ITEM 1.  DESCRIPTION OF BUSINESS.

     Colorado MEDtech, Inc. ("CMED") and its wholly-owned subsidiaries, RELA, 
Inc. ("RELA") and Novel Biomedical, Inc. ("Novel") (collectively, the 
"Company") are leading full-service providers of advanced medical products, 
technologies and services which increase the efficacy and lower the cost of 
health care. CMED was incorporated in 1977 as a Colorado corporation to 
develop, manufacture, market and service computerized diagnostic and testing 
instrumentation. RELA, a Colorado corporation, was incorporated in 1977. RELA 
is an integrated custom product development and manufacturing services 
company specializing in the design, development and manufacture of electronic 
and electro-mechanical medical products and software systems.  Novel, a 
Minnesota corporation, was incorporated in 1986 and was acquired by CMED in 
February, 1997.  Novel specializes in the custom design, development and 
manufacture of unique disposable medical devises, primarily catheters, used 
in angioplasty, minimally invasive surgery, electrophysiology and infertility 
treatment.  In July 1997, CMED entered into an agreement to acquire the 
operating assets of Erbtec Engineering, Inc. ("Erbtec").  Erbtec, located in 
Boulder, Colorado, produces high power radio frequency ("RF") amplifiers and 
systems for Magnetic Resonance Imaging ("MRI") equipment and other medical 
imaging applications.

PRODUCTS AND SERVICES

  The Company employs engineers, scientists, technicians, manufacturing 
specialists, and assembly workers.  The Company believes its experience in 
applying its proven methodologies and advanced technologies to the 
development of innovative new products gives its clients an advantage in 
their marketplace by providing them with state-of-the-art, quality products 
in a timely and cost-effective manner.  The Company designs, develops and 
manufactures healthcare products for a broad range of customers that include 
major pharmaceutical and medical instrumentation companies.  In addition to 
development, the Company performs product definition services, conducts focus 
groups and performs software verification and validation ("V&V")  activities 
necessary for Food and Drug Administration ("FDA") approval.  CMED and RELA 
received ISO 9001 and EN 46001 certification during 1996. Novel is currently 
preparing to undergo an ISO 9001 and EN 46001 certification audit during 
fiscal year 1998.  The Company is a Registered Device Manufacturer with the 
FDA and meets the agency's Quality Systems Regulation requirements.

Additional services include:

-  Feasibility studies                   -  Mechanical design and engineering
-  Market research                       -  Machining and modeling services
-  Product modeling, graphic design      -  Disposables engineering
   and trade show support                -  Prototype development
-  Industrial design and human           -  Design for manufacturability
   factors engineering                      and reliability engineering
-  User interface design and             -  Pilot, short- and long-run
   usability testing                        production
-  Electronic design and development     -  Quality assurance and testing
-  Software development, verification    -  Product service and sustaining
   and validation                           engineering
-  Electronic packaging and printed-
   circuit design

     Rapidly advancing technologies, heightened worldwide competition and the 
demands of an increasingly sophisticated marketplace have created pressures 
on companies, both domestic and international, to develop high quality, 
world-class products in time to meet the narrowing windows of opportunity in 
the marketplace.  These conditions have produced opportunities for companies 
that can react to those market needs.  Such companies need to have the 
technology, experience and ability to develop high quality, state-of-the-art 
products.  The Company believes it is uniquely positioned to provide its 
clients, within a single integrated structure, the valuable product 
development and manufacturing resources they need to satisfy the requirements 
of a worldwide marketplace.

     CMED was organized to develop, manufacture, market and service 
computerized diagnostic and testing instrumentation.  The Company's 
respiratory product lines include respiratory filters, metabolic assessment 
instruments and computers and computer software for the measurement of 
metabolic parameters.

     CMED is currently in the test phase of an oxygen regeneration system 
that is intended for use in long-term health care facilities.  This system is 
expected to reduce the cost of oxygen to patients of these facilities due to 
the fact that they would be generating their own oxygen at their own 
facilities instead of purchasing it from third parties.  The Company expects 
this product to be in commercial production during fiscal 1998.

     The Company's MetaScope-TM- allows physicians to perform metabolic 
analysis in a noninvasive manner by means of the science of indirect 
calorimetry.  The MetaScope-TM- provides physicians with precise nutritional 
information that assists in monitoring patient recovery.  Cardiac output 
measurements based on oxygen consumption can also be computed with this 
instrument.

MARKETING

     The Company markets its services through a direct sales program and 
nationwide network of independent manufacturers' representatives.  The 
Company promotes its services through advertising, direct mail and attendance 
at industry trade shows.

     The Company's respiratory products are sold primarily to Vencor, Inc. 
("Vencor"), a related party that is a large hospital and nursing home 
organization and to other hospitals, clinics, and private physicians 
throughout the continental United States, and on a limited basis in Canada, 
Japan, Mexico and several other foreign countries.  The Company distributes 
these products through its own support organization.

     For the period ended June 30, 1997, three customers accounted for 
approximately 19%, 14% and 12%, respectively, of total revenues of the 
Company and foreign sales were less than 5% of the Company's total sales.  
The loss of a significant customer could have a material, detrimental impact 
on the Company's operations.  Most sales are on net thirty-day credit terms.  
At June 30, 1997, the Company's backlog of orders for services or shipment of 
product in fiscal 1998 was approximately $21.7 million compared to 
approximately $16.0 million at June 30, 1996.

RESEARCH AND PRODUCT DEVELOPMENT

     The Company intends to continue to improve current products and to 
develop new products and services.  In addition to internal development 
efforts, the Company may acquire related technology and/or products from 
others.

     In June of 1994, the Company signed a product development agreement with 
Vencor to develop mutually agreed upon products that Vencor would purchase 
exclusively from the Company, while the Company is unrestricted in its rights 
to sell the products. The Company has agreed to expend at least $800,000 
toward development of products during the term of the agreement.

     While the Company employs approximately 100 engineers, scientists and 
technicians in research and development activities, these employees' efforts 
are primarily devoted to contract work for customers. Research and 
development expenses historically were  attributable to the metabolic and 
filter product lines.  During fiscal year 1997 most of the research and 
development expenses are attributable to the oxygen regeneration system.  No 
research and development expenditures are currently attributable to RELA or 
Novel. For fiscal years 1997 and 1996, the Company incurred approximately 
$304,000 and $97,000, respectively, for research and development activities. 

     Consistent with the Company's operating plans, the Company is 
continuously pursuing the acquisition and development of new or improved 
technology or products.  Should the Company identify any opportunities that 
would be commercially viable, the amount of future research and development 
expenditures may increase.

. 

COMPETITION

     The Company's present and future competition comes from a variety of 
sources.  These sources include commercial product development and 
manufacturing companies.  There are a number of firms that provide services 
similar to the Company's.  These vary from small consulting operations 
offering a small subset of the Company's services to a few integrated service 
companies. Frequent RELA competitors include SeaMed Corporation and Kollsman 
Manufacturing Company. Frequent Novel competitors include ACT Medical, 
Incorporated and NuMED, Incorporated.

     On a lesser scale, the Company also competes with commercial and 
university research laboratories.  There are both for-profit and 
not-for-profit organizations nationwide that perform services similar to the 
product development aspect of the Company's business.  These include 
Battelle, Inc., Stanford Research Institute, Arthur D. Little Center for 
Product Development, Southwest Research Institute and the research 
capabilities within the nation's leading universities.

     CMED's MetaScope-TM- has three major competitors. Mallinckrodt Group, 
Incorporated has a unit dedicated for use with their line of hospital 
ventilators.  Sensormedics Corporation and Medical Graphics Corporation both 
produce instruments that compete directly with the Company's product. Jaeger 
also produces a product that has not been released for sale in the United 
States.  

     As the Company develops and manufactures other proprietary products, 
such as the oxygen regeneration system,  it can expect to encounter 
additional competitors, many of which may be larger and in a stronger 
financial position than the Company.  As cost containment efforts continue in 
the healthcare marketplace, competition will continue to be intense in the 
future.

MANUFACTURING

     The Company manufactures its products and customer products at three 
facilities in Boulder, Colorado, Longmont, Colorado and in Plymouth, 
Minnesota.  Most products are fabricated as standard products, while others
are built in response to specific customer purchase orders.  The 
manufacturing process consists primarily of assembly, test and packaging of 
both custom and commercially available components from outside sources.

     Most of the materials and components used in the Company's products are 
available from a number of different suppliers.  The Company generally 
maintains multiple sources for most items, but some components are single 
source.  The Company is dependent upon its suppliers for timely delivery of 
quality components.

PRODUCT WARRANTIES AND SERVICE

     The Company generally warrants its products for 90 days, but in limited 
cases for up to one year against defects in materials and workmanship.  The 
Company has established a provision for estimated expenses of providing 
service under these warranties.  Nonwarranty service is billed to the 
customer as performed.

GOVERNMENT REGULATION

     The Medical Device Amendments of 1976 to the Food, Drug and Cosmetic Act 
(the "Act") and regulations issued or proposed thereunder, including the Safe 
Medical Devices Act of 1990, provide for regulation by the U.S. Food and Drug 
Administration ("FDA") of the marketing, design, manufacturing, labeling, 
packaging and distribution of medical devices.  These regulations apply to 
the Company's products and many of the Company's customers' products.  The 
Act and the regulations include requirements that manufacturers of medical 
devices register with and furnish lists of devices manufactured by them to 
the FDA.  Prior to marketing a medical device, FDA approval must be obtained. 
Tasks to be performed for approval range from bench-test data and 
engineering analysis to potentially expensive and time-consuming clinical 
trials.  The types of tasks for a particular product submission are indicated 
by the classification of the device and previous approvals for similar 
devices.  There are also certain requirements of other federal laws and of 
state, local, and foreign governments, which may apply to the manufacture and 
marketing of the Company's products.  To date, the Company has not 
experienced significant difficulty in complying with the requirements imposed 
on it by the FDA or other governmental agencies.

     The FDA's "Quality System Regulation for Medical Devices" ("QSR") sets 
forth standards for the Company's design and manufacturing processes that 
require the maintenance of certain records and provide for unscheduled 
inspections of the Company's facilities.  The Company does not expect to make 
significant expenditures as a result of these requirements.  The Company's 
procedures and records were reviewed in 1987, 1990, 1995, and 1997 by the FDA 
during routine general inspections.  The inspections resulted in some 
procedural changes that are intended to assure continued compliance with 
current QSR.

     CMED and RELA received ISO 9001 and EN 46001 certification in June of 
1996.  The ISO 9001 series of quality management and quality assurance 
standards has been adopted by 90 countries. ISO standards require that a 
quality system be used to guide work to assure quality and to produce quality 
products.  ISO 9001, the most comprehensive of the standards, covers 20 
elements.  These elements include management responsibility, design control, 
training, process control and servicing.  ISO 9001 is the quality systems 
standard used by companies providing design, development, manufacturing, 
installation,  and servicing.  Novel is currently preparing to apply for ISO 
9001 and EN 46001 certification during fiscal year 1998.

     There are no material costs or expenses associated with the Company's 
compliance with federal, state and local environmental laws.

PATENTS

     The Company has no significant patents.  The Company believes that the 
conduct of its business is not dependent upon its ability to obtain or defend 
patents.  

EMPLOYEES

     As of June 30, 1997, the Company had 245 employees, of which 189 are 
full-time.  85% of the Company's employees are employed at its operations in 
Boulder and Longmont, Colorado.  The remaining 15% of employees are employed 
at Novel in Plymouth, Minnesota.  No employees are represented by labor 
organizations and there are no collective bargaining agreements.  Employee 
relations are believed to be good.