |                         |           |                    |           |   |                   |         |          |      |            |          
|                                      |                                     | Net Loss                |           | $                  | (757,129  | ) |                   | $       | (715,768 | )    |            | $         | (1,102,939 | ) |            | $         | (2,343,494 | )
|                                      |                                     |                         |           |                    |           |   |                   |         |          |      |            |          
|                                     
|Basic and Dilutive Net Loss per Share |                                     | $                       | (.14      | )                  |           | $ | (.14              | )       |          | $    | (.21       | )         |            | $ | (.46       | )        
|                                     
|                                     
|                                     
|                                     
|Weighted Average Shares Outstanding   |                                     |                         | 5,318,060 |                    |           |   | 5,119,745         |         |          |      | 5,267,086  |           |            |   | 5,112,751  |          

See accompanying notes.

4



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##### Table of Contents



Hypertension Diagnostics, Inc.






|                                                                            |                                                             |                                                  |            |                   |            |   |            |        |            |  
|--------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------ | ---------- | ----------------- | ---------- | - | ---------- | ------ | ---------- | -
|                                                                            |                                                             |                                                  |            | Nine Months Ended |           
|                                                                            |                                                             |                                                  |            | March 31          |           
|                                                                            |                                                             |                                                  |            |                   |           
|                                                                            |                                                             |                                                  |            | 2001              |            |   | 2000       |       
|                                                                            |                                                             |                                                  |            |                   |            |   |            |       
|Operating Activities:                                                      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss                                                                    |                                                             | $                                                | (1,102,939 | )                 |            | $ | (2,343,494 | )     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Adjustments to reconcile net loss to net
cash used in operating activities:
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Value of stock options granted in lieu
of cash compensation |                                                  |            | 53,505            |            |   |            | 53,505 |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Depreciation                                                |                                                  |            | 80,826            |            |   |            | 73,832 |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Amortization                                                |                                                  |            | 5,100             |            |   |            | 5,100  |           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Change in operating assets and liabilities:                
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                             | Accounts receivable                              |            |                   | 50,963     |   |            |        | 20,681     |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                             | Interest receivable                              |            |                   | (3,549     | ) |            |        | 19,938     |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                             | Inventory                                        |            |                   | (108,632   | ) |            |        | (903,870   | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                             | Prepaid expenses                                 |            |                   | (13,113    | ) |            |        | (35,470    | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                             | Accounts payable                                 |            |                   | 60,652     |   |            |        | 143,680    |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                             | Accrued payroll and payroll taxes                |            |                   | (61,332    | ) |            |        | 20,209     |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                             | Other accrued expenses                           |            |                   | 27,706     |   |            |        | 1,334      |  
|                                                                            |                                                             |                                                  |            |                   |            |  
|                                                                            |                                                             | Net cash used in operating activities            |            |                   | (1,010,813 | ) |            |        | (2,944,555 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Investing Activities:                                                      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Purchase of property and equipment                                          |                                                             |                                                  | (43,010    | )                 |            |   | (74,765    | )     
|                                                                            |                                                             |                                                  |            |                   |            |  
|                                                                            |                                                             | Net cash used in investing activities            |            |                   | (43,010    | ) |            |        | (74,765    | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Financing Activities:                                                      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Issuance of Common Stock                                                    |                                                             |                                                  | 2,100,358  |                   |            |   | 128,924    |       
|                                                                            |                                                             |                                                  |            |                   |            |  
|                                                                            |                                                             | Net cash provided by financing activities        |            |                   | 2,100,358  |   |            |        | 128,924    |  
|                                                                            |                                                             |                                                  |            |                   |            |  
|Net increase (decrease) in cash and cash equivalents                        |                                                             |                                                  | 1,046,535  |                   |            |   | (2,890,396 | )     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                             | Cash and cash equivalents at beginning of period |            |                   | 4,018,745  |   |            |        | 7,684,525  |  
|                                                                            |                                                             |                                                  |            |                   |            |  
|Cash and cash equivalents at end of period                                  |                                                             | $                                                | 5,065,280  |                   |            | $ | 4,794,129  |       
|                                                                            |                                                             |                                                  |            |                   |            |  

See accompanying notes.

5



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##### Table of Contents






March 31, 2001



|1. |  | Interim Financial Information
|-- |  | -----------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and do not include all
the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, these unaudited financial statements reflect all adjustments,
consisting only of normal and recurring adjustments necessary for a fair
presentation of the financial statements. The results of operations for
the three months and nine months ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the full year ending
June 30, 2001. The June 30, 2000 balance sheet was derived from audited
financial statements. For further information, refer to the financial
statements and notes included in the Companys Annual Report on Form
10-KSB for the fiscal year ended June 30, 2000, as amended. The policies
described in that report are used for preparing quarterly reports.



|2. |  | Shareholders Equity
|-- |  | --------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In July and August 1998, the Company raised $9,188,414 (net of
underwriting discounts and offering expenses), through an initial public
offering of 2,587,500 units (which included 337,500 additional units to
cover over-allotments) at $4.125 per unit. Each unit consists of one
share of Common Stock and one Redeemable Class A Warrant (the Class A
Warrant) which entitled the holder to purchase one share of Common Stock
at an exercise price of $5.50 per Warrant, subject to adjustment. The
Class A Warrant Agreement was amended as of January 23, 2001 to reduce
the exercise price of the Class A Warrant from $5.50 to $5.15 per share
of Common Stock issuable upon exercise of the Class A Warrant. The Class
A Warrants are subject to redemption by the Company for $.01 per Warrant
at any time commencing 90 days after the Effective Date (July 23, 1998),
provided that the closing bid price of the Companys Common Stock exceeds
$6.50 (subject to adjustment) for 14 consecutive trading days. Written
notice must precede redemption by 30 days and must be sent within 10
business days of the 14 consecutive trading day period. The Class A
Warrants expire on July 22, 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 23, 2001, the Company commenced an offering of up to 2,752,192
Redeemable Class B Warrants enabling holders to purchase one share of its
$.01 par value Common Stock (the Class B Warrants). As an incentive to
exercise its outstanding Class A Warrants, the Company offered the Class B
Warrants to those holders of the Class A Warrants who properly exercised a
Class A Warrant in the offering period. The offering period began January
23, 2001 and expired at 5:00 p.m. Central Time, March 26, 2001. The
Company raised $1,964,372 (net of offering expenses of $73,061) in
connection with the offering of the Class B Warrants and the exercise of
395,618 Class A Warrants at $5.15 per share of Common Stock and issued
395,618 Class B Warrants. On March 23, 2001, the Company announced that
effective that day the exercise price of the Class B Warrants had been
reduced from $9.00 to $5.85 per share of Common Stock issuable upon
exercise of the Class B Warrant. The Class B Warrants expire on January
23, 2006. The Class B Warrants are redeemable by the Company for $.01 per
Class B Warrant at any time the closing bid price of its Common Stock
exceeds $13.50 (subject to adjustment) for 5 consecutive trading days, as
reported by The Nasdaq SmallCap Market. The Class B Warrants were
approved for listing by The Nasdaq SmallCap Market and began trading on
March 7, 2001 on The Nasdaq SmallCap Market under the symbol HDIIZ.

6



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. In addition, we may make
forward-looking statements orally in the future by or on behalf of the Company.
When used, the words believe, expect, will, can, estimate,
anticipate and similar expressions are intended to identify forward-looking
statements. We wish to caution readers not to place undue reliance on any
forward-looking statements and to recognize that the statements are not
predictions of actual future results. Actual results could differ materially
from those anticipated in the forward-looking statements due to the risks and
uncertainties set forth in our 2000 Annual Report on Form 10-KSB under the
caption Risk Factors, as well as others not now anticipated. These risks and
uncertainties include, without limitation, our ability to generate revenue; our
need for additional capital; the availability of third-party reimbursements;
market acceptance of our products; the ability to operate and maintain the
Central Data Management Facility (CDMF) on a commercial scale; regulatory
restrictions pertaining to data privacy issues in utilizing the CDMF; the
ability to manufacture our products on a commercial scale and in compliance
with regulatory requirements; the availability of integral components for our
products; our ability to develop distribution channels; increased competition;
changes in government regulation; health care reforms; exposure to potential
product liability; and our ability to protect our proprietary technology. We
undertake no responsibility to update any forward-looking statement.

Forward-looking statements involve risks and uncertainties, including
those discussed under Risk Factors, that could cause actual results to differ
materially from those anticipated. Because actual results may differ, readers
are cautioned not to place undue reliance on these forward-looking statements.

Overview

We are engaged in the design, development, manufacture and marketing of
proprietary medical devices that we believe non-invasively detect subtle
changes in the elasticity of large and small arteries. Vascular compliance or
arterial elasticity has been investigated for many years and clinical studies
suggest that a lack of arterial elasticity is an early indicator of vascular
disease. We are currently marketing two versions of our Product: the
HDI/PulseWave CR-2000 Research CardioVascular Profiling System and
the CVProfilor DO-2020 CardioVascular Profiling System. Further, we
intend to market a third version, the CVProfilor MD-3000
CardioVascular Profiling System. The CR-2000 Research System is being marketed
worldwide, has a CE Mark (CE0123) which allows it to be marketed as a medical
device in the European Union and is being marketed for research purposes only
in the United States (that is, not for screening, diagnosing, monitoring or
determining treatment of patients). The CVProfilor DO-2020 System,
intended for use by United States physicians to screen patients for the
presence of underlying vascular disease, is an FDA regulated medical device.
On November 2, 2000, we obtained FDA approval to market the
CVProfilor DO-2020 System and while we expect the
CVProfilor DO-2020 System to generate the majority of our revenues
in the future, to date, it has not yet generated any revenues. The
CVProfilor DO-2020 System is being marketed to primary care
physicians and other health care professionals on a per-patient-tested rental
basis. Utilizing our Central Data Management System (the CDMF), we are able
to track telephonically utilization of the CVProfilor DO-2020 System
in each physicians clinic and to invoice our physician customers on the number
of CardioVascular Profile Reports they generate in their clinics each month.
We anticipate that marketing the CVProfilor DO-2020 System under a
per-patient-tested rental program (as opposed to a capital sale) will allow
us to accelerate the rate of Product acceptance in the medical marketplace and
allow physician usage fees to eventually generate the majority of our revenues.
The CVProfilor MD-3000 System will provide physicians outside the
United States with key cardiovascular parameters, which we believe will provide
clinically beneficial information useful in screening patients who may be
at risk for future cardiovascular disease and in monitoring the effectiveness
of treatment of patients with

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previously diagnosed cardiovascular disease. The
CVProfilor MD-3000 System requires that we obtain a CE Mark in order
for it to be marketed inside the European Union and will require regulatory
approval to be marketed in Japan and China.

Results of Operations

As of March 31, 2001, we had an accumulated deficit of $(10,086,441),
attributable primarily to research and development and general and
administrative expenses. Until we are able to generate significant revenues
from our activities, we expect to continue to incur operating losses.

Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000

For the three months ended March 31, 2001 and 2000, we recorded revenue of
$303,500 and $165,244, respectively, relating to sales of the
HDI/PulseWave CR-2000 Research CardioVascular Profiling System.

Total cost and expenses for the three months ended March 31, 2001 were
$1,105,765 compared to $951,589 for the three months ended March 31, 2000.
Approximately 7% of the $1,105,765 and 12% of the $951,589 total cost and
expenses were related to research and development expenses. A further
breakdown of research and development expenses is as follows:

|                                                                                             |                                         |   |                    |        |  |      |        |         | 
|-------------------------------------------------------------------------------------------- | --------------------------------------- | - | ------------------ | ------ |  | ---- | ------ | ------- | 
|                                                                                             |                                         |   | Three Months Ended |       
|                                                                                             |                                         |   | March 31           |       
|                                                                                             |                                         |   |                    |       
|                                                                                             |                                         |   | 2001               |        |  | 2000 |       
|                                                                                             |                                         |   |                    |        |  |      |       
|Design and development of prototype devices and other
enhancements and improvements          |                                         | $ | 55,669             |        |  | $    | 93,578 |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Recognized compensation cost for value of stock options
granted in lieu of cash compensation |                                         |   | 17,835             |        |  |      | 17,835 |        
|                                                                                             |                                         |   |                    |        |  |     
|                                                                                             | Total research and development expenses |   | $                  | 73,504 |  |      | $      | 111,413 | 
|                                                                                             |                                         |   |                    |        |  |     

The following is a summary of the major categories included in selling,
general and administrative expenses:

|                                                             |                                                    |   |                    |         |  |      |         |         | 
|------------------------------------------------------------ | -------------------------------------------------- | - | ------------------ | ------- |  | ---- | ------- | ------- | 
|                                                             |                                                    |   | Three Months Ended |        
|                                                             |                                                    |   | March 31           |        
|                                                             |                                                    |   |                    |        
|                                                             |                                                    |   | 2001               |         |  | 2000 |        
|                                                             |                                                    |   |                    |         |  |      |        
|Wages, related expenses and benefits                         |                                                    | $ | 233,746            |         |  | $    | 275,701 |        
|                                                            
|                                                            
|                                                            
|                                                            
|Patents and related expenses                                 |                                                    |   | 17,577             |         |  |      | 19,469  |        
|                                                            
|                                                            
|                                                            
|                                                            
|Outside consultants                                          |                                                    |   | 50,130             |         |  |      | 73,442  |        
|                                                            
|                                                            
|                                                            
|                                                            
|Rent-building and utilities                                  |                                                    |   | 24,374             |         |  |      | 21,855  |        
|                                                            
|                                                            
|                                                            
|                                                            
|Insurance-general and directors/officers liability           |                                                    |   | 14,348             |         |  |      | 12,737  |        
|                                                            
|                                                            
|                                                            
|                                                            
|Selling, marketing and promotion, including applicable wages |                                                    |   | 432,698            |         |  |      | 246,501 |        
|                                                            
|                                                            
|                                                            
|                                                            
|Royalties                                                    |                                                    |   | 9,105              |         |  |      | 4,957   |        
|                                                            
|                                                            
|                                                            
|                                                            
|Depreciation and amortization                                |                                                    |   | 29,356             |         |  |      | 27,086  |        
|                                                            
|                                                            
|                                                            
|                                                            
|Other-general and administrative                             |                                                    |   | 156,677            |         |  |      | 127,708 |        
|                                                             |                                                    |   |                    |         |  |     
|                                                             | Total selling, general and administrative expenses |   | $                  | 968,011 |  |      | $       | 809,456 | 
|                                                             |                                                    |   |                    |         |  |     

Selling, marketing and promotion expense increased from $246,501 for the
three months ended March 31, 2000 to $432,698 for the three months ended March
31, 2001. This category includes

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wages and commissions paid by us relating to
our sales and marketing efforts as well as travel and convention expenses.

Interest income was $45,136 and $70,577 for the three months ended March
31, 2001 and 2000, respectively.

Net loss was $(757,129) for the three months ended March 31, 2001 compared
to a net loss of $(715,768) for the three months ended March 31, 2000. For the
three months ended March 31, 2001, basic and dilutive net loss per share was
$(.14), based on weighted average shares outstanding of 5,318,060. For the
three months ended March 31, 2000, basic and dilutive net loss per share was
$(.14), based on weighted average shares outstanding of 5,119,745.

Nine Months Ended March 31, 2001 Compared to Nine Months Ended March 31, 2000

Revenue was $1,956,804 and $294,241 for the nine months ended March 31,
2001 and 2000, respectively. This revenue related to sales of the
HDI/PulseWave CR-2000 Research CardioVascular Profiling System.

Total cost and expenses for the nine months ended March 31, 2001 were
$3,216,941 compared to $2,886,431 for the nine months ended March 31, 2000.
Approximately 6% of the $3,216,941 and 12% of the $2,886,431 total cost and
expenses were related to research and development expenses. A further
breakdown of research and development expenses is as follows:

|                                                                                             |                                         |   |                   |         |  |      |         |         | 
|-------------------------------------------------------------------------------------------- | --------------------------------------- | - | ----------------- | ------- |  | ---- | ------- | ------- | 
|                                                                                             |                                         |   | Nine Months Ended |        
|                                                                                             |                                         |   | March 31          |        
|                                                                                             |                                         |   |                   |        
|                                                                                             |                                         |   | 2001              |         |  | 2000 |        
|                                                                                             |                                         |   |                   |         |  |      |        
|Design and development of prototype devices and other
enhancements and improvements          |                                         | $ | 150,703           |         |  | $    | 285,866 |        
|                                                                                            
|                                                                                            
|                                                                                            
|                                                                                            
|Recognized compensation cost for value of stock options
granted in lieu of cash compensation |                                         |   | 53,505            |         |  |      | 53,505  |        
|                                                                                             |                                         |   |                   |         |  |     
|                                                                                             | Total research and development expenses |   | $                 | 204,208 |  |      | $       | 339,371 | 
|                                                                                             |                                         |   |                   |         |  |     

The following is a summary of the major categories included in selling, general
and administrative expenses:

|                                                             |                                                    |   |                   |           |  |      |         |           |  |  |  |  |  |  |  |  | 
|------------------------------------------------------------ | -------------------------------------------------- | - | ----------------- | --------- |  | ---- | ------- | --------- |  |  |  |  |  |  |  |  | 
|                                                             |                                                    |   | Nine Months Ended |          
|                                                             |                                                    |   | March 31          |          
|                                                             |                                                    |   |                   |          
|                                                             |                                                    |   | 2001              |           |  | 2000 |        
|                                                             |                                                    |   |                   |           |  |      |        
|Wages, related expenses and benefits                         |                                                    | $ | 689,464           |           |  | $    | 814,044 |          
|                                                            
|                                                            
|                                                            
|                                                            
|Patents and related expenses                                 |                                                    |   | 53,030            |           |  |      | 63,435  |          
|                                                            
|                                                            
|                                                            
|                                                            
|Outside consultants                                          |                                                    |   | 121,485           |           |  |      | 267,963 |          
|                                                            
|                                                            
|                                                            
|                                                            
|Rent-building and utilities                                  |                                                    |   | 69,547            |           |  |      | 66,246  |          
|                                                            
|                                                            
|                                                            
|                                                            
|Insurance-general and directors/officers liability           |                                                    |   | 40,829            |           |  |      | 36,332  |          
|                                                            
|                                                            
|                                                            
|                                                            
|Selling, marketing and promotion, including applicable wages |                                                    |   | 1,026,985         |           |  |      | 763,451 |          
|                                                            
|                                                            
|                                                            
|                                                            
|Royalties                                                    |                                                    |   | 58,704            |           |  |      | 8,827   |          
|                                                            
|                                                            
|                                                            
|                                                            
|Depreciation and amortization                                |                                                    |   | 85,926            |           |  |      | 78,932  |          
|                                                            
|                                                            
|                                                            
|                                                            
|Other-general and administrative                             |                                                    |   | 430,901           |           |  |      | 387,157 |          
|                                                             |                                                    |   |                   |           |  |     
|                                                             | Total selling, general and administrative expenses |   | $                 | 2,576,871 |  |      | $       | 2,486,387 | 
|                                                             |                                                    |   |                   |           |  |     

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Selling, marketing and promotion expense increased from $763,451 for the
nine months ended March 31, 2000 to $1,026,985 for the nine months ended March
31, 2001. This category includes wages and commissions paid by us relating to
our sales and marketing efforts as well as travel and convention expenses.

Interest income was $157,198 and $248,686 for the nine months ended March
31, 2001 and 2000, respectively.

Net loss was $(1,102,939) and $(2,343,494) for the nine months ended March
31, 2001 and 2000, respectively. For the nine months ended March 31, 2001,
basic and dilutive net loss per share was $(.21), based on weighted average
shares outstanding of 5,267,086. For the nine months ended March 31, 2000,
basic and dilutive net loss per share was $(.46), based on weighted average
shares outstanding of 5,112,751.

Liquidity and Capital Resources

Cash and cash equivalents had a net increase of $1,046,535 for the nine
months ended March 31, 2001. The significant elements of this change were as
follows: net cash used in operating activities net loss, as adjusted for
non-cash items, of $963,508; decrease in accounts receivable  $50,963;
increase in inventory  $108,632; net cash provided by financing activities
issuance of Common Stock  $2,100,358. For the nine months ended March 31,
2000, cash and cash equivalents had a net decrease of $2,890,396. The
significant elements of this change were as follows: net cash used in operating
activities net loss, as adjusted for non-cash items, of $(2,211,057);
increase in inventory -$903,870; increase in accounts payable  $143,680; net
cash provided by financing activities issuance of Common Stock  $128,924.

In July 1998, we completed our initial public offering (IPO) in which we
sold 2,250,000 units at $4.125 per unit, each unit consisting of one share of
Common Stock and one Redeemable Class A Warrant (the Class A Warrants). In
August 1998, the underwriter exercised in full an overallotment option to
purchase an additional 337,500 units. Total net proceeds from the IPO were
$9,188,414. On January 23, 2001, we commenced an offering of up to 2,752,192
Redeemable Class B Warrants enabling holders to purchase one share of our $.01
par value Common Stock (the Class B Warrants). As an incentive to exercise
our outstanding Class A Warrants, we offered the Class B Warrants to those
holders of the Class A Warrants who properly exercised a Class A Warrant in the
offering period. The offering period began January 23, 2001, and expired at
5:00 p.m. Central Time, March 26, 2001. We raised $1,964,372 (net of offering
expenses of $73,061) in connection with the offering of the Class B Warrants
and the exercise of 395,618 Class A Warrants at $5.15 per share of Common Stock
and issued 395,618 Class B Warrants. On March 23, 2001, we announced that
effective that day the exercise price of the Class B Warrants had been reduced
from $9.00 to $5.85 per share of Common Stock issuable upon exercise of the
Class B Warrant. The Class B Warrants expire on January 23, 2006. The Class B
Warrants are redeemable by us for $.01 per Class B Warrant at any time the
closing bid price of our Common Stock exceeds $13.50 (subject to adjustment)
for 5 consecutive trading days, as reported by The Nasdaq SmallCap Market. The
Class B Warrants were approved for listing by The Nasdaq SmallCap Market and
began trading on March 7, 2001 under the symbol HDIIZ. As of March 31, 2001,
we have cash and cash equivalents of $5,065,280, and anticipate that these
funds should allow us to pursue the different elements of our business
development strategy for at least the next 9 months. Our business plan and
financing needs are subject to change depending on, among other things, market
conditions, timing of our marketing efforts regarding the CVProfilor
DO-2020 System, business
opportunities and cash flow from operations. Pending application of the
net proceeds, such proceeds will be invested in short-term, high quality,
interest-bearing instruments.

Although not assured, in addition to the net proceeds from the IPO, we may
derive over a period of time up to $12,136,356 from the exercise of the
2,356,574 Redeemable Class A Warrants currently

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outstanding. Each Redeemable
Class A Warrant entitles the holder to purchase one share of our Common Stock
at an exercise price of $5.15 per Warrant, subject to adjustment. The
Redeemable Class A Warrants are subject to redemption by us for $.01 per
Warrant at any time commencing October 21, 1998, provided that the closing bid
price of our Common Stock exceeds $6.50 (subject to adjustment) for 14
consecutive trading days. The Redeemable Class A Warrants expire on July 22,
2002. The amounts, if any, that we derive from the exercise of such Redeemable
Class A Warrants will be used in connection with our development opportunities,
business plan activities and/or working capital requirements.









Item 2. Changes in Securities

Modification to Registered Securities

Modifications to Redeemable Class A Warrant

Each Redeemable Class A Warrant (the Class A Warrant) entitles a Class A
Warrant holder to receive, upon proper exercise, a share of our $.01 par value
Common Stock. On January 23, 2001, we commenced an offering of 2,752,192
Redeemable Class B Warrants (the Class B Warrant) to the holders of our Class
A Warrants. Those Class A Warrant holders who properly exercised their Class A
Warrant during the offering period would also receive, for no additional
consideration, a Class B Warrant for each share of our Common Stock issuable
upon the exercise of the Class A Warrant. The offering period began January
23, 2001 and expired at 5:00 p.m. Central Time, March 26, 2001.

In connection with the offering, on January 24, 2001, we reduced the
exercise price of our Class A Warrants from $5.50 to $5.15 per share of Common
Stock issuable upon exercise. This reduction was effective as of January 24,
2001 and continues in effect until the expiration of the Class A Warrant.

Modification to Redeemable Class B Warrant

On March 13, 2001, we reduced the exercise price of the Class B Warrant
from $9.00 to $5.85 per share of Common Stock issuable upon exercise. This
reduction was effective March 13, 2001 and continues in effect until the
expiration of the Class B Warrant.

Use of Proceeds

The following table sets forth our use of the net proceeds from our
initial public offering, from July 28, 1998 through March 31, 2001:

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|                                                         |                                                           |   |           |           | 
|-------------------------------------------------------- | --------------------------------------------------------- | - | --------- | --------- | 
|Temporary investments (U.S. Government obligations/notes
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | and U.S. Government money market funds; other short-term,
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | high quality, interest-bearing instruments)               |   | $         | 1,497,463 | 
|                                                        
|                                                        
|                                                        
|                                                        
|Central Data Management Facility                         |                                                           |   | 318,194   |          
|                                                        
|                                                        
|                                                        
|                                                        
|Purchase of property and equipment                       |                                                           |   | 446,273   |          
|                                                        
|                                                        
|                                                        
|                                                        
|Selling, marketing and promotion                         |                                                           |   | 2,221,577 |          
|                                                        
|                                                        
|                                                        
|                                                        
|Wages, related expenses and benefits                     |                                                           |   | 2,308,003 |          
|                                                        
|                                                        
|                                                        
|                                                        
|Outside consultants                                      |                                                           |   | 570,742   |          
|                                                        
|                                                        
|                                                        
|                                                        
|Inventory                                                |                                                           |   | 1,826,162 |          
|                                                         |                                                           |   |           |          
|                                                         |                                                           | $ | 9,188,414 |          
|                                                         |                                                           |   |           |          

During the offering period of January 23, 2001 through March 26, 2001, we
received net proceeds of $1,964,372 from our offering of Redeemable Class B
Warrants to certain holders of our Class A Warrants.




Item 6. Exhibits and Reports on Form 8-K

(a) The following Exhibits are furnished pursuant to Item 601 of Regulation
S-B:



| | None
| | ----

(b) Reports on Form 8-K.

The Company filed a Current Report on Form 8-K on January 24, 2001 (File
No. 0-24635) regarding the reduction of the exercise price of its outstanding
Redeemable Class A Warrant from $5.50 to $5.15 per share of Common Stock
issuable upon exercise of the Redeemable Class A Warrant. This reduction was
in connection with the Companys offering of 2,752,192 Redeemable Class B
Warrants as described in the Companys Registration Statement on Form S-3 (File
No. 333-53200), as filed on January 4, 2001 and as subsequently amended, which
was declared effective by the U.S. Securities and Exchange Commission at 5:30
p.m. Washington D.C. time, January 23, 2001.

The Company filed a Current Report on Form 8-K on March 6, 2001 (File No.
0-24635) regarding the receipt of approval by The Nasdaq SmallCap Market for
the listing of its Redeemable Class B Warrants on The Nasdaq SmallCap Market.

The Company filed a Current Report on Form 8-K on March 13, 2001 (File No.
0-24635) regarding the reduction of the exercise price of the Companys
Redeemable Class B Warrant from $9.00 to $5.85 per share of Common Stock
issuable upon exercise of the Redeemable Class B Warrant.

The Company filed a Current Report on Form 8-K on March 30, 2001 (File No.
0-24635) regarding the exercise of 395,618 Redeemable Class A Warrants and the
issuance of 395,618 Redeemable Class B Warrants, resulting in gross proceeds of
$2,037,433 to the Company.

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In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | HYPERTENSION DIAGNOSTICS, INC.                                                                                                                    
|
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| | By /s/ James S. Murphy
James S. Murphy
Senior Vice President, Finance and
Administration and Chief Financial
Officer
(principal financial officer)

Date: May 14, 2001

13