##### 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 March 31, 2005 Commission File Number: 0-24635 HYPERTENSION DIAGNOSTICS, INC.  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 þ     No o The number of shares of Common Stock outstanding as of April 30, 2005 was 31,923,351. Transitional Small Business Disclosure Format: Yes o     No þ




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HYPERTENSION DIAGNOSTICS, INC. INDEX TO FORM 10-QSB Page No.PART I. FINANCIAL INFORMATION:Item 1. Financial Statements
    
    
    3Balance Sheets  March 31, 2005 and June 30, 2004
    
    
    3Statements of Operations  Three Months and Nine Months Ended March 31, 2005 and 2004, respectively
    
    
    4Statements of Cash Flows  Nine Months Ended March 31, 2005 and 2004, respectively
    
    
    5Notes to Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 4. Controls and Procedures
    
    
    19PART II. OTHER INFORMATION:Item 1. Legal Proceedings
    
    
    20Item 2. Changes in Securities
    
    
    20Item 6. Exhibits
    
    
    20SIGNATURES
    
    
    21CERTIFICATIONS
    
    
    22Certification of CEO Pursuant to 13a-14 and 15d-14Certification of CFO Pursuant to 13a-14 and 15d-14Certificate Pursuant to 18 U.S.C. Section 1350
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements Hypertension Diagnostics, Inc. 
 Balance Sheets March 31,
    
    
    June 30,2005
    
    
    2004Assets
    
    (Unaudited)Current Assets:Cash and cash equivalents
    
    $
    1,544,926
    
    
    $
    1,378,293Accounts receivable
    
    
    760
    
    
    
    207,710Interest receivable
    
    
    
    
    
    
    8,920Inventory
    
    
    353,876
    
    
    
    224,824Prepaids and other current assets
    
    
    40,575
    
    
    
    55,497Total Current Assets
    
    
    1,940,137
    
    
    
    1,875,244Property and Equipment:Leasehold improvements
    
    
    17,202
    
    
    
    17,202Furniture and equipment
    
    
    1,294,241
    
    
    
    1,260,549Less accumulated depreciation and amortization
    
    
    (1,040,431
    )
    
    
    (915,619
    )271,012
    
    
    
    362,132Other Assets
    
    
    6,530
    
    
    
    6,530Total Assets
    
    $
    2,217,679
    
    
    $
    2,243,906Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    83,450
    
    
    $
    84,802Accrued payroll and payroll taxes
    
    
    368,284
    
    
    
    520,864Deferred revenue
    
    
    7,313
    
    
    
    Other accrued expenses
    
    
    27,768
    
    
    
    26,054Total Current Liabilities
    
    
    486,815
    
    
    
    631,720Deferred Revenue, less current portion
    
    
    2,800
    
    
    
    4,800Shareholders Equity:Series A Convertible Preferred Stock, $.01 par value:Authorized shares5,000,000Issued and outstanding shares963,916 and 803,484
at March 31, 2005 and June 30, 2004, respectively
    
    
    9,639
    
    
    
    8,035Common Stock, $.01 par value:Authorized shares150,000,000Issued and outstanding shares31,572,791 and 26,449,378
at March 31, 2005 and June 30, 2004, respectively
    
    
    315,728
    
    
    
    264,494Additional paid-in capital
    
    
    25,883,747
    
    
    
    24,585,206Accumulated deficit
    
    
    (24,481,050
    )
    
    
    (23,250,349
    )Total Shareholders Equity
    
    
    1,728,064
    
    
    
    1,607,386Total Liabilities and Shareholders Equity
    
    $
    2,217,679
    
    
    $
    2,243,906
 See accompanying notes. 3




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Hypertension Diagnostics, Inc. 
 Statements of Operations  Three Months Ended
    
    
    Nine Months EndedMarch 31
    
    
    March 312005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Equipment sales
    
    $
    25,145
    
    
    $
    10,450
    
    
    $
    157,865
    
    
    $
    147,695Equipment rental
    
    
    185,382
    
    
    
    132,914
    
    
    
    430,739
    
    
    
    324,734Service/contract income
    
    
    4,707
    
    
    
    67,157
    
    
    
    172,066
    
    
    
    220,711215,234
    
    
    
    210,521
    
    
    
    760,670
    
    
    
    693,140Cost of Sales
    
    
    27,772
    
    
    
    37,584
    
    
    
    127,060
    
    
    
    122,580Gross Profit
    
    
    187,462
    
    
    
    172,937
    
    
    
    633,610
    
    
    
    570,560Expenses:Selling, general and administrative
    
    
    553,541
    
    
    
    665,771
    
    
    
    1,886,431
    
    
    
    2,030,620Total Expenses
    
    
    553,541
    
    
    
    665,771
    
    
    
    1,886,431
    
    
    
    2,030,620Operating Loss
    
    
    (366,079
    )
    
    
    (492,834
    )
    
    
    (1,252,821
    )
    
    
    (1,460,060
    )Other Income (Expense):Interest income
    
    
    9,625
    
    
    
    7,821
    
    
    
    22,120
    
    
    
    23,363Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,185
    )9,625
    
    
    
    7,821
    
    
    
    22,120
    
    
    
    (26,822
    )Net Loss
    
    $
    (356,454
    )
    
    $
    (485,013
    )
    
    $
    (1,230,701
    )
    
    $
    (1,486,882
    )Basic and Diluted Net Loss per Share
    
    $
    (.01
    )
    
    $
    (.02
    )
    
    $
    (.05
    )
    
    $
    (.07
    )Weighted Average Shares Outstanding
    
    
    27,778,459
    
    
    
    24,016,177
    
    
    
    27,287,367
    
    
    
    20,598,659
 See accompanying notes. 4




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Hypertension Diagnostics, Inc. 
 Statements of Cash Flows  Nine Months EndedMarch 312005
    
    
    2004Operating Activities:Net loss
    
    $
    (1,230,701
    )
    
    $
    (1,486,882
    )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
    
    
    21,278
    
    
    
    5,791Depreciation
    
    
    124,812
    
    
    
    148,270Amortization of debt discount
    
    
    
    
    
    
    48,531Interest expense  converted to Common Stock
    
    
    
    
    
    
    11,956Change in operating assets and liabilities:Accounts receivable
    
    
    206,950
    
    
    
    44,499Interest receivable
    
    
    8,920
    
    
    
    3,026Inventory
    
    
    (129,052
    )
    
    
    45,496Prepaids and other current assets
    
    
    14,922
    
    
    
    (3,300
    )Accounts payable
    
    
    (1,352
    )
    
    
    28,954Accrued payroll and payroll taxes
    
    
    247,420
    
    
    
    162,089Deferred revenue
    
    
    5,313
    
    
    
    (153,553
    )Other accrued expenses
    
    
    1,714
    
    
    
    (30,230
    )Net cash used in operating activities
    
    
    (729,776
    )
    
    
    (1,175,353
    )Investing Activities:Purchase of property and equipment
    
    
    (33,692
    )
    
    
    (5,191
    )Net cash used in investing activities
    
    
    (33,692
    )
    
    
    (5,191
    )Financing Activities:Issuance of Preferred Stock and Common Stock
    
    
    930,101
    
    
    
    2,295,874Net cash provided by financing activities
    
    
    930,101
    
    
    
    2,295,874Net increase in cash and cash equivalents
    
    
    166,633
    
    
    
    1,115,330Cash and cash equivalents at beginning of period
    
    
    1,378,293
    
    
    
    90,335Cash and cash equivalents at end of period
    
    $
    1,544,926
    
    
    $
    1,205,665Supplemental Cash Flow Information:Cash paid for interest
    
    $
    
    
    
    $
    977Supplemental Schedule of Noncash Investing and Financing Activities:Conversion of notes payable and accrued interest into Common Stock
    
    $
    
    
    
    $
    541,980Transfer of asset from inventory to property and equipment
    
    
    
    
    
    
    33,188Conversion of accrued liability into Common Stock
    
    
    400,000
    
    
    
    
 See accompanying notes. 5




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Hypertension Diagnostics, Inc. 
 Notes to Financial Statements  1. Interim Financial Information The accompanying unaudited financial statements have been prepared in accordance with the
instructions to Form 10-QSB and do not include all the information and notes required by generally
accepted accounting principles for complete financial statements. In the opinion of management,
these unaudited financial statements reflect all adjustments, consisting only of normal and
recurring adjustments necessary for a fair presentation of the financial statements. The results
of operations for the three months and nine months ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the full year ending June 30, 2005. The June
30, 2004 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, 2004. The policies described in that report are used for
preparing quarterly reports. 2. Exercise of Warrants In July 2004, the Company issued 643,007 shares of common stock and 40,433 shares of Series A
Preferred Stock, to holders of warrants to purchase common stock and Series A Preferred Stock,
resulting in gross proceeds to the Company of $191,794. The exercise price was $.17 per share of
common stock and $2.04 per share of Series A Preferred Stock. The Company has granted certain
registration rights covering all of the common stock and Series A Preferred Stock sold in the
offering to the investors. These warrants relate to the nine-month stock purchase warrants issued
in the August 28, 2003 private placement offering. These warrants were exercisable until May 28,
2004. In May 2004, the Company extended the expiration date of these warrants to July 15, 2004.
For those warrant holders who exercised at least fifty percent (50%) of the number of shares
underlying these warrants by July 15, 2004, the Company further extended the expiration date of
these remaining warrants to November 9, 2004.
In November 2004, the Company further extended the expiration date of these remaining warrants to
March 15, 2005. On March 14, 2005, the Company further extended the expiration date of these
remaining warrants to March 31, 2005. On March 30, 2005, the Company further extended the
expiration date of these remaining warrants to April 29, 2005. On February 9, 2004, the Company completed a private placement offering to a group of
investors. As part of this offering, the Company issued nine-month stock purchase warrants to
purchase common stock and Series A Preferred Stock. These warrants were exercisable until November
9, 2004. In November 2004, the Company extended the expiration date of these warrants to March 15,
2005. On March 14, 2005, the Company further extended the expiration date of these warrants to
March 31, 2005. On March 30, 2005, the Company further extended the expiration date of these
warrants to April 29, 2005. In addition, for those holders who exercise with respect to at least
fifty percent (50%) of the shares underlying their November 9 warrants, the Company has agreed to
extend the exercise date of such November 9 warrants for an additional period, expiring July 31,
2005. During March 2005, certain warrant holders from the Companys August 2003 and February 2004
private placement offerings elected to exercise their warrants to receive the benefits of the
extended exercise period and the warrant exercise prices for the common stock and Series A
Preferred Stock. In connection with such exercise, the Company issued 2,421,334 shares of its
common stock at an exercise price of $0.17 per share and 152,255 shares of Series A Preferred Stock
at an exercise price of $2.04 per share to holders of common stock and Series A Preferred Stock
warrants, for an aggregate consideration of $722,227. In connection with such issuance, no
underwriters were utilized and no commissions were 6




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paid. The Company relied upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended, for such issuances. On April 26, 2005, the Company issued 335,200 shares of its common stock at an exercise price
of $0.17 per share and 21,016 shares of Series A Preferred Stock at an exercise price of $2.04 per
share to a holder of common stock and Series A Preferred Stock warrants, for an aggregate
consideration of $100,000. 3. Litigation On March 17, 2004, the Company received a letter from counsel for one of its employees
alleging that the Companys reimbursement practices were illegal and unethical and also alleging
violation of applicable whistleblower statutes. On March 18, 2004, the Company received a letter
from counsel for one of its former employees alleging that the Company failed to pay for accrued
vacation time and also alleging violation of applicable whistleblower statutes. On August 25,
2004, the Company entered into a binding memorandum of understanding with these individuals
agreeing to settle these disputes. As settlement in full of these employees claims, the Company
agreed to pay the individuals an aggregate amount of $130,000 in cash and to issue shares of freely
tradable Company common stock with a market value of $100,000. The Company intends to enter into a
definitive settlement agreement setting forth the details of the memorandum of understanding with
these individuals in the near future. The total of $230,000 has been accrued as accrued payroll at
March 31, 2005 and June 30, 2004. The Company has also retained a reimbursement consultant to
investigate the whistleblower claims, and such consultant has indicated its belief that such claims
lack merit. 4. Stock-Based Compensation The Company accounts for stock-based transactions under SFAS No.
123, Accounting for Stock-Based Compensation.As permitted by SFAS No. 123, the Company has
elected to continue following the guidance of APB Opinion No. 25 (as interpreted by FIN 44) for
measurement and recognition of stock-based transactions with employees and non-employee directors.
Because stock options have been granted at exercise prices at least equal to the fair market value
of the stock at grant
date, no compensation cost has been recognized for stock options issued to employees and
non-employee directors under the stock option plans. Stock-based transactions with non-employees
are accounted for in accordance with SFAS No. 123 and related interpretations. The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for
employee stock options. Under the intrinsic value method, compensation expense is recorded only to
the extent that the market price of the common stock exceeds the exercise price of the stock option
on the date of grant. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure. SFAS No. 148 is an amendment to SFAS No. 123 providing alternative
methods of transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation and also provides required additional disclosures about the
method of accounting for stock-based employee compensation. The Company adopted the annual
disclosure provision of SFAS No. 148 during the year ended June 30, 2003. The Company chose to not
adopt the voluntary change to the fair value method of accounting for stock-based employee
compensation, pursuant to SFAS No. 148. 7




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If compensation cost for the Companys stock option plans had been determined based on the
fair value at the grant dates, consistent with the method provided in SFAS No. 123 and SFAS No.
148, net loss and net loss per share would have been as follows: Three Months Ended March 31
    
    
    Nine Months Ended March 312005
    
    
    2004
    
    
    2005
    
    
    2004Net Loss:As Reported
    
    $
    (356,454
    )
    
    $
    (485,013
    )
    
    $
    (1,230,701
    )
    
    $
    (1,486,882
    )Fair value compensation
expense
    
    
    (60,422
    )
    
    
    (45,547
    )
    
    
    (291,216
    )
    
    
    (135,438
    )Pro Forma
    
    $
    (416,876
    )
    
    $
    (530,560
    )
    
    $
    (1,521,917
    )
    
    $
    (1,622,320
    )Basic and Diluted Net Loss per Share:As Reported
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.07
    )Fair value compensation
expense
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.01
    )Pro Forma
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.06
    )
    
    $
    (0.08
    )Stock Based Compensation:As Reported
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Fair value compensation
expense
    
    
    (60,422
    )
    
    
    (45,547
    )
    
    
    (291,216
    )
    
    
    (135,438
    )Pro Forma
    
    $
    (60,422
    )
    
    $
    (45,547
    )
    
    $
    (291,216
    )
    
    $
    (135,438
    )
 Pro forma information regarding net loss is required by Statement of Financial Accounting
Standards No. 123, and has been determined as if the Company had accounted for its stock options
under
the fair value method of that Statement. The fair value of these options granted during
the three months and nine months ended March 31, 2005 and March 31, 2004 was estimated using the
Black-Scholes option pricing model with the following weighted average assumptions: ExpectedRisk-Free
    
    
    Dividend
    
    
    Expected
    
    
    ExpectedInterest Rate
    
    
    Yield
    
    
    Life
    
    
    VolatilityThree Months EndedMarch 31, 2005
    
    
    3.60%-3.75
    %
    
    None
    
    5 years
    
    
    1.060-1.120March 31, 2004
    
    
    3.20
    %
    
    None
    
    5 years
    
    
    1.108Nine Months EndedMarch 31, 2005
    
    
    3.60%-3.75
    %
    
    None
    
    5 years
    
    
    1.060-1.120March 31, 2004
    
    
    2.46%-3.20
    %
    
    None
    
    5 years
    
    
    .915-1.108
 In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, that
focuses primarily on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. This statement replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company has entered into an employment agreement with its CEO, Mark N. Schwartz, whereby
the Company will grant 100,000 shares of its common stock to its CEO for every month of employment
for the period September 2003 through December 2004. In accordance with this agreement, on March
31, 2005, the Company issued 1,600,000 shares of its common stock to its CEO. The fair market
value of the shares at that date was $400,000. For the period January 1, 2005 through December 31,
2005, the Company will grant 125,000 shares of its common stock per month to its CEO. Accordingly,
the Company has accrued a compensation liability of $93,750 at March 31, 2005 which is the fair
market value of 375,000 shares relating to this provision. 8




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations Forward-Looking Statements This report contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. In addition, we may make forward-looking statements orally in the
future by or on behalf of the Company. When used, the words believe, expect, will, can,
estimate, anticipate and similar expressions are intended to identify forward-looking
statements. We 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 2004 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 develop a business model to timely generate acceptable levels of
revenues; the control exercised by the Schwartz Group; 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; potential violations by us of federal and state securities
laws; 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; and 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 9




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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.
    The CVProfilor® MD-3000 System is being marketed through
exclusive distributors to physicians outside the United States. These
distributors purchase the product from us and then re-sell it to end-user
physicians in their territory. The CVProfilor® MD-3000 System has a
CE Mark that allows it to be marketed within European Union countries. The
CVProfilor® MD-3000 may require certain regulatory approval for it
to be marketed in other countries throughout the world. 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, as amended by SAB No.
104. 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 or
replacement basis, at our discretion. We did not incur any significant warranty repair costs for
the three months and the nine months ended March 31, 2005 and 2004, respectively. 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. 10




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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 (first-in, first out method) 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. Research and Development. Research and Development costs are expenses as incurred. We did not
incur any research and development costs for the three months and the nine months ended March 31,
2005 and 2004, respectively. Results of Operations As of March 31, 2005, we had an accumulated deficit of $(24,481,050), 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 March 31, 2005, we had
cash and cash equivalents of $1,544,926. 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, anticipated operating cost reductions, as well as
anticipated proceeds from the exercise by holders of stock purchase warrants to purchase our common
stock and Series A Preferred Stock, will allow us to pursue our business development strategy for
at least the next twelve months following March 31, 2005. Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 The following is a summary of our Revenue and Cost of Sales for the three months ended March
31, 2005 and 2004, respectively: Three Months Ended March 31, 2005Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    215,234
    
    
    $
    25,145
    
    
    $
    185,382
    
    
    $
    4,707Cost of Sales
    
    
    27,772
    
    
    
    974
    
    
    
    26,784
    
    
    
    14Gross Profit
    
    $
    187,462
    
    
    $
    24,171
    
    
    $
    158,598
    
    
    $
    4,693
 Three Months Ended March 31, 2004Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    210,521
    
    
    $
    10,450
    
    
    $
    132,914
    
    
    $
    67,157Cost of Sales
    
    
    37,584
    
    
    
    3,064
    
    
    
    26,056
    
    
    
    8,464Gross Profit
    
    $
    172,937
    
    
    $
    7,386
    
    
    $
    106,858
    
    
    $
    58,693
 Total Equipment Sales Revenue for the three months ended March 31, 2005 was $25,145,
compared to $10,450 for the three months ended March 31, 2004. Revenue relating to international
equipment sales was $-0- for the three months ended March 31, 2005 and $10,450 for the three months
ended March 31, 2004. Although we continue to pursue sales of the CR-2000 Research Systems, the
majority of our time and attention is now, and it is expected to continue to be, focused on
expanding 11




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##### Table of Contents



CVProfilor® DO-2020 System placements (per-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 also focused 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. 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 March 31, 2005, we recognized Revenue for the
CVProfilor® DO-2020 System per-patient-tested rental program of $185,382, compared to
$132,914 for the three months ended
March 31, 2004. The per test fee is recognized as Revenue when we determine that collectibility is
probable, which currently is upon cash receipt. 12




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##### Table of Contents



For the three months ended March 31, 2005, Service/Contract Income was $4,707, compared to
$67,157 for the three months ended March 31, 2004. None of the $4,707 amount and $59,500 of the
$67,157 amount represent 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 provided our CardioVascular Profiling Systems and certain employees who tested
visitors to the pharmaceutical companys exhibition booth. In early 2005, the pharmaceutical
company informed us that they would no longer continue their prior arrangements with us for another
year. Total selling, general and administrative expenses for the three months ended March 31, 2005
were $553,541, compared to $665,771 for the three months ended March 31, 2004. The following is a
summary of the major categories included in selling, general and administrative expenses: Three Months EndedMarch 312005
    
    
    2004Wages, related expenses and benefits
    
    $
    161,159
    
    
    $
    227,358Patents and related expenses
    
    
    5,020
    
    
    
    12,389Outside consultants
    
    
    66,056
    
    
    
    36,218Rent (building/equipment) and utilities
    
    
    25,149
    
    
    
    24,105Insurance-general and directors/officers liability
    
    
    18,369
    
    
    
    20,374Selling, marketing and promotion, including applicable wages
    
    
    204,478
    
    
    
    190,917Legal and audit/accounting fees
    
    
    16,680
    
    
    
    88,019Royalties
    
    
    6,316
    
    
    
    4,301Depreciation and amortization
    
    
    13,989
    
    
    
    20,076Other-general and administrative
    
    
    36,325
    
    
    
    42,014Total selling, general and administrative expenses
    
    $
    553,541
    
    
    $
    665,771
 Wages, related expenses and benefits decreased from $227,358 to $161,159 for the three months
ended March 31, 2004 and March 31, 2005, respectively. Our number of employees decreased from
twelve as of March 31, 2004 to nine as of March 31, 2005. Outside consultants expense increased from $36,218 for the three months ended March 31, 2004
to $66,056 for the three months ended March 31, 2005. This increase is principally due to our need
for specific consulting services relating to the quality systems and regulatory affairs aspect of
our business that we now outsource as a result of our employee workforce reduction and plan to
continue to outsource. Selling, marketing and promotion expense increased from $190,917 for the three months ended
March 31, 2004 to $204,478 for the three months ended March 31, 2005. 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 to our per-patient-tested rental revenue model associated with our FDA cleared
CVProfilor® DO-2020 System 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. Interest income was $9,625 and $7,821 for the three months ended March 31, 2005 and 2004,
respectively. 13




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##### Table of Contents



Net loss was $(356,454) for the three months ended March 31, 2005, compared to a net loss of
$(485,013) for the three months ended March 31, 2004. For the three months ended March 31, 2005,
basic and diluted net loss per share was $(.01), based on weighted average shares outstanding of
27,778,459. For the three months ended March 31, 2004, basic and diluted net loss per share was
$(.02), based on weighted average shares outstanding of 24,016,177. Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004 The following is a summary of our Revenue and Cost of Sales for the nine months ended March
31, 2005 and 2004: Nine Months Ended March 31, 2005Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    760,670
    
    
    $
    157,865
    
    
    $
    430,739
    
    
    $
    172,066Cost of Sales
    
    
    127,060
    
    
    
    25,137
    
    
    
    79,855
    
    
    
    22,068Gross Profit
    
    $
    633,610
    
    
    $
    132,728
    
    
    $
    350,884
    
    
    $
    149,998
 Nine Months Ended March 31, 2004Equipment
    
    
    Equipment
    
    
    Service/Total
    
    
    Sales
    
    
    Rental
    
    
    ContractRevenue
    
    $
    693,140
    
    
    $
    147,695
    
    
    $
    324,734
    
    
    $
    220,711Cost of Sales
    
    
    122,580
    
    
    
    21,839
    
    
    
    73,762
    
    
    
    26,979Gross Profit
    
    $
    570,560
    
    
    $
    125,856
    
    
    $
    250,972
    
    
    $
    193,732
 Total Equipment Sales Revenue for the nine months ended March 31, 2005 was $157,865, compared to
$147,695 for the nine months ended March 31, 2004. Revenue relating to international equipment
sales was $58,220 for the nine months ended March 31, 2005 and $61,945 for the nine months ended
March 31, 2004. Although we continue to pursue sales of the CR-2000 Research Systems, the majority
of our time and attention is now, and it is expected to continue to be, focused on expanding
CVProfilor® DO-2020 System placements (per-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. For the nine months ended March 31, 2005, we recognized Revenue for the CVProfilor® DO-2020
per-patient-tested rental program of $430,739, compared to $324,734 for the nine months ended
March 31, 2004. The per test fee is recognized as Revenue when we determine that collectibility is
probable, which currently is upon cash receipt. For the nine months ended March 31, 2005, Service/Contract Income was $172,066 compared to
$220,711 for the nine months ended March 31, 2004. $154,500 of the $172,066 amount and $178,220 of
the $220,711 amount represent contract income pertaining to our agreement with a pharmaceutical 14




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##### Table of Contents



company to attend certain hypertension and cardiology meetings in both the U.S. and
internationally. Under this agreement, we provided our CardioVascular Profiling Systems and
certain employees who tested visitors to the pharmaceutical companys exhibition booth. In early
2005, the pharmaceutical company informed us that they would no longer continue their prior
arrangement with us for another year. Total selling, general and administrative expenses for the nine months ended March 31, 2005
were $1,886,431, compared to $2,030,620 for the nine months ended March 31, 2004. The following is
a summary of the major categories included in selling, general and administrative expenses: Nine Months EndedMarch 312005
    
    
    2004Wages, related expenses and benefits
    
    $
    581,684
    
    
    $
    672,230Patents and related expenses
    
    
    6,057
    
    
    
    27,650Outside consultants
    
    
    293,385
    
    
    
    70,757Rent (building/equipment) and utilities
    
    
    73,189
    
    
    
    73,125Insurance-general and directors/officers liability
    
    
    57,808
    
    
    
    55,117Selling, marketing and promotion, including applicable wages
    
    
    541,556
    
    
    
    618,535Legal and audit/accounting fees
    
    
    170,778
    
    
    
    222,375Royalties
    
    
    17,658
    
    
    
    14,173Depreciation and amortization
    
    
    44,956
    
    
    
    74,240Other-general and administrative
    
    
    99,360
    
    
    
    202,418Total selling, general and administrative expenses
    
    $
    1,886,431
    
    
    $
    2,030,620
 Wages, related expenses and benefits decreased from $672,230 to $581,684 for the nine months
ended March 31, 2004 and March 31, 2005, respectively. Our number of employees decreased from
twelve as of March 31, 2004 to nine as of March 31, 2005. Outside consultants expense increased from $70,757 for the nine months ended March 31, 2004 to
$293,385 for the nine months ended March 31, 2005. This increase is principally due to our need
for specific consulting services relating to the quality systems and regulatory affairs aspect of
our business that we now outsource as a result of our employee workforce reduction and plan to
continue to outsource. Selling, marketing and promotion expense decreased from $618,535 for the nine months ended
March 31, 2004 to $541,556 for the nine months ended March 31, 2005. 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 most of this decrease
in expenses. Interest income was $22,120 and $23,363 for the nine months ended March 31, 2005 and 2004,
respectively. Interest expense was $-0- and $50,185 for the nine months ended March 31, 2005 and 2004,
respectively. A further breakdown of the components of interest expense is as follows: 15




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##### Table of Contents



Nine Months EndedMarch 312005
    
    
    2004Convertible Notes Payable:8% interest on outstanding principal balances
    
    $
    
    
    
    $
    1,205Fair 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
    
    
    
    
    
    
    48,531Other-miscellaneous
    
    
    
    449Total Interest Expense
    
    $
    
    
    
    $
    50,185
 Net loss was $(1,230,701) and $(1,486,882) for the nine months ended March 31, 2005 and 2004,
respectively. For the nine months ended March 31, 2005, basic and diluted net loss per share was
$(.05), based on weighted average shares outstanding of 27,287,367. For the nine months ended
March 31, 2004, basic and diluted net loss per share was $(.07), based on weighted average shares
outstanding of 20,598,659. Liquidity and Capital Resources Cash and cash equivalents had a net increase of $166,633 and a net increase of $1,115,330 for
the nine months ended March 31, 2005 and March 31, 2004, respectively. The significant elements of
these changes were as follows: Nine Months Ended March 312005
    
    2004Net cash used in operating activities: net loss, as adjusted for non-cash items
    
    $
    (1,084,611
    )
    
    $
    (1,272,334
    )  decrease in accounts receivable:
    
    
    (A)206,950
    
    
    
    44,499 (A)
    
    $100,710 accounts receivable
balances re: four (4) CR-2000 unit sales in June, 2004 were
received in the quarter ended September 30, 2004;
$107,000 accounts receivable balance re: one
customer for services provided in June, 2004 was
received in the quarter ended September 30, 2004.
 16




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##### Table of Contents



Nine Months Ended March 312005
    
    2004 (increase) decrease in inventory:
    
    
    (B) (129,052
    )
    
    
    45,496 (B)
    
    In September 2004, we purchased
certain inventory parts from a single
vendor in the amount of $161,192. increase (decrease) in deferred revenue:
    
    
    5,313
    
    
    
    (C) (153,553
    ) (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) 930,101
    
    
    
    (E) 2,295,874 (D)
    
    $914,021 of this amount pertains to the
issuance of 192,688 shares of Series A Convertible
Preferred Stock and 3,064,341 shares of common stock to
holders who exercised certain stock purchase warrants. (E)
    
    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
$1,873,483. 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
March 31, 2005, we had an accumulated deficit of $(24,481,050). As of March 31, 2005, we had cash and cash equivalents of $1,544,926 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,
anticipated operating cost reductions, as well as anticipated proceeds from the exercise by holders
of stock purchase warrants to purchase our common stock and Series A Preferred Stock, will allow us
to pursue our business development strategy for at least the next twelve months following March 31,
2005. 17




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##### Table of Contents



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 are pursuing discussions with firms that have an interest in
representing our CVProfilor® DO-2020 System nationwide. In the short term, we have also
focused on international sales of our CR-2000 Research System and CVProfilor® MD-3000
System as a means of generating cash to support operational expenses. Until we increase our sales
and marketing staff and other programs, we do not expect to generate significant levels of revenue.
Within the next twelve months, we also do not anticipate devoting any funds to research and
development activities. 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. 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. 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 18




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##### Table of Contents



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 August Placement) of 585,980
units to a group of investors led by Mark N. Schwartz, our Chief Executive Officer. Gross proceeds
from this offering were $2,289,001 and net proceeds were $1,873,383. On February 9, 2004, we
completed an additional private placement offering (the February Placement) of 118,113 units to a
group of investors. Gross proceeds from this offering were $461,370 and net proceeds were
$413,121. In June 2004, we issued 1,580,623 shares of common stock and 99,391 shares of Series A
Preferred Stock, to holders of warrants to purchase common stock and Series A Preferred Stock,
resulting in gross proceeds of $471,464. In July 2004, we issued 643,007 shares of common stock
and 40,433 shares of Series A Preferred Stock, to holders of warrants to purchase common stock and
Series A Preferred Stock, resulting in gross proceeds of $191,794. In March 2005, we issued
2,421,334 shares of common stock and 152,255 shares of Series A Preferred Stock, to holders of
warrants to purchase common stock and Series A Preferred Stock, resulting in gross proceeds of
$722,227. 
 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. 19




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings On March 17, 2004, we received a letter from counsel for one of our employees alleging that our
reimbursement practices were illegal and unethical and also alleging violation of applicable
whistleblower statutes. On March 18, 2004, we received a letter from counsel for one of our
former employees alleging that we failed to pay for accrued vacation time and also alleging
violation of applicable whistleblower statutes. On August 25, 2004, we entered into a binding
memorandum of understanding with these individuals agreeing to settle these disputes. As
settlement in full of these employees claims, we agreed to pay the individuals an aggregate amount
of $130,000 in cash and to issue shares of freely tradable Company common stock with a market value
of $100,000. We intend to enter into a definitive settlement agreement setting forth the details
of the memorandum of understanding with these individuals in the near future. We have also
retained a reimbursement consultant to investigate the whistleblower claims, and such consultant
has indicated its belief that such claims lack merit. Except as set forth above, we are not aware of any material pending or threatened legal
proceedings, which involve us. 
 Item 2. Changes in Securities The disclosures made in Note 2 of the financial statements (see Item 1 of Part I of this report)
regarding sales and issuances of our securities relating to the exercise of certain warrants during
the quarter ended March 31, 2005 are hereby incorporated into this Item 2 of Part II by this
reference. On March 31, 2005, we issued 1,600,000 shares of our common stock to our CEO, Mark N. Schwartz,
which was in accordance with an existing employment agreement. We relied upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended, for such issuance. During the quarter ended March 31, 2005, certain holders of our Series A Convertible Preferred
Stock elected to convert their shares into shares of our common stock at a conversion rate of
twelve (12) shares of common stock for each share of Series A Convertible Preferred Stock. During
this quarter, an aggregate of 32,256 shares of Series A Convertible Preferred Stock were converted
into an aggregate of 380,072 shares of common stock. The shares of common stock issued upon
conversion of the Series A Convertible Preferred Stock were issued in reliance upon an exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as amended. 
 Item 6.
Exhibits 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 Act31.2
    Certification of Chief Financial Officer pursuant to
13a-14 and 15d-14 of the Exchange Act32
    Certificate pursuant to 18 U.S.C. § 1350 20




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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. MurphyJames S. Murphy
Senior Vice President, Finance and
Administration and Chief Financial Officer
(principal financial officer)
 Date: May 13, 2005 21