##### 





---



FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2001

Commission File Number: 0-24635

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

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

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

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



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

The number of shares of Common Stock outstanding as of November 2, 2001 was
5,905,829.

Transitional Small Business Disclosure Format:



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



1



---



##### 



HYPERTENSION DIAGNOSTICS, INC.INDEX TO FORM 10-QSB

|                                    |                                                                                                   |                                                                           |    |          |   |  |  |  |  |  |  |  |  | 
|----------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | -- | -------- | - |  |  |  |  |  |  |  |  | 
|                                    |                                                                                                   |                                                                           |    | Page No. |   |  |  |  |  |  |  |  | 
|                                    |                                                                                                   |                                                                           |    |          |   |  |  |  |  |  |  | 
|PART I.      FINANCIAL INFORMATION: |                                                                                                   |                                                                           |    |         
|                                   
|                                    | Item 1.     Financial Statements                                                                  |                                                                           |    | 3        |  
|                                   
|                                    |                                                                                                   | Balance Sheets  September 30, 2001 and June 30, 2001
        
        3  |    |          | 3 | 
|                                   
|                                    |                                                                                                   | Statements of Operations  Three Months Ended
September 30, 2001 and 2000 |    |          | 4 | 
|                                   
|                                    |                                                                                                   | Statements of Cash Flows  Three Months Ended
September 30, 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 From Initial Public Offering                                          |                                                                           |    | 11       |  
|                                   
|                                    | Item 6.     Exhibits and Reports on Form 8-K                                                      |                                                                           |    | 11       |  
|                                   
|SIGNATURES                          |                                                                                                   |                                                                           | 12 |         

2



---



##### 



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Hypertension Diagnostics, Inc.

Balance Sheets

|                                                                                                                      |                                   |                                                                                                             |                                            |             |               |           |          |             |        |           | 
|--------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ------------- | --------- | -------- | ----------- | ------ | --------- | 
|                                                                                                                      |                                   |                                                                                                             |                                            |             | September 30, |           | June 30,
|                                                                                                                      |                                   |                                                                                                             |                                            |             | 2001          |           | 2001    
|                                                                                                                      |                                   |                                                                                                             |                                            |             |               |           |         
|Assets                                                                                                                |                                   |                                                                                                             |                                            |             |               |           |          |            
|Current Assets:                                                                                                       |                                   |                                                                                                             |                                            |             |               |           |          |            
|                                                                                                                      | Cash and cash equivalents         |                                                                                                             | $                                          | 2,683,584   |               |           | $        | 3,885,064   |       
|                                                                                                                      | Accounts receivable               |                                                                                                             |                                            | 92,524      |               |           |          | 46,017      |       
|                                                                                                                      | Interest receivable               |                                                                                                             |                                            | 7,520       |               |           |          | 8,436       |       
|                                                                                                                      | Inventory                         |                                                                                                             |                                            | 1,303,689   |               |           |          | 1,298,178   |       
|                                                                                                                      | Prepaid expenses                  |                                                                                                             |                                            | 31,712      |               |           |          | 9,679       |       
|                                                                                                                      |                                   |                                                                                                             |                                            |             |               |          
|                                                                                                                      |                                   |                                                                                                             | Total Current Assets                       |             |               | 4,119,029 |          |             |        | 5,247,374 | 
|Property and Equipment:                                                                                               |                                   |                                                                                                             |                                            |             |               |           |          |            
|                                                                                                                      | Leasehold improvements            |                                                                                                             |                                            | 17,202      |               |           |          | 17,202      |       
|                                                                                                                      | Furniture and equipment           |                                                                                                             |                                            | 1,016,977   |               |           |          | 841,933     |       
|                                                                                                                      | Less accumulated depreciation     |                                                                                                             |                                            | (357,208    | )             |           |          | (309,567    | )     
|                                                                                                                      |                                   |                                                                                                             |                                            |             |               |          
|                                                                                                                      |                                   |                                                                                                             | 676,971                                    |             |               |           | 549,568  |            
|Patents, net of accumulated amortization of $36,905
and $35,205 at September 30, 2001 and June 30, 2001,
respectively |                                   |                                                                                                             | 8,500                                      |             |               |           | 10,200   |            
|Other Assets                                                                                                          |                                   |                                                                                                             | 6,730                                      |             |               |           | 6,730    |            
|                                                                                                                      |                                   |                                                                                                             |                                            |             |               |          
|                                                                                                                      |                                   |                                                                                                             | Total Assets                               |             | $             | 4,811,230 |          |             | $      | 5,813,872 | 
|                                                                                                                      |                                   |                                                                                                             |                                            |             |               |          
|Liabilities and Shareholders Equity                                                                                  |                                   |                                                                                                             |                                            |             |               |           |          |            
|Current Liabilities:                                                                                                  |                                   |                                                                                                             |                                            |             |               |           |          |            
|                                                                                                                      | Accounts payable                  |                                                                                                             | $                                          | 245,876     |               |           | $        | 238,797     |       
|                                                                                                                      | Accrued payroll and payroll taxes |                                                                                                             |                                            | 233,988     |               |           |          | 192,593     |       
|                                                                                                                      | Other accrued expenses            |                                                                                                             |                                            | 7,300       |               |           |          | 48,697      |       
|                                                                                                                      |                                   |                                                                                                             |                                            |             |               |          
|                                                                                                                      |                                   |                                                                                                             | Total Current Liabilities                  |             |               | 487,164   |          |             |        | 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5,904,329 and 5,684,329
at September 30, 2001 and June 30, 2001, respectively |                                            |             | 59,043        |           |          |             | 56,843 |          
|                                                                                                                      | Additional paid-in capital        |                                                                                                             |                                            | 18,724,465  |               |           |          | 16,527,165  |       
|                                                                                                                      | Deferred compensation             |                                                                                                             |                                            | (1,111,300  | )             |           |          | (11,870     | )     
|                                                                                                                      | Accumulated deficit               |                                                                                                             |                                            | (13,348,142 | )             |           |          | (11,238,353 | )     
|                                                                                                                      |                                   |                                                                                                             |                                            |             |               |          
|                                                                                                                      |                                   |                                                                                                             | Total Shareholders Equity                 |             |               | 4,324,066 |          |             |        | 5,333,785 | 
|                                                                                                                      |                                   |                                                                                                             |                                            |             |               |          
|                                                                                                                      |                                   |                                                                                                             | Total Liabilities and Shareholders Equity |             | $             | 4,811,230 |          |             | $      | 5,813,872 | 
|                                                                                                                      |                                   |                                                                                                             |                                            |             |               |          

See accompanying notes.

3



---



##### 



Hypertension Diagnostics, Inc.





|                                     |                                     |   |                |           |                    |            |           |         |   |          |  
|------------------------------------ | ----------------------------------- | - | -------------- | --------- | ------------------ | ---------- | --------- | ------- | - | -------- | -
|                                     |                                     |   |                |           | Three Months Ended
|                                     |                                     |   |                |           | September 30      
|                                     |                                     |   |                |           |                   
|                                     |                                     |   |                |           | 2001               |            | 2000     
|                                     |                                     |   |                |           |                    |            |          
|Revenue                              |                                     | $ | 91,715         |           |                    | $          | 448,804   |        
|Cost of Sales                        |                                     |   | 22,100         |           |                    |            | 74,905    |        
|                                     |                                     |   |                |           |                    |           
|                                     |                                     |   | Gross Profit   |           |                    | 69,615     |           |         |   | 373,899  |  
|Expenses:                            |                                     |   |                |           |                    |            |           |        
|                                     | Research and development            |   |                | 35,510    |                    |            |           | 72,034  |  
|                                     | Selling, general and administrative |   |                | 2,172,926 |                    |            |           | 707,318 |  
|                                     |                                     |   |                |           |                    |           
|                                     |                                     |   | Total Expenses |           |                    | 2,208,436  |           |         |   | 779,352  |  
|                                     |                                     |   |                |           |                    |           
|Operating Loss                       |                                     |   | (2,138,821     | )         |                    |            | (405,453  | )      
|Other Income:                        |                                     |   |                |           |                    |            |           |        
|                                     | Interest income                     |   |                | 29,032    |                    |            |           | 58,133  |  
|                                     |                                     |   |                |           |                    |           
|                                     |                                     |   | Net Loss       |           | $                  | (2,109,789 | )         |         | $ | (347,320 | )
|                                     |                                     |   |                |           |                    |           
|                                    
|                                     |                                     |   |                |           |                    |            |           |         |   |          |  
|
|Basic and Diluted Net Loss per Share |                                     | $ | (.36           | )         |                    | $          | (.07      | )      
|Weighted Average Shares Outstanding  |                                     |   | 5,872,210      |           |                    |            | 5,212,327 |        
|                                    
|                                     |                                     |   |                |           |                    |            |           |         |   |          |  
|See
accompanying notes.              |                                     |   |                |           |                    |            |           |        

4



---



##### 



Hypertension Diagnostics, Inc.



|                                                                            |                                                                        |                                   |                                                  |           |                    |            |           |        |          |           |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------- | --------------------------------- | ------------------------------------------------ | --------- | ------------------ | ---------- | --------- | ------ | -------- | --------- | -
|                                                                            |                                                                        |                                   |                                                  |           | Three Months Ended
|                                                                            |                                                                        |                                   |                                                  |           | September 30      
|                                                                            |                                                                        |                                   |                                                  |           |                   
|                                                                            |                                                                        |                                   |                                                  |           | 2001               |            | 2000     
|                                                                            |                                                                        |                                   |                                                  |           |                    |            |          
|Operating Activities:                                                       |                                                                        |                                   |                                                  |           |                    |            |           |       
|Net loss                                                                    |                                                                        | $                                 | (2,109,789                                       | )         |                    | $          | (347,320  | )     
|Adjustments to reconcile net loss to net
cash used in operating activities: |                                                                        |                                   |                                                  |           |                    |            |           |       
|                                                                            | Value of Common Stock and warrants issued in lieu
of cash compensation |                                   |                                                  | 1,076,870 |                    |            |           | 17,835 |         
|                                                                            | Depreciation                                                           |                                   |                                                  | 47,641    |                    |            |           | 25,946 |         
|                                                                            | Amortization                                                           |                                   |                                                  | 1,700     |                    |            |           | 1,700  |         
|                                                                            | Change in operating assets and liabilities:                            |                                   |                                                  |           |                    |            |           |        |         
|                                                                            |                                                                        | Accounts receivable               |                                                  |           | (46,507            | )          |           |        | (370,682 | )        
|                                                                            |                                                                        | Interest receivable               |                                                  |           | 916                |            |           |        | (7,540   | )        
|                                                                            |                                                                        | Inventory                         |                                                  |           | (174,902           | )          |           |        | (56,534  | )        
|                                                                            |                                                                        | Prepaid expenses                  |                                                  |           | (22,033            | )          |           |        | (19,251  | )        
|                                                                            |                                                                        | Accounts payable                  |                                                  |           | 7,079              |            |           |        | (61,411  | )        
|                                                                            |                                                                        | Accrued payroll and payroll taxes |                                                  |           | 41,395             |            |           |        | 23,531   |          
|                                                                            |                                                                        | Other accrued expenses            |                                                  |           | (41,397            | )          |           |        | 13,746   |          
|                                                                            |                                                                        |                                   |                                                  |           |                    |           
|                                                                            |                                                                        |                                   | Net cash used in operating activities            |           |                    | (1,219,027 | )         |        |          | (779,980  | )
|Investing Activities:                                                       |                                                                        |                                   |                                                  |           |                    |            |           |       
|Purchase of property and equipment                                          |                                                                        |                                   | (5,653                                           | )         |                    |            | (32,620   | )     
|                                                                            |                                                                        |                                   |                                                  |           |                    |           
|                                                                            |                                                                        |                                   | Net cash used in investing activities            |           |                    | (5,653     | )         |        |          | (32,620   | )
|Financing Activities:                                                       |                                                                        |                                   |                                                  |           |                    |            |           |       
|Issuance of Common Stock                                                    |                                                                        |                                   | 23,200                                           |           |                    |            | 72,656    |       
|                                                                            |                                                                        |                                   |                                                  |           |                    |           
|                                                                            |                                                                        |                                   | Net cash provided by financing activities        |           |                    | 23,200     |           |        |          | 72,656    |  
|                                                                            |                                                                        |                                   |                                                  |           |                    |           
|Net decrease in cash and cash equivalents                                   |                                                                        |                                   | (1,201,480                                       | )         |                    |            | (739,944  | )     
|                                                                            |                                                                        |                                   | Cash and cash equivalents at beginning of period |           |                    | 3,885,064  |           |        |          | 4,018,745 |  
|                                                                            |                                                                        |                                   |                                                  |           |                    |           
|Cash and cash equivalents at end of period                                  |                                                                        | $                                 | 2,683,584                                        |           |                    | $          | 3,278,801 |       
|                                                                            |                                                                        |                                   |                                                  |           |                    |           

See accompanying notes.

5



---



##### 



September 30, 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 ended September 30, 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. The Common Stock and warrants were issued to The
Anthony D. and Leslie T. Altavilla Revocable Trust UTA 03/06/2001,
Jens Dalsgaard and Jeff Lamberson. 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
services are provided. In the quarter ended September 30, 2001,
the Company recognized $1,065,000 of expense associated with the
Agreement.

6



---



##### 



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 2, 2000, we obtained FDA
approval to market the CVProfilor® DO-2020 System and while we expect the
CVProfilor® DO-2020 System to generate the majority of our revenues in the
future, to date, it has not yet generated any 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.

7



---



##### 



We anticipate that
marketing the CVProfilor® DO-2020 System under a per-patient-tested rental
program (as opposed to a capital sale approach) will allow us to accelerate the
rate of Product acceptance
in the medical marketplace and should allow physician usage fees to eventually
generate the majority of our revenue. 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 September 30, 2001, we had an accumulated deficit of $(13,348,142),
attributable primarily to research and development and general and
administrative expenses. Until we are able to generate significant revenue
from our activities, we expect to continue to incur operating losses.

Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000

The following is a summary of our Revenue and Cost of Sales for the three
months ended September 30, 2001 and 2000, respectively:

|              |  |                                       |        |       |  |           |        |                    |  |   |       | 
|------------- |  | ------------------------------------- | ------ | ----- |  | --------- | ------ | ------------------ |  | - | ----- | 
|              |  | Three Months Ended September 30, 2001
|              |  |                                      
|              |  |                                       |        |       |  | Equipment |        | CVProfilor®DO-2020
|              |  | Total                                 |        | Sales |  | Rental   
|              |  |                                       |        |       |  |          
|Revenue       |  | $                                     | 91,715 |       |  | $         | 85,150 |                    |  | $ | 6,565 | 
|Cost of Sales |  |                                       | 22,100 |       |  |           | 20,445 |                    |  |   | 1,655 | 
|              |  |                                       |        |       |  |           |        |                    | 
|Gross Profit  |  | $                                     | 69,615 |       |  | $         | 64,705 |                    |  | $ | 4,910 | 
|              |  |                                       |        |       |  |           |        |                    | 

|              |  |                                       |         |       |  |           |         |                    |  |   |   | 
|------------- |  | ------------------------------------- | ------- | ----- |  | --------- | ------- | ------------------ |  | - | - | 
|              |  | Three Months Ended September 30, 2000
|              |  |                                      
|              |  |                                       |         |       |  | Equipment |         | CVProfilor®DO-2020
|              |  | Total                                 |         | Sales |  | Rental   
|              |  |                                       |         |       |  |          
|Revenue       |  | $                                     | 448,804 |       |  | $         | 448,804 |                    |  | $ |  | 
|Cost of Sales |  |                                       | 74,905  |       |  |           | 74,905  |                    |  |   |  | 
|              |  |                                       |         |       |  |           |         |                    | 
|Gross Profit  |  | $                                     | 373,899 |       |  | $         | 373,899 |                    |  | $ |  | 
|              |  |                                       |         |       |  |           |         |                    | 

Total expenses for the three months ended September 30, 2001 were
$2,208,436 compared to $779,352 for the three months ended September 30, 2000.
Approximately 1.6% of the $2,208,436 and 9.2% of the $779,352 total expenses
were related to research and development expenses. A further breakdown of
research and development expenses is as follows:

8



---



##### 



|                                                                                             |      |                    |        |              |  |   |        | 
|-------------------------------------------------------------------------------------------- | ---- | ------------------ | ------ | ------------ |  | - | ------ | 
|                                                                                             |      | Three Months Ended
|                                                                                             |      |                    |        | September 30 |  |  
|                                                                                             |      |                    |        |             
|                                                                                             | 2001 |                    |        | 2000        
|                                                                                             |      |                    |        |              | 
|Design and development of prototype devices and other
enhancements and improvements          |      | $                  | 23,640 |              |  | $ | 54,199 | 
|Recognized compensation cost for value of stock options
granted in lieu of cash compensation |      |                    | 11,870 |              |  |   | 17,835 | 
|                                                                                             |      |                    |        |              |  |  
|Total research and development expenses                                                      |      | $                  | 35,510 |              |  | $ | 72,034 | 
|                                                                                             |      |                    |        |              |  |  

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

|                                                             |      |                    |           |              |  |   |         | 
|------------------------------------------------------------ | ---- | ------------------ | --------- | ------------ |  | - | ------- | 
|                                                             |      | Three Months Ended
|                                                             |      |                    |           | September 30 |  |  
|                                                             |      |                    |           |             
|                                                             | 2001 |                    |           | 2000        
|                                                             |      |                    |           |              | 
|Wages, related expenses and benefits                         |      | $                  | 323,669   |              |  | $ | 196,746 | 
|Patents and related expenses                                 |      |                    | 18,860    |              |  |   | 9,481   | 
|Outside consultants                                          |      |                    | 1,103,315 |              |  |   | 47,585  | 
|Rent-building, equipment and utilities                       |      |                    | 36,996    |              |  |   | 21,841  | 
|Insurance-general and directors/officers liability           |      |                    | 15,602    |              |  |   | 12,737  | 
|Selling, marketing and promotion, including applicable wages |      |                    | 462,784   |              |  |   | 231,898 | 
|Legal and audit/accounting fees                              |      |                    | 75,099    |              |  |   | 76,148  | 
|Royalties                                                    |      |                    | 2,751     |              |  |   | 12,909  | 
|Depreciation and amortization                                |      |                    | 47,686    |              |  |   | 27,646  | 
|Other-general and administrative                             |      |                    | 86,164    |              |  |   | 70,327  | 
|                                                             |      |                    |           |              |  |  
|Total selling, general and administrative expenses           |      | $                  | 2,172,926 |              |  | $ | 707,318 | 
|                                                             |      |                    |           |              |  |  

Our number of employees increased from twelve in the three months ended
September 30, 2000 to twenty-three in the three months ended September 30,
2001.

Outside consultants expense increased from $47,585 for the three months
ended September 30, 2000 to $1,103,315 for the three months ended September 30,
2001. Included in the $1,103,315 expense amount is a non-cash expense charge
of $1,065,000 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 $231,898 for the
three months ended September 30, 2000 to $462,784 for the three months ended
September 30, 2001. This category includes wages and commissions paid by us
relating to our sales and marketing efforts as well as travel and convention
expenses. We added six new employees in this category since September 30,
2000.

9



---



##### 



Interest income was $29,032 and $58,133 for the three months ended
September 30, 2001 and 2000, respectively.

Net loss was $(2,109,789) for the three months ended September 30, 2001
compared to a net loss of $(347,320) for the three months ended September 30,
2000. For the three months ended September 30, 2001, basic and diluted net
loss per share was $(.36), based on weighted average shares outstanding of
5,872,210. For the three months ended September 30, 2000, basic and diluted
net loss per share was $(.07), based on weighted average shares outstanding of
5,212,327.

Liquidity and Capital Resources

Cash and cash equivalents had a net decrease of $1,201,480 for the three
months ended
September 30, 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 $983,578; increase in accounts receivable -$46,507; increase in
inventory  $174,902. For the three months ended September 30, 2000, cash and
cash equivalents had a net decrease of $739,944. The significant elements of
this change were as follows: net cash used in operating activities net loss,
as adjusted for non-cash items, of $(301,839); increase in accounts receivable
- $370,682.

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 September 30, 2001, we have cash and cash equivalents of $2,683,584,
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. The Company is currently
implementating a plan to conserve cash through reductions in selling, general
and administrative expenses to improve working capital management for fiscal
year ending June 30, 2002. The Company has also engaged a non-exclusive investment banker as
an advisor as to alternative modes and sources of additional working capital
for funding growth and expansion of the Companys operations,
which cannot be assured. Our business
plan and financing needs are subject to change depending
on, among other things, market conditions, including the possible
effect of the events of September 11, 2001, timing and success of our
marketing efforts regarding the CVProfilor® DO-2020 System and cash flow from
operations. Pending

10



---



##### 



application of the net proceeds, such proceeds will be
invested in short-term, high quality, interest-bearing instruments.

Although not assured, in addition to the net proceeds from the IPO, we may
derive over a period of time up to $12,136,351 from the exercise of the
2,356,573 Redeemable Class A Warrants currently 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.

PART II. OTHER INFORMATION

Item 2.     Use of Proceeds From Initial Public Offering

The following table sets forth our use of the net proceeds from our
initial public offering, from July 28, 1998 through September 30, 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 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 September 30,
2001.

11



---



##### 



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: November 14, 2001

12