##### 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, 2001

Commission File Number: 0-24635



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

|                                   |  |                                                
|---------------------------------- |  | -----------------------------------------------
|MINNESOTA
(State of incorporation) |  | 41-1618036
(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 IN BALLOT BOX |  | No OPEN BALLOT BOX

The number of shares of Common Stock outstanding as of January 31, 2002 was 5,920,829.

Transitional Small Business Disclosure Format:

|                    |  |                   
|------------------- |  | ------------------
|Yes OPEN BALLOT BOX |  | No X IN BALLOT BOX





---

TABLE OF CONTENTS



|                              |                                                                                               |                                                                                                       |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | Balance Sheets  December 31, 2001 and June 30, 2001                                                 
|                              |                                                                                               | Statements of Operations  Three Months and Six Months Ended December 31, 2001 and 2000, respectively
|                              |                                                                                               | Statements of Cash Flows  Six Months Ended December 31, 2001 and 2000                               
|                              |                                                                                               | Notes to Financial Statements                                                                        
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II. OTHER INFORMATION   
|                              | Item 2. Use of Proceeds                                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   



---



##### 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, 2001 and June 30, 2001                                                  |    |          | 3 | 
|                              
|                               |                                                                                               | Statements of Operations  Three Months and Six Months Ended
December 31, 2001 and 2000, respectively |    |          | 4 | 
|                              
|                               |                                                                                               | Statements of Cash Flows  Six Months Ended
December 31, 2001 and 2000                                |    |          | 5 | 
|                              
|                               |                                                                                               | Notes to Financial Statements                                                                         |    |          | 6 | 
|                              
|                               | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                       |    | 7        |  
|                              
|PART II. OTHER INFORMATION:    |                                                                                               |                                                                                                       |    |         
|                              
|                               | Item 2. Use of Proceeds                                                                       |                                                                                                       |    | 14       |  
|                              
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                       |    | 14       |  
|                              
|                               | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                       |    | 15       |  
|                              
|SIGNATURES                     |                                                                                               |                                                                                                       | 15 |         

2



---



##### Table of Contents












PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Hypertension Diagnostics, Inc.

Balance Sheets

|                                                                                                               |                                   |                                                                                                      |                                            |             |              |           |         |             |        |           | 
|-------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ------------ | --------- | ------- | ----------- | ------ | --------- | 
|                                                                                                               |                                   |                                                                                                      |                                            |             | December 31, |           |         | June 30,    |       
|                                                                                                               |                                   |                                                                                                      |                                            |             | 2001         |           |         | 2001        |       
|                                                                                                               |                                   |                                                                                                      |                                            |             |              |           |         |             |       
|Assets                                                                                                         |                                   |                                                                                                      |                                            |             |              |           |         |            
|Current Assets:                                                                                                |                                   |                                                                                                      |                                            |             |              |           |         |            
|                                                                                                               | Cash and cash equivalents         |                                                                                                      | $                                          | 1,385,881   |              |           | $       | 3,885,064   |       
|                                                                                                               | Accounts receivable               |                                                                                                      |                                            | 187,929     |              |           |         | 46,017      |       
|                                                                                                               | Interest receivable               |                                                                                                      |                                            |            |              |           |         | 8,436       |       
|                                                                                                               | Inventory                         |                                                                                                      |                                            | 1,397,910   |              |           |         | 1,298,178   |       
|                                                                                                               | Prepaids and other current assets |                                                                                                      |                                            | 181,305     |              |           |         | 9,679       |       
|                                                                                                               |                                   |                                                                                                      |                                            |             |              |          
|                                                                                                               |                                   |                                                                                                      | Total Current Assets                       |             |              | 3,153,025 |         |             |        | 5,247,374 | 
|                                                                                                              
|Property and Equipment:                                                                                        |                                   |                                                                                                      |                                            |             |              |           |         |            
|                                                                                                               | Leasehold improvements            |                                                                                                      |                                            | 17,202      |              |           |         | 17,202      |       
|                                                                                                               | Furniture and equipment           |                                                                                                      |                                            | 1,056,923   |              |           |         | 841,933     |       
|                                                                                                               | Less accumulated depreciation     |                                                                                                      |                                            | (406,932    | )            |           |         | (309,567    | )     
|                                                                                                               |                                   |                                                                                                      |                                            |             |              |          
|                                                                                                               |                                   |                                                                                                      | 667,193                                    |             |              |           | 549,568 |            
|Patents, net of accumulated amortization of $38,605
and $35,205 at December 31 and June 30, 2001,
respectively |                                   |                                                                                                      | 6,800                                      |             |              |           | 10,200  |            
|Other Assets                                                                                                   |                                   |                                                                                                      | 14,230                                     |             |              |           | 6,730   |            
|                                                                                                               |                                   |                                                                                                      |                                            |             |              |          
|                                                                                                               |                                   |                                                                                                      | Total Assets                               |             | $            | 3,841,248 |         |             | $      | 5,813,872 | 
|                                                                                                               |                                   |                                                                                                      |                                            |             |              |          
|Liabilities and Shareholders Equity                                                                           |                                   |                                                                                                      |                                            |             |              |           |         |            
|Current Liabilities:                                                                                           |                                   |                                                                                                      |                                            |             |              |           |         |            
|                                                                                                               | Accounts payable                  |                                                                                                      | $                                          | 98,922      |              |           | $       | 238,797     |       
|                                                                                                               | Accrued payroll and payroll taxes |                                                                                                      |                                            | 191,422     |              |           |         | 192,593     |       
|                                                                                                               | Other accrued expenses            |                                                                                                      |                                            | 21,086      |              |           |         | 48,697      |       
|                                                                                                               |                                   |                                                                                                      |                                            |             |              |          
|                                                                                                               |                                   |                                                                                                      | Total Current Liabilities                  |             |              | 311,430   |         |             |        | 480,087   | 
|                                                                                                              
|Shareholders Equity:                                                                                          |                                   |                                                                                                      |                                            |             |              |           |         |            
|                                                                                                               | Preferred Stock, $.01 par value:  |                                                                                                      |                                            |             |              |           |         |             |       
|                                                                                                               |                                   | Authorized shares5,000,000                                                                          |                                            |             |              |           |         |             |        |          
|                                                                                                               |                                   | Issued and outstanding sharesnone                                                                   |                                            |             |              |           |         |             |        |          
|                                                                                                               | Common Stock, $.01 par value:     |                                                                                                      |                                            |             |              |           |         |             |       
|                                                                                                               |                                   | Authorized shares25,000,000                                                                         |                                            |             |              |           |         |             |        |          
|                                                                                                               |                                   | Issued and outstanding shares5,920,829 and 5,684,329
at December 31 and June 30, 2001, respectively |                                            |             | 59,208       |           |         |             | 56,843 |          
|                                                                                                               | Additional paid-in capital        |                                                                                                      |                                            | 18,798,497  |              |           |         | 16,527,165  |       
|                                                                                                               | Deferred compensation             |                                                                                                      |                                            | (779,107    | )            |           |         | (11,870     | )     
|                                                                                                               | Accumulated deficit               |                                                                                                      |                                            | (14,548,780 | )            |           |         | (11,238,353 | )     
|                                                                                                               |                                   |                                                                                                      |                                            |             |              |          
|                                                                                                               |                                   |                                                                                                      | Total Shareholders Equity                 |             |              | 3,529,818 |         |             |        | 5,333,785 | 
|                                                                                                               |                                   |                                                                                                      |                                            |             |              |          
|                                                                                                               |                                   |                                                                                                      | Total Liabilities and Shareholders Equity |             | $            | 3,841,248 |         |             | $      | 5,813,872 | 
|                                                                                                               |                                   |                                                                                                      |                                            |             |              |          

See accompanying notes.

3



---



##### Table of Contents






Hypertension Diagnostics, Inc.

Statements of Operations

|                                              |                                     |              |                   |           |                    |            |           |                  |         |         |            |           |         |            |           |           |           |           |  
|--------------------------------------------- | ----------------------------------- | ------------ | ----------------- | --------- | ------------------ | ---------- | --------- | ---------------- | ------- | ------- | ---------- | --------- | ------- | ---------- | --------- | --------- | --------- | --------- | -
|                                              |                                     |              |                   |           | Three Months Ended |            |           | Six Months Ended |        
|                                              |                                     |              |                   |           | December 31        |            |           | December 31      |        
|                                              |                                     |              |                   |           |                    |            |           |                  |        
|                                              |                                     |              |                   |           | 2001               |            |           | 2000             |         |         | 2001       |           |         | 2000       |          
|                                              |                                     |              |                   |           |                    |            |           |                  |         |         |            |           |         |            |          
|Revenue                                       |                                     | $            | 232,493           |           |                    | $          | 1,204,500 |                  |         | $       | 324,208    |           |         | $          | 1,653,304 |          
|Cost of Sales                                 |                                     |              | 41,476            |           |                    |            | 296,707   |                  |         |         | 63,576     |           |         |            | 371,612   |          
|                                              |                                     |              |                   |           |                    |            |           |                  |         |         |            |          
|                                              |                                     | Gross Profit |                   |           | 191,017            |            |           |                  | 907,793 |         |            |           | 260,632 |            |           |           | 1,281,692 |          
|                                             
|Expenses:                                     |                                     |              |                   |           |                    |            |           |                  |         |         |            |           |         |            |           |          
|                                              | Research and development            |              |                   | 5,317     |                    |            |           | 58,670           |         |         |            | 40,827    |         |            |           | 130,704   |          
|                                              | Selling, general and administrative |              |                   | 1,398,532 |                    |            |           | 901,542          |         |         |            | 3,571,458 |         |            |           | 1,608,860 |          
|                                              |                                     |              |                   |           |                    |            |           |                  |         |         |            |          
|                                              |                                     |              | Total Expenses    |           |                    | 1,403,849  |           |                  |         | 960,212 |            |           |         | 3,612,285  |           |           |           | 1,739,564 |  
|                                              |                                     |              |                   |           |                    |            |           |                  |         |         |            |          
|Operating (Loss)                              |                                     |              | (1,212,832        | )         |                    |            | (52,419   | )                |         |         | (3,351,653 | )         |         |            | (457,872  | )        
|                                             
|Other Income:                                 |                                     |              |                   |           |                    |            |           |                  |         |         |            |           |         |            |           |          
|                                              | Interest income                     |              |                   | 12,194    |                    |            |           | 53,929           |         |         |            | 41,226    |         |            |           | 112,062   |          
|                                              |                                     |              |                   |           |                    |            |           |                  |         |         |            |          
|                                              |                                     |              | Net Income (Loss) |           | $                  | (1,200,638 | )         |                  | $       | 1,510   |            |           | $       | (3,310,427 | )         |           | $         | (345,810  | )
|                                              |                                     |              |                   |           |                    |            |           |                  |         |         |            |          
|                                             
|Basic and Diluted Net Income (Loss) per Share |                                     | $            | (.20              | )         |                    | $          | .00       |                  |         | $       | (.56       | )         |         | $          | (.07      | )        
|Weighted Average Shares Outstanding           |                                     |              | 5,913,128         |           |                    |            | 5,280,761 |                  |         |         | 5,892,669  |           |         |            | 5,242,443 |          

See accompanying notes.

4



---



##### Table of Contents






Hypertension Diagnostics, Inc.

Statements of Cash Flows

|                                                                            |                                                             |                                   |                                                  |           |                  |            |            |        |          |            |  
|--------------------------------------------------------------------------- | ----------------------------------------------------------- | --------------------------------- | ------------------------------------------------ | --------- | ---------------- | ---------- | ---------- | ------ | -------- | ---------- | -
|                                                                            |                                                             |                                   |                                                  |           | Six Months Ended |           
|                                                                            |                                                             |                                   |                                                  |           | December 31      |           
|                                                                            |                                                             |                                   |                                                  |           |                  |           
|                                                                            |                                                             |                                   |                                                  |           | 2001             |            |            | 2000   |         
|                                                                            |                                                             |                                   |                                                  |           |                  |            |            |        |         
|Operating Activities:                                                       |                                                             |                                   |                                                  |           |                  |            |            |       
|Net loss                                                                    |                                                             | $                                 | (3,310,427                                       | )         |                  | $          | (345,810   | )     
|Adjustments to reconcile net loss to net
cash used in operating activities: |                                                             |                                   |                                                  |           |                  |            |            |       
|                                                                            | Value of stock options granted in lieu
of cash compensation |                                   |                                                  | 1,463,863 |                  |            |            | 35,670 |         
|                                                                            | Depreciation                                                |                                   |                                                  | 97,364    |                  |            |            | 53,170 |         
|                                                                            | Amortization                                                |                                   |                                                  | 3,400     |                  |            |            | 3,400  |         
|                                                                            | Change in operating assets and liabilities:                 |                                   |                                                  |           |                  |            |            |        |         
|                                                                            |                                                             | Accounts receivable               |                                                  |           | (141,912         | )          |            |        | (864,193 | )         
|                                                                            |                                                             | Interest receivable               |                                                  |           | 8,436            |            |            |        | (2,681   | )         
|                                                                            |                                                             | Inventory                         |                                                  |           | (309,069         | )          |            |        | 589      |           
|                                                                            |                                                             | Prepaids and other current assets |                                                  |           | (171,626         | )          |            |        | (38,450  | )         
|                                                                            |                                                             | Other assets                      |                                                  |           | (7,500           | )          |            |        |         |           
|                                                                            |                                                             | Accounts payable                  |                                                  |           | (139,875         | )          |            |        | (19,323  | )         
|                                                                            |                                                             | Accrued payroll and payroll taxes |                                                  |           | (1,171           | )          |            |        | 28,941   |           
|                                                                            |                                                             | Other accrued expenses            |                                                  |           | (27,611          | )          |            |        | 34,883   |           
|                                                                            |                                                             |                                   |                                                  |           |                  |           
|                                                                            |                                                             |                                   | Net cash used in operating activities            |           |                  | (2,536,128 | )          |        |          | (1,113,804 | )
|                                                                           
|Investing Activities:                                                       |                                                             |                                   |                                                  |           |                  |            |            |       
|Purchase of property and equipment                                          |                                                             |                                   | (5,653                                           | )         |                  |            | (39,344    | )     
|                                                                            |                                                             |                                   |                                                  |           |                  |           
|                                                                            |                                                             |                                   | Net cash used in investing activities            |           |                  | (5,653     | )          |        |          | (39,344    | )
|                                                                           
|Financing Activities:                                                       |                                                             |                                   |                                                  |           |                  |            |            |       
|Issuance of Common Stock                                                    |                                                             |                                   | 42,598                                           |           |                  |            | 135,986    |       
|                                                                            |                                                             |                                   |                                                  |           |                  |           
|                                                                            |                                                             |                                   | Net cash provided by financing activities        |           |                  | 42,598     |            |        |          | 135,986    |  
|                                                                            |                                                             |                                   |                                                  |           |                  |           
|Net decrease in cash and cash equivalents                                   |                                                             |                                   | (2,499,183                                       | )         |                  |            | (1,017,162 | )     
|                                                                            |                                                             |                                   | Cash and cash equivalents at beginning of period |           |                  | 3,885,064  |            |        |          | 4,018,745  |  
|                                                                            |                                                             |                                   |                                                  |           |                  |           
|Cash and cash equivalents at end of period                                  |                                                             | $                                 | 1,385,881                                        |           |                  | $          | 3,001,583  |       
|                                                                            |                                                             |                                   |                                                  |           |                  |           

See accompanying notes.

5



---



##### Table of Contents






Hypertension Diagnostics, Inc.
Notes to Financial Statements

December 31, 2001



|1. |  | Interim Financial Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying unaudited financial statements have been prepared in accordance with the instructions
to Form 10-QSB and do not include all the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of management, these unaudited
financial statements reflect all adjustments, consisting only of normal and recurring adjustments
necessary for a fair presentation of the financial statements. The results of operations for the three
months and six months ended December 31, 2001 are not necessarily indicative of the results that may be
expected for the full year ending June 30, 2002. The June 30, 2001 balance sheet was derived from
audited financial statements. For further information, refer to the financial statements and notes
included in the Companys Annual Report on Form 10-KSB for the fiscal year ended June 30, 2001. The
policies described in that report are used for preparing quarterly reports.                                                                                                                                                                                                                             
|  
|2. |  | Consulting Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | On July 9, 2001, the Company entered into a Consulting Agreement (the Agreement) for investor
communications and public relations consulting services with Redwood Consulting, LLC (Redwood), a full
service investor relations firm based in Marin County, California. In consideration for the consulting
services to be provided, on July 9, 2001 the Company issued 200,000 shares of Common Stock with a fair
market value of $6.02 per share on the date of issuance and warrants to purchase 300,000 shares of
Common Stock. Under the warrants agreement,
warrant holders can purchase an aggregate of 100,000 shares of Common Stock at $5.00 per share, an
aggregate of 100,000 shares at $7.50 per share and an aggregate of 100,000 shares at $10.00 per share.
The warrants agreement expires in July 2004. The Company has determined the fair value of the Agreement
to be $2,129,000, which amount will be expensed as the services are provided. In the quarters ended
September 30, 2001 and December 31, 2001, the Company recognized $1,065,000 and $355,000, respectively,
of expense associated with the Agreement. The fair value of the issued shares and warrants was arrived
at based upon the following methods:

|         |  |   |  |  |  |                                                                                                         
|-------- |  | - |  |  |  | --------------------------------------------------------------------------------------------------------
|Shares   |  | - |  |  |  | Last Sales price ($6.02) of the Companys Common Stock on July 9,
2001 (The Nasdaq SmallCap Market); and
|        
|Warrants |  | - |  |  |  | The Black-Scholes option pricing model.                                                                 

6



---



##### 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 wish to caution readers not to place undue
reliance on any forward-looking statements and to recognize that the statements are not predictions of actual
future results. Actual results could differ materially from those anticipated in the forward-looking statements
due to the risks and uncertainties set forth in our 2001 Annual Report on Form 10-KSB under the caption Risk
Factors, as well as others not now anticipated. These risks and uncertainties include, without limitation, our
ability to generate revenue; our need for additional capital; the availability of third-party reimbursements;
market acceptance of our products; the ability to operate and maintain the Central Data Management Facility
(CDMF) on a commercial scale; regulatory restrictions pertaining to data privacy issues in utilizing the CDMF;
the ability to manufacture our products on a commercial scale and in compliance with regulatory requirements; the
availability of integral components for our products; our ability to develop distribution channels; increased
competition; changes in government regulation; health care reforms; exposure to potential product liability; and
our ability to protect our proprietary technology. We undertake no responsibility to update any forward-looking
statement.

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

Overview

We are engaged in the design, development, manufacture and marketing of proprietary medical devices
that we believe non-invasively detect subtle changes in the elasticity of both large and small arteries.
Vascular compliance or arterial elasticity has been investigated for many years and clinical studies suggest that
a lack of arterial elasticity is an early indicator of vascular disease. We are currently marketing two versions
of our Product: the HDI/PulseWave CR-2000 Research CardioVascular Profiling System and the CVProfilor® DO-2020
CardioVascular Profiling System. We also plan to market the CVProfilor® MD-3000 CardioVascular Profiling
System. The CR-2000 Research System is being marketed worldwide, has a medical device CE Mark (CE0123) which
allows it to be marketed as a medical device in the European Union and is being marketed for research purposes
only in the United States (that is, not for screening, diagnosing, or monitoring the treatment of patients).
The CVProfilor® DO-2020 System, intended for use by United States physicians to screen patients for the presence
of underlying vascular disease, is an FDA regulated medical device. On November 1, 2000, we obtained FDA
approval to market the CVProfilor® DO-2020 System in the U.S. and while we expect the CVProfilor® DO-2020 System
to generate the majority of our revenues in the future, to date, it has not yet generated any significant
revenues. The CVProfilor® DO-2020 System is being marketed to primary care physicians and other health care
professionals on a per-patient-tested rental basis. Utilizing our Central Data Management 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

7



---



##### Table of Contents



Product acceptance in the medical marketplace and should allow physician usage fees to eventually generate the
majority of our revenue. The CVProfilor® MD-3000 System will provide physicians outside the United States with
important cardiovascular parameters, which we believe will provide clinically beneficial information useful in
screening patients who may be at risk for future cardiovascular disease, provide assistance to physicians with
their diagnosis of patient cardiovascular diseases, and allow for monitoring the effectiveness of various
treatments of patients with diagnosed cardiovascular disease. The CVProfilor® MD-3000 System requires that we
obtain a CE Mark in order for it to be marketed within European Union countries and will require certain
regulatory approval for it to be marketed in other countries throughout the world.

Results of Operations

As of December 31, 2001, we had an accumulated deficit of $(14,548,780), attributable primarily to
research and development and general and administrative expenses. Until we are able to generate significant
revenues from our activities, we expect to continue to incur operating losses.

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

The following is a summary of our Revenue and Cost of Sales for the three months ended December 31, 2001
and 2000, respectively:

|              |  |                                      |         |  |       |           |         |        |                    |   |        | 
|------------- |  | ------------------------------------ | ------- |  | ----- | --------- | ------- | ------ | ------------------ | - | ------ | 
|              |  | Three Months Ended December 31, 2001 |        
|              |  |                                      |        
|              |  |                                      |         |  |       | Equipment |         |        | CVProfilor®DO-2020 |  
|              |  | Total                                |         |  | Sales |           |         | Rental |                   
|              |  |                                      |         |  |       |           |         |        |                   
|Revenue       |  | $                                    | 232,493 |  |       | $         | 208,701 |        |                    | $ | 23,792 | 
|Cost of Sales |  |                                      | 41,476  |  |       |           | 38,060  |        |                    |   | 3,416  | 
|              |  |                                      |         |  |       |           |         |        |                   
|Gross Profit  |  | $                                    | 191,017 |  |       | $         | 170,641 |        |                    | $ | 20,376 | 
|              |  |                                      |         |  |       |           |         |        |                   

|              |  |                                      |           |  |       |           |           |        |                    |   |   | 
|------------- |  | ------------------------------------ | --------- |  | ----- | --------- | --------- | ------ | ------------------ | - | - | 
|              |  | Three Months Ended December 31, 2000 |          
|              |  |                                      |          
|              |  |                                      |           |  |       | Equipment |           |        | CVProfilor®DO-2020 |  
|              |  | Total                                |           |  | Sales |           |           | Rental |                   
|              |  |                                      |           |  |       |           |           |        |                   
|Revenue       |  | $                                    | 1,204,500 |  |       | $         | 1,204,500 |        |                    | $ |  | 
|Cost of Sales |  |                                      | 296,707   |  |       |           | 296,707   |        |                    |   |  | 
|              |  |                                      |           |  |       |           |           |        |                   
|Gross Profit  |  | $                                    | 907,793   |  |       | $         | 907,793   |        |                    | $ |  | 
|              |  |                                      |           |  |       |           |           |        |                   

Total Equipment Sales Revenue for the three months ended December 31, 2001 was $208,701, compared to
$1,204,500 for the three months ended December 31, 2000. This decrease is 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 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. Another reason for the decrease
was that, in the quarter ended December 31, 2000, we had a purchase order from one customer that involved a
purchase of multiple units of our CR-2000 Research System.

8



---



##### Table of Contents



For the three months ended December 31, 2001, we recognized Revenue for the CVProfilor® DO-2020
per-patient-tested rental program of $23,792. 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 three months ended December 31, 2001 were $1,403,849 compared to $960,212 for the
three months ended December 31, 2000. Approximately .4% of the $1,403,849 and 6.1% of the $960,212 total
expenses were related to research and development expenses. A further breakdown of research and development
expenses is as follows:

|                                                                                             |                                         |   |                    |       |  |      |        |        | 
|-------------------------------------------------------------------------------------------- | --------------------------------------- | - | ------------------ | ----- |  | ---- | ------ | ------ | 
|                                                                                             |                                         |   | Three Months Ended |      
|                                                                                             |                                         |   | December 31        |      
|                                                                                             |                                         |   |                    |      
|                                                                                             |                                         |   | 2001               |       |  | 2000 |       
|                                                                                             |                                         |   |                    |       |  |      |       
|Design and development of prototype devices and other
enhancements and improvements          |                                         | $ | 5,317              |       |  | $    | 40,835 |       
|Recognized compensation cost for value of stock options
granted in lieu of cash compensation |                                         |   |                   |       |  |      | 17,835 |       
|                                                                                             |                                         |   |                    |       |  |     
|                                                                                             | Total research and development expenses |   | $                  | 5,317 |  |      | $      | 58,670 | 
|                                                                                             |                                         |   |                    |       |  |     

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

|                                                             |                                                    |   |                    |           |  |      |         |         | 
|------------------------------------------------------------ | -------------------------------------------------- | - | ------------------ | --------- |  | ---- | ------- | ------- | 
|                                                             |                                                    |   | Three Months Ended |          
|                                                             |                                                    |   | December 31        |          
|                                                             |                                                    |   |                    |          
|                                                             |                                                    |   | 2001               |           |  | 2000 |        
|                                                             |                                                    |   |                    |           |  |      |        
|Wages, related expenses and benefits                         |                                                    | $ | 324,923            |           |  | $    | 258,972 |        
|Patents and related expenses                                 |                                                    |   | 8,617              |           |  |      | 25,972  |        
|Outside consultants                                          |                                                    |   | 412,184            |           |  |      | 23,770  |        
|Rent-building, equipment and utilities                       |                                                    |   | 30,566             |           |  |      | 23,332  |        
|Insurance-general and directors/officers liability           |                                                    |   | 17,948             |           |  |      | 13,744  |        
|Selling, marketing and promotion, including applicable wages |                                                    |   | 416,414            |           |  |      | 362,389 |        
|Legal and audit/accounting fees                              |                                                    |   | 51,303             |           |  |      | 31,761  |        
|Royalties                                                    |                                                    |   | 6,975              |           |  |      | 36,690  |        
|Depreciation and amortization                                |                                                    |   | 48,007             |           |  |      | 28,924  |        
|Other-general and administrative                             |                                                    |   | 81,595             |           |  |      | 95,988  |        
|                                                             |                                                    |   |                    |           |  |     
|                                                             | Total selling, general and administrative expenses |   | $                  | 1,398,532 |  |      | $       | 901,542 | 
|                                                             |                                                    |   |                    |           |  |     

Our number of employees increased from thirteen in the three months ended December 31, 2000 to sixteen
in the three months ended December 31, 2001.

Outside consultants expense increased from $23,770 for the three months ended December 31, 2000 to
$412,184 for the three months ended December 31, 2001. Included in the $412,184 expense amount is a non-cash
expense charge of $355,000 relating to our July 9, 2001 Consulting Agreement with Redwood Consultants, LLC. The
fair value of that agreement ($2,129,000) is being expensed as services are provided.

9



---



##### Table of Contents



Selling, marketing and promotion expense increased from $362,389 for the three months ended December 31,
2000 to $416,414 for the three months ended December 31, 2001. This category includes wages and commissions paid
by us relating to our sales and marketing efforts as well as travel and convention expenses.

Interest income was $12,194 and $53,929 for the three months ended December 31, 2001 and 2000,
respectively.

Net loss was $(1,200,638) for the three months ended December 31, 2001 compared to a net income of $1,510 for the
three months ended December 31, 2000. For the three months ended December 31, 2001, basic and diluted net loss
per share was $(.20), based on weighted average shares outstanding of 5,913,128. For the three months ended
December 31, 2000, basic and diluted net income per share was $.00, based on weighted average shares outstanding
of 5,280,761.

Six Months Ended December 31, 2001 Compared to Six Months Ended December 31, 2000

The following is a summary of our Revenue and Cost of Sales for the six months ended December 31, 2001
and 2000, respectively:

|              |  |                                    |         |  |       |           |         |        |                    |   |        | 
|------------- |  | ---------------------------------- | ------- |  | ----- | --------- | ------- | ------ | ------------------ | - | ------ | 
|              |  | Six Months Ended December 31, 2001 |        
|              |  |                                    |        
|              |  |                                    |         |  |       | Equipment |         |        | CVProfilor®DO-2020 |  
|              |  | Total                              |         |  | Sales |           |         | Rental |                   
|              |  |                                    |         |  |       |           |         |        |                   
|Revenue       |  | $                                  | 324,208 |  |       | $         | 293,851 |        |                    | $ | 30,357 | 
|Cost of Sales |  |                                    | 63,576  |  |       |           | 58,505  |        |                    |   | 5,071  | 
|              |  |                                    |         |  |       |           |         |        |                   
|Gross Profit  |  | $                                  | 260,632 |  |       | $         | 235,346 |        |                    | $ | 25,286 | 
|              |  |                                    |         |  |       |           |         |        |                   

|              |  |                                    |           |  |       |           |           |        |                    |   |   | 
|------------- |  | ---------------------------------- | --------- |  | ----- | --------- | --------- | ------ | ------------------ | - | - | 
|              |  | Six Months Ended December 31, 2000 |          
|              |  |                                    |          
|              |  |                                    |           |  |       | Equipment |           |        | CVProfilor®DO-2020 |  
|              |  | Total                              |           |  | Sales |           |           | Rental |                   
|              |  |                                    |           |  |       |           |           |        |                   
|Revenue       |  | $                                  | 1,653,304 |  |       | $         | 1,653,304 |        |                    | $ |  | 
|Cost of Sales |  |                                    | 371,612   |  |       |           | 371,612   |        |                    |   |  | 
|              |  |                                    |           |  |       |           |           |        |                   
|Gross Profit  |  | $                                  | 1,281,692 |  |       | $         | 1,281,692 |        |                    | $ |  | 
|              |  |                                    |           |  |       |           |           |        |                   

Total Equipment Sales Revenue for the six months ended December 31, 2001 was $293,851, compared to
$1,653,304 for the six months ended December 31, 2000. This decrease is 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 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.

For the six months ended December 31, 2001, we recognized Revenue for the CVProfilor® DO-2020
per-patient-tested rental program of $30,357. 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, 2001 were $3,612,285 compared to $1,739,564 for the
six months ended December 31, 2000. Approximately 1.1% of the $3,612,285 and

10



---



##### Table of Contents



7.5% of the $1,739,564 total
expenses were related to research and development expenses. A further breakdown of research and development
expenses is as follows:

|                                                                                             |                                         |   |                  |        |  |      |        |         | 
|-------------------------------------------------------------------------------------------- | --------------------------------------- | - | ---------------- | ------ |  | ---- | ------ | ------- | 
|                                                                                             |                                         |   | Six Months Ended |       
|                                                                                             |                                         |   | December 31      |       
|                                                                                             |                                         |   |                  |       
|                                                                                             |                                         |   | 2001             |        |  | 2000 |       
|                                                                                             |                                         |   |                  |        |  |      |       
|Design and development of prototype devices and other
enhancements and improvements          |                                         | $ | 28,957           |        |  | $    | 95,034 |        
|Recognized compensation cost for value of stock options
granted in lieu of cash compensation |                                         |   | 11,870           |        |  |      | 35,670 |        
|                                                                                             |                                         |   |                  |        |  |     
|                                                                                             | Total research and development expenses |   | $                | 40,827 |  |      | $      | 130,704 | 
|                                                                                             |                                         |   |                  |        |  |     

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

|                                                             |                                                    |   |                  |           |  |      |         |           | 
|------------------------------------------------------------ | -------------------------------------------------- | - | ---------------- | --------- |  | ---- | ------- | --------- | 
|                                                             |                                                    |   | Six Months Ended |          
|                                                             |                                                    |   | December 31      |          
|                                                             |                                                    |   |                  |          
|                                                             |                                                    |   | 2001             |           |  | 2000 |        
|                                                             |                                                    |   |                  |           |  |      |        
|Wages, related expenses and benefits                         |                                                    | $ | 648,592          |           |  | $    | 455,718 |          
|Patents and related expenses                                 |                                                    |   | 27,477           |           |  |      | 35,453  |          
|Outside consultants                                          |                                                    |   | 1,515,499        |           |  |      | 71,355  |          
|Rent-building and utilities                                  |                                                    |   | 67,562           |           |  |      | 45,173  |          
|Insurance-general and directors/officers liability           |                                                    |   | 33,550           |           |  |      | 26,481  |          
|Selling, marketing and promotion, including applicable wages |                                                    |   | 879,198          |           |  |      | 594,287 |          
|Legal and audit/accounting fees                              |                                                    |   | 126,402          |           |  |      | 107,909 |          
|Royalties                                                    |                                                    |   | 9,726            |           |  |      | 49,599  |          
|Depreciation and amortization                                |                                                    |   | 95,693           |           |  |      | 56,570  |          
|Other-general and administrative                             |                                                    |   | 167,759          |           |  |      | 166,315 |          
|                                                             |                                                    |   |                  |           |  |     
|                                                             | Total selling, general and administrative expenses |   | $                | 3,571,458 |  |      | $       | 1,608,860 | 
|                                                             |                                                    |   |                  |           |  |     

Our number of employees increased from thirteen in the six months ended December 31, 2000 to sixteen in
the six months ended December 31, 2001.

Outside consultants expense increased from $71,355 for the six months ended December 31, 2000 to
$1,515,499 for the six months ended December 31, 2001. Included in the $1,515,499 expense amount is a non-cash
expense charge of $1,420,000 relating to our July 9, 2001 Consulting Agreement with Redwood Consultants, LLC.
The fair value of that agreement ($2,129,000) is being expensed as services are provided.

Selling, marketing and promotion expense increased from $594,287 for the six months ended December 31,
2000 to $879,198 for the six months ended December 31, 2001. This category includes wages and commissions paid
by us relating to our sales and marketing efforts as well as travel and convention expenses.

Interest income was $41,226 and $112,062 for the six months ended December 31, 2001 and 2000,
respectively.

11



---



##### Table of Contents



Net loss was $(3,310,427) and $(345,810) for the six months ended December 31, 2001 and 2000, respectively. For
the six months ended December 31, 2001, basic and diluted net loss per share was $(.56), based on weighted
average shares outstanding of 5,892,669. For the six months ended December 31, 2000, basic and diluted net loss
per share was $(.07), based on weighted average shares outstanding of 5,242,443.

Liquidity and Capital Resources

Cash and cash equivalents had a net decrease of $2,499,183 for the six months ended December 31, 2001.
The significant elements of this change were as follows: net cash used in operating activities  net loss, as
adjusted for non-cash items, of $(1,745,800); increase in accounts receivable  $141,912; increase in inventory 
$309,069; increase in prepaids and other current assets  $171,626; decrease in accounts payable  $139,875. For
the six months ended December 31, 2000, cash and cash equivalents had a net decrease of $1,017,162. The
significant elements of this change were as follows: net cash used
in operating activities  net loss, as
adjusted for noncash items, of $(253,570); increase in accounts
receivable  $864,193; net cash provided by
financing activities  issuance of Common Stock  $135,986.

In July 1998, we completed our initial public offering (IPO) in which we sold 2,250,000 units at $4.125
per unit, each unit consisting of one share of Common Stock and one Redeemable Class A Warrant (the Class A
Warrants). In August 1998, the underwriter exercised in full an overallotment option to purchase an additional
337,500 units. Total net proceeds from the IPO were $9,188,414. On January 23, 2001, we commenced an offering
of up to 2,752,192 Redeemable Class B Warrants enabling holders to purchase one share of our $.01 par value
Common Stock (the Class B Warrants). As an incentive to exercise our outstanding Class A Warrants, we offered
the Class B Warrants to those holders of the Class A Warrants who properly exercised a Class A Warrant in the
offering period. The offering period began January 23, 2001, and expired at 5:00 p.m. Central Time, March 26,
2001. We raised $1,964,371 (net of offering expenses of $73,062) in connection with the offering of the Class B
Warrants and the exercise of 395,618 Class A Warrants at $5.15 per share of Common Stock and issued 395,618 Class
B Warrants. On March 23, 2001, we announced that effective that day the exercise price of the Class B Warrants
had been reduced from $9.00 to $5.85 per share of Common Stock issuable upon exercise of the Class B Warrant.
The Class B Warrants expire on January 23, 2006. The Class B Warrants are redeemable by us for $.01 per Class B
Warrant at any time the closing bid price of our Common Stock exceeds $13.50 (subject to adjustment) for 5
consecutive trading days, as reported by The Nasdaq SmallCap Market. The Class B Warrants were approved for
listing by The Nasdaq SmallCap Market and began trading on March 7, 2001 under the symbol HDIIZ.

As of December 31, 2001, we have cash and cash equivalents of $1,385,881, and anticipate that these
funds and the anticipated revenue to be earned from placements of our CVProfilor®DO-2020 Systems, as well as
anticipated operating cost reductions, are expected to allow us to pursue the different elements of our business
development strategy until approximately June 30, 2002. We are currently implementating a plan to
conserve cash through reductions in selling, general and administrative expenses to improve working capital
management for the fiscal year ending June 30, 2002. We are also
seeking additional financing. We have engaged a non-exclusive investment
banker as an advisor as to possible alternative modes and sources of
additional working capital for funding our short-term needs and growth and
expansion of our operations. Our business plan and financing needs are
subject to change depending on, among other things, market conditions, timing and success of our marketing
efforts regarding the CVProfilor® DO-2020 System and cash flow
from operations. 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.

Although not assured, in addition to the net proceeds from the IPO, we may derive over a period of time
up to $12,133,775 from the exercise of the 2,356,073 Redeemable Class A Warrants currently

12



---



##### Table of Contents



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

13



---



##### Table of Contents






PART II. OTHER INFORMATION




Item 2. Use of Proceeds

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

|                                     |  |   |           | 
|------------------------------------ |  | - | --------- | 
|Central Data Management Facility     |  | $ | 318,194   | 
|Purchase of property and equipment   |  |   | 579,027   | 
|Selling, marketing and promotion     |  |   | 3,185,619 | 
|Wages, related expenses and benefits |  |   | 2,638,663 | 
|Outside consultants                  |  |   | 586,174   | 
|Inventory                            |  |   | 1,880,737 | 
|                                     |  |   |          
|                                     |  | $ | 9,188,414 | 
|                                     |  |   |          




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



|(a) |  | The Annual Meeting of Shareholders was held on December 10, 2001.
|--- |  | -----------------------------------------------------------------
|   
|(b) |  | The results of the shareholders votes were as follows:          

|   |  |                                                                                                      |  |           |  |         |  |           |  |        
|-- |  | ---------------------------------------------------------------------------------------------------- |  | --------- |  | ------- |  | --------- |  | -------
|   |  |                                                                                                      |  |           |  |         |  | Withhold  |  |        
|   |  |                                                                                                      |  | For       |  | Against |  | Authority |  | Abstain
|   |  |                                                                                                      |  |           |  |         |  |           |  |        
|1. |  | Re-Election of two
Class III Directors:                                                              |  |           |  |         |  |           |  |        
|   |  | Jay N. Cohn                                                                                          |  | 5,060,509 |  | N/A     |  | 53,520    |  | N/A    
|   |  | Kenneth W. Brimmer                                                                                   |  | 5,060,509 |  | N/A     |  | 53,520    |  | N/A    
|  
|2. |  | Amend the 1998 Stock
Option Plan to Increase
the Number of Shares
Reserved from 750,000
to 1,250,000 |  | 1,529,560 |  | 75,238  |  | N/A       |  | 101,633
|  
|3. |  | Approval of Selection
of Independent
Auditors                                                        |  | 5,076,696 |  | 33,800  |  | N/A       |  | 3,533  

The terms in office
as director of Messrs. Greg H. Guettler, Charles F. Chesney, and
Melville R. Bois continued after the Annual Meeting of Shareholders.

14



---



##### Table of Contents






Item 6. Exhibits and Reports on Form 8-K



|(a) |  | The following Exhibits are furnished pursuant to Item 601 of Regulation S-B: 
|--- |  | -----------------------------------------------------------------------------
|   
|    |  | None                                                                         
|   
|(b) |  | Reports on Form 8-K.                                                         
|   
|    |  | No reports on Form 8-K were filed during the quarter ended December 31, 2001.






SIGNATURES

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



|      |  |                   |  |                                                                              
|----- |  | ----------------- |  | -----------------------------------------------------------------------------
|      |  |                   |  | HYPERTENSION DIAGNOSTICS, INC.                                               
|     
|     
|      |  |                   |  | By /s/ James S. Murphy                                                       
|      |  |                   |  | James S. Murphy                                                              
|      |  |                   |  | Senior Vice President, Finance and
Administration and Chief Financial Officer
|      |  |                   |  | (principal financial officer)                                                
|Date: |  | February 13, 2002 |  |                                                                              

15