##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2003

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 x |  | No o

The number of shares of Common Stock outstanding as of January 31, 2004 was
22,940,390.

Transitional Small Business Disclosure Format:

|      |  |     
|----- |  | ----
|Yes o |  | No x

1



---

TABLE OF CONTENTS



|                                                 |                                                                                               |                               |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                   
|                                                 | Item 1. Financial Statements                                                                 
|                                                 |                                                                                               | Balance Sheets               
|                                                 |                                                                                               | Statements of Operations     
|                                                 |                                                                                               | Statements of Cash Flows     
|                                                 |                                                                                               | Notes to Financial Statements
|                                                 | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                      
|                                                 | Item 2. Changes in Securities                                                                
|                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                 | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                      
|Certification of Chief Executive Officer        
|Certification of Chief Financial Officer        
|Certification Pursuant to 18 U.S.C. Section 1350



---



##### Table of Contents



HYPERTENSION DIAGNOSTICS, INC.

INDEX TO FORM 10-QSB

|                               |                                                                                               |                                                                                         |    |          |   | 
|------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | -- | -------- | - | 
|                               |                                                                                               |                                                                                         |    | Page No.
|                               |                                                                                               |                                                                                         |    |         
|PART I. FINANCIAL INFORMATION: |                                                                                               |                                                                                         |    |         
|                               | Item 1. Financial Statements                                                                  |                                                                                         |    | 3        |  
|                               |                                                                                               | Balance Sheets  December 31, 2003 and June 30, 2003                                    |    |          | 3 | 
|                               |                                                                                               | Statements of Operations  Three Months and Six Months Ended
December 31, 2003 and 2002 |    |          | 4 | 
|                               |                                                                                               | Statements of Cash Flows  Six Months Ended
December 31, 2003 and 2002                  |    |          | 5 | 
|                               |                                                                                               | Notes to Financial Statements                                                           |    |          | 6 | 
|                               | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                         |    | 11       |  
|                               | Item 4. Controls and Procedures                                                               |                                                                                         |    | 22       |  
|PART II. OTHER INFORMATION:    |                                                                                               |                                                                                         |    |         
|                               | Item 2. Changes in Securities                                                                 |                                                                                         |    | 23       |  
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                         |    | 23       |  
|                               | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                         |    | 23       |  
|SIGNATURES                     |                                                                                               |                                                                                         | 24 |         
|CERTIFICATIONS                 |                                                                                               |                                                                                         | 25 |         

2



---



##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements

Hypertension Diagnostics, Inc.




Balance Sheets

|                                     |                                                       |                                                                                                              |                                            |             |              |           |          |             |         |           | 
|------------------------------------ | ----------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ----------- | ------------ | --------- | -------- | ----------- | ------- | --------- | 
|                                     |                                                       |                                                                                                              |                                            |             | December 31, |           | June 30,
|                                     |                                                       |                                                                                                              |                                            |             | 2003         |           | 2003    
|                                     |                                                       |                                                                                                              |                                            |             |              |           |         
|Assets                               |                                                       |                                                                                                              |                                            |             |              |           |          |            
|Current Assets:                      |                                                       |                                                                                                              |                                            |             |              |           |          |            
|                                     | Cash and cash equivalents                             |                                                                                                              | $                                          | 1,078,381   |              |           | $        | 90,335      |        
|                                     | Accounts receivable                                   |                                                                                                              |                                            | 94,242      |              |           |          | 124,351     |        
|                                     | Interest receivable                                   |                                                                                                              |                                            | 19,996      |              |           |          | 14,710      |        
|                                     | Inventory, net                                        |                                                                                                              |                                            | 260,799     |              |           |          | 333,241     |        
|                                     | Prepaids and other current assets                     |                                                                                                              |                                            | 91,996      |              |           |          | 39,876      |        
|                                     |                                                       |                                                                                                              |                                            |             |              |           |          |            
|                                     |                                                       |                                                                                                              | Total Current Assets                       |             |              | 1,545,414 |          |             |         | 602,513   | 
|Property and Equipment:              |                                                       |                                                                                                              |                                            |             |              |           |          |            
|                                     | Leasehold improvements                                |                                                                                                              |                                            | 17,202      |              |           |          | 17,202      |        
|                                     | Furniture and equipment                               |                                                                                                              |                                            | 1,256,950   |              |           |          | 1,222,169   |        
|                                     | Less accumulated depreciation                         |                                                                                                              |                                            | (824,582    | )            |           |          | (722,712    | )      
|                                     |                                                       |                                                                                                              |                                            |             |              |           |          |            
|                                     |                                                       |                                                                                                              | 449,570                                    |             |              |           | 516,659  |            
|Prepaid Offering Expenses            |                                                       |                                                                                                              | 37,256                                     |             |              |           | 29,002   |            
|Other Assets                         |                                                       |                                                                                                              | 6,730                                      |             |              |           | 6,730    |            
|                                     |                                                       |                                                                                                              |                                            |             |              |           |          |            
|                                     |                                                       |                                                                                                              | Total Assets                               |             | $            | 2,038,970 |          |             | $       | 1,154,904 | 
|                                     |                                                       |                                                                                                              |                                            |             |              |           |          |            
|Liabilities and Shareholders Equity |                                                       |                                                                                                              |                                            |             |              |           |          |            
|Current Liabilities:                 |                                                       |                                                                                                              |                                            |             |              |           |          |            
|                                     | Accounts payable                                      |                                                                                                              | $                                          | 73,650      |              |           | $        | 101,821     |        
|                                     | Accrued payroll and payroll taxes                     |                                                                                                              |                                            | 401,578     |              |           |          | 251,773     |        
|                                     | Convertible notes payable                             |                                                                                                              |                                            |            |              |           |          | 481,492     |        
|                                     | Deferred revenue                                      |                                                                                                              |                                            |            |              |           |          | 153,553     |        
|                                     | Other accrued expenses                                |                                                                                                              |                                            | 27,522      |              |           |          | 43,910      |        
|                                     |                                                       |                                                                                                              |                                            |             |              |           |          |            
|                                     |                                                       |                                                                                                              | Total Current Liabilities                  |             |              | 502,750   |          |             |         | 1,032,549 | 
|Shareholders Equity:                |                                                       |                                                                                                              |                                            |             |              |           |          |            
|                                     | Series A Convertible Preferred Stock, $.01 par value: |                                                                                                              |                                            |             |              |           |          |             |        
|                                     |                                                       | Authorized shares5,000,000                                                                                  |                                            |             |              |           |          |             |         |          
|                                     |                                                       | Issued and outstanding shares585,980 and -0-
at December 31, 2003 and June 30, 2003, respectively           |                                            |             | 5,860        |           |          |             |        |          
|                                     | Common Stock, $.01 par value:                         |                                                                                                              |                                            |             |              |           |          |             |        
|                                     |                                                       | Authorized shares150,000,000                                                                                |                                            |             |              |           |          |             |         |          
|                                     |                                                       | Issued and outstanding shares22,940,390 and 10,291,088
at December 31, 2003 and June 30, 2003, respectively |                                            |             | 229,404      |           |          |             | 102,911 |          
|                                     | Additional paid-in capital                            |                                                                                                              |                                            | 23,713,225  |              |           |          | 21,429,844  |        
|                                     | Accumulated deficit                                   |                                                                                                              |                                            | (22,412,269 | )            |           |          | (21,410,400 | )      
|                                     |                                                       |                                                                                                              |                                            |             |              |           |          |            
|                                     |                                                       |                                                                                                              | Total Shareholders Equity                 |             |              | 1,536,220 |          |             |         | 122,355   | 
|                                     |                                                       |                                                                                                              |                                            |             |              |           |          |            
|                                     |                                                       |                                                                                                              | Total Liabilities and Shareholders Equity |             | $            | 2,038,970 |          |             | $       | 1,154,904 | 
|                                     |                                                       |                                                                                                              |                                            |             |              |           |          |            

See accompanying notes.

3



---



##### Table of Contents



Hypertension Diagnostics, Inc.




Statements of Operations

|                                     |                                     |   |                |         |                    |          |                  |           |      |           |            |           |   |            |            |           |   |            |  
|------------------------------------ | ----------------------------------- | - | -------------- | ------- | ------------------ | -------- | ---------------- | --------- | ---- | --------- | ---------- | --------- | - | ---------- | ---------- | --------- | - | ---------- | -
|                                     |                                     |   |                |         | Three Months Ended |          | Six Months Ended
|                                     |                                     |   |                |         | December 31        |          | December 31     
|                                     |                                     |   |                |         |                    |          |                 
|                                     |                                     |   |                |         | 2003               |          | 2002             |           | 2003 |           | 2002      
|                                     |                                     |   |                |         |                    |          |                  |           |      |           |           
|Revenue:                             |                                     |   |                |         |                    |          |                  |           |      |           |            |           |   |            |            |          
|                                     | Equipment sales                     |   | $              | 63,500  |                    |          | $                | 121,688   |      |           | $          | 137,245   |   |            | $          | 150,388   |  
|                                     | Equipment rental                    |   |                | 101,924 |                    |          |                  | 88,650    |      |           |            | 191,820   |   |            |            | 161,595   |  
|                                     | Service/contract income             |   |                | 68,297  |                    |          |                  | 17,416    |      |           |            | 153,554   |   |            |            | 34,833    |  
|                                     |                                     |   |                |         |                    |          |                  |           |      |           |            |           |   |            |            |          
|                                     |                                     |   | 233,721        |         |                    |          | 227,754          |           |      |           | 482,619    |           |   |            | 346,816    |          
|Cost of Sales                        |                                     |   | 38,503         |         |                    |          | 37,627           |           |      |           | 84,996     |           |   |            | 53,357     |          
|                                     |                                     |   |                |         |                    |          |                  |           |      |           |            |           |   |            |            |          
|                                     |                                     |   | Gross Profit   |         |                    | 195,218  |                  |           |      | 190,127   |            |           |   | 397,623    |            |           |   | 293,459    |  
|Expenses:                            |                                     |   |                |         |                    |          |                  |           |      |           |            |           |   |            |            |          
|                                     | Selling, general and administrative |   |                | 749,375 |                    |          |                  | 1,034,789 |      |           |            | 1,364,849 |   |            |            | 2,031,982 |  
|                                     |                                     |   |                |         |                    |          |                  |           |      |           |            |           |   |            |            |          
|                                     |                                     |   | Total Expenses |         |                    | 749,375  |                  |           |      | 1,034,789 |            |           |   | 1,364,849  |            |           |   | 2,031,982  |  
|                                     |                                     |   |                |         |                    |          |                  |           |      |           |            |           |   |            |            |          
|Operating Loss                       |                                     |   | (554,157       | )       |                    |          | (844,662         | )         |      |           | (967,226   | )         |   |            | (1,738,523 | )        
|Other Income (Expense):              |                                     |   |                |         |                    |          |                  |           |      |           |            |           |   |            |            |          
|                                     | Interest income                     |   |                | 9,473   |                    |          |                  | 6,503     |      |           |            | 15,542    |   |            |            | 13,132    |  
|                                     | Interest expense                    |   |                |        |                    |          |                  | (63,170   | )    |           |            | (50,185   | ) |            |            | (152,689  | )
|                                     |                                     |   |                |         |                    |          |                  |           |      |           |            |           |   |            |            |          
|                                     |                                     |   | 9,473          |         |                    |          | (56,667          | )         |      |           | (34,643    | )         |   |            | (139,557   | )        
|                                     |                                     |   |                |         |                    |          |                  |           |      |           |            |           |   |            |            |          
|                                     |                                     |   | Net Loss       |         | $                  | (544,684 | )                |           | $    | (901,329  | )          |           | $ | (1,001,869 | )          |           | $ | (1,878,080 | )
|                                     |                                     |   |                |         |                    |          |                  |           |      |           |            |           |   |            |            |          
|Basic and Diluted Net Loss per Share |                                     | $ | (.02           | )       |                    | $        | (.12             | )         |      | $         | (.05       | )         |   | $          | (.26       | )        
|Weighted Average Shares Outstanding  |                                     |   | 22,940,145     |         |                    |          | 7,416,964        |           |      |           | 18,908,475 |           |   |            | 7,091,543  |          

See accompanying notes.

4



---



##### Table of Contents



Hypertension Diagnostics, Inc.




Statements of Cash Flows

|                                                                            |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |         |         |            |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------- | ------------------------------------------------ | ------- | ---------------- | --------- | - |  |  | - | ---------- | ------- | ------- | ---------- | -
|                                                                            |                                                                          |                                   |                                                  |         | Six Months Ended
|                                                                            |                                                                          |                                   |                                                  |         | December 31     
|                                                                            |                                                                          |                                   |                                                  |         |                 
|                                                                            |                                                                          |                                   |                                                  |         | 2003             |           |   |  |  |   | 2002      
|                                                                            |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |           
|Operating Activities:                                                       |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |        
|Net loss                                                                    |                                                                          | $                                 | (1,001,869                                       | )       |                  |           |   |  |  | $ | (1,878,080 | )      
|Adjustments to reconcile net loss to net
cash used in operating activities: |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |        
|                                                                            | Value of stock options, Common Stock and warrants
issued in lieu of cash |                                   |                                                  |        |                  |           |   |  |  |   |            | 300,000 |        
|                                                                            | Depreciation                                                             |                                   |                                                  | 101,870 |                  |           |   |  |  |   |            | 109,230 |        
|                                                                            | Amortization                                                             |                                   |                                                  |        |                  |           |   |  |  |   |            | 3,400   |        
|                                                                            | Amortization of debt discount                                            |                                   |                                                  | 48,531  |                  |           |   |  |  |   |            | 104,338 |        
|                                                                            | Interest expense - converted to Common Stock                             |                                   |                                                  | 11,956  |                  |           |   |  |  |   |            | 10,086  |        
|                                                                            | Change in operating assets and liabilities:                              |                                   |                                                  |         |                  |           |   |  |  |   |            |         |        
|                                                                            |                                                                          | Accounts receivable               |                                                  |         | 30,109           |           |   |  |  |   |            |         | 181,232 |           
|                                                                            |                                                                          | Interest receivable               |                                                  |         | (5,286           | )         |   |  |  |   |            |         | (4,784  | )         
|                                                                            |                                                                          | Inventory                         |                                                  |         | 39,255           |           |   |  |  |   |            |         | 36,711  |           
|                                                                            |                                                                          | Prepaids and other current assets |                                                  |         | (60,374          | )         |   |  |  |   |            |         | (18,612 | )         
|                                                                            |                                                                          | Accounts payable                  |                                                  |         | (28,171          | )         |   |  |  |   |            |         | (72,677 | )         
|                                                                            |                                                                          | Accrued payroll and payroll taxes |                                                  |         | 149,805          |           |   |  |  |   |            |         | 904     |           
|                                                                            |                                                                          | Deferred revenue                  |                                                  |         | (153,553         | )         |   |  |  |   |            |         | (34,833 | )         
|                                                                            |                                                                          | Other accrued expenses            |                                                  |         | (16,388          | )         |   |  |  |   |            |         | (12,607 | )         
|                                                                            |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |        
|                                                                            |                                                                          |                                   | Net cash used in operating activities            |         |                  | (884,115  | ) |  |  |   |            |         |         | (1,275,692 | )
|Investing Activities:                                                       |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |        
|Purchase of property and equipment                                          |                                                                          |                                   | (1,592                                           | )       |                  |           |   |  |  |   |           |        
|                                                                            |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |        
|                                                                            |                                                                          |                                   | Net cash used in investing activities            |         |                  | (1,592    | ) |  |  |   |            |         |         |           |  
|Financing Activities:                                                       |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |        
|Issuance of Preferred and Common Stock                                      |                                                                          |                                   | 1,873,753                                        |         |                  |           |   |  |  |   | 57,400     |        
|                                                                            |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |        
|                                                                            |                                                                          |                                   | Net cash provided by financing activities        |         |                  | 1,873,753 |   |  |  |   |            |         |         | 57,400     |  
|                                                                            |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |        
|Net increase (decrease) in cash and cash equivalents                        |                                                                          |                                   | 988,046                                          |         |                  |           |   |  |  |   | (1,218,292 | )      
|                                                                            |                                                                          |                                   | Cash and cash equivalents at beginning of period |         |                  | 90,335    |   |  |  |   |            |         |         | 1,824,238  |  
|                                                                            |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |        
|Cash and cash equivalents at end of period                                  |                                                                          | $                                 | 1,078,381                                        |         |                  |           |   |  |  | $ | 605,946    |        
|                                                                            |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |        
|Supplemental Schedule of Noncash Financing Activities:                      |                                                                          |                                   |                                                  |         |                  |           |   |  |  |   |            |        
|Conversion of notes payable and accrued interest into Common Stock          |                                                                          | $                                 | 541,980                                          |         |                  |           |   |  |  | $ | 562,705    |        

See accompanying notes.

5



---



##### Table of Contents



Hypertension Diagnostics, Inc.




Notes to Financial Statements


December 31, 2003

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 six months
ended December 31, 2003 are not necessarily indicative of the results that may
be expected for the full year ending June 30, 2004. The June 30, 2003 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, as amended, for the fiscal year ended June 30, 2003.
The policies described in that report are used for preparing quarterly reports.

2. Unit Placement

On August 28, 2003, the Company completed the private placement offering
(the Unit Placement) of 585,980 units (the Units) to a group of investors
led by Mark N. Schwartz, who is the Companys Chief Executive Officer. Gross
proceeds from this offering were approximately $2,300,000 and net proceeds were
$1,873,383. The 585,980 Units are comprised of 585,980 shares of Series A
Convertible Preferred Stock, 9,318,866 shares of common stock, and warrants as
follows:



| |  |  | Nine-month preferred stock purchase warrants permitting the holders
to purchase up to an aggregate of 585,980 shares of Series A Preferred
Stock at an exercise price of $2.04 per share.     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nine-month common stock purchase warrants permitting the holders to
purchase up to an aggregate of 9,318,866 shares of common stock at an
exercise price of $0.17 per share.                  
|
| |  |  | Eighteen-month preferred stock purchase warrants permitting the
holders to purchase up to an aggregate of 468,797 shares of Series A
Preferred Stock at an exercise price of $2.64 per share. 
|
| |  |  | Eighteen-month common stock purchase warrants permitting the
holders to purchase up to an aggregate of 7,455,114 shares of common
stock at an exercise price of $0.22 per share.              
|
| |  |  | Sixty-month preferred stock purchase warrants permitting the
holders to purchase up to an aggregate of 410,198 shares of Series A
Preferred Stock at an exercise price of $3.60 per share; and
|
| |  |  | Sixty-month common stock purchase warrants permitting the holders
to purchase up to an aggregate of 6,523,233 shares of common stock at
an exercise price of $0.30 per share.                 

6



---



##### Table of Contents



Hypertension Diagnostics, Inc.
Notes to Financial Statements (Continued)
December 31, 2003

2. Unit Placement (Continued)

As a condition to the Unit Placement, each of the investors in the Unit
Placement (each, an Investor and collectively, the Investors) entered into
a Shareholders Agreement, Voting Agreement, with an irrevocable proxy, and
Registration Rights Agreement.

The Shareholders Agreement contains provisions relating to, among other
things, preemptive rights, rights of first refusal and approval of certain
transactions. The Voting Agreement provides, among other things, that each
party to the Voting Agreement will agree to vote all of the Stock (which means
shares of common stock, preferred stock and any other class of our equity
securities and shall include any shares of common stock issuable upon exercise,
exchange or conversion of securities exercisable or exchangeable for or
convertible into shares of our common stock) held by such party in favor of
certain composition of the Board and an increase in the number of shares of
authorized common stock. To effectuate the Voting Agreement, each Investor
executed a proxy in favor of Mark N. Schwartz with respect to all shares of
Stock owned by such Investor. Pursuant to the Registration Rights Agreement,
during the period commencing 120 days after the final closing of the Unit
Placement and expiring 48 months after the final closing of the Unit Placement,
the holders of the Units are entitled to a one-time demand that we effect as
soon as practicable the registrations of the certain components of the Units,
subject to customary restrictions. The Registration Rights Agreement also
grants the Investors certain registration rights commonly called piggy-back
registration rights.

Because of the Companys lack of sufficient authorized common stock, the
Company had agreed to seek the approval of its shareholders of an amendment to
its Articles of Incorporation increasing the number of shares of common stock
authorized to at least 150,000,000 shares (or such other number as may be
sufficient to allow for the reservation for issuance of all of the shares of
common stock underlying each outstanding security convertible or exercisable
for or exchangeable into, common stock) (the Proposal). In connection with
the closing of the Unit Placement, the Company agreed to call a meeting of its
shareholders and to obtain the approval of its shareholders of the Proposal
within 120 days of the final closing of the Unit Placement. The Company held
an Annual Meeting of Shareholders on December 3, 2003 and the shareholders
approved the Proposal.

Bridge Financing Loans

To facilitate its continued operations pending a closing of the Unit
Placement, the Company obtained $20,000 bridge financing loans on August 4,
2003 from each of Kenneth W. Brimmer, a Director, and James S. Murphy, the
Companys Senior Vice President, Finance and Administration, and Chief
Financial Officer. On August 15, 2003, the Company obtained an additional
$75,000 bridge financing loan from Dr. Jay N. Cohn, a Director. The bridge
financing loans were each evidenced by unsecured promissory notes
(collectively, the Bridge Financing Notes). The Bridge Financing Notes
accrued interest at the annual rate of 8% and were due on demand of the holder
at any time after September 1, 2003. In connection with the Unit Placement,
the principal amounts due under the Bridge Financing Notes were automatically
converted into Units in the Unit Placement at the same rate as a cash
investment.

7



---



##### Table of Contents



Hypertension Diagnostics, Inc.
Notes to Financial Statements (Continued)
December 31, 2003

2. Unit Placement (Continued)

Satisfaction of the Notes

Pursuant to a Subscription Agreement dated March 27, 2002, the Company
issued three-year 8% Convertible Notes (the Notes) to Alpha Capital
Aktiengesellschaft (Alpha), Stonestreet Limited Partnership (Stonestreet),
Palisades Equity Fund, L.P. (Palisades), Ellis Enterprises Ltd. (Ellis) and
Bristol Investment Fund, Ltd. (Bristol) in an aggregate principal amount of
$2,000,000.

On August 28, 2003, the Company closed the transactions under a Conversion
and Voting Agreement dated August 1, 2003 (Conversion Agreement) with Alpha,
Stonestreet and Ellis (collectively, the Holders), the remaining holders of
the Notes, for the complete satisfaction and discharge of all amounts and
obligations under the Notes, including any penalties relating to the Notes. As
of August 1, 2003, all principal and interest under the Notes of Bristol and
Palisades had been converted into shares of our common stock pursuant to the
terms of the Notes.

Pursuant to the Conversion Agreement, the Holders converted 1/3 of the
outstanding principal and accrued but unpaid interest as of July 10, 2003 into
1,472,168 shares of common stock. The rate of this conversion was 1 share of
common stock for each $.12 of outstanding principal and accrued but unpaid
interest. Further, the Company issued to the Holders 1,766,599 shares of
common stock in connection with the satisfaction of the remaining 2/3 of the
outstanding principal and accrued but unpaid interest (a rate of conversion of
1 share of common stock for each $.20 of outstanding principal and accrued but
unpaid interest). As of July 10, 2003, there was $518,023.50 in outstanding
principal and $11,956.57 in accrued but unpaid interest relating to the Notes.

Each of the Holders also executed and delivered an irrevocable proxy in
favor of Mark N. Schwartz to vote in favor of the Proposal and such other
matters (provided such matters do not adversely effect the rights of the
Holders) as may be presented at meetings of security holders of the Company
during the term of the proxy.

Other Transaction Documents

In connection with the Unit Placement, the Company entered into that
certain Reservation Agreement dated as of August 4, 2003 with Messrs. Brimmer,
Guettler and Murphy and Drs. Cohn and Chesney (the Optionees). Each of the
Optionees agreed that each option to purchase the Companys common stock held
by such Optionee may not be exercised until such time as the shareholders
approve the Proposal. The number of shares of common stock underlying options
granted to the Optionees are as follows: 379,428 shares, Greg H. Guettler;
532,474 shares, Charles F. Chesney; 308,124 shares, James S. Murphy; 469,211
shares, Jay N. Cohn; and 79,500 shares, Kenneth W. Brimmer. In connection with
the closing of the Unit Placement, the Optionees also delivered a proxy
appointing either of Kenneth W. Brimmer or Greg H. Guettler as proxies to vote
all of such Optionees securities for certain composition of the Board and in
favor of the Proposal.

8



---



##### Table of Contents



Hypertension Diagnostics, Inc.
Notes to Financial Statements (Continued)
December 31, 2003

3. Stock Based Compensation

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (FASB 123), but applies Accounting Principles Board Opinion No.
25 (APB 25) and related interpretations in accounting for its plans. Under APB
25, when the exercise price of employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. In accordance with FASB 123 and EITF 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services,transactions in which equity
instruments are issued in exchange for services are measured at the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is a more reliable measure.

The Company accounts for stock options under APB 25, under which no
compensation cost has been recognized. Had compensation cost for these options
been determined consistent with FASB 123, the net loss and basic and diluted
net loss per share would have been increased to the following pro forma amounts
for the three months and six months ended December 31, 2003 and December 31,
2002:

|                                      |             |  |                                |          |                              |  |      |          |      |  |   |            |   |  |   |            |  
|------------------------------------- | ----------- |  | ------------------------------ | -------- | ---------------------------- |  | ---- | -------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                      |             |  | Three Months Ended December 31 |          | Six Months Ended December 31
|                                      |             |  |                                |          |                             
|                                      |             |  | 2003                           |          | 2002                         |  | 2003 |          | 2002
|                                      |             |  |                                |          |                              |  |      |          |     
|Net Loss:                             |             |  |                                |          |                              |  |      |          |      |  |   |            |   |  |   |           
|                                      | As
Reported |  | $                              | (544,684 | )                            |  | $    | (901,329 | )    |  | $ | (1,001,869 | ) |  | $ | (1,878,080 | )
|                                      | Pro
Forma   |  |                                | (586,846 | )                            |  |      | (972,798 | )    |  |   | (1,091,760 | ) |  |   | (2,002,149 | )
|Basic and Diluted Net Loss per Share: |             |  |                                |          |                              |  |      |          |      |  |   |            |   |  |   |           
|                                      | As
Reported |  | $                              | (0.02    | )                            |  | $    | (0.12    | )    |  | $ | (0.05      | ) |  | $ | (0.26      | )
|                                      | Pro
Forma   |  |                                | (0.03    | )                            |  |      | (0.13    | )    |  |   | (0.06      | ) |  |   | (0.28      | )

9



---



##### Table of Contents



4. Subsequent Event

On February 9, 2004, the Company completed an additional private placement
offering of 118,113 units (the Units) to a group of investors. Gross
proceeds from this offering were $461,370. The 118,113 Units are comprised of
118,113 shares of Series A Convertible Preferred Stock, 1,878,365 shares of
common stock, and warrants as follows:



| |  |  | Nine-month preferred stock purchase warrants permitting the holders
to purchase up to an aggregate of 118,113 shares of Series A Preferred
Stock at an exercise price of $2.04 per share.    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nine-month common stock purchase warrants permitting the holders to
purchase up to an aggregate of 1,878,365 shares of common stock at an
exercise price of $0.17 per share.                 
|
| |  |  | Eighteen-month preferred stock purchase warrants permitting the
holders to purchase up to an aggregate of 94,496 shares of Series A
Preferred Stock at an exercise price of $2.64 per share. 
|
| |  |  | Eighteen-month common stock purchase warrants permitting the
holders to purchase up to an aggregate of 1,502,702 shares of common
stock at an exercise price of $0.22 per share.             
|
| |  |  | Sixty-month preferred stock purchase warrants permitting the
holders to purchase up to an aggregate of 82,686 shares of Series A
Preferred Stock at an exercise price of $3.60 per share; and
|
| |  |  | Sixty-month common stock purchase warrants permitting the holders
to purchase up to an aggregate of 1,314,868 shares of common stock at
an exercise price of $0.30 per share.                

10



---



##### Table of Contents






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 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 2003 Annual Report on Form 10-KSB, as amended,
under the caption Risk Factors, as well as others not now anticipated. These
risks and uncertainties include, without limitation: our ability to develop a
business model to timely generate acceptable levels of revenues; the control
exercised by the Schwartz Group; existing shareholders will suffer dilution as
a result of the Unit Placements; negative effect on our stock price resulting
from available securities for sale; our need for additional capital; our
dependence on our CVProfilor® DO-2020; the availability of third-party
reimbursements for the use of our products; increased market acceptance of our
products; our marketing strategy may result in lower revenues; the illiquidity
of our securities on the OTC Bulletin Board and the related restrictions on our
securities relating to penny stocks; 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; our ability to protect our proprietary technology;
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. We undertake no responsibility to
update any forward-looking statement. These forward-looking statements are only
made as of the date of this report. In addition to the risks we have
articulated above, changes in market conditions, changes in our business and
other factors may result in different or increased risks to our business in the
future that are not foreseeable at this time.

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 both large and small arteries. We are currently
marketing three products: the HDI/PulseWave CR-2000 Research CardioVascular
Profiling System, the CVProfilor® DO-2020 CardioVascular Profiling System and
the CVProfilor® MD-3000 CardioVascular Profiling System.



| |  |  | The CR-2000 Research System is being marketed
worldwide for research purposes only to clinical research
investigators for the purpose of collecting data in
cardiovascular studies. Further, because the CR-2000 Research
System bears the CE Mark (CE0123) and meets the European
Union Medical Device Directive, physicians may use the CR-2000
Research System with patients in a clinical setting in the
European Union.                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In the U.S., the CVProfilor® DO-2020 System is
being marketed to primary care physicians and other health
care professionals on a per-patient-tested rental basis. It
can also be purchased or leased. Utilizing our Central Data
Management Facility (the CDMF), we are able to track
utilization of the CVProfilor® DO-2020 System in each
physicians office and medical clinic and to invoice our
physician customers on the number of CardioVascular Profile
Reports (CVProfile Reports) which they generate each month.
We anticipate that marketing the CVProfilor® DO-2020 System
under a per-patient-tested rental program (as opposed to a
capital sale approach) will allow us to accelerate the rate of
product acceptance in the medical marketplace and should allow physician usage
fees to eventually generate the majority of our revenue.

11



---



##### Table of Contents





The CVProfilor® DO-2020 System was launched late in the 3rd Quarter of
fiscal year 2001 (March 2001) and had its first reported revenue in the 1st
Quarter of fiscal year 2002, which ended September 30, 2001. Reductions in
comparative revenue between fiscal year 2002 and fiscal year 2003 relate to our
planned conversion from capital sales of our HDI/PulseWave CR-2000 Research
System in fiscal year 2001 to our per-patient-tested rental revenue model
associated with physician use of our FDA cleared CVProfilor® DO-2020 System in
fiscal year 2002. Although we are attempting to maintain a balance in
marketing the HDI/PulseWave CR-2000 on a capital sales basis with the
CVProfilor® DO-2020 on a per-patient-tested basis, we expect that our
per-patient-tested marketing of the CVProfilor® DO-2020 will ultimately
produce the majority of our revenue.

Critical Accounting Policies

The financial statements are prepared in accordance with accounting
principles generally accepted in the U.S., which requires us to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying financial statements and related footnotes. In preparing these
financial statements, management has made its best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. We do not believe there is a great likelihood that materially
different amounts would be reported related to the accounting policies
described below. However, application of these accounting policies involves
the exercise of judgment and use of assumptions as to future uncertainties and,
as a result, actual results could differ from these estimates.

Revenue Recognition. We recognize revenue in accordance with U.S.
Securities and Exchange Commissions Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition. Pursuant to SAB No. 101, the Company recognizes revenue
from the sale of equipment at the time of shipment to a customer or
distributor. Shipment occurs only after receipt of a valid purchase order.
Payments from customers and distributors are either made in advance of shipment
or within a short time frame after shipment. In the case of sales to
distributors, such payment is not contingent upon resale of the product to end
users. Shipping and handling costs are included as cost of equipment sales.
In addition, title passes to the customer or distributor upon shipment. At the
time of shipment, all of the criteria for recognition set forth in SAB No. 101
have been met: persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the selling price is fixed or
determinable and collectability is reasonably assured.

Equipment rental revenue, whether from the minimum monthly fee or from the
per-patient-tested fee, is recognized when collection is probable, which is
currently upon cash receipt. At the time of receipt of rental revenues, all
of the criteria for recognition set forth in SAB No. 101 have been met:
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the selling price is fixed or determinable and
collectability is reasonably assured.

In the case of either a sale or rental of our product, there are no
post-shipment obligations which affect the timing of revenue recognition.
Neither customers nor distributors have a right to return or exchange our
product. Warranty repairs on all of the above are handled on a repair

12



---



##### Table of Contents



or
replacement basis, at our discretion. Further, there is no installation of our product; it is
ready to use when plugged into an electrical outlet and no specialized
knowledge is required to ready it for use. For these reasons, we have
concluded that our revenue recognition policy is appropriate and in accordance
with SAB No. 101.

Allowance for Doubtful Accounts. Accounts receivable are reviewed to
determine the need for an allowance for amounts that may become uncollectible
in the future. The necessity of an allowance is based on managements review
of accounts receivable balances and historic write-offs.

Inventories and Related Allowance for Excess and Obsolete Inventory.
Inventories are valued at the lower of cost or market and reviewed to determine
the need for an allowance for excess and obsolete inventories. The need for an
allowance is based on managements review of inventories on hand compared to
estimated future usage and sales.

Results of Operations

As of December 31, 2003, we had an accumulated deficit of $(22,412,269),
attributable primarily to selling, general and administrative expenses. Until
we are able to generate significant revenue from our activities, we expect to
continue to incur operating losses. As of December 31, 2003, we had cash and
cash equivalents of $1,078,381. We anticipate that these funds, in conjunction
with revenue anticipated to be earned from placements of our CVProfilor®
DO-2020 Systems, anticipated sales of our CR-2000 Research Systems, gross
proceeds of $461,370 from the private placement offering completed February 9,
2004, as well as anticipated operating cost reductions, will allow us to pursue
our business development strategy for at least the next twelve months following
December 31, 2003.

Three Months Ended December 31, 2003 Compared to Three Months Ended December
31, 2002

The following is a summary of our Revenue and Cost of Sales for the three
months ended December 31, 2003 and 2002:

|              |  |                                      |         |       |  |           |        |           |  |          |         |  |  |   |        | 
|------------- |  | ------------------------------------ | ------- | ----- |  | --------- | ------ | --------- |  | -------- | ------- |  |  | - | ------ | 
|              |  | Three Months Ended December 31, 2003
|              |  |                                     
|              |  |                                      |         |       |  | Equipment |        | Equipment |  | Service/
|              |  | Total                                |         | Sales |  | Rental    |        | Contract 
|              |  |                                      |         |       |  |           |        |          
|Revenue       |  | $                                    | 233,721 |       |  | $         | 63,500 |           |  | $        | 101,924 |  |  | $ | 68,297 | 
|Cost of Sales |  |                                      | 38,503  |       |  |           | 5,750  |           |  |          | 25,939  |  |  |   | 6,814  | 
|              |  |                                      |         |       |  |           |        |           |  |          |         |  |  |   |        | 
|Gross Profit  |  | $                                    | 195,218 |       |  | $         | 57,750 |           |  | $        | 75,985  |  |  | $ | 61,483 | 
|              |  |                                      |         |       |  |           |        |           |  |          |         |  |  |   |        | 

|              |  |                                      |         |       |  |           |         |           |  |          |        |  |  |   |        | 
|------------- |  | ------------------------------------ | ------- | ----- |  | --------- | ------- | --------- |  | -------- | ------ |  |  | - | ------ | 
|              |  | Three Months Ended December 31, 2002
|              |  |                                     
|              |  |                                      |         |       |  | Equipment |         | Equipment |  | Service/
|              |  | Total                                |         | Sales |  | Rental    |         | Contract 
|              |  |                                      |         |       |  |           |         |          
|Revenue       |  | $                                    | 227,754 |       |  | $         | 121,688 |           |  | $        | 88,650 |  |  | $ | 17,416 | 
|Cost of Sales |  | $                                    | 37,627  |       |  |           | 24,475  |           |  |          | 13,152 |  |  |   |       | 
|              |  |                                      |         |       |  |           |         |           |  |          |        |  |  |   |        | 
|Gross Profit  |  | $                                    | 190,127 |       |  | $         | 97,213  |           |  | $        | 75,498 |  |  | $ | 17,416 | 
|              |  |                                      |         |       |  |           |         |           |  |          |        |  |  |   |        | 

Total Equipment Sales Revenue for the three months ended December 31, 2003
was $63,500, compared to $121,688 for the three months ended December 31, 2002.
Revenue relating to international equipment sales was $-0- for the three
months ended December 31, 2003 and $99,438 for the three months ended December
31, 2002. Although we continue to pursue sales of the CR-2000 Research
Systems, the majority of our time and attention is now, and is expected to
continue to be, focused on expanding CVProfilor® DO-2020 System placements (per-

13



---



##### Table of Contents



patienttested rental
program) and attempting to increase its utilization in U.S. physicians medical
offices and clinics and seeking to increase third party reimbursements for such
utilization. The reason for the shift in our strategic focus to the
CVProfilor® DO-2020 System was: a) FDA 510(k) clearance to market it in the
United States on November 1, 2000; and b) the potential practicing physician
market is significantly larger than the research market for the CR-2000
Research System.

Placements of the CVProfilor® DO-2020 System, and satisfactory utilization
by physicians of those systems placed, has taken more time and resources than
originally anticipated due to delays in obtaining consistent and satisfactory
levels of third party reimbursements to physicians utilizing the CVProfilor®
DO-2020 System and delays in integrating the CVProfilor® DO-2020 System into
the clinic operations in which they are placed. We have commenced focusing our
resources on specific regional markets that we believe are more likely to
generate higher levels of acceptance of the CVProfilor® DO-2020 System by
physicians and a greater amount of reimbursements by third party payors to such
physicians. We believe this approach is the most effective method of both
increasing placements of the CVProfilor® DO-2020 System and increasing the
physician utilizations of such systems placed. Our current marketing strategy
focuses on marketing the CVProfilor® DO-2020 System to physicians who treat
patients with diabetes and hypertension. We believe these physicians have the
greatest interest in, and use for, our product. Therefore, the most critical
factor in our ability to increase rental revenue rests in our ability to expand
our marketing and distribution network to increase placements and utilization
of our CVProfilor® DO-2020 System. We believe there are three ways we could
expand our marketing and distribution network: 1) the development of an
internal sales force; 2) a strategic partnership with a firm that possesses a
distribution network calling on these same physicians; or 3) a combination of
the internal sales force and external distribution network methods. We believe
this dual method of expansion offers us the greatest opportunity for success.
We anticipate adding additional sales personnel at the same time that we pursue
discussions with firms that have an interest in representing our CVProfilor®
DO-2020 System nationwide. In the short term, we have been focused on and will
continue to focus on international sales of our CR-2000 Research System and
CVProfilor® MD-3000 System as a means of generating cash to support operational
expenses.

Further, the existence, timing and extent of reimbursement of physicians
for the use of our CVProfilor® DO-2020 System affects the availability of our
working capital. Reimbursement will always vary considerably by the patients
medical necessity, by physician, by provider, by geography and by provider
coverage plans, making the process of obtaining reimbursement for the
CVProfilor® DO-2020 System by current physician customers an important
component of our products success. To the extent that reimbursement is
unavailable or inadequate, physicians will be less likely to use the
CVProfilor® DO-2020 System. Therefore, we continue to devote considerable
effort to activities such as payer advocacy and coding clarification directed
at long-term reimbursement in our target markets. We provide assistance to
physicians with the ongoing process of insurance billing procedures in an
attempt to facilitate reimbursement coverage and payment on a nationwide basis.

In addition, because our CVProfilor® DO-2020 System is being marketed on a
per-patient-tested basis, we have a delay in the cost recovery of our working
assets. Although our per-patient-tested marketing approach reduces the risk
and thereby increases the potential rate of acceptance for physician customers
willing to use the CVProfilor® DO-2020 System as compared to a capital
acquisition approach, it also delays our cash flow recovery of product costs.
Physician payments for use of the CVProfilor® DO-2020 System follow actual
utilization by some 60-90 days; utilization in one month is invoiced in the
following month and payment is generally received within 30 to 60 days of
invoicing. This delay in payment, therefore, requires six to twelve months to
fully recover product costs. These cash flow delays mean that we will generate
little, if any, cash during the initial placement of the product and will
require cash from other sources to support our operations during this period.

For the three months ended December 31, 2003, we recognized Revenue for
the CVProfilor® DO-2020 System per-patient-tested rental program of $101,924,
compared to $88,650 for the three months ended December 31, 2002. The per
test
fee is recognized as Revenue when we determine that collectibility is probable,
which currently is upon cash receipt.

14



---



##### Table of Contents



For the three months ended December 31, 2003, Service/Contract Income was
$68,297, compared to $17,416 for the three months ended December 31, 2002. For
the three months ended December 31, 2003, $17,417 pertains to a service
warranty contract with a customer who purchased certain CR-2000 Research
Systems from us. The balance, $50,880, represents contract income pertaining
to our agreement with a pharmaceutical company to attend certain hypertension
and cardiology meetings in both the U.S. and internationally. Under this
agreement, we provide our CardioVascular Profiling Systems and certain
employees who test visitors to the pharmaceutical companys exhibition booth.

Total expenses for the three months ended December 31, 2003 were $612,375,
compared to $1,034,789 for the three months ended December 31, 2002. The
following is a summary of the major categories included in selling, general and
administrative expenses:

|                                                             |                                                    |   |                    |         |      |   |         |           | 
|------------------------------------------------------------ | -------------------------------------------------- | - | ------------------ | ------- | ---- | - | ------- | --------- | 
|                                                             |                                                    |   | Three Months Ended
|                                                             |                                                    |   | December 31       
|                                                             |                                                    |   |                   
|                                                             |                                                    |   | 2003               |         | 2002
|                                                             |                                                    |   |                    |         |     
|Wages, related expenses and benefits                         |                                                    | $ | 308,126            |         |      | $ | 229,046 |          
|Patents and related expenses                                 |                                                    |   | 6,970              |         |      |   | 10,598  |          
|Outside
consultants                                          |                                                    |   | 12,793             |         |      |   | 204,819 |          
|Rent (building/equipment) and
utilities                      |                                                    |   | 24,466             |         |      |   | 25,482  |          
|Insurance-general and directors/officers liability           |                                                    |   | 18,089             |         |      |   | 21,408  |          
|Selling, marketing and promotion, including applicable wages |                                                    |   | 234,132            |         |      |   | 293,510 |          
|Legal and audit/accounting fees                              |                                                    |   | 28,110             |         |      |   | 69,619  |          
|Royalties                                                    |                                                    |   | 4,963              |         |      |   | 6,310   |          
|Depreciation and amortization                                |                                                    |   | 22,626             |         |      |   | 42,887  |          
|Convertible debt private placement expenses                  |                                                    |   |                   |         |      |   | 29,173  |          
|Other-general and administrative                             |                                                    |   | 89,100             |         |      |   | 101,937 |          
|                                                             |                                                    |   |                    |         |      |   |         |          
|                                                             | Total selling, general and administrative expenses |   | $                  | 749,375 |      |   | $       | 1,034,789 | 
|                                                             |                                                    |   |                    |         |      |   |         |          

Wages, related expenses and benefits increased from $229,046 to $308,126
for the three months ended December 31, 2002 and December 31, 2003,
respectively. In late December 2002, we implemented a plan to conserve cash
through reductions in selling, general and administrative expenses, which
included the reduction in the number of our employees, transitioning some
employees to part-time employment status and the reduction in salaries of
executive management. The reduction in salaries of executive management
amounted to approximately $112,000 for the period late December 2002 through
late June 2003. Executive management salaries were restored to their original
levels in late June 2003. Included in the $308,126 expense amount for the
three months ended December 31, 2003 is an accrued compensation charge of
$137,000 that relates to the amount due our chief executive officer as part of
his agreed upon compensation for services provided to us.

Outside consultants expense decreased from $204,819 for the three months
ended December 31, 2002 to $12,793 for the three months ended December 31,
2003. Included in the $204,819 expense amount for the three months ended December 31, 2002 is a non-cash expense
charge of $150,000 that relates to a Consulting Agreement for investor
communications and public relations consulting services with HRI Consultants.
In consideration for the consulting services, we issued 300,000 shares of
common stock and warrants to purchase 100,000 shares of common stock at $1.50
per share. The fair value of the issued shares and warrants was based on the
agreed upon contract price of $400,000.

15



---



##### Table of Contents



The Consulting Agreement involved
certain services to be performed, including the following: introduce us to
various interested parties in the financial community; assist and consult us
with respect to our relations with brokers, dealers, analysts and other
investment professionals; and financial public relations generally. The fair
value of this agreement was expensed as services were provided.

Selling, marketing and promotion expense decreased from $293,510 for the
three months ended December 31, 2002 to $234,132 for the three months ended
December 31, 2003. This category includes wages and commissions paid by us
relating to our sales and marketing efforts, as well as travel and convention
expenses. Our planned conversion from capital sales of our HDI/PulseWave
CR-2000 Research System in fiscal year 2001 to our per-patient-tested rental
revenue model associated with our FDA cleared CVProfilor® DO-2020 System in
fiscal year 2002 had no material effect on our total expenses in this category,
as our sales force has merely redirected its efforts to placements of our
rental units in physicians offices.

Legal and audit/accounting fees decreased from $69,619 to $28,110 for the
three months ended December 31, 2002 and 2003, respectively. This decrease was
due primarily to additional expenses incurred in connection with the filing of
registration statements and other reports and communications with the U.S.
Securities and Exchange Commission in the three month period ended December 31,
2002.

Interest income was $9,473 and $6,503 for the three months ended December
31, 2003 and 2002, respectively.

Interest expense was $-0- and $63,170 for the three months ended December
31, 2003 and 2002, respectively. A further breakdown of the components of
interest expense is as follows:

|                           |                                                                                                                                                                                                                                       |                        |   |                    |   |      |   |        |        | 
|-------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | - | ------------------ | - | ---- | - | ------ | ------ | 
|                           |                                                                                                                                                                                                                                       |                        |   | Three Months Ended
|                           |                                                                                                                                                                                                                                       |                        |   | December 31       
|                           |                                                                                                                                                                                                                                       |                        |   |                   
|                           |                                                                                                                                                                                                                                       |                        |   | 2003               |   | 2002
|                           |                                                                                                                                                                                                                                       |                        |   |                    |   |     
|Convertible Notes Payable: |                                                                                                                                                                                                                                       |                        |   |                    |   |      |   |       
|                           | 8% interest on outstanding principal balances                                                                                                                                                                                         |                        | $ |                   |   |      | $ | 21,630 |       
|                           | Fair value basis allocation to the five-year
warrants to purchase 250,000 shares of
Common Stock ($315,789), being amortized on a
straight-line basis over the three (3) year term of the
debt agreement and as the debt is converted |                        |   |                   |   |      |   | 41,540 |       
|                           |                                                                                                                                                                                                                                       |                        |   |                    |   |      |   |       
|                           |                                                                                                                                                                                                                                       | Total Interest Expense |   | $                  |  |      |   | $      | 63,170 | 
|                           |                                                                                                                                                                                                                                       |                        |   |                    |   |      |   |       

Net loss was $(544,684) for the three months ended December 31, 2003,
compared to a net loss of $(901,329) for the three months ended December 31,
2002. For the three months ended December 31, 2003, basic and diluted net loss
per share was $(.02), based on weighted average shares outstanding of
22,940,145. For the three months ended December 31, 2002, basic and
diluted net loss per share was $(.12), based on weighted average shares
outstanding of 7,416,964.

Six Months Ended December 31, 2003 Compared to Six Months Ended December 31,
2002

The following is a summary of our Revenue and Cost of Sales for the six
months ended December 31, 2003 and 2002:

16



---



##### Table of Contents



|              |  |                                    |         |       |  |           |         |           |  |          |         |  |  |   |         | 
|------------- |  | ---------------------------------- | ------- | ----- |  | --------- | ------- | --------- |  | -------- | ------- |  |  | - | ------- | 
|              |  | Six Months Ended December 31, 2003
|              |  |                                   
|              |  |                                    |         |       |  | Equipment |         | Equipment |  | Service/
|              |  | Total                              |         | Sales |  | Rental    |         | Contract 
|              |  |                                    |         |       |  |           |         |          
|Revenue       |  | $                                  | 482,619 |       |  | $         | 137,245 |           |  | $        | 191,820 |  |  | $ | 153,554 | 
|Cost of Sales |  |                                    | 84,996  |       |  |           | 18,776  |           |  |          | 47,705  |  |  |   | 18,515  | 
|              |  |                                    |         |       |  |           |         |           |  |          |         |  |  |   |         | 
|Gross Profit  |  | $                                  | 397,623 |       |  | $         | 118,469 |           |  | $        | 144,115 |  |  | $ | 135,039 | 
|              |  |                                    |         |       |  |           |         |           |  |          |         |  |  |   |         | 

|              |  |                                    |         |       |  |           |         |           |  |          |         |  |  |   |        | 
|------------- |  | ---------------------------------- | ------- | ----- |  | --------- | ------- | --------- |  | -------- | ------- |  |  | - | ------ | 
|              |  | Six Months Ended December 31, 2002 |         |       |  |          
|              |  |                                    |         |       |  |          
|              |  |                                    |         |       |  | Equipment |         | Equipment |  | Service/
|              |  | Total                              |         | Sales |  | Rental    |         | Contract 
|              |  |                                    |         |       |  |           |         |          
|Revenue       |  | $                                  | 346,816 |       |  | $         | 150,388 |           |  | $        | 161,595 |  |  | $ | 34,833 | 
|Cost of Sales |  |                                    | 53,357  |       |  |           | 30,260  |           |  |          | 23,097  |  |  |   |       | 
|              |  |                                    |         |       |  |           |         |           |  |          |         |  |  |   |        | 
|Gross Profit  |  | $                                  | 293,459 |       |  | $         | 120,128 |           |  | $        | 138,498 |  |  | $ | 34,833 | 
|              |  |                                    |         |       |  |           |         |           |  |          |         |  |  |   |        | 

Total Equipment Sales Revenue for the six months ended December 31, 2003
was $137,245, compared to $150,388 for the six months ended December 31, 2002.
This decrease was mainly due to our anticipated revenue shift from the CR-2000
Research System (Equipment Sales) to the CVProfilor® DO-2020 System
(per-patient-tested rental program). The CR-2000 Research System is being
marketed for research purposes only in the United States, while the
CVProfilor® DO-2020 System is being marketed to primary care physicians and
other health care professionals on a per-patient-tested rental basis. The
reason for the shift in our strategic focus to the CVProfilor® DO-2020 System
was: a) FDA 510(k) clearance to market it in the United States on November 1,
2000; and b) the potential practicing physician market is significantly larger
than the research market for the CR-2000 Research System. The majority of our
time and attention is now, and will continue to be, focused on expanding
CVProfilor® DO-2020 System placements and utilization in U.S. physicians
medical offices and clinics. This shift in our strategic focus began in the
fourth quarter of fiscal year 2001. Revenue relating to international
equipment sales was $51,495 for the six months ended December 31, 2003 and
$109,388 for the six months ended December 31, 2002.

For the six months ended December 31, 2003, we recognized Revenue for the
CVProfilor® DO-2020 per-patient-tested rental program of $191,820, compared
to $161,595 for the six months ended December 31, 2002. The per test fee is
recognized as Revenue when we determine that collectibility is probable, which
currently is upon cash receipt.

Total expenses for the six months ended December 31, 2003 were $1,364,849,
compared to $2,031,982 for the six months ended December 31, 2002. The
following is a summary of the major categories included in selling, general and
administrative expenses:

17



---



##### Table of Contents



|                                                             |                                                    |   |                  |           |      |   |         |           | 
|------------------------------------------------------------ | -------------------------------------------------- | - | ---------------- | --------- | ---- | - | ------- | --------- | 
|                                                             |                                                    |   | Six Months Ended
|                                                             |                                                    |   | December 31     
|                                                             |                                                    |   |                 
|                                                             |                                                    |   | 2003             |           | 2002
|                                                             |                                                    |   |                  |           |     
|Wages, related expenses and benefits                         |                                                    | $ | 444,872          |           |      | $ | 462,800 |          
|Patents and related expenses                                 |                                                    |   | 15,261           |           |      |   | 32,713  |          
|Outside
consultants                                          |                                                    |   | 34,539           |           |      |   | 383,432 |          
|Rent (building/equipment) and
utilities                      |                                                    |   | 49,020           |           |      |   | 51,127  |          
|Insurance-general and directors/officers liability           |                                                    |   | 34,743           |           |      |   | 44,863  |          
|Selling, marketing and promotion, including applicable wages |                                                    |   | 427,618          |           |      |   | 599,218 |          
|Legal and audit/accounting fees                              |                                                    |   | 134,356          |           |      |   | 138,596 |          
|Royalties                                                    |                                                    |   | 9,872            |           |      |   | 9,359   |          
|Depreciation and amortization                                |                                                    |   | 54,164           |           |      |   | 89,531  |          
|Convertible debt private placement
expenses                  |                                                    |   |                 |           |      |   | 40,226  |          
|Other-general and administrative                             |                                                    |   | 160,404          |           |      |   | 180,117 |          
|                                                             |                                                    |   |                  |           |      |   |         |          
|                                                             | Total selling, general and administrative expenses |   | $                | 1,364,849 |      |   | $       | 2,031,982 | 
|                                                             |                                                    |   |                  |           |      |   |         |          

Wages, related expenses and benefits decreased from $462,800 to $444,872
for the six months ended December 31, 2002 and December 31, 2003, respectively.
In late December 2002, we implemented a plan to conserve cash through
reductions in selling, general and administrative expenses, which included the
reduction in the number of our employees, transitioning some employees to
part-time employment status and the reduction in salaries of executive
management. The reduction in salaries of executive management amounted to
approximately $112,000 for the period late December 2002 through late June
2003. Executive management salaries were restored to their original levels in
late June 2003.

Outside consultants expense decreased from $383,432 for the six months
ended December 31, 2002 to $34,539 for the six months ended December 31, 2003.
Included in the $383,432 expense amount is a non-cash expense charge of
$300,000 relating to our June 2002 Consulting Agreement with HRI Consultants.
The fair value of this agreement is expensed as services are provided. The
fair value of the issued shares and warrants to HRI Consultants was based on
the agreed upon contract price of $400,000. The Consulting Agreement involved
certain services to be performed, including the following: introduce the
Company to various interested parties in the financial community; assist and
consult the Company with respect to its relations with brokers, dealers,
analysts and other investment professionals; and financial public relations
generally.

Selling, marketing and promotion expense decreased from $599,218 for the
six months ended December 31, 2002 to $427,618 for the six months ended
December 31, 2003. This category includes wages and commissions paid by us
relating to our sales and marketing efforts as well as travel and convention
expenses. The decrease in our number of employees accounted for this decrease
in expenses.

Interest income was $15,542 and $13,132 for the six months ended December
31, 2003 and 2002, respectively.

18



---



##### Table of Contents



Interest expense was $50,185 and $152,689 for the six months ended
December 31, 2003 and 2002, respectively. A further breakdown of the
components of interest expense is as follows:

|                           |                                                                                                                                                                                                                                       |                        |     |                  |        |      |   |         |         | 
|-------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | --- | ---------------- | ------ | ---- | - | ------- | ------- | 
|                           |                                                                                                                                                                                                                                       |                        |     | Six Months Ended
|                           |                                                                                                                                                                                                                                       |                        |     | December 31     
|                           |                                                                                                                                                                                                                                       |                        |     |                 
|                           |                                                                                                                                                                                                                                       |                        |     | 2003             |        | 2002
|                           |                                                                                                                                                                                                                                       |                        |     |                  |        |     
|Convertible Notes Payable: |                                                                                                                                                                                                                                       |                        |     |                  |        |      |   |        
|                           | 8% interest on outstanding principal balances                                                                                                                                                                                         |                        | $   | 1,205            |        |      | $ | 48,351  |        
|                           | Fair value basis allocation to the five-year warrants
to purchase 250,000 shares of Common Stock
($315,789), being amortized on a straight-line basis
over the three (3) year term of the debt agreement
and as the debt is converted |                        |     | 48,531           |        |      |   | 104,338 |        
|Other-miscellaneous        |                                                                                                                                                                                                                                       |                        | 449 |                  |        |      |  |        
|                           |                                                                                                                                                                                                                                       |                        |     |                  |        |      |   |        
|                           |                                                                                                                                                                                                                                       | Total Interest Expense |     | $                | 50,185 |      |   | $       | 152,689 | 
|                           |                                                                                                                                                                                                                                       |                        |     |                  |        |      |   |        

Net loss was $(1,001,869) and $(1,878,080) for the six months ended
December 31, 2003 and 2002, respectively. For the six months ended December
31, 2003, basic and diluted net loss per share was $(.05), based on weighted
average shares outstanding of 18,908,475. For the six months ended December
31, 2002, basic and diluted net loss per share was $(.26), based on weighted
average shares outstanding of 7,091,543.

19



---



##### Table of Contents



Liquidity and Capital Resources

Cash and cash equivalents had a net increase of $988,046 and a net
decrease of $(1,218,292) for the six months ended December 31, 2003 and
December 31, 2002, respectively. The significant elements of these changes
were as follows:

|                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     |                              |   |      |     |            |   | 
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | ---------------------------- | - | ---- | --- | ---------- | - | 
|                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     | Six Months Ended December 31
|                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     |                             
|                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     | 2003                         |   | 2002
|                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     |                              |   |     
|Net cash used in operating activities:          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     |                              |   |      |     |            |  
| net loss, as adjusted for non-cash items      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | $   | (702,512                     | ) |      | $   | (1,351,026 | )
| decrease in accounts receivable:              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     | 30,109                       |   |      | (A) | 181,232    |  
| (A)                                           | $104,500 accounts receivable
balance regarding one customer at June
30, 2002 pertaining to a service
warranty contract was received in July
2002.                                                                                                                                                                                                                                                                                                                                   |     |                              |   |      |     |            |   | 
| increase in accrued payroll and payroll taxes |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | (B) | 149,805                      |   |      |     | 904        |  
| (B)                                           | Approximately 89% of this
increase pertains to compensation due
our chief executive officer as part of
his agreed upon compensation for
services provided to us.                                                                                                                                                                                                                                                                                                                    |     |                              |   |      |     |            |   | 
| (decrease) in deferred revenue:               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | (C) | (153,553                     | ) |      |     | (34,833    | )
| (C)                                           | Approximately 80% of this
decrease pertains to deferred revenue
recognized relating to our services
contract agreement with a
pharmaceutical company.                                                                                                                                                                                                                                                                                                                               |     |                              |   |      |     |            |   | 
|Net cash provided by financing activities:      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |     |                              |   |      |     |            |  
| issuance of Preferred and Common Stock:       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | (D) | 1,873,753                    |   |      |     | 57,400     |  
| (D)                                           | On August 28, 2003, we
completed the private placement
offering (the Unit Placement) of
585,980 units (the Units) to a group
of investors led by Mark N. Schwartz,
who is our Chief Executive Officer
Gross proceeds from this offering were
approximately $2,300,000 and net
proceeds were $1,873,383. The 585,980
Units are comprised of 585,980 shares
of Series A Convertible Preferred
Stock, 9,318,866 shares of common
stock, and a series of six (6)
purchase warrants. |     |                              |   |      |     |            |   | 

We have incurred operating losses and have not generated positive cash
flow from operations. As of December 31, 2003, we had an accumulated deficit
of $(22,412,269).

20



---



##### Table of Contents



As of December 31, 2003, we had cash and cash equivalents of $1,078,381,
and anticipate that these funds, in conjunction with revenue anticipated to be
earned from placements of our CVProfilor® DO-2020 Systems, anticipated sales of
our CR-2000 Research Systems, gross proceeds of $461,370 from the private
placement offering completed February 9, 2004, as well as anticipated operating
cost reductions, will allow us to pursue our business development strategy for
at least the next twelve months following December 31, 2003.

Our current marketing strategy focuses on marketing the CVProfilor®
DO-2020 System to physicians who treat patients with diabetes and hypertension.
We believe these physicians have the greatest interest in, and use for, our
product. Therefore, the most critical factor in our ability to increase rental
revenue rests in our ability to expand our marketing and distribution network
to increase placements and utilization of our CVProfilor® DO-2020 System. We
believe there are three ways we could expand our marketing and distribution
network: 1) the development of an internal sales force; 2) a strategic
partnership with a firm that possesses a distribution network calling on these
same physicians; or 3) a combination of the internal sales force and external
distribution network methods. We believe this dual method of expansion offers
us the greatest opportunity for success. We anticipate adding additional
sales personnel at the same time that we pursue discussions with firms that
have an interest in representing our CVProfilor® DO-2020 System nationwide. In
the short term, we have been focused on and will continue to focus on
international sales of our CR-2000 Research System and CVProfilor® MD-3000
System as a means of generating cash to support operational expenses.

In late December 2002, we implemented a plan to conserve cash through
reductions in selling, general and administrative expenses to improve working
capital management. This expense reduction plan included the reduction in the
number of our employees, transitioning some employees to part-time employment
status and reducing salaries of executive management. The reduction in
salaries of executive management amounted to approximately $112,000 for the
period late December 2002 through late June 2003. Executive management
salaries were restored to their original levels in late June 2003. While these
measures reduced the rate at which we used our available cash, they have
compromised, and will continue to compromise, our ability to pursue and
generate placements of our CVProfilor® DO-2020 Systems and sales of our CR-2000
Research Systems. Until we increase our sales and marketing staff and other
programs, we do not expect to generate significant levels of revenue.

Further, the existence, timing and extent of reimbursement of physicians
for the use of our CVProfilor® DO-2020 affects the availability of our working
capital. Reimbursement will always vary considerably by the patients medical
necessity, by physician, by provider, by geography and by provider coverage
plans, making the process of obtaining reimbursement for the CVProfilor®
DO-2020 by current physician customers an important component of our products
success. To the extent that reimbursement is unavailable or inadequate,
physicians will be less likely to use the CVProfilor® DO-2020. Therefore, we
continue to devote considerable effort to activities such as payer advocacy and
coding clarification directed at long-term reimbursement in our target markets.
We provide assistance to physicians with the ongoing process of insurance
billing procedures in an attempt to facilitate reimbursement coverage and
payment on a nationwide basis.

In addition, because our CVProfilor® DO-2020 is being marketed on a
per-patient-tested basis, we have a delay in the cost recovery of our working
assets. Although our per-patient-tested marketing approach reduces the risk
and thereby increases the potential rate of acceptance for physician customers
willing to use the CVProfilor® DO-2020 as compared to a capital acquisition
approach, it also delays our cash flow recovery of product costs. Physician
payments for use of the CVProfilor® DO-2020 follow actual utilization by some
60-90 days; utilization in one month is invoiced in the following month and
payment is generally received within 30 to 60 days of invoicing. This delay in
payment, therefore, requires six to twelve months to fully recover product
costs. These cash flow delays mean that we will generate little, if any, cash
during the initial placement of the product and
will require cash from other sources to support our operations during this
period.

21



---



##### Table of Contents



No assurance can be given that additional working capital will be obtained
in a timely manner or on terms and conditions acceptable to us or our
shareholders. Our financing needs are based upon management estimates as to
future revenue and expense. Our business plan and our financing needs are also
subject to change based upon, among other factors, market conditions, and our
ability to materially increase the revenue generated by our CVProfilor® DO-2020
System and other cash flow from operations. Our efforts to raise additional
funds may be hampered by the fact that our securities are quoted on the OTC
Bulletin Board, are illiquid and are subject to the rules relating to penny
stocks.

We have historically obtained working capital from the issuance of our
securities. In July 1998, we completed our initial public offering of
2,587,500 units, each unit consisting of one share of our common stock and one
Redeemable Class A Warrant (the Class A Warrant) which resulted in total net
proceeds to us of $9,188,414. Beginning on January 23, 2001 and ending on
March 26, 2001, we offered our Redeemable Class B Warrants (the Class B
Warrants) for no additional consideration to those holders of our Class A
Warrants who properly exercised a Class A Warrant in the offering period. We
raised $1,964,371 (net of offering expenses of $73,062) in connection with this
offering of the Class B Warrants. On March 27, 2002, we completed a private
placement to five investors consisting of three-year 8% Convertible Notes in
the aggregate principal amount of $2,000,000. Beginning on June 6, 2002 and
ending on November 14, 2002, we offered Class B Warrants for no additional
consideration to those holders of the Class A Warrants who properly exercised a
Class A Warrant in the offering period. Total gross proceeds from this
offering were $57,400. On August 28, 2003, we completed the private placement
offering (the Unit Placement) of 585,980 units to a group of investors led by
Mark N. Schwartz, our Chief Executive Officer. Net proceeds from this offering
were approximately $1.87 million. On February 9, 2004, we completed an
additional private placement offering of 118,113 units to a group of investors.
Gross proceeds from this offering were $461,370.




Item 4. Controls and Procedures.

(a)  Evaluation of Disclosure Controls and Procedures.

The Companys Chief Executive Officer, Mark N. Schwartz, and Chief
Financial Officer, James S. Murphy, have evaluated the Companys disclosure
controls and procedures as of the end of the period covered by this report.
Based upon that review, they have concluded that these controls and procedures
are effective in ensuring that material information related to the Company is
made known to them by others within the Company.

(b)  Changes in Internal Controls over Financial Reporting.

There have been no significant changes in internal control financial
reporting that occurred during the fiscal period covered by this report that
have materially affected, or are reasonably likely to materially affect, the
registrants internal control over financial reporting.

22



---



##### Table of Contents






PART II. OTHER INFORMATION




Item 2. Changes in Securities

See Item 5. Market for Common
Equity and Related Stockholder Matters, Recent Sales of Unregistered
Securities of our Annual Report on Form 10-KSB for the fiscal
year ended June 30, 2003 for a description of issuances of
unregistered securities during the quarter ended September 30,
2003 in connection with the Unit Placement and the closing of the
Conversion and Voting Agreement.

On December 18, 2003, the Company
granted options to purchase an aggregate of 2,480,000 shares of
common stock, pursuant to the Companys 2003
Stock Plan, to certain members of the Companys Board of
Directors and employees. The options vest over three (3) years,
commencing December 18, 2004, and have an exercise price of
$0.20 per share.

On February 9, 2004, the Company
completed a private placement of 118,113 units (the
Units) comprised of 118,113 shares of Series A Preferred
Stock, 1,878,365 shares of our common stock, purchase warrants which
entitle the holders thereof to acquire an aggregate of 295,295 shares
of Series A Preferred Stock and 4,695,935 shares of common stock.
Based upon the manner of sale and representations by the investors,
this issuance was exempt from registration under Rule 506 of
Regulation D, as this issuance was a private placement not involving
any public offering within the meaning of Section 4(2) of the Act.




Item 4. Submission of Matters to a Vote of Security Holders

(a)  The Annual Meeting of Shareholders was held on December 3, 2003.

(b)  The results of the shareholders votes were as follows:

|   |  |                                                                                                                                       |  |                                                                |            |         |  |         |  |    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------- | ---------- | ------- |  | ------- |  | ---
|   |  |                                                                                                                                       |  | Votes of Common Stock and Series A Preferred Stock, as a Class
|   |  |                                                                                                                                       |  |                                                               
|   |  |                                                                                                                                       |  | For                                                            |            | Against |  | Abstain
|   |  |                                                                                                                                       |  |                                                                |            |         |  |        
|1. |  | Election of two Class I
directors, two Class II
directors and one
Class III director.                                                 |  |                                                                | 19,886,067 |         |  | N/A     |  | N/A
|2. |  | Amend the Articles of Incorporation
to increase the total number
of authorized shares of common
stock from 25,000,000 to
150,000,000. |  |                                                                | 19,886,067 |         |  | N/A     |  | N/A
|3. |  | Approve the 2003 Stock Plan.                                                                                                          |  |                                                                | 19,886,067 |         |  | N/A     |  | N/A




Item 6. Exhibits and Reports on Form 8-K

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

|     |  |                                                                                           
|---- |  | ------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to
13a-14 and 15d-14 of the Exchange Act
|    
|31.2 |  | Certification of Chief Financial Officer pursuant to
13a-14 and 15d-14 of the Exchange Act
|    
|32   |  | Certificate pursuant to 18 U.S.C. § 1350                                                  

(b)  Reports on Form 8-K.

The Company filed the following Current Report on Form 8-K during the
quarter covered by this Form 10-QSB:



| |  |  | Current Report on Form 8-K dated November
3, 2003 reporting under Item 5 that its Board of Directors
determined that the Companys Annual Meeting of
Shareholders will be held Wednesday, December 3, 2003. The
Board of Directors established October 31, 2003 as the
record date for determination of shareholders entitled to
vote at the Annual Meeting.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23



---



##### Table of Contents






SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant
has caused this Form 10-QSB to be signed on its behalf by the undersigned,
thereunto duly authorized.



|                  |  |  |                                            |                    
|----------------- |  |  | ------------------------------------------ | -------------------
|                  |  |  | HYPERTENSION DIAGNOSTICS, INC.            
|                 
|                  |  |  | By                                         | /s/ James S. Murphy
|                  |  |  |                                            |                    
|                  |  |  | James S. Murphy                           
|                  |  |  | Senior Vice President, Finance and        
|                  |  |  | Administration and Chief Financial Officer
|                  |  |  | (principal financial officer)             
|February 17, 2004 |  | 

24