##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2002

Commission File Number: 0-24635

HYPERTENSION DIAGNOSTICS, INC.

(Exact name of small business issuer as specified in its charter)


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

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

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

Yes x      No o

The number of shares of Common Stock outstanding as of January 31, 2003 was
9,628,225.

Transitional Small Business Disclosure Format:

Yes o      No x





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TABLE OF CONTENTS



|                                              |                                                                                               |                               |  |  |  |  |  | 
|--------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                
|                                              | Item 1. Financial Statements                                                                 
|                                              |                                                                                               | Balance Sheets               
|                                              |                                                                                               | Statements of Operations     
|                                              |                                                                                               | Statements of Cash Flows     
|                                              |                                                                                               | Notes to Financial Statements
|                                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                              | Item 4. Controls and Procedures.                                                             
|PART II. OTHER INFORMATION                   
|                                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                              | Item 5. Other Information.                                                                   
|                                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                   
|CERTIFICATIONS                               
|Certificate Pursuant to 18 U.S.C Section 1350



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##### Table of Contents



HYPERTENSION DIAGNOSTICS, INC.

INDEX TO FORM 10-QSB

|                               |                                                                                               |                                                                                                       |    |          |   | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | -- | -------- | - | 
|                               |                                                                                               |                                                                                                       |    | Page No.
|                               |                                                                                               |                                                                                                       |    |         
|PART I. FINANCIAL INFORMATION: |                                                                                               |                                                                                                       |    |         
|                               | Item 1. Financial Statements                                                                  |                                                                                                       |    | 3        |  
|                               |                                                                                               | Balance Sheets  December 31, 2002 and June 30, 2002                                                  |    |          | 3 | 
|                               |                                                                                               | Statements of Operations  Three Months and Six Months Ended
December 31, 2002 and 2001, respectively |    |          | 4 | 
|                               |                                                                                               | Statements of Cash Flows  Six Months Ended
December 31, 2002 and 2001                                |    |          | 5 | 
|                               |                                                                                               | Notes to Financial Statements                                                                         |    |          | 6 | 
|                               | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                       |    | 8        |  
|                               | Item 4. Controls and Procedures                                                               |                                                                                                       |    | 16       |  
|PART II. OTHER INFORMATION:    |                                                                                               |                                                                                                       |    |         
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                       |    | 17       |  
|                               | Item 5. Other Information                                                                     |                                                                                                       |    | 17       |  
|                               | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                       |    | 18       |  
|SIGNATURES                     |                                                                                               |                                                                                                       | 19 |         
|CERTIFICATIONS                 |                                                                                               |                                                                                                       | 20 |         

2



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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Hypertension Diagnostics, Inc.

Balance Sheets

|                                                                                                               |                                   |                                                                                                            |                                            |             |              |           |          |             |        |           | 
|-------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ------------ | --------- | -------- | ----------- | ------ | --------- | 
|                                                                                                               |                                   |                                                                                                            |                                            |             | December 31, |           | June 30,
|                                                                                                               |                                   |                                                                                                            |                                            |             | 2002         |           | 2002    
|                                                                                                               |                                   |                                                                                                            |                                            |             |              |           |         
|Assets                                                                                                         |                                   |                                                                                                            |                                            |             |              |           |          |            
|Current Assets:                                                                                                |                                   |                                                                                                            |                                            |             |              |           |          |            
|                                                                                                               | Cash and cash equivalents         |                                                                                                            | $                                          | 605,946     |              |           | $        | 1,824,238   |       
|                                                                                                               | Accounts receivable               |                                                                                                            |                                            | 98,377      |              |           |          | 279,609     |       
|                                                                                                               | Interest receivable               |                                                                                                            |                                            | 9,854       |              |           |          | 5,070       |       
|                                                                                                               | Related party note receivable     |                                                                                                            |                                            | 117,000     |              |           |          | 117,000     |       
|                                                                                                               | Inventory                         |                                                                                                            |                                            | 1,272,866   |              |           |          | 1,394,191   |       
|                                                                                                               | Prepaids and other current assets |                                                                                                            |                                            | 107,950     |              |           |          | 89,338      |       
|                                                                                                               |                                   |                                                                                                            |                                            |             |              |           |          |            
|                                                                                                               |                                   |                                                                                                            | Total Current Assets                       |             |              | 2,211,993 |          |             |        | 3,709,446 | 
|Property and Equipment:                                                                                        |                                   |                                                                                                            |                                            |             |              |           |          |            
|                                                                                                               | Leasehold improvements            |                                                                                                            |                                            | 17,202      |              |           |          | 17,202      |       
|                                                                                                               | Furniture and equipment           |                                                                                                            |                                            | 1,159,082   |              |           |          | 1,074,468   |       
|                                                                                                               | Less accumulated depreciation     |                                                                                                            |                                            | (614,512    | )            |           |          | (505,283    | )     
|                                                                                                               |                                   |                                                                                                            |                                            |             |              |           |          |            
|                                                                                                               |                                   |                                                                                                            | 561,772                                    |             |              |           | 586,387  |            
|Patents, net of accumulated amortization of $45,405
and $42,005 at December 31 and June 30, 2002,
respectively |                                   |                                                                                                            |                                           |             |              |           | 3,400    |            
|Other Assets                                                                                                   |                                   |                                                                                                            | 6,730                                      |             |              |           | 6,730    |            
|                                                                                                               |                                   |                                                                                                            |                                            |             |              |           |          |            
|                                                                                                               |                                   |                                                                                                            | Total Assets                               |             | $            | 2,780,495 |          |             | $      | 4,305,963 | 
|                                                                                                               |                                   |                                                                                                            |                                            |             |              |           |          |            
|Liabilities and Shareholders Equity                                                                           |                                   |                                                                                                            |                                            |             |              |           |          |            
|Current Liabilities:                                                                                           |                                   |                                                                                                            |                                            |             |              |           |          |            
|                                                                                                               | Accounts payable                  |                                                                                                            | $                                          | 76,629      |              |           | $        | 149,306     |       
|                                                                                                               | Accrued payroll and payroll taxes |                                                                                                            |                                            | 225,419     |              |           |          | 224,515     |       
|                                                                                                               | Convertible notes payable         |                                                                                                            |                                            | 819,838     |              |           |          | 1,268,119   |       
|                                                                                                               | Deferred revenue                  |                                                                                                            |                                            | 69,667      |              |           |          | 69,667      |       
|                                                                                                               | Other accrued expenses            |                                                                                                            |                                            | 45,826      |              |           |          | 58,433      |       
|                                                                                                               |                                   |                                                                                                            |                                            |             |              |           |          |            
|                                                                                                               |                                   |                                                                                                            | Total Current Liabilities                  |             |              | 1,237,379 |          |             |        | 1,770,040 | 
|Deferred Revenue, less current portion                                                                         |                                   |                                                                                                            |                                           |             |              |           | 34,833   |            
|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8,053,635 and 6,495,577
at December 31, 2002 and June 30, 2002, respectively |                                            |             | 80,537       |           |          |             | 64,956 |          
|                                                                                                               | Additional paid-in capital        |                                                                                                            |                                            | 20,948,678  |              |           |          | 20,044,153  |       
|                                                                                                               | Accumulated deficit               |                                                                                                            |                                            | (19,486,099 | )            |           |          | (17,608,019 | )     
|                                                                                                               |                                   |                                                                                                            |                                            |             |              |           |          |            
|                                                                                                               |                                   |                                                                                                            | Total Shareholders Equity                 |             |              | 1,543,116 |          |             |        | 2,501,090 | 
|                                                                                                               |                                   |                                                                                                            |                                            |             |              |           |          |            
|                                                                                                               |                                   |                                                                                                            | Total Liabilities and Shareholders Equity |             | $            | 2,780,495 |          |             | $      | 4,305,963 | 
|                                                                                                               |                                   |                                                                                                            |                                            |             |              |           |          |            

See accompanying notes.

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Hypertension Diagnostics, Inc.

Statements of Operations

|                                     |                                     |                |           |                    |           |                  |            |           |            |      |            |           |            |   |            |           |            |  
|------------------------------------ | ----------------------------------- | -------------- | --------- | ------------------ | --------- | ---------------- | ---------- | --------- | ---------- | ---- | ---------- | --------- | ---------- | - | ---------- | --------- | ---------- | -
|                                     |                                     |                |           | Three Months Ended |           | Six Months Ended
|                                     |                                     |                |           | December 31        |           | December 31     
|                                     |                                     |                |           |                    |           |                 
|                                     |                                     |                |           | 2002               |           | 2001             |            | 2002      |            | 2001
|                                     |                                     |                |           |                    |           |                  |            |           |            |     
|Revenue:                             |                                     |                |           |                    |           |                  |            |           |            |      |            |           |            |   |            |          
|                                     | Equipment sales                     |                | $         | 121,688            |           |                  | $          | 208,701   |            |      | $          | 150,388   |            |   | $          | 293,851   |           
|                                     | Equipment rental                    |                |           | 88,650             |           |                  |            | 23,792    |            |      |            | 161,595   |            |   |            | 30,357    |           
|                                     | Service warranty income             |                |           | 17,416             |           |                  |            |          |            |      |            | 34,833    |            |   |            |          |           
|                                     |                                     |                |           |                    |           |                  |            |           |            |      |            |           |            |   |            |          
|                                     |                                     | Total Revenue  |           |                    | 227,754   |                  |            |           | 232,493    |      |            |           | 346,816    |   |            |           | 324,208    |  
|Cost of Sales                        |                                     |                | 37,627    |                    |           |                  | 41,476     |           |            |      | 53,357     |           |            |   | 63,576     |          
|                                     |                                     |                |           |                    |           |                  |            |           |            |      |            |           |            |   |            |          
|                                     |                                     | Gross Profit   |           |                    | 190,127   |                  |            |           | 191,017    |      |            |           | 293,459    |   |            |           | 260,632    |  
|Expenses:                            |                                     |                |           |                    |           |                  |            |           |            |      |            |           |            |   |            |          
|                                     | Research and development            |                |           |                   |           |                  |            | 5,317     |            |      |            |          |            |   |            | 40,827    |           
|                                     | Selling, general and administrative |                |           | 1,034,789          |           |                  |            | 1,398,532 |            |      |            | 2,031,982 |            |   |            | 3,571,458 |           
|                                     |                                     |                |           |                    |           |                  |            |           |            |      |            |           |            |   |            |          
|                                     |                                     | Total Expenses |           |                    | 1,034,789 |                  |            |           | 1,403,849  |      |            |           | 2,031,982  |   |            |           | 3,612,285  |  
|                                     |                                     |                |           |                    |           |                  |            |           |            |      |            |           |            |   |            |          
|Operating Loss                       |                                     |                | (844,662  | )                  |           |                  | (1,212,832 | )         |            |      | (1,738,523 | )         |            |   | (3,351,653 | )        
|Other Income (Expense):              |                                     |                |           |                    |           |                  |            |           |            |      |            |           |            |   |            |          
|                                     | Interest income                     |                |           | 6,503              |           |                  |            | 12,194    |            |      |            | 13,132    |            |   |            | 41,226    |           
|                                     | Interest expense                    |                |           | (63,170            | )         |                  |            |          |            |      |            | (152,689  | )          |   |            |          |           
|                                     |                                     |                |           |                    |           |                  |            |           |            |      |            |           |            |   |            |          
|                                     |                                     | Net Loss       |           | $                  | (901,329  | )                |            | $         | (1,200,638 | )    |            | $         | (1,878,080 | ) |            | $         | (3,310,427 | )
|                                     |                                     |                |           |                    |           |                  |            |           |            |      |            |           |            |   |            |          
|Basic and Diluted Net Loss per Share |                                     | $              | (.12      | )                  |           | $                | (.20       | )         |            | $    | (.26       | )         |            | $ | (.56       | )        
|Weighted Average Shares Outstanding  |                                     |                | 7,416,964 |                    |           |                  | 5,913,128  |           |            |      | 7,091,543  |           |            |   | 5,892,669  |          

See accompanying notes.

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Hypertension Diagnostics, Inc.

Statements of Cash Flows

|                                                                            |                                                                          |                                   |                                                  |         |                  |            |            |           |          |            |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------- | ------------------------------------------------ | ------- | ---------------- | ---------- | ---------- | --------- | -------- | ---------- | -
|                                                                            |                                                                          |                                   |                                                  |         | Six Months Ended
|                                                                            |                                                                          |                                   |                                                  |         | December 31     
|                                                                            |                                                                          |                                   |                                                  |         |                 
|                                                                            |                                                                          |                                   |                                                  |         | 2002             |            | 2001      
|                                                                            |                                                                          |                                   |                                                  |         |                  |            |           
|Operating Activities:                                                       |                                                                          |                                   |                                                  |         |                  |            |            |          
|Net loss                                                                    |                                                                          | $                                 | (1,878,080                                       | )       |                  | $          | (3,310,427 | )        
|Adjustments to reconcile net loss to net
cash used in operating activities: |                                                                          |                                   |                                                  |         |                  |            |            |          
|                                                                            | Value of stock options, Common Stock and warrants
issued in lieu of cash |                                   |                                                  | 300,000 |                  |            |            | 1,463,863 |         
|                                                                            | Depreciation                                                             |                                   |                                                  | 109,230 |                  |            |            | 97,364    |         
|                                                                            | Amortization                                                             |                                   |                                                  | 3,400   |                  |            |            | 3,400     |         
|                                                                            | Amortization of debt discount                                            |                                   |                                                  | 104,338 |                  |            |            |          |         
|                                                                            | Interest expense  converted to Common Stock                             |                                   |                                                  | 10,086  |                  |            |            |          |         
|                                                                            | Change in operating assets and liabilities:                              |                                   |                                                  |         |                  |            |            |           |         
|                                                                            |                                                                          | Accounts receivable               |                                                  |         | 181,232          |            |            |           | (141,912 | )         
|                                                                            |                                                                          | Interest receivable               |                                                  |         | (4,784           | )          |            |           | 8,436    |           
|                                                                            |                                                                          | Inventory                         |                                                  |         | 36,711           |            |            |           | (309,069 | )         
|                                                                            |                                                                          | Prepaids and other current assets |                                                  |         | (18,612          | )          |            |           | (171,626 | )         
|                                                                            |                                                                          | Other assets                      |                                                  |         |                 |            |            |           | (7,500   | )         
|                                                                            |                                                                          | Accounts payable                  |                                                  |         | (72,677          | )          |            |           | (139,875 | )         
|                                                                            |                                                                          | Accrued payroll and payroll taxes |                                                  |         | 904              |            |            |           | (1,171   | )         
|                                                                            |                                                                          | Deferred revenue                  |                                                  |         | (34,833          | )          |            |           |         |           
|                                                                            |                                                                          | Other accrued expenses            |                                                  |         | (12,607          | )          |            |           | (27,611  | )         
|                                                                            |                                                                          |                                   |                                                  |         |                  |            |            |          
|                                                                            |                                                                          |                                   | Net cash used in operating activities            |         |                  | (1,275,692 | )          |           |          | (2,536,128 | )
|Investing Activities:                                                       |                                                                          |                                   |                                                  |         |                  |            |            |          
|Purchase of property and equipment                                          |                                                                          |                                   |                                                 |         |                  |            | (5,653     | )        
|                                                                            |                                                                          |                                   |                                                  |         |                  |            |            |          
|                                                                            |                                                                          |                                   | Net cash used in investing activities            |         |                  |           |            |           |          | (5,653     | )
|Financing Activities:                                                       |                                                                          |                                   |                                                  |         |                  |            |            |          
|Issuance of Common Stock                                                    |                                                                          |                                   | 57,400                                           |         |                  |            | 42,598     |          
|                                                                            |                                                                          |                                   |                                                  |         |                  |            |            |          
|                                                                            |                                                                          |                                   | Net cash provided by financing activities        |         |                  | 57,400     |            |           |          | 42,598     |  
|                                                                            |                                                                          |                                   |                                                  |         |                  |            |            |          
|Net decrease in cash and cash equivalents                                   |                                                                          |                                   | (1,218,292                                       | )       |                  |            | (2,499,183 | )        
|                                                                            |                                                                          |                                   | Cash and cash equivalents at beginning of period |         |                  | 1,824,238  |            |           |          | 3,885,064  |  
|                                                                            |                                                                          |                                   |                                                  |         |                  |            |            |          
|Cash and cash equivalents at end of period                                  |                                                                          | $                                 | 605,946                                          |         |                  | $          | 1,385,881  |          
|                                                                            |                                                                          |                                   |                                                  |         |                  |            |            |          
|Suppemental Schedule of Noncash Financing Activities:                       |                                                                          |                                   |                                                  |         |                  |            |            |          
|Conversion of notes payable and accrued interest into Common Stock          |                                                                          | $                                 | 562,705                                          |         |                  | $          |           |          

See accompanying notes.

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Hypertension Diagnostics, Inc.
Notes to Financial Statements

December 31, 2002



|1. |  | Interim Financial Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and do not include all
the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, these unaudited financial statements reflect all adjustments,
consisting only of normal and recurring adjustments necessary for a fair
presentation of the financial statements. The results of operations for
the three months and six months ended December 31, 2002 are not
necessarily indicative of the results that may be expected for the full
year ending June 30, 2003. The June 30, 2002 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, 2002. The policies
described in that report are used for preparing quarterly reports.
|  
|2. |  | Convertible Notes Payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The Company is a party to that certain Subscription Agreement dated as of
March 27, 2002 ( the Subscription Agreement) with the subscribers named
therein for a private placement to five investors of three-year 8%
Convertible Notes (the Notes) in the original aggregate principal
amount of $2,000,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | One of the events of default specified in the Notes is notification from
The Nasdaq Stock Market, Inc. that the Company is not in compliance with
the conditions for continued listing on The Nasdaq SmallCap Market. On
August 27, 2002, the Company received a notice from The Nasdaq SmallCap
Market advising the Company that because the minimum bid price of the
Companys Common Stock was not at least $1.00 for thirty (30) consecutive
trading days, the Company does not meet the requirements for continued
listing on The Nasdaq SmallCap Market. Because of receipt of this notice
from Nasdaq, the Company was in default of the Notes.                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | The Nasdaq Marketplace Rules provide that the Company has 180 calendar
days, or until February 24, 2003, to regain compliance with the
requirement for continued listing relating to the minimum bid price.
Generally, unless otherwise determined by Nasdaq staff, compliance with
the minimum bid price requirement can be demonstrated during the 180
calendar day period by the Companys Common Stock maintaining a $1.00
minimum bid price for at least ten (10) consecutive trading days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | As reported on a Form 8-K dated July 24, 2002, the Company was also in
default of the Note covenant relating to the failure of the Companys
Common Stock to maintain a minimum bid price of $1.00 for a period of
seven (7) consecutive trading days. By a letter dated October 15, 2002,
each of the holders of the Companys 8% Convertible Notes due March 27,
2005 agreed to waive existing covenant defaults under the Notes if, in
exchange, the Company hired a proxy solicitor for its Special Meeting of
Shareholders and on or before October 25, 2002, obtained shareholder
approval of the proposal put forth at the Companys Special Meeting. The
Special Meeting sought shareholder approval of the issuance by the
Company of Common Stock equal to 20% or more of its outstanding Common
Stock upon conversion of the Notes and exercise of certain Common Stock
Purchase Warrants.                                                                                                             

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|3. |  | Special Meeting of Shareholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On October 25, 2002, the Company reconvened its Special Meeting of
Shareholders, which had been adjourned from the original meeting date of
September 25, 2002. The Special Meeting was called for the purposes of
allowing the Companys shareholders to consider and approve Proposal 1:
The issuance of Common Stock equal to 20% or more of the outstanding
Common Stock of the Company upon (a) conversion of $2,000,000 aggregate
principal amount of 8% Convertible Notes due March 27, 2005 and (b)
exercise of certain Common Stock Purchase Warrants. Since a majority of
the Companys shares were represented at the reconvened Special Meeting,
a quorum was present. Proposal 1 was approved by a majority of the
shares present in person or represented by proxy at the Special Meeting.
Accordingly, Proposal 1 has been adopted by shareholders of the Company.
|  
|   |  | By a letter dated October 15, 2002, each of the holders of the Companys
8% Convertible Notes due March 27, 2005 agreed to waive certain existing
covenant defaults under the Notes if, in exchange, the Company hired a
proxy solicitor for its Special Meeting of Shareholders and on or before
October 25, 2002, obtained shareholder approval of the proposal put forth
at the Companys Special Meeting. With approval of Proposal 1 by the
Companys shareholders, the Company has met the two conditions for the
effectiveness of the waiver.                                                                                                                                                                                                                                                                                                                             

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

Forward-Looking Statements

This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. In addition, we may make
forward-looking statements orally in the future by or on behalf of the Company.
When used, the words believe, expect, will, can, estimate,
anticipate and similar expressions are intended to identify forward-looking
statements. We wish to caution readers not to place undue reliance on any
forward-looking statements and to recognize that the statements are not
predictions of actual future results. Actual results could differ materially
from those anticipated in the forward-looking statements due to the risks and
uncertainties set forth in our 2002 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 immediate need for additional
capital; our ability to increase our sales and marketing staff to
generate revenues from placements and/or sales of our products; our violation of the requirements for continued listing on The Nasdaq
SmallCap Market and our ability to comply with each of the other requirements
for continued listing; the existence of events of default under our 8%
Convertible Notes and the resulting right of the holders of such Notes to
demand immediate repayment; our ability to discharge the Notes at the
end of the forbearance period on February 21, 2003; our ability to more quickly generate acceptable
levels of revenue; the availability of third-party reimbursements for the use
of our products; increased 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 three versions of
our Product: 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, 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 is being marketed to primary care physicians and
other health care professionals on a per-patient-tested rental basis.
Utilizing our Central Data Management Facility (the CDMF), we are able to
track utilization of the CVProfilor® DO-2020 System in each physicians office
and medical clinic and to invoice our physician customers on the number of
CardioVascular Profile Reports (CVProfile Reports) which they generate each
month. We anticipate that marketing the CVProfilor® DO-2020 System under a
per-patient-tested rental program (as opposed to a capital sale approach)
will allow us to accelerate the rate of Product acceptance in the medical
marketplace and should allow physician usage fees to eventually generate the
majority of our revenue.

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The CVProfilor® MD-3000 System is being marketed to
physicians outside the United States. We believe that the CVProfilor® MD-3000
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 has a medical
device CE Mark (CE0123) that allows it to be marketed within European Union
countries. The CVProfilor® MD-3000 will require certain regulatory approval
for it to be marketed in other countries throughout the world.

Results of Operations

As of December 31, 2002, we had an accumulated deficit of $(19,486,099),
attributable primarily to research and development and general and
administrative expenses. Until we are able to generate significant revenues
from our activities, we expect to continue to incur operating losses.

Three Months Ended December 31, 2002 Compared to Three Months Ended December 31, 2001

The following is a summary of our Revenue and Cost of Sales for the three
months ended December 31, 2002 and 2001, respectively:

|              |  |                                      |         |       |  |           |         |                    |  |                  |        |  |  |   |        | 
|------------- |  | ------------------------------------ | ------- | ----- |  | --------- | ------- | ------------------ |  | ---------------- | ------ |  |  | - | ------ | 
|              |  | Three Months Ended December 31, 2002
|              |  |                                     
|              |  |                                      |         |       |  | Equipment |         | CVProfilor®DO-2020 |  | Service Warranty
|              |  | Total                                |         | Sales |  | Rental    |         | Income            
|              |  |                                      |         |       |  |           |         |                   
|Revenue       |  | $                                    | 227,754 |       |  | $         | 121,688 |                    |  | $                | 88,650 |  |  | $ | 17,416 | 
|Cost of Sales |  |                                      | 37,627  |       |  |           | 24,475  |                    |  |                  | 13,152 |  |  |   |       | 
|              |  |                                      |         |       |  |           |         |                    |  |                  |        |  |  |   |        | 
|Gross Profit  |  | $                                    | 190,127 |       |  | $         | 97,213  |                    |  | $                | 75,498 |  |  | $ | 17,416 | 
|              |  |                                      |         |       |  |           |         |                    |  |                  |        |  |  |   |        | 

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

Total Equipment Sales Revenue for the three months ended December 31, 2002
was $121,688, compared to $208,701 for the three months ended December 31,
2001. This decrease is mainly due to our anticipated revenue shift from the
CR-2000 Research System (Equipment Sales) to the CVProfilor® DO-2020 System
(per-patient-tested rental program). The CR-2000 Research System is being
marketed for research purposes only in the United States, while the
CVProfilor® DO-2020 System is being marketed to primary care physicians and
other health care professionals on a per-patient-tested rental basis. The
reason for the shift in our strategic focus to the CVProfilor® DO-2020 System
was: a) FDA 510(k) clearance to market it in the United States on November 1,
2000; and b) the potential practicing physician market is significantly larger
than the research market for the CR-2000 Research System. The majority of our
time and attention is now, and will continue to be, focused on expanding
CVProfilor® DO-2020 System placements and utilization in United States
physicians medical offices and clinics. This shift in our strategic focus
began in the fourth quarter of fiscal year 2001.

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For the three months ended December 31, 2002, we recognized Revenue for
the CVProfilor® DO-2020 per-patient-tested rental program of $88,650 compared
to $23,792 for the three months ended December 31, 2001. The per test fee is
recognized as Revenue when we determine that collectibility is probable, which
currently is upon cash receipt.

Total expenses for the three months ended December 31, 2002 were
$1,034,789 compared to $1,403,849 for the three months ended December 31, 2001.
The majority of these expenses related to selling, general and administrative
expenses. The following is a summary of the major categories included in
selling, general and administrative expenses:

|                                                             |                                                    |   |                    |           |      |   |         |           | 
|------------------------------------------------------------ | -------------------------------------------------- | - | ------------------ | --------- | ---- | - | ------- | --------- | 
|                                                             |                                                    |   | Three Months Ended
|                                                             |                                                    |   | December 31       
|                                                             |                                                    |   |                   
|                                                             |                                                    |   | 2002               |           | 2001
|                                                             |                                                    |   |                    |           |     
|Wages, related expenses and benefits                         |                                                    | $ | 229,046            |           |      | $ | 324,923 |          
|Patents and related expenses                                 |                                                    |   | 10,598             |           |      |   | 8,617   |          
|Outside consultants                                          |                                                    |   | 204,819            |           |      |   | 412,184 |          
|Rent-building, equipment and utilities                       |                                                    |   | 25,482             |           |      |   | 30,566  |          
|Insurance-general and directors/officers liability           |                                                    |   | 21,408             |           |      |   | 17,948  |          
|Selling, marketing and promotion, including applicable wages |                                                    |   | 293,510            |           |      |   | 416,414 |          
|Legal and audit/accounting fees                              |                                                    |   | 69,619             |           |      |   | 51,303  |          
|Royalties                                                    |                                                    |   | 6,310              |           |      |   | 6,975   |          
|Depreciation and amortization                                |                                                    |   | 42,887             |           |      |   | 48,007  |          
|Convertible debt private placement expenses                  |                                                    |   | 29,173             |           |      |   |        |          
|Other-general and administrative                             |                                                    |   | 101,937            |           |      |   | 81,595  |          
|                                                             |                                                    |   |                    |           |      |   |         |          
|                                                             | Total selling, general and administrative expenses |   | $                  | 1,034,789 |      |   | $       | 1,398,532 | 
|                                                             |                                                    |   |                    |           |      |   |         |          

Our number of employees decreased from sixteen in the three months ended
December 31, 2001 to twelve in the three months ended December 31, 2002, which
accounted for the decrease in wages, related expenses and benefits from
$324,923 to $229,046.

Outside consultants expense decreased from $412,184 for the three months
ended December 31, 2001 to $204,819 for the three months ended December 31,
2002. Included in the $412,184 expense amount is a non-cash expense charge of
$355,000 relating to our July 9, 2001 Consulting Agreement with Redwood
Consultants, LLC. Included in the $204,819 expense amount is a non-cash
expense charge of $150,000 relating to our June 2002 Consulting Agreement with
HRI Consultants. The fair value of those agreements are expensed as services
are provided. The fair value of the issued shares and warrants to Redwood
Consultants, LLC was arrived at based upon the following methods: Shares 
Last Sales price of our Common Stock on July 9, 2001; and Warrants  The
Black-Scholes option pricing model. The fair value of the issued shares and
warrants to HRI Consultants was based on the agreed upon contract price of
$400,000. Both Consulting Agreements involved similar services to be
performed, including the following: introduce us to various interested parties
in the financial community; assist and consult us with respect to our relations
with brokers, dealers, analysts and other investment professionals; and
financial public relations generally.

Selling, marketing and promotion expense decreased from $416,414 for the
three months ended December 31, 2001 to $293,510 for the three months ended
December 31, 2002. This category includes wages and commissions paid by us
relating to our sales and marketing efforts as well as travel and convention
expenses. The decrease in our number of employees accounted for this decrease
in expenses.

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Interest income was $6,503 and $12,194 for the three months ended December
31, 2002 and 2001, respectively. This decrease is due to the decrease in cash
and cash equivalents from $1,239,050 at September 30, 2002 to $605,946 at
December 31, 2002.

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

|                          |                                                                                                                                                                                                                                       |                        |   |        |        | 
|------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | - | ------ | ------ | 
|Convertible Notes Payable |                                                                                                                                                                                                                                       |                        |   |       
|                          |                                                                                                                                                                                                                                       |                        |   |       
|                          | 8% interest on outstanding principal balances from
October 1, 2002 to December 31, 2002                                                                                                                                               |                        | $ | 21,630 |       
|                          | Fair value basis allocation to the five-year warrants
to purchase 250,000 shares of Common Stock
($315,789), being amortized on a straight-line basis
over the three (3) year term of the debt agreement
and as the debt is converted |                        |   | 41,540 |       
|                          |                                                                                                                                                                                                                                       |                        |   |       
|                          |                                                                                                                                                                                                                                       | Total Interest Expense |   | $      | 63,170 | 
|                          |                                                                                                                                                                                                                                       |                        |   |       

Net loss was $(901,329) for the three months ended December 31, 2002
compared to a net loss of $(1,200,638) for the three months ended December 31,
2001. For the three months ended December 31, 2002, basic and diluted net loss
per share was $(.12), based on weighted average shares outstanding of
7,416,964. For the three months ended December 31, 2001, basic and diluted net
loss per share was $(.20), based on weighted average shares outstanding of
5,913,128.

Six Months Ended December 31, 2002 Compared to Six Months Ended December 31, 2001

The following is a summary of our Revenue and Cost of Sales for the six
months ended December 31, 2002 and 2001, respectively:

|              |  |                                    |         |       |  |           |         |                    |  |                  |         |  |  |   |        | 
|------------- |  | ---------------------------------- | ------- | ----- |  | --------- | ------- | ------------------ |  | ---------------- | ------- |  |  | - | ------ | 
|              |  | Six Months Ended December 31, 2002
|              |  |                                   
|              |  |                                    |         |       |  | Equipment |         | CVProfilor®DO-2020 |  | Service Warranty
|              |  | Total                              |         | Sales |  | Rental    |         | Income            
|              |  |                                    |         |       |  |           |         |                   
|Revenue       |  | $                                  | 346,816 |       |  | $         | 150,388 |                    |  | $                | 161,595 |  |  | $ | 34,833 | 
|Cost of Sales |  |                                    | 53,357  |       |  |           | 30,260  |                    |  |                  | 23,097  |  |  |   |       | 
|              |  |                                    |         |       |  |           |         |                    |  |                  |         |  |  |   |        | 
|Gross Profit  |  | $                                  | 293,459 |       |  | $         | 120,128 |                    |  | $                | 138,498 |  |  | $ | 34,833 | 
|              |  |                                    |         |       |  |           |         |                    |  |                  |         |  |  |   |        | 

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

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Total Equipment Sales Revenue for the six months ended December 31, 2002
was $150,388, compared to $293,851 for the six months ended December 31, 2001.
This decrease is mainly due to our anticipated revenue shift from the CR-2000
Research System (Equipment Sales) to the CVProfilor® DO-2020 System
(per-patient-tested rental program). The CR-2000 Research System is being
marketed for research purposes only in the United States, while the
CVProfilor® DO-2020 System is being marketed to primary care physicians and
other health care professionals on a per-patient-tested rental basis. The
reason for the shift in our strategic focus to the CVProfilor® DO-2020 System
was: a) FDA 510(k) clearance to market it in the United States on November 1,
2000; and b) the potential practicing physician market is significantly larger
than the research market for the CR-2000 Research System. The majority of our
time and attention is now, and will continue to be, focused on expanding
CVProfilor® DO-2020 System placements and utilization in United States
physicians medical offices and clinics. This shift in our strategic focus
began in the fourth quarter of fiscal year 2001.

For the six months ended December 31, 2002, we recognized Revenue for the
CVProfilor® DO-2020 per-patient-tested rental program of $161,595 compared to
$30,357 for the six months ended December 31, 2001. The per test fee is
recognized as Revenue when we determine that collectibility is probable, which
currently is upon cash receipt.

Total expenses for the six months ended December 31, 2002 were $2,031,982
compared to $3,612,285 for the six months ended December 31, 2001.
Approximately 0% of the $2,031,982 and 1.1% of the $3,612,285 total expenses
were related to research and development expenses. A further breakdown of
research and development expenses is as follows:

|                                                                                             |                                         |   |                  |   |      |   |        |        | 
|-------------------------------------------------------------------------------------------- | --------------------------------------- | - | ---------------- | - | ---- | - | ------ | ------ | 
|                                                                                             |                                         |   | Six Months Ended
|                                                                                             |                                         |   | December 31     
|                                                                                             |                                         |   |                 
|                                                                                             |                                         |   | 2002             |   | 2001
|                                                                                             |                                         |   |                  |   |     
|Design and development of prototype devices and other
enhancements and improvements          |                                         | $ |                 |   |      | $ | 28,957 |       
|Recognized compensation cost for value of stock options
granted in lieu of cash compensation |                                         |   |                 |   |      |   | 11,870 |       
|                                                                                             |                                         |   |                  |   |      |   |        |       
|                                                                                             | Total research and development expenses |   | $                |  |      |   | $      | 40,827 | 
|                                                                                             |                                         |   |                  |   |      |   |        |       

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

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|                                                             |                                                    |   |                  |           |      |   |           |           | 
|------------------------------------------------------------ | -------------------------------------------------- | - | ---------------- | --------- | ---- | - | --------- | --------- | 
|                                                             |                                                    |   | Six Months Ended
|                                                             |                                                    |   | December 31     
|                                                             |                                                    |   |                 
|                                                             |                                                    |   | 2002             |           | 2001
|                                                             |                                                    |   |                  |           |     
|Wages, related expenses and benefits                         |                                                    | $ | 462,800          |           |      | $ | 648,592   |          
|Patents and related expenses                                 |                                                    |   | 32,713           |           |      |   | 27,477    |          
|Outside consultants                                          |                                                    |   | 383,432          |           |      |   | 1,515,499 |          
|Rent-building and utilities                                  |                                                    |   | 51,127           |           |      |   | 67,562    |          
|Insurance-general and directors/officers liability           |                                                    |   | 44,863           |           |      |   | 33,550    |          
|Selling, marketing and promotion, including applicable wages |                                                    |   | 599,218          |           |      |   | 879,198   |          
|Legal and audit/accounting fees                              |                                                    |   | 138,596          |           |      |   | 126,402   |          
|Royalties                                                    |                                                    |   | 9,359            |           |      |   | 9,726     |          
|Depreciation and amortization                                |                                                    |   | 89,531           |           |      |   | 95,693    |          
|Convertible debt private placement expenses                  |                                                    |   | 40,226           |           |      |   |          |          
|Other-general and administrative                             |                                                    |   | 180,117          |           |      |   | 167,759   |          
|                                                             |                                                    |   |                  |           |      |   |           |          
|                                                             | Total selling, general and administrative expenses |   | $                | 2,031,982 |      |   | $         | 3,571,458 | 
|                                                             |                                                    |   |                  |           |      |   |           |          

Our number of employees decreased from sixteen in
the six months ended December 31, 2001 to twelve in the six months ended
December 31, 2002, which accounted for the decrease in wages, related expenses
and benefits from $648,592 to $462,800.

Outside consultants expense decreased from $1,515,499 for the six months
ended December 31, 2001 to $383,432 for the six months ended December 31, 2002.
Included in the $1,515,499 expense amount is a non-cash expense charge of
$1,420,000 relating to our July 9, 2001 Consulting Agreement with Redwood
Consultants, LLC. Included in the $383,432 expense amount is a non-cash
expense charge of $300,000 relating to our June 2002 Consulting Agreement with
HRI Consultants. The fair value of those agreements are expensed as services
are provided. The fair value of the issued shares and warrants to Redwood
Consultants, LLC was arrived at based upon the following methods: Shares 
Last Sales price of our Common Stock on July 9, 2001; and Warrants  The
Black-Scholes option pricing model. The fair value of the issued shares and
warrants to HRI Consultants was based on the agreed upon contract price of
$400,000. Both Consulting Agreements involved similar services to be
performed, including the following: introduce us to various interested parties
in the financial community; assist and consult us with respect to our relations
with brokers, dealers, analysts and other investment professionals; and
financial public relations generally.

Selling, marketing and promotion expense decreased from $879,198 for the
six months ended December 31, 2001 to $599,218 for the six months ended
December 31, 2002. This category includes wages and commissions paid by us
relating to our sales and marketing efforts as well as travel and convention
expenses. The decrease in our number of employees accounted for this decrease
in expenses.

Interest income was $13,132 and $41,226 for the six months ended December
31, 2002 and 2001, respectively. This decrease is due to the decrease in cash
and cash equivalents from $1,824,238 at June 30, 2002 to $605,946 at December
31, 2002.

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

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

Net loss was $(1,878,080) and $(3,310,427) for the six months ended
December 31, 2002 and 2001, respectively. For the six months ended December
31, 2002, basic and diluted net loss per share was $(.26), based on weighted
average shares outstanding of 7,091,543. For the six months ended December 31,
2001, basic and diluted net loss per share was $(.56), based on weighted
average shares outstanding of 5,892,669.

Liquidity, Capital Resources and Going Concern Matters

Cash and cash equivalents had a net decrease of $(1,218,292) and
$(2,499,183) for the six months ended December 31, 2002 and December 31, 2001,
respectively. The significant elements of these changes were as follows:

|                                       |   |   |  |  |                                                                                                                                                               |      |  |    |   |  |                              |            |   |  |  |    |   |  |   |            |  
|-------------------------------------- | - | - |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | - |  | ---------------------------- | ---------- | - |  |  | -- | - |  | - | ---------- | -
|                                       |   |   |  |  |                                                                                                                                                               |      |  |    |   |  | Six Months Ended December 31
|                                       |   |   |  |  |                                                                                                                                                               |      |  |    |   |  |                             
|Net cash used in operating activities: |   |   |  |  |                                                                                                                                                               | 2002 |  |    |   |  |                              | 2001      
|                                       |   |   |  |  |                                                                                                                                                               |      |  |    |   |  |                              |           
|                                       |  |   |  |  | net loss, as adjusted for non-cash items                                                                                                                      |      |  |    |   |  | $                            | (1,351,026 | ) |  |  |    |   |  | $ | (1,745,800 | )
|                                       |  |   |  |  | decrease (increase) in accounts receivable:                                                                                                                   |      |  | (A | ) |  |                              | 181, 232   |   |  |  | (B | ) |  |   | (141,912   | )
|                                       |   |   |  |  |  (A) $104,500 accounts receivable balance
regarding one customer at June 30, 2002
pertaining to a service warranty contract was
received in July 2002        |      |  |    |   |  |                              |            |   |  |  |    |   |  |   |           
|                                       |   |   |  |  |  (B) $150,000 accounts receivable balance
regarding one customer was recorded in November
2001 pertaining to the sale of CR-2000 Research
Systems            |      |  |    |   |  |                              |            |   |  |  |    |   |  |   |           
|                                       |   |  |  |  | decrease (increase) in inventory:                                                                                                                             |      |  |    |   |  |                              | 36,711     |   |  |  | (C | ) |  |   | (309,069   | )
|                                       |   |   |  |  |  (C) approximately $250,000 of this amount
pertained to the purchase of Arterial
PulseWave Sensors which are an integral part
of our medical device Systems |      |  |    |   |  |                              |            |   |  |  |    |   |  |   |           
|                                       |  |   |  |  | (increase) in prepaids and other current assets:                                                                                                              |      |  |    |   |  |                              | (18,612    | ) |  |  | (D | ) |  |   | (171,626   | )
|                                       |   |   |  |  |  (D) $117,000 of this amount pertained to a
non-trade receivable/interest bearing loan to a
shareholder                                                      |      |  |    |   |  |                              |            |   |  |  |    |   |  |   |           

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As of December 31, 2002, we have cash and cash equivalents of $605,946.
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, as well as anticipated operating cost reductions,
are estimated to allow us to pursue our business development strategy for
approximately the next three months following December 31, 2002. At February 1, 2003,
we have cash and cash equivalents of approximately $480,000.
Revenues from placements of our CVProfilor® DO-2020 Systems and
sales of our CR-2000 Research Systems are not expected to be sufficient, either alone or
together, to provide us with sufficient working capital to support our
operations during the twelve month period following December 31, 2002. These
matters raise substantial doubt about our ability to continue as a going
concern. If we do not receive substantial additional capital in the next three
months following December 31, 2002, we will be forced to cease operations. If
we are forced to cease operations, we will seek to eliminate all operating
expenses while we reassess our strategic options.

We have implemented a plan to conserve cash through reductions in selling,
general and administrative expenses to improve working capital management.
Since implementing this plan in late December 2003, we have reduced the number of employees from
sixteen at September 30, 2002 to twelve at December 31, 2002. Since December
31, 2002, we have reduced expenses relating to wages associated with the
remaining employees by transitioning some employees to part-time employment and
reducing salaries for executive management. While these measures have reduced
the rate at which we use our available cash, they have also compromised our
ability to pursue and generate placements of our CVProfilor® DO-2020 Systems
and sales of our CR-2000 Research Systems. Until we obtain significant
additional capital to increase our sales and marketing staff and other programs, we
do not expect to generate significant levels of revenue. Thus, while management believes that reduction of expenses is a
necessary component to our continuation as a going concern, we cannot continue
as a going concern as a result of expense reduction alone. To the extent we do
not obtain significant additional capital to increase our sales and marketing
staff and other programs, we will not be able to continue as a going concern.

Our estimates as to our ability to continue operations with our existing
cash and cash equivalents assume that we do not receive any working capital
from any financing. Moreover, our financing needs assume that no demand for
repayment is made by any holder of our 8% Convertible Notes. Because of our
failure to meet the requirements for continued listing relating to
shareholders equity and the notice from The Nasdaq Stock Market regarding this
deficiency (See Part II, Item 5. Other Information), we are in default of
certain covenants under the Notes. A default under the Notes entitles a holder
of a Note, in its discretion, to demand repayment in cash of the accrued but
unpaid interest and 130% of the then-outstanding principal of the Note. In
conjunction with the Companys efforts to obtain financing, the holders of the
Notes have agreed to forbear from any demand for repayment of principal,
interest or any penalty relating to such Notes and to forbear from conversion
of such Notes until February 21, 2003.

If we do not repay and discharge the Notes by February 21, 2003, there can be no
assurance that the holders will not demand such payments or convert such Notes into our Common Stock after February 21,
2003. Our financing needs are based upon management estimates as to future
revenue and expense. Any demand for repayment of the Notes after February 21,
2003, without adequate additional financing, would adversely affect our ability to
continue operations. 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 revenue generated by our CVProfilor® DO-2020
System and CR-2000 Research System and other cash flow from operations.

15



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We continue to pursue
additional financing for working capital, although as of
February 14, 2003
we do not have any commitments for additional working capital. We are
considering all possible financing alternatives. However, no assurance can be given that we will obtain any
additional financing, obtain sufficient financing to support our
business in the short-term or long-term, or that additional financing
will be obtained in a timely manner or on terms and conditions acceptable to
us, our shareholders or the Note holders. Our efforts to raise additional
funds may be hampered by existence of the Notes, the requirement that the
holders of the Notes consent to the repayment of such Notes and any claim by
the holders for penalty amounts under the Notes relating to our covenant
defaults. Our efforts to raise additional working capital will be further
hampered by the likelihood that our securities will de-listed from The Nasdaq
SmallCap Market due to our failure to comply with the requirements for
continued listing relating to shareholders equity and minimum bid price. See
Part II, Item 5. Other Information.

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 (the
Notes) in the aggregate principal amount of $2,000,000. The Notes are
convertible into our common stock at a conversion price initially set at
$2.5072 and subject to downward adjustment because the closing bid price of our
common stock was less than $2.5072 for twenty consecutive trading days. The
new conversion price is 80% of the average of the closing bid prices of our
common stock for the last 5 consecutive trading days of any 20 consecutive
trading day period. Beginning on June 6, 2002 and ending on November 14, 2002,
we offered Class B Warrants for no additional consideration to those holders of
the Class A Warrants who properly exercised a Class A Warrant in the offering
period. Total gross proceeds from this offering were $57,400.




Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures.

The Companys President, Greg H. Guettler, and Chief Financial Officer,
James S. Murphy, have reviewed the Companys disclosure controls and procedures
within 90 days prior to the filing of this Quarterly Report on Form 10-QSB.
Based upon this review, these officers believe that the Companys disclosure
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.

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect these controls during the quarter
covered by this report or from the end of the reporting period to the date of
this Form 10-QSB.

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PART II. OTHER INFORMATION




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



|(a) |  | The Company held a Special Meeting of Shareholders on September 25, 2002.
For lack of a quorum, the Special Meeting was adjourned from September
25, 2002 to
October 25, 2002 (with intervening adjournments on October 4,
2002 and October 15,
2002).                                                                                                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | At the Special Meeting, the Companys shareholders were asked to consider
and approve Proposal 1: The issuance of Common Stock equal to 20% or more
of the outstanding Common Stock of the Company upon (a) conversion of
$2,000,000 aggregate principal amount of 8% Convertible Notes due March
27, 2005 and (b) exercise of Common Stock Purchase Warrants. The
following table shows the results of the votes cast, in person or by
proxy, at the Special Meeting:

|                 |  |  |           | 
|---------------- |  |  | --------- | 
|For:             |  |  | 2,415,466 | 
|Against:         |  |  | 537,996   | 
|Abstain:         |  |  | 441,786   | 
|                 |  |  |           | 
|Total Votes Cast |  |  | 3,395,248 | 
|                 |  |  |           | 




Item 5. Other Information.

On August 27, 2002, we received a notice from The Nasdaq Stock Market,
Inc. advising us that because the minimum bid price of the our common stock was
not at least $1.00 for thirty (30) consecutive trading days, we do not meet the
requirements for continued listing on The Nasdaq SmallCap Market. The Nasdaq
Marketplace Rules provide that we have 180 calendar days, or until February 24,
2003, to regain compliance with the requirement for continued listing relating
to the minimum bid price. Generally, unless otherwise determined by Nasdaq
staff, compliance with the minimum bid price requirement can be demonstrated
during the 180 calendar day period by our common stock maintaining a $1.00
minimum bid price for at least ten (10) consecutive trading
days. While we have requested that Nasdaq provide us with additional
time beyond February 24, 2003 to comply with the minimum bid price
requirement to allow us the opportunity to pursue financing, we have
not been advised that such additional time will be granted.

Another requirement for continued listing on The Nasdaq SmallCap
Market is that an issuer must maintain a minimum of $2,500,000 in shareholders
equity. As of September 30, 2002, we had shareholders equity of $2,011,679,
which does not meet the shareholders equity requirement for continued listing
on The Nasdaq SmallCap Market and which resulted in a notice from The Nasdaq
SmallCap Market of our deficiency on December 4, 2002. As of December 31,
2002, we had shareholders equity of $1,543,116, which does not meet the
shareholders equity requirement.

On December 18, 2002, pursuant to a request from the Nasdaq staff, we
provided Nasdaq with our plan to achieve and maintain compliance with all of
The Nasdaq SmallCap Market listing requirements. As of February 14, 2003, we
had not received any determination from Nasdaq as to the adequacy of our plan.
If Nasdaq staff determines that our plan does not adequately address Nasdaqs
requirements, we will be provided a written notification that our securities
will be delisted from The Nasdaq SmallCap Market. While we will be provided
the opportunity to appeal the Nasdaq staffs delisting determination to the
Nasdaq Listing Qualifications Panel, no assurance can be given that we would
prevail if we seek to appeal the decision.

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##### Table of Contents






Item 6. Exhibits and Reports on Form 8-K



|(a) |  | The following Exhibits are furnished pursuant to Item 601 of Regulation S-B:                                    
|--- |  | ----------------------------------------------------------------------------------------------------------------
|   
|    |  | 99.1 Certificate pursuant to 18 U.S.C. §1350.                                                                   
|   
|    |  | Reports on Form 8-K.                                                                                            
|   
|(b) |  | The Company filed the following Current Reports on Form 8-K during the last
quarter covered by this Form 10-QSB:



| |  |  | Current Reports on Form 8-K dated October 4, 2002 and October 15,
2002 under Item 5 announcing the adjournments of the Special Meeting of
Shareholders for lack of quorum;                                                                                                                                                                                                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Current Report on Form 8-K dated October 17, 2002 under Item 5
announcing the extension of the expiration of the Companys offering of
Redeemable Class B Warrants, the extension of the expiration of the
Companys Redeemable Class A Warrant and the reduction in the
respective exercise prices of the Companys Redeemable Class A Warrant
and Redeemable Class B Warrant to $1.00;               
|
| |  |  | Current report on Form 8-K dated October 15, 2002 under Item 5
announcing that the Company had entered into a letter agreement
relating to a waiver of certain existing events of default regarding
its 8% Convertible Notes due March 27, 2005;                                                                                                                                                       
|
| |  |  | Current report on Form 8-K dated October 25, 2002 under Item 5
announcing that the Companys shareholders had approved Proposal 1: The
issuance of common stock equal to 20% or more of the outstanding common
stock of the Company upon (a) conversion of $2,000,000 aggregate
principal amount of 8% Convertible Notes due March 27, 2005 and (b)
exercise of certain common stock Purchase Warrants;
|
| |  |  | Current report on Form 8-K dated November 14, 2002 under Item 5
reporting the results of our offering of Redeemable Class B Warrants;                                                                                                                                                                                                                                                                  
|
| |  |  | Current report on Form 8-K dated December 4, 2002 under Item 5
reporting the receipt by us of a notice from The Nasdaq Stock Market,
Inc. of a violation of the requirements for continued listing relating
to stockholders equity and related covenant default under the 8%
Convertible Notes due March 27, 2005.                                                                                    

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##### Table of Contents






SIGNATURES

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

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

Date: February 14, 2003

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##### Table of Contents






CERTIFICATIONS

I, Greg H. Guettler, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-QSB of Hypertension
Diagnostics, Inc.;                                                                                                                                                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | a) |  | Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                   |  |                     
|----- |  | ----------------- |  | --------------------
|Date: |  | February 14, 2003 |  | /s/ Greg H. Guettler
|      |  |                   |  |                     
|      |  |                   |  | President           

20



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##### Table of Contents



I, James S. Murphy, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-QSB of Hypertension
Diagnostics, Inc.;                                                                                                                                                                                                                                       
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                   |  |                        
|----- |  | ----------------- |  | -----------------------
|Date: |  | February 14, 2003 |  | /s/ James S. Murphy    
|      |  |                   |  |                        
|      |  |                   |  | Chief Financial Officer

21