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                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                   FORM 10-K


XX   Annual Report Pursuant to Section 13 or 15(d) of the Securities and
     Exchange Act of 1934 for the fiscal year ended April 30, 1997.

     Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 for transition period from ____________ to
     ____________.


Commission File No. 0-18472

                            HEALTH MANAGEMENT, INC.
             (Exact name of registrant as specified in its charter)

              

              DELAWARE                                  75-2096632
  (State or other jurisdiction of                   (I.R.S. Employer
  incorporation or organization)                   Identification No.)


               1371-A ABBOTT COURT, BUFFALO GROVE, ILLINOIS 60089
                    (Address of principal executive offices)

Registrant's telephone number, including area code: (847) 913-2700

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

                              TITLE OF EACH CLASS

                     Common Stock, $.03 par value per share

     Indicate by check mark whether the Registrant has (1) filed all reports
required to be filed by Section 12 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) been subject to such
filing requirements for the past 90 days.

                                  Yes X     No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [  ]




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     As of September 2, 1997, the closing price of the Registrant's common
stock quoted on the NASDAQ SmallCap Market was $.125. The aggregate market
value of the voting stock held by non-affiliates of the Registrant was
$1,163,650. As of September 2, 1997, there were 18,294,494 shares of the
Company's Common Stock ("Common Stock"), $.03 par value, outstanding. For
purposes of the computation of the number of shares of the Registrant's Common
Stock held by non-affiliates, the shares of Common Stock held by directors,
officers and principal stockholders that filed a Schedule 13G or Schedule 13D
were deemed to be stock held by affiliates. As of September 2, 1997, there were
8,985,292 shares of Common Stock outstanding held by such affiliates.

     All statements contained herein that are not historical facts, including,
but not limited to, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause actual results to differ materially are the
following: the availability of sufficient capital to finance the
Company's business plans on terms satisfactory to the Company; changes or
conditions affecting the Merger Agreement and other transactions with
Transworld HealthCare, Inc., a New York corporation ("Transworld"),  including
Transworld's willingness not to proceed against the Company for being in
default under the Credit Agreement; competitive factors; the ability of the
Company adequately to defend or reach a settlement of outstanding litigation
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; management and employee turnover; general business and economic
conditions; and other factors described from time to time in the Company's
reports filed with the Securities and Exchange Commission. The Company wishes
to caution readers not to place undue reliance on any such forward-looking
statements, which statements are made pursuant to the Private Litigation Reform
Act of 1995 and, as such, speak only as of the date made.

                                     PART I

ITEM 1. BUSINESS

GENERAL

     Health Management, Inc., a Delaware corporation (the "Company"), was
founded in 1986 as a home health care provider.  In 1989, the Company made a
strategic shift and began to concentrate on the provision of post-surgical
pharmaceutical products and services to organ transplant patients.  Currently,
the Company is focused on the provision of integrated pharmaceutical management
services to patients with chronic medical conditions which may be complicated
by a higher risk of patient non-compliance with the prescribed pharmaceutical
regimen, and to the health care professionals, pharmaceutical manufacturers and
third-party payors involved in the care of such patients.  Services offered
include the distribution of prescription drugs, drug utilization review,
patient compliance monitoring, assistance in insurance coverage, verification
and reimbursement.  The Company has expanded its



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business primarily through acquisitions to include the oncology, HIV/AIDS,
infertility, and schizophrenia markets.


Transactions with Transworld Healthcare, Inc.


     On November 13, 1996, Transworld HealthCare, Inc, a New York corporation
("Transworld"), acquired the bank debt of the Company that was outstanding under
the Credit Agreement, dated March 31, 1995 (the "Credit Agreement"), among the
Company, Chase Manhattan Bank, as agent, and the guarantors and lenders named
therein, the principal amount of which aggregated $28.35 million.  The Company
was in default under various covenants contained in the Credit Agreement and
Transworld agreed to forebear until December 12, 1996 from exercising any
remedies under the Credit Agreement and agreed, in its discretion, to loan the
Company up to an additional $3.0 million under the Company's revolving credit
facility.  The forbearance agreement was subsequently extended in short term
intervals until July 15, 1997 and the Company's revolving credit facility was
increased by up to an additional $2.0 million on December 23, 1996.

     Also on November 13, 1996, the Company entered into a Stock Purchase
Agreement with Transworld, pursuant to which Transworld agreed to acquire
8,964,292 newly issued shares of Common Stock, representing 49% of the
outstanding Common Stock, as well as an option to purchase an additional
746,713 shares of the Common Stock at $1.00 per share.  The closing of this 
transaction occurred on January 13, 1997. The consideration for the Shares
included: (i) the execution by Transworld of the Merger Agreement (defined
below), (ii)the purchase by Transworld of the rights of the Company's
senior lenders under the Credit Agreement, (iii) the extension by Transworld of
the expiration date under the Forbearance Agreement, (iv)the extension by
Transworld of additional amounts under the revolving credit facility, subject
to certain conditions and at Transworld's discretion, (v) the cancellation by
Transworld of rights granted to the lenders to warrants of the Company, and
(vi) $1.00 per share of Common Stock.  Of the $1.00 per share consideration,
which aggregated approximately $8.9 million, approximately $4.6 million was
applied toward repayment of amounts loaned to the Company under the revolving
credit facility subsequent to November 13, 1996 through January 13, 1997, and
approximately $.1 million was applied towards payment of outstanding interest
under the Credit Agreement. If Transworld exercises its option, it will own 51%
of the outstanding Common  Stock of the Company.

     On November 13, 1996, the Company, Transworld and IMH Acquisition Corp., a
wholly owned Delaware subsidiary of Transworld ("IMH"), also entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which IMH
would merge (the "Merger") into the Company and each stockholder of the Company
(other than Transworld and its affiliates) would receive cash consideration
equal to $2.00 per share.  On January 13, 1997, the Merger Agreement was
amended to provide for, among other things, a reduced cash consideration of
$1.50 per share in light of certain material adverse changes to the business
and financial condition of the Company.  On March 17, 1997, the Company
announced that it planned to restate its



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first and second quarter fiscal 1997 results and take a charge of approximately
$13 million in the third quarter of fiscal 1997.  In light of these events, the
cash consideration was renegotiated to $0.30 per share (the "Merger
Consideration"). If the Merger is consummated, the Company will become the
wholly owned subsidiary of Transworld.  The Merger Agreement is subject to
certain conditions, including the consent of Transworld's lenders. The Merger
Agreement was approved and adopted by the stockholders of the Company on July
11, 1997.

     On August 1, 1997, Transworld informed the Company that Transworld's
lenders had not yet consented to the Merger and Transworld would not be able to
consummate the Merger in the near future.  Transworld and the Company began to
explore alternative transactions, including those involving bankruptcy filings.
On August 14, 1997, Transworld announced that it had entered into an agreement
with Counsel Corporation, a Canadian corporation ("Counsel"), relating to the
sale of substantially all of the business and assets of the Company.  Pursuant
to the agreement, Counsel will purchase the assets of the Company for $40
million, subject to certain conditions, including satisfactory due diligence.
While the Company is not a party to the agreement between Transworld and
Counsel, the Company has agreed to allow Counsel to conduct due diligence and
has agreed to refrain from discussing transactions with other potential buyers
until September 30, 1997 or such earlier date after September 3, 1997 as
instructed by Transworld.  As the Company previously announced, it is still not
clear whether Transworld intends to consummate the Merger.  If the Merger is
not consummated and the transaction with Counsel proceeds as a purchase of
assets, it is not clear what consideration, if any, would be paid to the
Company's stockholders.

     In addition, Hyperion Partners II, L.P. ("Hyperion"), the majority
stockholder of Transworld, acquired the obligations of the Company due to
Foxmeyer Drug Co., Bindley Western, Inc. and Caremark, Inc. which, in the
aggregate, amount to approximately $18.3 million.  Hyperion has agreed to
contibute the obligations purchased from Foxmeyer Drug Co., and Bindley
Western, Inc to Transworld in exchange for stock of Transworld.

     The revolving credit facility was frozen from January 13, 1997 until May
1997.  From May through July 1997, the Company received additional advances of
$1.4 million from Transworld pursuant to the revolving credit facility.  
However, the Forbearance Agreement expired on July 15, 1997 and the Company is 
currently in default under its Credit Agreement.

     The Company continues to experience severe financial difficulties and, if
not stabilized through the Merger or an alternative transaction, may  seek
protection under the Federal Bankruptcy Laws.

LIFECARE(TM) PROGRAM

     Through its LifecareTM Program, the Company provides integrated
pharmaceutical management programs servicing specific patient populations,
which can benefit from a highly focused approach to health care delivery.
These services include patient education programs, the preparation, delivery
and administration of prescribed outpatient drug therapies, patient compliance
programs and data management.  The



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Company provides continuity of care to patients as they move from acute care
hospital settings to home-based care programs.

     Pharmaceutical Therapies:  The Company provides services to individuals
with chronic medical conditions who require at least one continual drug therapy
and may also require additional oral and/or injectable drug therapies.  For
example, organ transplant recipients require a continual drug therapy
consisting of immunosuppressants and other drugs in order to prevent rejection
of the transplanted organ.  These individuals also require other oral and, on
occasion, injectable drug therapies to combat or control other conditions
arising from transplant surgery, the disease or medical condition that led to
the transplant or side effects of the immunosuppressant drugs.  The Company can
supply the total pharmaceutical needs for each of these patients.

     Given the medical condition of these patients, timely and accurate
availability of medications and use that is consistently compliant with
physician instructions can mean the difference between a successful outcome and
a costly complication.  The Company's licensed pharmacists and other health
care professionals are available via a toll-free number 24 hours per day, seven
days per week, for assistance or consultation.  The Company's pharmacists
prepare and dispense all drug therapies in compliance with the regimen
prescribed by each patient's physician.  Most often, orders are received by
telephone at one of the Company's 17 pharmacy locations (in 16 states) and are
then shipped directly or via common carrier to ensure prompt delivery to the
patient.  The Company's pharmacists serve the needs of the Company's patients
by maintaining the appropriate pharmaceuticals and medical supplies in
inventory, and by having experience with each of the chronic medical conditions
being treated.

     Drug Monitoring and Screening:  A substantial portion of the costs
associated with treating the chronically ill is attributable to
hospitalizations and medical procedures necessitated by noncompliance and
adverse drug interactions.  In addition to the direct costs associated with
noncompliance, including hospital admissions or organ rejections, there are
indirect costs associated with noncompliance, which result from work disability
and deteriorated health status.  To monitor patient compliance, the Company
maintains a proprietary patient database that contains comprehensive patient
profiles, including demographics, listings of all medications with dosages and
directions for use, laboratory results and drug delivery schedules with the aim
of enhancing compliance.  A Company pharmacist consults with the patient's
physician or primary health care professional to determine the patient's plan
of treatment, including drug therapy, support services and delivery
requirements.  Throughout the course of treatment, a Company pharmacist
appropriately reviews each patient's drug profile, evaluates patient compliance
with the physician's orders and screens for potential interactions among new
drug orders or with existing medications in the patient's profile.  In order to
further improve its ability to monitor each patient's compliance with the
prescribed drug therapies, the Company continues to develop its proprietary
patient database.  Clinical information for over  17,000 patients is currently
maintained through the system.  The Company makes information from this
database and from drug utilization review data available to referral sources,
third-party payors and pharmaceutical manufacturers, in compliance with patient
confidentiality requirements.



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     Reimbursement:  The Company offers billing and reimbursement services to
each of its patients.  The Company accepts the assignment of benefits from, and
the responsibility for the submission of, reimbursement claims, and receives
reimbursement payments directly from the patients' insurance carriers or other
third-party payors.  The Company's reimbursement personnel review each
prospective patient's insurance plan to analyze whether the plan provides
adequate coverage and to determine the scope and extent of this coverage and
lifetime maximum limits.  If the coverage is limited or inadequate for the
required treatments, the Company's staff advises patients on the availability
of alternative and supplemental coverage, including Medicare, Medicaid or other
financial support programs.  Additionally, the Company negotiates on behalf of
individual patients with health insurers, HMOs and other health care
reimbursement entities to aid in optimizing and facilitating coverage for
required drug therapies and supportive services.


MARKETS

     Organ Transplantation.  There are approximately 270 organ transplant
centers in the United States.  Currently, these centers perform approximately
20,000 transplants a year, of which an estimated 60% are kidney transplants.
At December 31, 1996, there were approximately 80,000 transplant patients in
the United States and an additional 49,650 patients on the national organ
waiting list according to United Network for Organ Sharing (UNOS).  The annual
number of new transplant recipients continues to grow due to increasing public
awareness and participation in organ donation programs and the success of organ
transplant surgeries.  Improvements in surgical, pharmaceutical, organ
preservation and tissue typing technologies have allowed more patients to
receive organ transplants each year and further enhance graft survival and
increase the life expectancy of these patients.  The Company believes that the
incidence of organ transplantation will continue to expand because it
represents a cost-effective alternative to other therapies and results in a
higher quality of life.  For example, the average annual cost of drug therapies
for kidney transplant patients is approximately $10,000, as compared to the
average annual cost of hemodialysis, the principal alternative therapy, which
is approximately $25,000.

     Once a transplant has been performed, transplant patients must receive
multiple medications for the rest of their lives because of the possibility of
organ rejection.  Additionally, these patients are susceptible to complications
as a result of the transplantation.  Based on the Company's experience, each
transplant patient requires medications costing an average of approximately
$10,000 per year.  The Company believes that the organ transplant recipient
population spends in excess of $800 million per year on drug therapies and that
this market has increased substantially each year as the number and type of
transplants increase each year.

     The Company currently serves approximately 7,000 transplant recipients.
The Company targets hospital-based transplant programs that direct the
outpatient care of their transplant recipients to outside, third-party service
groups.  The Company has increased the number of transplant programs which it
serves from 25 at the end of fiscal year 1991 to 100 at the end of fiscal year
1996 and 127 as of April 30, 1997.  Furthermore, the Company has established
contractual arrangements with health care providers and payors to provide
services at negotiated rates.  The Company also



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intends to continue to expand its LifecareTM Program by continuing to work with
medical professionals and organizations, such as the United Network for Organ
Sharing (UNOS), to educate the public on the need for organ donations.

     Schizophrenia.  Schizophrenia is a psychotic disorder, which is estimated
to affect approximately one percent of the U.S. population, or 2.5 million
people.  The Company's services include distribution and monitoring of
antipsychotic medications including Clozapine, and other first line
antipsychotic medications.  Monitoring services include data administration,
phlebotomy services and laboratory analysis.  Clozapine is prescribed primarily
for schizophrenia patients who have not responded to first-line antipsychotic
medications.  Because of potentially severe side effects associated with
Clozapine, the FDA currently requires that patients using Clozapine receive
weekly monitoring of their white blood cell levels.  The Company presently
provides Clozapine to approximately 5,500 schizophrenia patients at an average
cost per patient of between $6,000 and $8,000 per year depending upon the
dosage.  The Clozaril patient base of the Company has declined approximately
17% since October 1996, 9% of such decline is directly related to office
closures by the Company or the loss of referral sources. Management believes
that the balance of the decline may be attributable to the introduction of
Olanzapine and other market factors.  (See below for discussion of Olanzapine).
The Company's Clozaril Patient Management Business contains multiple
components including weekly blood draws to test for a side effect associated
with Clozapine.

     In October, 1996, Olanzapine, a new antipsychotic agent for the treatment
of schizophrenia, was introduced into the market.  The Company also expects
several additional antipsychotic drugs to be introduced in the next year, based
upon the recent history of such new products having been introduced into the
market and the present pipeline of potential products in various stages of the
Food and Drug Administration review process.  The Company anticipates providing
these new drugs to schizophrenic patients as it broadens its LifecareTM Program
by taking advantage of its existing relationships with over 3,000
psychiatrists, various payors and state mental health and Medicaid programs.
To date, management believes that the introduction of Olanzapine has been a
factor in the recent decline of the Company's Clozapine customer base of
approximately 8% as physicians preferentially prescribe Olanzapine for
treatment of schizophrenia.  Because Olanzapine does not require weekly blood
monitoring, and therefore is less costly than Clozapine, and because the
relative efficacy of Olanzapine is still uncertain, the Company cannot predict
the ultimate effect on its customer base and, in turn, its financial condition
from the introduction of Olanzapine.  The Company also cannot predict the
effect on its financial condition of the introduction of other antipsychotic
drugs.

On July 14, 1997, an advisory committee of the Food and Drug Administration
("FDA") convened a meeting to discuss potential changes in the need for and
frequency of  monitoring.  The advisory committee recommended the following to
the FDA:
1.   After six months, the weekly blood monitoring could be reduced to
bi-weekly;
2.   Blood monitoring should not be totally eliminated; and
3.   After one year, the monitoring should be made voluntary.
Subsequently, alternative scenarios have been discussed with the manufacturer.
At this time, there is no certainty regarding whether the FDA will accept the
recommendations of the committee, decide not to make any changes for the time
being,



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or make alternative changes in the frequency of or requirement for monitoring.
However, management believes that there is sufficient evidence to conclude that
a substantial decrease in monitoring frequency is probable in the near future..
The Company derives a significant portion of its Clozapine gross margin from
the fees related to the weekly blood test monitoring of its Clozapine patients.
Any changes in the requirement for or frequency of monitoring could materially
effect the Company's results of operations and cash flows. Accordingly, the
carrying value of the goodwill associated with the original purchase of the
Clozapine business as well as long-lived assets at certain Clozapine facilities
has been written off.  (See Note 6 to the Consolidated Financial Statements.)

     Infertility.  Today, there are an estimated 4.5 million women of
child-bearing age in the United States with reduced fertility, although of
those only 100,000 utilize methods available to treat infertility.  The primary
treatments for infertility are ovulatory induction and artificial reproductive
technology, often coupled with the use of fertility drugs to maximize success
rates.  The average number of monthly cycles of treatment per year for women
seeking such treatment is approximately 2.5.  In 1996, the total U.S. market
for drugs used in infertility treatment was approximately $540 million, and the
average cost of treatment per cycle was between $2,000 and $2,500.  Currently,
the Company provides services to approximately 300 new individuals per month
through its infertility program.

     Oncology.  The American Cancer Society estimates that over 1.0 million new
cases of cancer were diagnosed in 1996.  One out of every four deaths in the
United States is related to this group of diseases.  The rising incidence of
cancer combined with higher survival rates for cancer patients has led to a
corresponding increase in the overall market for cancer therapies.  The
National Cancer Institute estimates that $104 billion is spent on cancer
patients of which $35 billion is in direct medical costs.  Drug therapies
provided by the Company include: oral medications such as etoposide,
methotrexate, melphalan and cyclophosphamide; intravenous therapies such as
5-fluorouracil and Taxol(R); and injectables such as Neupogen(R) and
Intron-A(R).  The cost of these therapies range between $1,500 and $6,000 per
annum.  The Company currently provides services to approximately 800 oncology
patients.

     HIV and AIDS.  The Centers for Disease Control and Prevention estimates
that 650,000 to 900,000 Americans are living with HIV, the virus that causes
AIDS, and it reports that as many as 300,000 people have died of AIDS.  In
1996, nearly 75,000 new cases of AIDS were reported.  It is estimated that over
$15.2 billion was spent on HIV/AIDS care and treatment in 1996.  Available drug
protocols believed to slow the progression of the disease include first line
drugs like AZT and the new protease inhibitors (Invirase(R), Norvir(R) and
Crixivan(R)).  In addition, drugs like pentamidine, intravenous and oral
antibiotics, parenteral nutrition, Neupogen(R) and Doxil(R) are used to treat
opportunistic infections and counteract adverse reactions from the disease and
its therapies respectively.  The Company presently provides pharmaceutical
products to approximately 400 HIV/AIDS patients.  The pharmaceutical cost of
treatment to these patients varies between $5,000 and $10,000 per patient per
year depending on their individual symptoms and the therapeutic regimens.

COMPANY STRATEGY




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     The Company's business strategy has been  focused on the basic factors
that could improve profitability and cash flows: revenue generation, cost
reduction, supplier relations, quality improvement and cash collections.
However, much of senior management's attention has been focused on the normally
routine task of sourcing product from its suppliers and this distraction was
heightened substantially following the bankruptcy filing, on August 27, 1996,
by its then principal wholesaler.  More recently, management has focused on the
pursuit of the Transworld and Counsel transactions.  Throughout this period the
Company has had inadequate financial resources to implement much of its
strategy.  Cost reduction efforts are focused on the consolidation and
operational efficiency of the Company's pharmacy locations, improving
efficiencies in reimbursement and distribution services and selling certain
retail pharmacies.  Management focused on improved cash collections through an
emphasis on enhancing systems capabilities within the Company, and retaining
outside consultants to provide support in the financial, reimbursement and
systems areas.


ACQUISITIONS AND DISPOSITIONS

     The Company has made several acquisitions over the last few years.

     Effective March 31, 1995, HMI Illinois, Inc., a Delaware corporation
wholly-owned by the Company ("HMI Illinois"), acquired certain assets
(including equipment, information and records, goodwill, the rights to proceeds
of accounts receivable generated after March 31, 1995 and the assignment of
certain real estate leases), subject to certain liabilities, of the Clozaril(R)
Patient Management Business ("CPMB") from Caremark, Inc., a California
corporation ("Caremark").  CPMB provides ongoing drug therapies and related
support services primarily to schizophrenic patient populations throughout the
United States.  Other assets of CPMB, including inventory and provider
contracts, were transferred pursuant to a transition agreement, dated as of
March 31, 1995, between HMI Illinois and Caremark over a six-month period
commencing on March 31, 1995.  The aggregate purchase price for the assets
acquired by HMI Illinois was approximately $23,260,000, consisting of
approximately $20,060,000 in cash, a $200,000 escrow deposit, and a $3,000,000
five-year convertible subordinated note with an annual interest rate of 8%
payable semi-annually.  This note has subsequently been purchased from Caremark
by Hyperion, the principal stockholder of Transworld.  The source of funds for
the cash portion of the acquisition was bank financing provided pursuant to the
Credit Agreement.

     In February 1995, the Company acquired substantially all of the assets,
subject to certain liabilities, of Arcade Pharmacy of Maryland, Inc., a
Maryland corporation ("Arcade") and Kaufmann's of Kenilworth Pharmacy, Inc., a
Maryland  corporation ("Kaufmann's").  The businesses acquired provide ongoing
drug therapies and related products primarily to persons afflicted with chronic
illnesses or infertility problems and also operate as retail pharmacies.  The
aggregate purchase price of the acquired assets of Arcade consisted of
$1,812,500 in cash and cash equivalents and 26,002 newly issued, restricted
shares of the Common Stock of the Company, which were valued at $325,000.  The
aggregate purchase price for the assets of Kaufmann's consisted of 82,755 newly
issued, restricted shares of the Common Stock of the



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Company, which were valued at $1,034,375.  The assets related to retail
pharmacies acquired by the Company were sold in the fourth quarter of the
Company's 1997 fiscal year for approximately $1 million.

     Effective April 1, 1994, the Company acquired substantially all of the
assets, subject to certain liabilities, of Murray Pharmacy, Too, Inc., a
Pennsylvania corporation ("Murray Too").  The business acquired provides
ongoing drug therapies and related support services primarily to oncology,
HIV/AIDS and infertility patient populations in Western Pennsylvania.  Also
effective April 1, 1994, the Company acquired substantially all the assets
subject to certain liabilities of Murray Pharmacy, Inc., a Pennsylvania
corporation ("Murray Pharmacy"), that was primarily engaged in the retail
pharmacy business.  The aggregate purchase price for the acquired assets of
Murray Too consisted of $7,500,000 in cash and cash equivalents and 368,885
newly issued, restricted shares of the Common Stock of the Company, which were
valued at $4,600,000.  The aggregate purchase price for the acquired assets of
Murray Pharmacy consisted of 248,175 newly issued, restricted shares of the
Common Stock of the Company, which were valued at $3,094,747.  The Company
closed the retail pharmacy in November, 1996; however, a significant portion of
that is now being serviced by the Company's remaining Pittsburgh retail
facility.

MARKETING AND SALES

     The Company's 13 full-time sales personnel market the LifecareTM Program
throughout the United States through presentations at national meetings of
health care professionals, through advertisements in professional journals and
through direct sales calls to physicians and other health care professionals.
Most of the LifecareTM Program patients are initially referred to the Company
by health care professionals from hospitals at which they are being treated.
Other patients contact the Company directly or are referred to the Company by
family members.

     The Company also markets itself to medical organizations, health plans,
national and local organizations which advance the interests of patients with
specific chronic disorders and patient groups.  Another important element of
the Company's marketing effort is to provide information to referral sources
concerning the nature and availability of the services which the Company
offers, as well as the quality and cost-effectiveness of its programs.  This
effort involves development and implementation of training programs for the
Company's sales representatives and field personnel.

     In order to remain current with information and issues related to chronic
illness disease state management, the Company supports and participates in
various local, state and national professional organizations and societies.

COMPETITION

     The markets in which the Company operates are highly competitive and are
experiencing substantial consolidation.  Although the Company believes that its
package of services distinguishes it from its competition, there are several
other companies that deliver prescription and non-prescription medications to
its patient populations.  These companies include regional and national
pharmacies such as



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Chronimed Inc., Coram Healthcare Corp., Caremark Inc.,  Stadtlander
Drug Company, Inc. (owned by Counsel) and Systemed, Inc. These competitors,
other than Chronimed Inc. and Coram Healthcare Corp., have all been acquired by
other companies.

     The competition is based on a number of factors, including price, quality
of care and service, reputation within the medical community, the ability to
develop and maintain relationships with patients, drug manufacturers and
referral sources and geographical scope.  Competition has also been affected by
the decisions of third-party payors and case managers to become more active in
monitoring and directing the care delivered to their beneficiaries.
Relationships with such groups, as well as inclusion within a contracted
network, has affected and will continue to affect the Company's ability to
serve many of its patients.  Similarly, the ability of the Company and its
competitors to align themselves with other health care service providers may
increase in importance.  Managed care organizations may attempt to align
themselves with providers who offer a broader range of services than those
currently offered directly by the Company.

     There are relatively few barriers to entry into the local markets that the
Company serves.  Local and regional companies are currently competing in many
of the markets presently served by the Company and others may do so in the
future.  The Company also expects competitors to develop new strategic
relationships with providers, referral sources and payors, which could result
in a rapid and dramatic increase in competition.  The introduction of new
services, the enhancement of current services and the development of strategic
relationships by the Company's competitors could cause a significant decline in
sales, the loss of market acceptance of the Company's services or intense price
competition, or could render the Company's services noncompetitive.  The
Company expects to continue to encounter increased competition in the future,
which, if not matched by Company initiatives, could limit its ability to
maintain or increase its market share.  Such increased competition could have a
material adverse effect on the business, financial condition and results of
operations of the Company.

REIMBURSEMENT

     The Company provides reimbursement services to its patients.  These
services include: (1) insurance coverage verification; (2) patient counseling
regarding co-payment and deductible obligations, lifetime maximums, prior
authorizations and other limitations to patient benefits; (3) recommendations
for alternative and supplemental coverage for uninsured and underinsured
patients; (4) claim submission; (5) disputed claim resolution; and (6) general
patient account management.

     The Company bills for drug therapies, medical equipment and supplies and
certain services.  The Company works closely with the patients it serves to
obtain reimbursement from governmental and private third-party payors.
Generally, the Company contacts the third-party payor before delivering drug
therapies in order to determine the patient's coverage and the percentage of
costs that the payor will reimburse.  The Company's reimbursement specialists
review such issues as lifetime limits, preexisting condition clauses, the
availability of special state programs and other reimbursement-related issues.
The Company will often negotiate with the third-party payor on the patient's
behalf to help ensure that coverage is available.



                                     11



<PAGE>   12

     In most cases, third-party payors pay the Company directly for the
reimbursable amounts of its charges.  Once reimbursement processing for these
patients has been established by a payor, claims processing and reimbursement
tend to become routine, subject to continued patient eligibility and coverage
limitations.  Co-payments and deductibles pursuant to Medicare, Medicaid and
private insurance are billed directly to the patient.

     The Company accepts direct assignment of claims for reimbursement from
Medicare and Medicaid, as well as from other third-party payors on behalf of
its patients.  This means that the Company processes the claim for its
customers, accepts payment at the prevailing allowable rates and incurs the
risks of delay or nonpayment if services are determined to be improperly billed
or not medically necessary.  Additionally, because Medicare and Medicaid
reimburse the Company only for patients who meet certain eligibility
requirements, the Company must rely upon its own internal controls to ensure
that it renders services to individuals eligible for reimbursement.  See
"Regulation-Medicare and Medicaid" below in this section.

     Private payors traditionally reimburse a higher amount for a given service
and provide a broader range of benefits than governmental payors, although net
revenue and gross profits from private payors have been decreased by their
continuing efforts to contain or reduce the costs of health care.  An
increasing percentage of the Company's commercial revenue has been derived in
recent years from agreements with HMOs, PPOs and other managed care providers.
Although these agreements often provide for negotiated reimbursement at reduced
rates, they may also result in lower bad debts, provide for faster payment
terms and provide opportunities to generate greater volumes than traditional
referral sources.

     The following table sets forth the approximate percentages of the
Company's revenue attributable to the stated payors for the periods noted:

     
<TABLE>
<CAPTION>
                                                      FISCAL   YEAR   ENDED 
                                                      ---------------------
                                                       1997   1996   1995
                                                       ----   ----   ----
APRIL 30,                                                          
---------                                                          
<S>                                                   <C>    <C>    <C>      
                                                                             
Commercial Insurance and other private payors           43%    56%    60%    
Medicaid and other state programs                       39%    35%    26%    
Medicare and other federal programs                     18%     9%    14%    
                                                       ----   ----   ----
      TOTAL                                            100%   100%   100%   
                                                       ====   ====   ====
</TABLE>                                                                       


     A majority of the Company's revenue is derived from third-party payors,
including private insurers, managed care organizations such as HMOs and PPOs
and governmental payors such as Medicare and Medicaid.  Like other medical
service providers, as a result of third party and governmental payment
procedures, the Company experiences lengthy delays prior to its reimbursement
by third party and governmental payors.  Consequently, management of accounts
receivable through effective patient registration, billing, collection and
reimbursement procedures is critical to financial success and continues to be a
high priority for management.  The Company has experienced problems in its
billing and collections functions that have resulted in a deterioration of its
accounts receivable collections.  The Company has retained outside consultants
to help improve operations, controls and systems related to these functions and
anticipates that it will experience improved



                                     12



<PAGE>   13

collection results.  However, there can be no assurance that these efforts will
result in such improvements.

     To date, the Company's arrangements with managed care organizations have
mostly been on a discounted fee-for-service basis; the Company does not
currently have any significant capitated arrangements (fees based on a flat
rate per patient). In addition, the Company has experienced downward pricing
pressures and an inability to participate in certain managed care networks and
the Company may continue to experience these pressures in the future.



                                     13



<PAGE>   14



REGULATION

     The health care field is subject to extensive and dynamic regulatory
change.  Changes in the law or new interpretations of existing laws can have a
dramatic effect on permissible activities, the relative costs associated with
doing business and the amount of reimbursement by government and third-party
payors, such as Medicare and Medicaid.  The Company is also subject to fraud
and abuse and self-referral laws that regulate the Company's business
relationships with physicians, other health care providers, referral sources
and government payors.

     The federal government and all states in which the Company currently
operates regulate various aspects of its business.  In particular, the
operations of the Company's branch locations are subject to federal and state
laws covering the repackaging and dispensing of drugs and regulating interstate
motorcarrier transportation.  The Company's operations also are subject to
state laws governing pharmacies, nursing services and certain types of home
health agency activities.  Certain of the Company's employees are subject to
state laws and regulations governing the ethics and professional practice of
pharmacy and social work.  The failure to obtain, renew or maintain any of the
required regulatory approvals or licenses could adversely affect the Company's
business and could prevent the location involved from offering products and
services to patients.  Any loss by the Company of its various federal
certifications, its authorization to participate in the Medicare and Medicaid
programs or its licenses under the laws of any state or other governmental
authority from which a substantial portion of its revenues are derived would
have a material adverse effect on its business.  The health care services
industry will continue to be subject to intense regulation at the federal and
state levels, the scope and effect of which cannot be predicted.  The Company
regularly monitors legislative developments and would seek to restructure a
business arrangement if it was determined that any of its business
relationships placed it in material noncompliance with any statute.  No
assurance can be given that the activities of the Company will not be reviewed
and challenged or that government sponsored health care reform, if enacted,
will not result in a material adverse change to the Company.

     Medicare and Medicaid. Medicare is a federally funded insurance program,
which provides health insurance coverage for certain disabled persons,
including persons eligible for most organ transplants and persons age 65 and
older.  The Company is an authorized supplier eligible to receive direct
reimbursement for outpatient services under Medicare.

     Under previous Medicare regulations, certain transplant medications were
reimbursed by Medicare for a period of one year following the transplant
surgery.  After one year, the responsibility for paying for such medication
shifted to the patient's third-party insurance carrier or to the patient
directly.  Legislation has been enacted by Congress to increase this Medicare
coverage period to three years.  This is being implemented in stages which have
already commenced and which will be completed in 1997.   In August, 1997,
Congress enacted a statute which provided for a decrease in Medicare
reimbursement levels for transplant medications to 95% of Average Wholesale
Price ("AWP") down from the current reimbursement of 100% of AWP.



                                     14



<PAGE>   15

However, under the new statute Medicare would have the authority to pay a
reasonable dispensing fee.  The new statute will take effect on January 1,
1998.  The Company's management expects a negative effect on the cash flow and
margins of the Company's transplant business as a result of the statute;
however, no prediction can be made at this time whether or not the effect will
be significant particularly because the magnitude of the dispensing fees is not
yet known.

     Medicaid is a cooperative state-federal program for medical assistance to
the poor.  States have great flexibility in determining eligibility for such
assistance and those services to be paid for under their Medicaid programs.
Beyond mandatory services, states can provide for a wide range of medical
services, including services not otherwise covered under Medicare, such as
long-term nursing, respiratory therapy, home medical equipment and infusion
therapy.

     From time to time, the Company like all providers under the program, is
subject to government audits of its Medicare and Medicaid reimbursement claims.
The Company has been audited in the past.  Medicare and Medicaid have set
stringent requirements for reimbursement of the costs of drugs, services,
equipment and supplies and rental of medical equipment.  The Company intends to
comply with all regulations.  In addition, the Company believes its pricing
policies are within the limits established by Medicare and Medicaid, and the
drugs, services  and supplies it provides are ordered by a physician and
documented as being "medically necessary" and, therefore, reimbursable.
However, if a Medicare or Medicaid audit of the Company's records were to
reveal reimbursement for services which are deemed not to be medically
necessary or costs in excess of current guidelines, those amounts may be
disallowed.  In that event, the Company would either repay Medicare or
Medicaid, as applicable, or offset the deficiencies against amounts owed to the
Company.  In addition, if the Medicare or Medicaid authorities were to
determine that the Company had intentionally violated Medicare or Medicaid
regulations, such authorities may institute criminal or civil proceedings,
including proceedings to revoke the Company's status as a certified Medicare or
Medicaid provider.

     The Company entered into a settlement agreement, dated as of March 31,
1997, with the New York State Department of Social Services, pursuant to which
the Company agreed to make payments of $1.4 million with respect to prior
Medicaid overpayments from such Department, $.5 million of which was paid in
the form of set-offs against amounts then held by New York State Medicaid on
behalf of the Company.  The settlement agreement provides that the remaining
$.9 million be paid in four installments between March 31, 1997 and November 1,
1998, together with interest on the unpaid portion thereof at a rate of 10.25%
per annum.

     Certain states require that the Company have a pharmacy located within or
near the borders of such states in order to qualify for reimbursement for
Medicaid claims filed by their residents.  The Company has established certain
of its branch pharmacy facilities to comply with such requirements, and
believes that it is presently positioned to qualify for such reimbursement in
approximately 40 states.

     Medicare and Health Care Reform. Congress takes action in almost every
legislative session to modify the Medicare program for the purpose of reducing
the amount otherwise payable by the program to health care providers in order
to achieve



                                     15



<PAGE>   16

deficit reduction targets, among other reasons.  Legislation or regulations may
be enacted in the future that may substantially reduce the amount paid for the
Company's services.  Further, statutes or regulations may be adopted which
would impose additional requirements in order for the Company to be eligible to
participate in the federal and state payment programs.  Such new legislation or
regulations may adversely affect the Company's business operations.  There is
significant national concern today about the availability and rising cost of
health care in the United States.  New federal and/or state legislation may be
passed and regulations adopted to attempt to provide broader and better health
care and to manage and contain its cost.  The Company is unable to predict the
content of any such legislation or what, if any, changes may occur in the
method and rates of Medicare and Medicaid reimbursement or in other government
regulations that may affect its business, or, whether such changes, if made,
will have a material adverse effect on its business, financial position or
results of operations.

     Fraud and Abuse Generally. As a supplier of services under the Medicare
and Medicaid programs, the Company is subject to the Medicare and state health
care program anti-kickback laws, which prohibit any remuneration in return for
the referral of Medicare, Medicaid or other state health program patients, or
for purchasing, leasing, ordering or arranging for, or recommending the
purchase, lease or ordering any good, facility, service or item for which
payment may be made under the Medicare, Medicaid or other state health
programs.  In addition, several states in which the Company operates have laws
that prohibit certain direct or indirect payments as well as fee-splitting
arrangements.  Possible sanctions for violation of these restrictions include
loss of licensure, and civil and criminal penalties.  Although the Company
believes its operations as currently conducted are in material compliance with
existing applicable laws, certain aspects of the Company's business operations
have not been subject to state or federal regulatory interpretation.  There can
be no assurance that review of the Company's business by courts or regulatory
authorities will not result in determinations that could adversely affect the
operations of the Company or that the health care regulatory environment will
not change so as to restrict the Company's existing operations or its
expansion.

     Stark Amendment and Similar State Laws. Congress adopted legislation in
1989 (effective January 1992) (the "Stark Law") that generally prohibits or
restricts a physician from referring a Medicare beneficiary's clinical
laboratory services to any entity with which such physician has a financial
relationship, and prohibits such entity from billing for or receiving
reimbursement on account of such referral, unless a specified exception is
available.  Additional legislation expanding the Stark Law to other physician
and health care business relationships was passed as part of the Omnibus Budget
Reconciliation Act of 1993 ("Stark II").  Stark II extends the Stark Law to
referrals of services eligible for Medicare or Medicaid reimbursement and
expand the provisions prohibiting physicians from making referrals to entities
with which they have financial relationships to all "designated health
services", including, among others, durable medical equipment and supplies;
parenteral and enteral nutrients; home health services; and outpatient
prescription drugs.  Stark II took effect January 1, 1995.

     Many state jurisdictions have adopted practitioner self-referral
legislation modeled after the Stark Law, some of which apply to referral
sources, third party



                                     16



<PAGE>   17

payors and services not otherwise covered by the federal law.  For instance,
New York law prohibits any licensed health practitioner, including, among
others, physicians, nurses and physician assistants, from referring Medicaid,
Medicare or private- insured patients for clinical laboratory, x-ray or
pharmacy services if the referral is made to an entity with which such
practitioner has a financial relationship.

     Numerous exceptions are allowed under the Stark Law, as amended, and state
laws for financial arrangement that would otherwise trigger the referral
prohibition.  These vary from jurisdiction to jurisdiction, but generally
include exceptions for certain relationships involving rental of office space
and equipment, employment relationships, personal service arrangements,
payments unrelated to designated services and certain isolated transactions as
long as all of the statutorily required terms for the applicable exception are
met.

     Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws, certain aspects of the
Company's business operations have not been subject to state or federal
regulatory interpretation.  There can be no assurance that review of the
Company's business by courts or regulatory authorities will not result in
determinations that could adversely affect the operations of the Company or
that the health care regulatory environment will not change so as to restrict
the Company's existing operations or its expansion.

     State Licensure and Notice Requirements.  The Company must obtain and
maintain licensure from the various states' boards of pharmacy where it does
business in order to provide retail and wholesale pharmacy services.  In
addition, several states have enacted statutes or regulations that apply to
pharmacies that engage in the interstate distribution of prescription drugs.
Some such states generally permit such out-of-state pharmacies to operate in
accordance with the laws of the state in which they are located, but require
them to register with the state's board of pharmacy, follow certain procedures
and make certain disclosures.  Other such states generally require out-of-state
pharmacies to obtain a license in those states and comply with local laws, as
in-state pharmacies must do.  The Company believes that it is in substantial
compliance with the registration, disclosure and licensing requirements of
those jurisdictions in which it conducts its business.  If the Company were
found to be in noncompliance with applicable laws and regulations, the Company
might be subject to sanctions and its operations in such states might be
impaired, interrupted, discontinued or prohibited.

ACCREDITATION

     The Company's New York and Pittsburgh facilities have received
accreditation by the Joint Commission on Accreditation of Healthcare
Organizations.



                                     17



<PAGE>   18



SOURCES AND AVAILABILITY OF PRODUCT SUPPLY

     Approximately 19% of the Company's revenues are currently attributable to
sales of Sandimmune (also known as cyclosporine) and Neoral(R), the primary
immunosuppressive drugs used in the United States and approximately 21% of the
Company's revenues are currently attributable to sales of Clozaril(R) (also
known as clozapine), an anti-psychotic medication used in the treatment of
schizophrenia.  The Company currently purchases Neoral(R),  Sandimmune(R) and
Clozaril(R), which drugs are produced only by a single manufacturer,
principally directly from the manufacturer and some through wholesalers.  If
the Company were unable to purchase Neoral(R), Sandimmune(R) or Clozaril(R) for
any reason, its results of operations would be materially and adversely
affected.  The patents on Sandimmune(R) and Clozaril(R) held by their
manufacturer expired in September 1995 and September 1994, respectively.  The
Company has to date experienced no material impact on its business from the
expiration of the patents and cannot predict with certainty the effect the
expiration may have in the future.  No generic products have been introduced to
date and, to the Company's knowledge, none appears to be imminent.

     The three gonadotropins used in the treatment of infertility, Pergonal,
Metrodin and Humagon, were in short supply in the general market throughout
1996 and 1997.  The Company's infertility business was not materially affected
by this shortage, and it appears that such shortages have been abated, but
there can be no assurances that the Company will not be affected by shortages
of such drugs in the future.

     The Company distributes branded pharmaceutical products produced by single
manufacturers.  If any of these manufacturers were to experience disruptions in
product availability, the Company's ability to deliver products to its
customers could be adversely affected.

     The Company purchases its pharmaceuticals from wholesalers and, to a
lesser degree, directly from pharmaceutical manufacturers.  Its sources have
established credit limitations and a few suppliers are seeking to reduce their
credit limitations with the Company.  The Company's former primary supplier,
Foxmeyer Drug Company, filed for protection under the Federal Bankruptcy laws
on August 27, 1996 and has subsequently been acquired by McKesson Drug Company.
There has been no improvement in the lines of credit available to the Company
as a result of entering into the Stock Purchase Agreement and the Merger 
Agreement with Transworld and there has been no improvement in such
relationships since the completion of the Stock Purchase Agreement.  Although
the Company has been able to maintain adequate product supply within the credit
limitations, there can be no assurances that it will continue to do so in the
future.  Such an inability would have a material adverse impact on the Company
if alternative sources of product supply were inadequate.

EMPLOYEES

     As of August 1, 1997, the Company employed 369 persons, of whom 300 were
full-time employees.  Of the full-time and part-time employees, 27 were
executive, corporate and administrative personnel, 20 were sales and marketing
personnel and



                                     18



<PAGE>   19

322 were patient services, reimbursement and operating personnel.  The Company
also employs contracted social workers, registered nurses and other personnel
on a case by case basis to deliver services in localized areas.  The Company
believes that relations with its employees are good.  However, financial
uncertainty surrounding the Company has led to significant employee turnover.
The employees are not represented by any union.

ITEM 2. PROPERTIES

     In April 1996, the Company moved its executive offices to its 19,367
square feet facility in Buffalo Grove, Illinois.  During the fiscal year ended
April 30, 1997, the monthly rent for this facility was $21,194.  The lease for
this facility expires in August 2000.  Also located at the facility are a
pharmacy and a substantial reimbursement operation.

     The Company also operates a substantial pharmacy and reimbursement
operation in a 18,400 square feet leased facility located in Ronkonkoma, New
York.  During the fiscal year ended April 30, 1997, the monthly rent for this
facility was $12,284.  The lease for this facility expires in April 2000.

     In addition to the above-described properties, the Company has leased the
following regional offices:

<TABLE>
<CAPTION>
LOCATION                                                           SQUARE FEET
--------                                                           -----------
<S>                                                            <C>

Birmingham, Alabama                                                   2,425  
Torrance, California                                                  4,070  
Atlanta, Georgia                                                      1,190  
Kailua, Hawaii                                                        1,776  
Portland, Maine                                                       2,300  
Baltimore, Maryland                                                   2,737  
Milford, Massachusetts                                                2,500  
Livonia, Michigan                                                     2,680  
Arden Hills, Minnesota                                                4,170  
Florissant, Missouri                                                  2,000  
Portland, Oregon                                                      1,766  
Pittsburgh, Pennsylvania                                              8,665  
Wayne, Pennsylvania                                                   2,240  
Columbia, South Carolina                                              3,850  
Dallas, Texas                                                         3,000  
Salt Lake City, Utah                                                  1,400  
Bothell, Washington                                                   3,500  
</TABLE>
                                                                             


     The aggregate of the monthly rents for all the leased facilities is
approximately $87,111. The Oregon and Michigan facilities were closed in June
1997.  The Company is still responsible for rents on those properties through
the expiration of the respective leases.

     During the 1996 fiscal year, the Company closed its administrative offices
in Holbrook, New York and moved its executive headquarters to Buffalo Grove,
Illinois.In fiscal year 1997, the Company closed  its walk-in retail
pharmacies, including two which were located in Baltimore, Maryland and one
which was located in Pittsburgh, Pennsylvania.  Since the beginning of the 1998
fiscal year, as part of its plan of



                                     19



<PAGE>   20

consolidation, the Company closed its facilities in Sneads, Florida, Detroit,
Michigan and Portland, Oregon.

     The Company believes that these facilities are suitable and adequate for
its current needs.


ITEM 3. LEGAL PROCEEDINGS


     The Company and certain of its former directors and officers and its
current outside auditors, BDO Seidman, have been named as defendants in a
consolidated securities fraud lawsuit filed on February 29, 1996 in the United
States District Court for the Eastern District of New York entitled In re
Health Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889
(ADS).  This consolidated action alleged claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 arising out of alleged
misrepresentations and omissions by the Company in connection with certain of
its previous securities filings.  The consolidated action represented a class
of persons who purchased Shares between August 25, 1994 and February 27, 1996,
the date the Company announced that it would have to restate certain of its
financial statements.  The consolidated action sought unspecified monetary
damages reflecting the decline in the trading price of the Common Stock that
allegedly resulted from the Company's February 1996 announcements.  The Company
reached a settlement of the consolidated action which received court approval
on June 9, 1997.  The settlement provided for a cash payment of $4,550,000 of
which $3,200,000 was paid at the time the court's approval of the settlement
became final and the remaining $1,350,000 is to be paid at the effective time
of the Merger.  The Company has been in the process of negotiating with its
directors and officers liability insurance carrier with respect to coverages
for damages in connection with the stockholder class action lawsuit and certain
payments received from such carrier may reduce the Company's liability with
respect to such settlement.

     Certain of the Company's current and former officers and directors,
including Messrs. Bergman, Hotte, Clifton and Dimitriadis and Ms. Belloise,
have been named as defendants, and the Company has been named as a nominal
defendant, in a consolidated derivative action filed on March 15, 1996 in the
United States District Court for the Eastern District of New York entitled In
re Health Management, Inc. Stockholders' Derivative Litigation, Master File No.
96 Civ. 1208 (TCP).  The consolidated action alleges claims for breach of
fiduciary duty and contribution against the individual director defendants
arising out of alleged misrepresentations and omissions contained in certain of
the Company's previous securities filings.  The consolidated action seeks
unspecified monetary damages on behalf of the Company as well as declaratory
and injunctive relief.  An amended consolidated complaint was served on the
Company on August 12, 1996.  The Company filed a motion to dismiss the amended
consolidated complaint on June 2, 1997.  The Company's motion argued, among
other things, that plaintiffs failed to serve a presuit demand upon the
Company's Board of Directors and that plaintiffs will lose standing upon the
consummation of the Merger.  A hearing on the Company's motion  is currently
scheduled to take place on October 17, 1997.  In December 1996, the Company and
the plaintiffs' counsel tentatively agreed on a cash settlement of $175,000;
however, the parties subsequently were unable to agree on the



                                     20



<PAGE>   21

other terms of the settlement and currently there is no settlement offer
pending.

     BDO Seidman has been named as a defendant, and the Company has been named
as a nominal defendant, in a derivative lawsuit filed on June 12, 1996 in the
Supreme Court for the State of New York, County of New York entitled Howard
Vogel, et al. v. BDO Seidman, LLP, et al., Index No. 96-603064.  The complaint
alleges claims for breach of contract, professional malpractice, negligent
misrepresentation, contribution and indemnification against BDO Seidman arising
out of alleged misrepresentations and omissions contained in certain of the
Company's securities filings.  BDO Seidman was the Company's auditor at the
time those filings were made and has continued to serve as such.  The complaint
seeks unspecified monetary damages on behalf of the Company as well as
declaratory and injunctive relief.  Pursuant to stipulation, the Company's time
to answer or otherwise move against the complaint in this action has been
adjourned indefinitely.

     The Company and Messrs. Nicol, Jurewicz and Mieszala have been named as
defendants in an alleged class action lawsuit filed on April 3, 1997 in the
United States District Court for the Eastern District of New York entitled
Nicholas Volonnino et al. v. Health Management, Inc., W. James Nicol, Paul S.
Jurewicz and James Mieszala, 97 Civ. 1646.  This action alleges claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder arising out of misrepresentations and omissions by the
Company in connection with certain of its securities filings and press
releases.  The action purports to represent a class of persons who purchased
shares between September 15, 1996 and March 17, 1997, the date the Company
announced that it would have to restate certain of its financial statements and
that it was renegotiating its deal with Transworld.  The action seeks
unspecified compensatory damages.  The Company has not responded to the
complaint and plaintiff has indicated that it will file an amended complaint by
September 2, 1997.  The Company intends to vigorously defend itself in such
action.

     Under the Company's Certificate of Incorporation and Bylaws, certain
officers and directors may be entitled to indemnification, or advancement of
expenses for legal fees in connection with the above lawsuits.  The Company may
be required to make payments in respect thereof in the future.  The Company and
Transworld had been named as defendants in a lawsuit filed on March 11, 1997 in
the Chancery Court of the State of Delaware for New Castle County entitled Drew
Bergman v. Health Management, Inc. and Transworld Home Healthcare, Inc., CA No.
15609NC.  The plaintiff in that case sought reimbursement and advancement of
legal fees and expenses and on April 29, 1997, that suit was settled for
$275,000.

     The enforcement division of the Securities and Exchange Commission has
issued a formal order of investigation relating to matters arising out of the
Company's public announcement on February 27, 1996 that the Company would have
to restate its financial statements for prior periods as a result of certain
accounting irregularities.  The Company is fully cooperating with this
investigation and has responded to the requests of the Securities and Exchange
Commission for documentary evidence.

     On April 3, 1995, American Preferred Prescription, Inc. ("APP") filed a



                                     21



<PAGE>   22
complaint against the Company, Preferred Rx, Inc., Community Prescription
Services and Sean Strub in the New York Supreme Court for tortious interference
with existing and prospective contractual relationships, for lost customers and
business opportunities resulting from allegedly slanderous statements and for
allegedly false advertising and promotions.  Four separate causes of action are
alleged, each for up to $10 million in damages.  By motion dated March 12,
1996, APP moved, in the Supreme Court of the State of New York, to amend its
complaint to add, among other things, a cause of action against the Company
alleging that a proposed plan of reorganization presented by the Company to the
Bankruptcy Court in APP's bankruptcy case was based on financial statements of
the Company that were allegedly fraudulent.  On September 17, 1996 the Court
granted APP's motion to amend its complaint to add a fifth cause of action.
The Company noticed an appeal of this order in November 1996 and has filed its
initial brief on the matter.  Management believes APP's suit against it to be
without merit, intends to defend the proceeding vigorously and believes the
outcome will not have a material adverse effect on the Company's results of
operations or financial position.

     On or about August 4, 1995, APP commenced an action in the Supreme Court
of the State of New York, County of Nassau, against a former APP employee who
is currently employed by the Company, and Charles Hutson, Susan Hutson and
Hutson Consulting Services (collectively, the "Hutsons").  The Company is not
named as a defendant in this lawsuit.  The complaint in this action alleges,
among other things, that the employee provided to the Hutsons, who formed and
subsequently discontinued a joint marketing venture with APP, confidential
information which was disclosed to competitors of APP, including the Company.
The action was removed to the United States Bankruptcy Court of the Eastern
District of New York and subsequently remanded to the Supreme Court of the
State of New York, Nassau County.  The Hutsons have noticed their appeal of
this order and have moved to dismiss the action against them, asserting that
they are not subject to the jurisdiction of the New York State court.  The
Company is presently paying certain expenses of its employee in connection with
this litigation.

     On May 22, 1997, a Writ of Summons was sent to the Company in respect of
action brought in the Superior Court at Nashua, New Hampshire entitled Linley
v. Health Management, Inc.  Mr. Linley alleges, among other things, breach of
contract, estoppel, negligent misrepresentation, fraud and breach of fiduciary
duties and obligation of good faith and fair dealing in connection with an
alleged joint venture between plaintiff and the Company. Management believes
this action to be without merit and not material to the Company's results of
operations or financial condition.

     On June 4, 1997, the Company commenced an action in the United States
District Court for the Eastern District of New York entitled Health Management,
Inc. v. Clifford E. Hotte, Robert Clifton, Robert Heiser, Christopher DeMarzo,
Crystal Collard, Clementine Ceglia, and Virginia Belloise.  The complaint
alleges that Messrs. Hotte, Clifton, Heiser, and DeMarzo and Ms. Collard and
Ceglia breached their respective employment agreements with the Company by 
competing against the Company, soliciting its customers and employees,
and/or disclosing or using confidential information.  The complaint also
alleges that Clifford E. Hotte and Virginia Belloise breached their fiduciary
duties while serving as members of the Company's Board of Directors.  Finally,
the complaint alleges that Pharmaceutical Care Services, Inc.



                                     22



<PAGE>   23

interfered with the contractual relations between the Company and the
above-referenced individuals. A hearing on the Company's application for a
preliminary injunction was held on June 12, 1997, and the Magistrate issued his
Report and Recommendations on July 10, 1997 that the preliminary injunction be
granted against defendants Hotte, Clifton and DeMarzo but not against the other
defendants.  Hotte, Clifton and DeMarzo filed their objections to the
Magistrate's Report and Recommendation on July 21 and 24, 1997, and the Company
filed its opposition to the defendants' objections on July 29, 1997.

     If the Merger is not consummated, the outcomes of certain of the foregoing
lawsuits and the investigation are uncertain and the ultimate outcomes could
have a material adverse effect on the Company.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.




                                     23



<PAGE>   24
PART II


ITEM 5.  MARKET FOR REGISTRANT'S  COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


Market Information

     The Registrant's Common Stock began trading on a limited basis on the
over-the-counter market on March 1, 1988, and was approved for quotation on
NASDAQ National Market effective May 24, 1990 under the trading symbol HMIS.
The Registrant's Common Stock was included on the NASDAQ National Market from
June 5, 1992 until March 11, 1997,  on which date quotation of the Registrant's
Common Stock was commenced on the NASDAQ SmallCap Market, because the Company
no longer met the maintenance criteria for the NASDAQ National Market System.

     The following table sets forth the range of high and low bid prices of the
Common Stock for the periods indicated, as quoted by NASDAQ National Market or
NASDAQ Small Cap Market, as applicable.  These quotations represent prices
between dealers in securities, do not include retail mark-ups, mark-downs or
commissions, and do not necessarily represent actual transactions.


<TABLE>
<CAPTION>
                                                         HIGH         LOW    
                                                        -------      ------  
     <S>                                                <C>           <C>    
                                                                             
     Fiscal Year Ended April 30, 1996:                                       
           First Quarter                                 18  3/8      10 5/8 
           Second Quarter                                14  3/4          11 
           Third Quarter                                 14  1/2      10 3/4 
           Fourth Quarter                                12  3/8       2 3/8 
     Fiscal Year Ended April 30, 1997:                                       
           First Quarter                                  6  1/4           2 
           Second Quarter                                 5  1/4       2 7/8 
           Third Quarter                                  2 3/16         5/8 
           Fourth Quarter                                 1  1/4        5/32 
     Fiscal Year Ending April 30, 1998:                                      
           First Quarter                                     1/4        5/32 
           Second Quarter (through September 2, 1997)        1/4        1/16
</TABLE>                                                                   

     Holders of Common Stock are entitled to dividends when, as and if declared
by the Board of Directors out of funds legally available therefor.  The Company
has never paid cash dividends on its Common Stock.  The Company's Credit
Agreement restricts the ability of the Company to pay dividends on the Shares
and the Merger Agreement provides that the Company will not, prior to the
effective time of the Merger, declare or pay any cash or stock dividends.

     As of September 2, 1997, there were 18,294,474 shares of Common Stock 
outstanding held by 1,359 owners of record.


ITEM 6.  SELECTED FINANCIAL DATA
         -----------------------

     The following selected financial information for the five fiscal years 
ended



                                     24



<PAGE>   25


April 30, 1997 is derived from the consolidated financial statements of the
Company, which statements were audited by BDO Seidman, LLP, independent
certified public accounts, whose report with respect to the more recent
statements covering the three fiscal years ended April 30, 1997 appears
elsewhere in this Annual Report.  Such report was modified with respect to the
Company's ability to continue as a going concern.

     This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this Report.



                                     25



<PAGE>   26


                            HEALTH MANAGEMENT, INC.
                                 (CONSOLIDATED)



<TABLE>
<CAPTION>
                                                            YEARS ENDED APRIL 30,                    
                                                            --------------------- 
                                            1997      1996       1995      1994     1993        
                                            ----      ----       ----      ----     ----        
                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)              
<S>                                       <C>       <C>       <C>       <C>       <C>           
INCOME STATEMENT DATA
Revenues                                  $158,419   $158,860   $88,456   $44,250   $26,393                  
Gross Profit(1)                             29,700     38,636    24,748    15,606     9,023                  
 Selling                                     5,446      4,650     2,898     1,847     1,324                  
 Provision for Doubtful                                                                                      
   Accounts(1)(2)                           18,911     14,715     7,978     1,781       705                  
 G&A                                        26,383     24,324    10,649     5,428     3,458                  
 Unusual Charges(1)(2)                      35,157      5,600        --        --        --                  
Total Operating Expenses                    85,897     49,289    21,525     9,056     5,487                  
Operating Income (Loss)                    (56,197)   (10,652)    3,223     6,549     3,536                  
Settlement Costs(3)                          4,825         --       --         --        --                 
 Income (Loss) Before Income Taxes         (65,822)   (13,332)    3,287     6,752     3,488                  
Net Income (Loss)                          (66,099)   (10,927)    1,946     4,001     2,207                  
Net Income (Loss) per Share                                                                                  
   --Primary                                $(5.52)    $(1.16)    $0.21      $.54      $.38                  
   --Fully Diluted                          $(5.52)    $(1.16)    $0.21      $.53      $.35                  
Weighted Average Number of Shares                                                                            
 Outstanding                                                                                                 
  --Primary                                 11,982      9,415     9,408     7,383     5,884                  
  --Fully Diluted                           11,982      9,415     9,421     7,594     6,309                  
</TABLE>         
                 



(1)  Unusual charges reflected in the fiscal year 1996 include $3,600,000 for
     costs associated with organizational consolidation and other cost
     reduction programs and $2,000,000 for professional fees related to
     litigation and restatements of fiscal 1995 financial statements.
     Additionally, a $2,840,000 charge for the write-off of medical device
     inventory was recorded to cost of sales, thereby reducing gross profit,
     and an additional $8,400,000 increase was recorded to the provision for
     doubtful accounts.(See Note 6 to the Consolidated Financial Statements.)

(2)  Unusual charges reflected in the year ended April 30, 1997 include
     $30,944,000 for the write-off of goodwill and certain facilities for
     impairment in value; $1,400,000 for costs associated with overpayments
     from New York State Medicaid and approximately $2,813,000 relating to
     costs and other expenses related to the closing or sale of three retail
     pharmacies, including a goodwill write-off of approximately $2,400,000.
     Additionally, the provision for doubtful accounts was increased by $10
     million. (See Note 6 to the Consolidated Financial Statements.)

(3)  Settlement costs reflected in the year ended April 30, 1997 relate to
     estimated costs for the settlement of the stockholder class action suit,
     $4,550,000, and the actual costs of settling an additional suit of
     $275,000.  There can be no assurance that litigation will be settled for
     the amounts provided.  (See Note 6 to the Consolidated Financial
     Statements.)








                                      26



<PAGE>   27


<TABLE>
<CAPTION>

                                               AS OF APRIL 30,
                                               ---------------
                                  1997     1996      1995      1994      1993
                                  ----     ----      ----      ----      ----
                                               (IN THOUSANDS)  
                                                
<S>                          <C>        <C>      <C>       <C>       <C>
BALANCE SHEET DATA                              
Total Assets                    $40,989   $95,916   $88,690   $52,418   $17,158
Working Capital (Deficiency)    (22,257)    2,492    12,486    32,013     8,946
Long term debt, including                       
current maturities               34,994    32,752    26,326       256       521
Stockholders' Equity (Deficit)  (20,647)   37,363    48,171    44,096     9,755
</TABLE>                                        




ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS


SPECIAL CONSIDERATIONS


     The Company's business is subject to a number of special considerations,
such as industry trends, certain risks inherent in the business and the
Company's recent events.  Some of these considerations are described in this
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations."  Other considerations are presented elsewhere in this Annual
Report.

     Financial Condition.  On February 27, 1996, the Company announced that in
the course of an internal investigation it had discovered certain accounting
irregularities, that it intended to write down accounts receivable and
inventory assets, that the Company may have to restate its financial statements
and that it had accepted the resignation of Clifford E. Hotte as Chairman of
the Board and Chief Executive Officer.  Thereafter, on April 30, 1996 the
Company filed with the Securities and Exchange Commission restated financial
statements for the fiscal year ended April 30, 1995 and for each of the fiscal
quarters contained therein, including the fiscal quarters ended July 31, 1994,
October 31, 1994 and January 31, 1995; and for the fiscal quarters ended July
31, 1995 and October 31, 1995.  As a result of the restatements and special
charges recorded in the Company's financial statements for the fiscal years
1995 and 1996, the Company recorded significant charges to its balance sheet
including reductions in the Company's working capital, retained earnings and
stockholders' equity.

     The Company was in default under its Credit Agreement with Chase Manhattan
Bank, N.A., as agent and lender.  This senior debt, the principal amount of
which aggregated approximately $28,350,000, was acquired by Transworld on
November 13, 1996, the date on which Transworld entered into the Stock Purchase
Agreement and the Merger Agreement with the Company.  Also, on November 13,
1996, Transworld agreed to forbear until December 12, 1996 from exercising any
remedies under such bank debt and agreed, in its discretion, to loan the
Company up to an additional $3,000,000 under the Company's revolving credit
facility.  As of December 12, 1996, the Forbearance



                                      27



<PAGE>   28

Agreement was further extended until December 23, 1996 and the availability
under the Company's revolving credit facility was further increased by up to an
additional $2,000,000, subject to certain conditions and at the discretion of
Transworld.  At the closing of the Stock Purchase Agreement, of the $8,964,292
of cash proceeds, $4,649,285 was applied to repay all loans of Transworld to
the Company from November 13, 1996 through January 13, 1997 and $107,248 was
applied toward interest on amounts covered under the Credit Agreement. Since
that time and until May 1997, the revolving credit facility had been frozen;
however, Transworld continued to extend the Forbearance Agreement in short term
intervals.  The Forbearance Agreement expired July 15, 1997.  From May through
July 1997, the Company received additional advances of $1.4 million from
Transworld pursuant to the  revolving  credit facility; however, the
Forbearance Agreement expired on July 15, 1997, and the Company is currently in
default under its credit agreement.  In addition, Hyperion Partners II, L.P., 
the majority stockholder of Transworld, acquired the obligations of the
Company due to Foxmeyer Drug Co., Bindley Western, Inc. and Caremark, Inc.
which, in the aggregate, amount to approximately $18.3 million.  Hyperion has
agreed to contribute the obligations purchased from Foxmeyer Drug Co., and
Bindley Western Inc. to Transworld in exchange for stock of Transworld.


     There have been no improvements in the lines of credit available to the
Company as a result of entering into and consummating the Stock Purchase
Agreement and entering into the Merger Agreement.


     The Company was anticipating to consummate the Merger Agreement by July 31
1997;  however, Transworld has not yet been able to obtain the bank consent
necessary to consummate the transaction.  The Company and Transworld have
entered into discussions regarding alternatives, including bankruptcy. The
Company is also cooperating with Transworld in its search for a  buyer of
assets of the Company following the consummation of the Merger Agreement,
including entering into an agreement with Counsel Corporation ("Counsel") (See
"Business - Transactions with Transworld HealthCare, Inc.")

     If the Merger or an alternative transaction is not consummated in the 
near future or  if Transworld or Hyperion does not advance additional
funds to the Company, the Company may file for protection under the Federal
bankruptcy laws.

     Significant Litigation.  The Company has been named as a defendant in a
consolidated stockholder class action lawsuit and as a nominal defendant in two
derivative suits. With respect to the consolidated stockholder class action
lawsuit, the Company entered into a Stipulation of Partial Settlement with the
plaintiffs' counsel and on September 18, 1996 such Stipulation of Partial
Settlement received preliminary court approval (the "Original Settlement").
The Original Settlement provided for, among other things, the payment by the
Company of $2,000,000 in cash, the issuance of 2,200,000 shares of Common Stock
and warrants to purchase 2,200,000 shares of Common Stock.  On December 19,
1996 the Company entered into an Amended Stipulation of Partial Settlement
providing for, among other things, a $7,200,000 cash payment.  Preliminary
approval of the Amended Stipulation of Partial Settlement was granted by the
U.S. District Court for the Eastern District of New



                                      28



<PAGE>   29

York, on December 20, 1996.  As a condition to Transworld's obligation to
consummate the Merger, the Amended Stipulation of Partial Settlement was
further amended on April 23, 1997, to provide for a reduced cash settlement in
the amount of $4,550,000, and court approval of such amended settlement was
received on June 9, 1997.  The Restated Stipulation of Partial Settlement
provides for the settlement of the lawsuit as against the Company of $4,550,000
in cash, of which $3,200,000 was paid at the time the Restated Stipulation of
Partial Settlement became final. The remaining $1,350,000 is to be paid at the
effective time of the Merger.  The Company is in the process of negotiating
with its directors and officers' liability insurance carrier with respect to
coverage for damages in connection with the stockholder class action lawsuit
and any payments received from such carrier may reduce the Company's liability
with respect to such settlement.  After the Company announced that it would
have to restate its financial statements for the first and second quarters of
fiscal 1997, the Company and certain executive officers were named as
defendants in a purported stockholder class action lawsuit.  See "Business--
Legal Proceedings".

     Management and Employee Turnover.  Effective May 1, 1996, W. James Nicol,
an experienced health care executive, was named Chief Executive Officer and
President of the Company, succeeding the office of the Chief Executive Officer
of the Company which was formed when Clifford E. Hotte resigned in February
1996.  James R. Mieszala, formerly of Caremark, Inc., who became president of
Home Care Management, Inc., a wholly-owned operating subsidiary of the Company,
in January 1996, was named Chief Operating Officer of the Company effective May
10, 1996.  Paul S. Jurewicz, formerly of Caremark, Inc., who became Chief
Financial Officer of the Company in December 1995 was also named the Executive
Vice President of the Company in April 1996.  Mr. Jurewicz resigned, effective
January 10, 1997, to assume a new position.  Mr. Nicol assumed the additional
duties of the Chief Financial Officer effective January 10, 1997 and in March
1997 the Company retained outside financial consultants to also provide support
in the financial area. In July 1997, Mr. Dennis J. Conley joined the Company to
provide support in the financial area. In August he was appointed Vice
President of Finance. Mr. Mieszala assumed the additional duties of President
and Chief Executive Officer from Mr. Nicol effective August 11, 1997. Mr. Nicol
remains on the Board of Directors.

     The Company has experienced substantial turnover of its management group
and, as a result of financial uncertainty surrounding the Company, its
employees over the past twenty months and several of the Company's executive
officers have been in their current position for only a limited period of time.
The Company's future depends, in large part, upon its ability to obtain,
retain and replace its staff .  Also, the Company's ability to successfully
conclude the Transworld transaction may depend on its ability to retain its key
personnel to manage through the transition.  There can be no assurances that
the Company will be successful in its efforts retain such personnel.


     Introduction of New Antipsychotic Drugs; Blood Monitoring.  In October,
1996, Olanzapine, a new antipsychotic agent for the treatment of schizophrenia,
was introduced into the market.  The Company also expects several additional
antipsychotic drugs to be introduced in the next year, based upon the recent
history



                                      29



<PAGE>   30

of such new products having been introduced into the market and the present
pipeline of potential new products in various stages of the Food and Drug
Administration review process.  The Company anticipates providing these new
drugs to schizophrenic patients as it broadens its LifecareTM Program.
Management believes that the introduction of Olanzapine has been a factor in
the recent decline of the Company's Clozapine customer base (approximately 17%
since October 1996, including an approximately 9% decline attributable to the
closure of three offices) as physicians preferentially prescribe Olanzapine for
treatment of schizophrenia.  Because Olanzapine does not require weekly blood
monitoring, and therefore is less costly than Clozapine, and because the
relative efficacy of Olanzapine is still uncertain, the Company cannot predict
the ultimate effect on its customer base and, in turn, its financial condition
from the introduction of Olanzapine.  The Company also cannot predict the
effect on its financial condition of the introduction of other antipsychotic
drugs.

     In addition, the Company's Clozaril Patient Management Business ("CPMB")
contains multiple components including weekly blood draws to test for a side
effect associated with Clozapine. On July 14, 1997, an advisory committee of
the FDA recommended potential changes to reduce  the need for and frequency of
the blood test monitoring.  At this time, there is no certainty regarding
whether the FDA will accept the recommendations of the committee, decide not to
make any changes for the time being, or make some other changes in the
frequency of or requirement for monitoring. The Company derives a significant
portion of its gross margin from the sale of Clozapine from the fees related to
the weekly monitoring. See "Business - Markets - Schizophrenia" above.  Any
change in the requirement for or frequency of monitoring could materially
effect the Company's results of operations and cash flows and, accordingly, the
carrying value of the goodwill associated with the original purchase of the
Clozapine business has been written off.  (See Note 6 to the Consolidated
Financial Statements.)

     Goodwill and Other Long Lived Assets.  At January 31, 1997, the Company
had goodwill of approximately $30.8 million, or 39% of its total assets.  A
significant portion of the Company's goodwill related to CPMB.  See
"Introduction of New Antipsychotic Drugs; Blood Monitoring" above.  It is the
Company's policy to review the recoverability of goodwill and other long-lived
assets periodically to determine if any impairment indicators are present.  The
evaluation of the recoverability of goodwill is significantly affected by
estimates of future cash flows from each of the Company's market areas.  As a
result of a July 1997 advisory committee recommendation to the FDA, it is
possible that there will be a  change in the frequency of blood monitoring to
bi-weekly after six months of therapy and monitoring after one year may become
voluntary.  While this preliminary recommendation is subject to approval by the
FDA, the Company believes it is probable that the future profitability and cash
flows of the CPMB business have been impaired sufficiently to result in a
write-off of the related goodwill.  Because of the significance of the CPMB
business to the total cash flows and the deteriorating financial condition of
the Company, it is likely the Company will need to restructure its future
operations with or without the potential merger with Transworld. In assessing
the carrying value of its goodwill, the Company's estimate of future cash flows
was based on their best estimate for the next five years.  While definitive
restructuring plans have not been finalized, the Company has written off, in
the fourth quarter of fiscal 1997, the remainder of its



                                      30



<PAGE>   31

goodwill and approximately $950,000 of assets  related to facilities expected
to be closed or sold. (See "Business --Markets--Schizophrenia" and Note 6 to
the Consolidated Financial Statements.).

 .
RESULTS OF OPERATIONS

     YEAR ENDED APRIL 30, 1997 AS COMPARED TO YEAR ENDED APRIL 30, 1996

     Revenues for the year ended April 30, 1997 were $158,419,205, a decrease
of $440,433 or .3% in comparison to revenues for the year ended April 30, 1996.
The slight decline in revenues is largely attributable to management's focus
being diverted to cash flow improvement and cost reductions as well as
financing for and selling the Company rather than revenue growth. In addition,
the Company has been experiencing (a) a reduction in reimbursement rates that
occurs when the pharmacy benefit is "carved out" from the major medical
benefit and switched to a drug card plan at lower revenue rates; (b) an ongoing
increase in the number of transplant patients receiving immunosuppressant drug
benefits under Medicare due to the extension of Medicare coverage beyond the
historical one year period post-transplant (Medicare reimbursement is at lower
rates than indemnity insurance); (c) a decline in the number of patients served
by the Company's Clozaril(R) Patient Management Business (see "Introduction of
New Antipsychotic Drugs; Blood Monitoring," in "Special Considerations,"
above); (d) the implementation of the Company's decision to discontinue its
modest retail pharmacy businesses; and (e) an increase in the accrual of
contractual allowances. These factors were somewhat offset by internal growth
from ongoing patient referrals from existing and new referral sources.

     Gross profit margins were 18.7% for the year ended April 30, 1997, as
compared to 24.3% for the prior year. Without the one time write-off of
$2,840,000 of medical device inventory in fiscal year 1996, the gross profit
margin for that year would have been 26.1%.   The decrease in the gross profit
rate reflects an overall reduction in reimbursement rates from third party
payors, including pricing pressures exerted by managed care payors on the
Company.  In addition, the current period gross profit margin was negatively
impacted by the following: (a) a one-time payment to Caremark, Inc. of
approximately $525,000 to account for a working capital adjustment relating to
the Company's acquisition of the Clozaril(R) Patient Management Business
recorded in the quarter ended October 31, 1996; (b) a delay in updated Medicare
pricing for an immunosuppressant drug widely distributed by the Company and
servicing its organ transplant patients for which the drug manufacturer raised
prices which primarily affected the quarter ended October 31, 1996; (c) the
retroactive reversal in the quarter ended January 31, 1997, by a vendor of
discounts of approximately $450,000 recorded in prior fiscal 1997 periods
presuming payment in accordance with specified terms, such amount being
consented to by the Company in connection with Hyperion's purchase of the
Foxmeyer accounts payable;  (d) purchase discounts associated with drug
purchases which are no longer available to the Company because of its recent
financial condition and (e) higher contractual allowances.

     Operating expenses for the year ended April 30, 1997 were $85,896,735, a
net



                                      31



<PAGE>   32

increase of $36,607,942 over the year ended April 30, 1996.  The principal
components of the net increase were:

     A $.8 million increase in selling expenses.  This increase is primarily
     the result of incremental shipping costs of $.35 million incurred because
     the Company could only afford to carry minimum amounts of inventory and
     had to use expensive overnight shipping to deliver product and
     $.25 million in marketing of the Company's new infertility line of
     products, including supporting its internet web site.

     A $2.1 million increase in general and administrative expenses.  This
     increase is primarily related to increased professional fees, including
     (a) $500,000 attributable to the retention of an investment banking firm
     to seek additional financing or the sale of the Company, and (b) increased
     legal, audit, tax return preparation and consulting fees.

     A $4.2 million increase in the provision for doubtful accounts.  In the
     third quarters of fiscal 1997 and 1996 the Company evaluated the adequacy
     of the allowance for doubtful accounts, which caused an increased
     provision (change in estimate) of $10 million and $8.4 million in the
     third quarter of fiscal 1997 and 1996, respectively.  The remainder of the
     increase is due to the higher estimated loss rates being applied to the
     various aging categories of receivables especially in the receivables
     being collected  by the Company's Long Island, New York, office where
     collection efforts were hampered by inadequate staffing and follow-up.
     See Note 6 to the Consolidated Financial Statements.

     A $29.5 million increase in unusual charges.  During the year ended April
     30, 1997, the Company provided (a) $30.9 million to write off goodwill and
     write down certain facilities related to an impairment in value caused
     primarily by an  advisory committee recommendation to the FDA to reduce
     the blood monitoring of Clozaril(R) patients, fees from which are a
     significant portion of the Company's gross margin from its Clozaril(R)
     business; (b) $2.8 million charge ($2.4 million of which relates to a
     write-off of goodwill) for the closing or sale of three retail pharmacies,
     which pharmacies no longer conform to the Company's current focus and
     strategy and were immaterial to the Company's overall current and
     prospective operations; and (c) $1.4 million for costs associated with
     overpayments from New York State Medicaid.  The fiscal 1996 charges of
     $5.6 million relate to the (a) costs associated with the organizational
     consolidation and other cost reduction programs ($3.6 million) and (b)
     professional fees related to the Company's litigation and restatements of
     fiscal 1995 financial statements ($2 million).  See Note 6 to the
     Consolidated Financial Statements.

     Loss from operations for the year ended April 30, 1997 was ($56,196,933)
compared to a ($10,652,683) loss in the comparable period last year.  The
primary reasons for this loss are the decline in gross profits and the increase
in operating expenses described above.

     The Company incurred settlement costs of $4,825,000 during the year ended



                                      32



<PAGE>   33

April 30, 1997 related to the estimated costs of the settlement of the
stockholder class action litigation and certain other litigation.  No similar
costs were incurred in 1996.

     Interest expense for the year ended April 30, 1997 was $4,813,941 an
increase of $2,096,786, or 77.2% over the year ended April 30, 1996.  The
increase is attributable to the accrual of a $650,000 forbearance fee to the
Company's senior lender, increased borrowings and a higher percentage rate of
interest being paid on debt and other obligations.

     Loss before income taxes for the year ended April 30, 1997 was
($65,822,407) compared to a loss of ($13,332,187) for the year ended April 30,
1996.  Expenses related to the write-off of the $30.9 million of goodwill and
long lived assets at certain facilities; an additional $10 million provision
for doubtful accounts; the costs associated with the closing or sale of the
Company's three retail pharmacies ($2.8 million); the estimated costs of the
settlement of the stockholder class action litigation of $4.55 million and
costs associated with overpayments from New York State Medicaid of $1.4
million; increased interest expense and professional fees and lower margins
generally throughout the year were the primary reasons for the loss.

     Income taxes for the year ended April 30, 1997 are less than the statutory
rate since the Company, in accordance with generally accepted accounting
principles, did not record the benefit, if any, of the potential net operating
loss carry forward because of the uncertainty of its future realization while
at the same time the Company incurred income or franchise tax expense in
certain states in which it does business.

     The net loss for the year ended April 30, 1997 was ($66,098,797) compared
to net loss of ($10,927,341) for the period ended April 30, 1996.  The increase
in the net loss was primarily a result of the increased costs discussed above,
together with the tax benefit recorded in the year ended April 30, 1996 related
to the tax benefit of a net operating loss carryback, which did not apply in
the year ended April 30, 1997.

     Primary and fully diluted loss per common share for the year ended April
30, 1997 were ($5.52) compared to a loss per common share of ($1.16) for the
year ended April 30, 1996.  The weighted average number of shares outstanding
used in the calculation of primary and fully diluted earnings per share were
11,982,000 for the year ended April 30, 1997 and 9,414,500 for the year ended
April 30, 1996.


YEAR ENDED APRIL 30, 1996 AS COMPARED TO YEAR ENDED APRIL 30, 1995

     The Company's revenues were $158,859,638 for the year ended April 30,
1996, an increase of $70,403,610 or 79.6% over revenues of $88,456,028 for the
year ended April 30, 1995. Revenues generated from the Company's acquisition of
the Clozaril(R) Patient Management Business accounted for approximately $47
million of the increased levels. Additional growth of approximately $6 million
was generated from the acquisition of the Arcade and Kaufmann's businesses which
were acquired on February 1,



                                      33



<PAGE>   34

1995 and therefore were reflected in the Company's consolidated financial
statements for the entire fiscal year of 1996 as compared to only the fourth
quarter of fiscal 1995. The remainder of the increase was derived from internal
growth through the expansion of the LifecareTM Program and new referral
sources.

     Gross profit margins were 24.3% for the year ended April 30, 1996, a 3.7
percentage-point decline from 28.0% for the preceding fiscal year. The decrease
in the gross profit rate was primarily attributable to the following factors:
(a) a $2.8 million charge was recorded in the third quarter of fiscal 1996 for
the write-down of medical device inventory; (b) a reduction in reimbursement
rates that occurs when the drug benefit is "carved out" of the major medical
benefit and is converted into a drug card, which generally provides for a lower
reimbursement rate; and (c) the phase-in of a change in Medicare regulations
extending immunosuppressant drug Medicare benefits to transplant patients for
up to three years post-transplant, as opposed to the historical one year
period, which results in lower reimbursement rates for such patients covered
thereby as compared to those covered by commercial insurance carriers and other
private payors (see "Business -Reimbursement "). Without the $2.8 million
charge, the gross profit margin would have been 26.1%. These decreases in gross
profit margins were partially offset by the Clozaril(R) Patient Management
Business, which currently generates a higher gross profit margin than the other
segments of the Company's business and which recorded a gross profit of $15.9
million or approximately 41% of the Company's overall gross profit in fiscal
1996. The erosion of the Company's profit margins is typical of recent
healthcare industry trends and is attributable to the pricing pressure exerted
by managed care organizations.

     Operating expenses for the fiscal year ended April 30, 1996 were
$49,288,793, an increase of $27,736,604 or 129.0% over operating expenses of
$21,525,189 for the year ended April 30, 1995. $5.6 million of this increase
was attributable to unusual charges recorded during the third quarter of fiscal
year 1996; $3.6 million of the charge was attributable to costs associated with
organizational consolidation and other cost reduction programs, which includes
severance costs of approximately $1.3 million, a goodwill writedown charge of
approximately $.6 million and a charge for the write-off of assets of
approximately $1 million and the accrual of lease termination costs of
approximately $.7 million; and $2.0 million was associated with professional
fees arising out of the Company's restatements, litigation, etc. The Company
also increased the provision for doubtful accounts by $8.4 million in the third
quarter of fiscal 1996. This increased provision related primarily to the organ
transplant business where collection efforts are more difficult and the
Company's collection efforts were hampered by inadequate staffing levels and
the requisite follow-up. These efforts wereconducted primarily from the
Company's former corporate offices in Long Island, New York, which has been
particularly affected by employee turnover. It was not practical to determine
the potential impact of the additional provision on the first two quarters of
fiscal 1996. During 1996, the Company also wrote-off approximately $12.6
million of receivables against the allowance for doubtful accounts, which were
deemed to be uncollectible because of the age of the receivables and, in some
cases, the collectibility period from third party payors had lapsed. Operating
expenses year over year were also affected by the inclusion for the full year
in fiscal 1996 of the Clozaril(R) Patient Management Business versus one month
in fiscal year 1995 and by the inclusion for the full year in 1996 of the



                                      34



<PAGE>   35

Arcade and Kaufmann's business versus three months in the fiscal year 1995. The
Clozaril(R) Patient Management Business was acquired on April 1, 1995. The full
year inclusion of the Clozaril(R) Patient Management Business resulted in an
increase in operating expenses of approximately $9.9 million.

     The operating loss for the fiscal year 1996 was ($10,652,683), a
$13,875,501 change from the operating profit of $3,222,818 for the fiscal year
1995. The unusual and other charges recorded in the third quarter of fiscal
year 1996 resulted in the operating loss for the year.

     Interest expense for the year ended April 30, 1996 was $2,717,155 compared
to $269,316 in fiscal year 1995. The increase in interest expense was driven by
the outstanding term loans associated with the Clozaril(R) Patient Management
Business acquisition and the borrowings under the Company's line of credit.

     Loss before income taxes for the year ended April 30, 1996 was
($13,332,187) compared to a $3,286,579 income level for the year ended April
30, 1995. The unusual and other charges recorded in the third quarter
contributed significantly to the loss for fiscal 1996.

     The net loss for the year was ($10,927,341) compared to a net income of
$1,946,188 for the fiscal year ended April 30, 1995. The net loss for the 1996
fiscal year was, in part, the result of the unusual and other charges recorded
in the third quarter of this fiscal year. Also contributing to the net loss was
a valuation allowance of approximately $2.5 million to reserve for a deferred
tax asset. The remaining unreserved deferred tax asset is the estimated benefit
of a net operating loss carryback to the Company. Given the circumstances that
led to the modification of the independent auditors' report, a valuation
allowance was established for the deferred tax asset.

     Primary and fully diluted earnings per share of Common Stock for the year
ended April 30, 1996 were both a ($1.16) loss compared to earnings of $0.21 for
the year ended April 30, 1995. The weighted average number of shares
outstanding used in the calculation of primarily and fully diluted earnings per
share were 9,414,500 for the year ended April 30, 1996 and 9,408,300 and
9,420,816, respectively, for the year ended April 30, 1995.

INFLATION

     Inflation did not have a material effect on the Company's results during
the periods discussed.

LIQUIDITY AND CAPITAL RESOURCES


     The net decrease of $2,146,600 in the Company's cash and cash equivalents
to $1,133,595 at April 30, 1997 was attributable to cash used in operating
activities, debt repayments and capital expenditures offset by the additional
equity and debt from Transworld and the sales of certain retail pharmacies.
The Company continues to experience monthly operating losses and negative cash
flow.




                                      35



<PAGE>   36
     Working capital at April 30, 1997 was a negative ($22,257,107), a decrease
of $24,748,726 from April 30, 1996.  Current assets decreased $18,594,443 due
to a decrease in cash and cash equivalents of $2,146,600, a decrease in net
accounts receivable of $9,558,918, an increase in inventories of $307,039, a
decrease in tax refund receivable of $5,175,997, a decrease in deferred tax
assets of $1,807,000 and a decrease in prepaid expenses of $212,967.

     Current liabilities increased $6,154,283 from April 30, 1996 principally
due to a increase an accounts payable of $430,936, a decrease of $2,105,697 in
accrued unusual charges and settlement costs, an increase in accrued expenses
of $2,516,932, and an increase in the current maturities of debt and other
obligations of $5,312,112.


     The Company purchases its pharmaceuticals from wholesalers and, to a
lesser degree, directly from pharmaceutical manufacturers. Its sources have
established credit limitations and a few suppliers recently reduced their
credit limitations with the Company. The Company's historical primary supplier,
Foxmeyer Drug Company, filed for protection under the Federal Bankruptcy laws
on August 27, 1996 and has subsequently been acquired by McKesson Drug Company.
There was no improvement in the lines of credit available to the Company as a
result of entering into the Stock Purchase Agreement and the Merger Agreement
with Transworld and there has been no significant improvement in such
relationships since the completion of the Stock Purchase Agreement.  Although
the Company has been able to maintain adequate product supply within
established credit limitations, there can be no assurances that it will
continue to do so in the future. Such an inability would have a material
adverse impact on the Company if alternative sources of product supply were
inadequate. 

     The Company is in default under various covenants contained in the Credit
Agreement and, since July 15, 1997, has not made payments of interest 
thereunder. The Forbearance Agreement between Transworld and the Company has
not been extended past July, 1997, but, as of the date hereof, Transworld has
not pursued any of its remedies under the Credit Agreement. To date the Company
has experienced continued monthly operating losses and net cash outflows. 
During the period May through July 1997, the Company received additional net
advances of $1.4 million from Transworld under its revolving credit facility.
        
     In addition the Company continues to experience monthly operating losses
and negative cash flows.  According, the Company is not generating sufficient
cash flow to meet its expenses.  While the Company is continuing to experience
difficulties in collecting accounts receivable, management anticipates that the
Company may be able to  make sufficient collections, particularly from older
accounts receivable, to meet its expenses.  There can be no assurance, however,
that the Company will be able to collect accounts receivable in a timely
manner.  The Company's liquidity crisis may be temporarily eased upon receipt
of an anticipated tax refund of $2.8 million.  However, under the terms of
the Credit Agreement, the proceeds of the refund are payable to Transworld.




                                      36



<PAGE>   37


     In order to meet its ongoing cash flow requirements and continue its
operations, the Company may be dependent upon further cash infusions from
Transworld.  In light of Transworld's agreement with Counsel, Transworld's
principal stockholder, Hyperion, has indicated its willingness to provide the
Company with additional liquidity.  However, neither Transworld nor Hyperion is
obligated to provide the Company with additional funds.

     In the event that the Company is not stabilized throught the Merger or an
alternative transaction, the Company may file for protection under Federal
Bankruptcy Laws.


NEW ACCOUNTING PRONOUNCEMENTS


Earnings per Share

     Statement of Financial Accounting Standards Number 128 "Earnings per
Share" ("SFAS 128"), issued by the Financial Accounting Standards Board
("FASB") is effective for financial statements for fiscal years ending after
December 15, 1997.  This pronouncement provides a different method of
calculating earnings per share than is currently used in accordance with
Accounting Principles Board Opinion Number 15, "Earnings per Share".  SFAS 128
provides for the calculation of basic and diluted earnings per share.  Basic
earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period.  Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity.
Management does not anticipate a significant effect on earnings (loss) per
share as a result of implementing SFAS 128.


Information About Capital Structure

     SFAS 129, "Disclosure of Information about Capital Structure", effective
for periods ending after December 15, 1997, establishes standards for
disclosing information about an entity's capital structure.  SFAS 129 requires
disclosure of the pertinent rights and privileges of various securities
outstanding (stock, options, warrants, preferred stock, debt and participation
rights) including dividend and liquidation preferences, participation rights,
call prices and dates, conversion or exercise prices and redemption
requirements.  Adoption of SFAS 129 is not expected to affect the Company as it
currently discloses the information specified.


Reporting Comprehensive Income

     SFAS 130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains and losses).
This statement requires that all items that are required to be recognized
under accounting standards as the components of comprehensive income be
reported in a financial statement that



                                      37



<PAGE>   38

is displayed with the same prominence as other financial statements. This
statement requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet.  The
Company has not evaluated the impact of this statement since it was just
released in June 1997.

Disclosure About Segments of an Enterprise and Related Information

     SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information", effective for periods beginning after December 15, 1997,
establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders.  It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.  This statement supersedes SFAS 14,
"Financial Reporting for Segments of a Business Enterprise", but retains the
requirement to report information about major customers.  This statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments.  Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.  Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments.  The Company has not evaluated the impact of this
statement since it was released in June 1997.


ITEM 8. FINANCIAL STATEMENTS

     The Financial Statements for the fiscal year ended April 30, 1997 may be
found beginning on page F-1 hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

     None.












                                      38



<PAGE>   39
                                   PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT


     The following table contains information concerning the Company's
directors and executive officers.  It is expected that these persons will serve
in these offices until the next annual meeting or until their respective
successors are elected and qualified or until they are replaced following the
consummation of the Merger.


<TABLE>
<CAPTION>
        Name                   Age                        Position
        ----                   ---                        --------          
<S>                         <C>         <C>
Andre C. Dimitriadis......      56        Chairman of the Board and Director

James R. Mieszala.........      46        Chief Executive Officer, President 
                                          and Assistant Secretary      
Dennis J. Conley..........      44        Vice President of Finance and 
                                          Treasurer          

W. James Nicol............      54        Director and Secretary       

Dr. Timothy Triche........      53        Director                     

D. Mark Weinberg..........      45        Director                     
</TABLE>                                                                        

James R. Mieszala

     Mr. Mieszala was named the Chief Executive Officer, President and
Assistant Secretary of the Company on August 11, 1997.  From May 1996 until
August 1997, Mr. Mieszala served as the Chief Operating Officer of the Company
and prior to that served as Acting President of the Company's subsidiary Home
Care Management, Inc. from February to May 1996.  Prior to joining the Company,
from 1986 to 1996, Mr. Mieszala held a variety of positions with Caremark,
Inc., including Vice President and General Manager of the Specialized
Pharmaceutical Services Division.  From 1978 to 1986, Mr. Mieszala was employed
by Baxter International in various management roles.  Mr. Mieszala graduated
from the University of Illinois in 1973 and has an M.B.A. from the Keller
Graduate School of Management.

Dennis J. Conley

     Mr. Conley has been the Vice President of Finance and Treasurer of the
Company since August 11, 1997.  Prior to joining the Company, Mr. Conley served
as Chief Financial Officer of Dental Care Plan Management Corp. from 1995 until
1996.  From 1979 through 1994, Mr. Conley held various positions with KPMG Peat
Marwick, including Partner from 1989 through 1994.  Mr. Conley graduated from
Saint Louis University in 1975 and has an MBA from the Saint Louis University
Graduate School of Business.



                                      39



<PAGE>   40
Andre C. Dimitriadis

     Mr. Dimitriadis was elected as a Director of the Company in October 1993.
He became the Chairman of the Board of Directors of the Company in May 1996.
Mr. Dimitriadis is the Chief Executive Officer and Chairman of LTC Properties,
Inc., Oxnard, California, a real estate investment trust that invests in
long-term care and other health care related facilities.  Prior to founding LTC
Properties, Mr. Dimitriadis was Executive Vice President and Chief Financial
Officer of Beverly Enterprises, an owner/operator of nursing facilities, from
October 1989 to May 1992.  From December 1984 to July 1989 he was Executive
Vice President, Chief Financial Officer and a Director of American Medical,
Inc., an owner/operator of hospitals.  Mr. Dimitriadis is a Director of
Magellan Health Services, Inc. and Assisted Living Concepts, Inc.  Mr.
Dimitriadis earned a B.S. in electrical engineering from Robert College,
Istanbul, Turkey, an M.S. in computer science from Princeton University and an
M.B.A. and Ph.D. from New York University.

W. James Nicol

     Mr. Nicol was named to the Board of Directors of the Company in May 1996.
He also served as Chief Executive Officer and President of the Company from May
1, 1996 through August 10, 1997, as Chief Financial Officer and Treasurer from
January 10, 1997 through August 10, 1997 and as Secretary since January 10, 
1997. Mr. Nicol is currently the Chief Financial Officer of Med First
Healthcare Affiliates.  Prior to joining the Company, Mr. Nicol was a Senior 
Vice President and the Chief Financial Officer of Careline, Inc. from May 1995 
to October 1995.  From 1990 until 1995, Mr. Nicol served as Senior Vice 
President and Chief Financial Officer of Quantum Health Resources, Inc.  For 17
years prior to joining Quantum, Mr. Nicol held various senior-level management 
positions with Comprehensive Care Corporation and was its Chief Executive 
Officer and President in 1989-1990.  Mr. Nicol also serves on Comprehensive's 
Board of Directors and is a member of such Board's audit and compensation 
committees.  Mr. Nicol graduated from Bradley University in 1969 with a B.S. 
in Political Science and Economics.

D. Mark Weinberg

     Mr. Weinberg was elected as a Director of the Company in November 1995.
Mr. Weinberg is the President of the WellPoint Group's Unicare Businesses.
Prior to that position, from 1987 to 1996, Mr. Weinberg held a variety of
executive management positions with WellPoint Health Networks Inc. and its
affiliates, including Executive Vice President.  Mr. Weinberg received a B.S.
in 1975 from the University of Missouri at Columbia.

Dr.  Timothy Triche

     Dr. Triche was elected as a Director of the Company in November 1995.  Dr.
Triche is the Chairman of the Board and the Chief Executive Officer of
OncorMed, Inc., a clinical services company.  He is also Pathologist-in-Chief
for the Children's Hospital of Los Angeles in Los Angeles, California and
Professor of Pathology and Pediatrics at, and Vice Chairman of, the University
of Southern



                                      40



<PAGE>   41

California School of Medicine, Los Angeles, California.  Prior to June 1988, he
was Chief of the Ultrastructural Laboratory of the Division of Pathology at the
National Cancer Institute of the National Institutes of Health in Bethesda,
Maryland.  Dr. Triche is also a director of Oncor, Inc.  Dr. Triche received an
A.B. from Cornell University in 1966 and in 1971 received both a Ph.D. in Cell
Biology and a M.D. from Tulane University.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the Nasdaq Stock Market.  Executive officers, directors and
greater than ten percent stockholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they may file.

     Based solely on a review of the copies of such forms furnished to the
Company, or written representations from certain persons that no Forms 5 were
required, the Company believes that during the fiscal year ended April 30,
1997, no directors, officers or beneficial owners of more than 10% of the
Company's common stock failed to file, on a timely basis, reports required by
Section 16(a) of the Securities Exchange Act of 1934 other than Messrs.
Dimitriades and Weinberg and Dr. Triche who failed to file one Form 4 on a
timely basis.



                                      41



<PAGE>   42


ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

     The following table summarizes compensation for services to the Company in
all capacities awarded to, earned by or paid to (i) the Company's chief
executive officers and(ii) the three other most highly compensated executive
officers who earned in excess of $100,000 in salary and bonus (the "Named
Executive Officers").  No other executive officer of the Company met the
definition of "highly compensated" within the meaning of the Securities and
Exchange Commission's executive compensation disclosure rules.


<TABLE>
<CAPTION>
                                                             Long Term Compensation               
                                                             ----------------------               
                              Annual Compensation            AWARDS         PAYOUTS                
                                                             ------         -------                
                                                                              All Other               
Name and Principal         Year      Salary      Bonus       Options/SARs    Compensation(2)                
--------------------       ----      ------      -----       ------------    ------------            
Position                             (1)   
--------           
<S>                      <C>       <C>        <C>         <C>              <C>
W. James Nicol,    
Chief Executive
Officer and
President(3)               1997      $286,154    $50,000     --              --                         

Paul S. Jurewicz,                                                          
Chief Financial                                                            
Officer and                                                                
Executive Vice                                                             
President(4)               1997      $133,606    $50,000     --              $1,177                  
                           1996      $ 58,461    __          200,000         __                      
James R. Mieszala,                                                         
Chief Operating                                                            
Officer(5)                 1997      $215,193    $50,000     --              $2,690                  
                           1996      $ 64,616    --          200,000         --                         
Robert Clifton,                                                            
Vice President (6)         1997      $166,920    --           35,000         $2,787       
                           1996      $165,264    --          --              $3,059       
                           1995      $149,600    --          --              $1,723       
</TABLE>           
                   
                   
                   

                                      42



<PAGE>   43
(1)  Effective May 1, 1996, Mr. Nicol entered into a three-year employment
agreement pursuant to which he received $300,000 during the first year of the
term of the agreement plus a bonus to be determined in the future.  In
connection with the Merger Agreement and the Stock Purchase Agreement,  on
November 13, 1996, Mr. Nicol and the Company amended Mr. Nicol's employment
agreement to provide that Mr. Nicol shall continue to serve as Chief Executive
Officer and President of the Company through the effective date of the Merger
and to provide for the payment of certain bonuses, $50,000 of which was paid
during the fiscal year ended April 30, 1997.

     On September 9, 1996, Messrs. Jurewicz and Mieszala entered into new
employment agreements with the Company with a term through April 30, 1998.  Mr.
Jurewicz's agreement provided for a base salary of $180,000.  Mr. Mieszala's
employment agreement provided for a base salary of $225,000 during the fiscal
year ended April 30, 1997.  In connection with the Merger Agreement and Stock
Purchase Agreement, on November 13, 1996, Messrs. Jurewicz and Mieszala entered
into amendments to their employment agreements providing that the Merger and
stock purchase will not trigger the change of control provisions in their
employment agreements.  The amendments also provided for the payment of certain
bonuses, $50,000 of which was paid to each of them during the fiscal year
ending April 30, 1997.

(2)  All compensation listed herein consists of matching payments made pursuant
to the Company's 401(k) Plan.

(3)  Mr. Nicol served as the President and Chief Executive Officer of the
Company from May 1, 1996 through August 10, 1997 when he was replaced by Mr.
Mieszala.

(4)  Mr. Jurewicz served as the Chief Financial Officer and Executive Vice
President of the Company until January 10, 1997.

(5)  Mr. Mieszala was named the Chief Executive Officer and President of the
Company on August 11, 1997.  Prior to that, he was the Chief Operating Officer
of the Company.

(6)  Mr. Clifton resigned effective March 28, 1997.



     Lance Berkowitz, a Vice President of a subsidiary  of the Company and a
previous owner of the businesses of Arcade and Kaufmann's, was paid a salary 
and bonus of $196,154 and $150,000, respectively, in fiscal 1997 and $152,308 
and $150,000, respectively, in fiscal 1996.  He also received options for 10,000
shares of Common Stock of the Company and payouts of $3,154 in fiscal 1997.
Mr. Berkowitz is not an executive officer of the Company.




                                      43



<PAGE>   44
OPTION GRANTS IN LAST YEAR



<TABLE>
<CAPTION>
                               Individual Grants                                                         Potential 
                                                                                                     realizable value at 
                                                                                                       assumed annual 
                                                                                                       rates of stock
                                                                                                      price appreciation
                                                                                                      for option term (1)
------------------------------------------------------------------------------------------------------------------------------------
                                                 Percent                                                                        
                                                 of total          Exercise       Expiration                                    
      Name               Number                  options           or base           date               5%         10%        
                          of                     granted            price                                                     
                       securities                  to                                                                         
                       underlying               employees                                                                     
                        options                in fiscal                                                                      
                        granted                   year                                                                        
------------------------------------------------------------------------------------------------------------------------------------
<S>                <C>                   <C>                   <C>                C>               <C>        <C>
W. James Nicol              --                    --                  --              --               --           --
Paul S. Jurewicz            --                    --                  --              --               --           --
James R. Mieszala           --                    --                  --              --               --           --
Robert Clifton            35,000                 7.2%                $4.16          9/9/03             --           --
</TABLE>

(1)  In connection with the Merger, a holder of an outstanding option will be
entitled to receive the $0.30 per share merger consideration upon payment of
the exercise price of such option.


AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED APRIL 30, 1997 AND
FISCAL YEAR END OPTION VALUES

     No options were exercised during the fiscal year ended April 30, 1997 by
the Named Executive Officers.

     The following table provides information relating to the number and value
of options held by such Officers at fiscal year-end:






                                      44



<PAGE>   45
                   Number of securities           Value of unexercised
                   underlying unexercised         in-the-money options at
                   options at fiscal year end     fiscal year end (1)
                   --------------------------------------------------------
      Name         Exercisable/                   Exercisable/
                   unexercisable                  unexercisable
W. James Nicol              0/0                          0/0
Paul S. Jurewicz      133,333/66,667                     0/0
James R. Mieszala     133,333/66,667                     0/0
Robert Clifton         11,666/23,334                     0/0

(1)  The value of unexercised options is determined by multiplying the number of
options held by the difference in the fair market value of the Common Stock
underlying the options at April 30, 1997 (as determined by the closing sales
price on April 30, 1997 as reported by the NASDAQ National Market, which was
$0.172 per share) and the exercise price of the options granted.

LONG-TERM INCENTIVE PLAN AWARDS TABLE.

     There were no long-term incentive plans awards granted by the Company
during the fiscal year ended April 30, 1997.

DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE.

     The Company has no defined benefit or actuarial plans.

COMPENSATION OF DIRECTORS

     Generally, outside directors receive $2,000 per year as a retainer, $1,000
per meeting of the Board of Directors attended, $1,000 per Chairmanship of a
committee of the Board of Directors, and $1,000 per meeting of a committee of
the Board of Directors attended.  Pursuant to the 1996 Non-Employee Director
Stock Option Plan, which was adopted by the stockholders at the November 1996
annual meeting of stockholder of the Company, each outside director receives an
option to purchase 10,000 shares of Common Stock at the time of his or her
election.  Each non-employee director who has already received the initial
stock option grant mentioned above also receives an annual automatic grant of
options to purchase 2,500 shares of common stock after being reelected at each
annual meeting of the stockholders of the Company.

     In addition, the Board of Directors voted to award Mr. Dimitriadis 1,000
shares

                                      45




<PAGE>   46

of Common Stock on February 8, 1995 and on that same date awarded him 4,000
shares of Common Stock to be issued to him on the fifth anniversary of the date
that he was elected to the Board of Directors, provided that if he resigns,
retires or dies prior to such date he is entitled only to the pro rata amount
of such shares; however, if he is terminated as a director, other than for
cause, or if there is a merger, consolidation, acquisition of substantially all
of the assets, reorganization or liquidation of the Company, he will be
entitled to the full 4,000 shares.  These awards of shares were in place of
awards of 5,000 shares to be made over a five-year period at the time of Mr.
Dimitriadis' election to the Board of Directors.

     On April 3, 1996, the Executive Committee passed resolutions compensating
Messrs. Dimitriadis and Weinberg and Dr. Triche for their efforts serving on
various committees of the Board, including the Special Committee, and for
serving as the Office of the Chief Executive Officer.  Each of Mr. Weinberg and
Dr. Triche were awarded options to purchase 7,500 shares of Common Stock, stock
appreciation rights with respect to 22,500 shares of Common Stock and $30,000
in cash, and Mr. Dimitriadis was awarded options to purchase 10,000 shares of
Common Stock, stock appreciation rights with respect to 30,000 shares of Common
Stock and $40,000 in cash.  The vesting schedule for the exercisability of the
stock options and for the stock appreciation rights were half upon the
appointment of the permanent Chief Executive Officer of the Company and half
upon the first annuversary of the date thereof.  The exercise prices or strike
price for these stock options and stock appreciation rights was the average
closing price of shares of Common Stock for the five (5) trading days preceding
April 3, 1996 or $4.8375 per share. On September 9, 1996,the Executive
Committee of the Board of Directors of the Company repriced the exercise price
of the stock options to $4.16 per share, or the average closing price of the
Common stock for the five (5) days preceding September 9, 1996.  Also, at the
September 9th meeting of the Executive Committee, the stock appreciation rights
previously authorized for issuance to Messrs. Dimitriadis and Weinberg and Dr.
Triche were rescinded and, in place thereof, stock options were authorized,
subject to stockholder approval, for 30,000, 22,500,and 22,500 shares of Common
Stock, respectively.  Such stockholder approval was not obtained.  The
foregoing awards of stock options, stock appreciation rights and cash were
contingent upon Messrs. Weinberg and Dimitriadis and Dr. Triche waiving their
respective rights to any remunerations to which they might be entitled from the
Company for the period beginning on February 18, 1996 through September 9, 1996.
In addition, Mr. Weinberg and Dr. Triche relinquished their rights to receive
the options for 4,000 shares normally granted to new directors of the Company.

     In addition, on  May 6, 1996, the Board of Directors of the Company voted
to issue stock options for 30,000 shares of the Common Stock for each
non-employee director and stock options for an additional 20,000 shares of the
Common Stock to the Chairman of the Board, subject to stockholder approval.
Stockholder approval for these shares was not obtained.

EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS

     In May 1996 the Company entered into a three year employment agreement
with W. James Nicol to serve as Chief Executive Officer and President of the
Company.

                                      46

<PAGE>   47

Pursuant to the terms of the employment agreement, Mr. Nicol received an annual
base salary of $300,000. Pursuant to the employment agreement, if (i) the
Company terminates Mr. Nicol other than for disability or for cause or (ii) Mr.
Nicol resigns pursuant to the agreement upon a change of control of the Company
or upon a material reduction by the Company of Mr. Nicol scope and/or
authority, then Mr. Nicol will be entitled to receive a severance payment equal
to his base salary for the remaining term of the agreement and all of the
options granted to Mr. Nicol's under the agreement shall become vested and
immediately exercisable.  If the Company terminates Mr. Nicol other than for
disability or for cause, then Mr. Nicol will also be entitled to receive a
prorated portion of any bonus to which he may be entitled.  Under his
employment agreement, Mr. Nicol was also eligible to receive options for
500,000 shares of Common Stock of the Company subject to stockholder approval;
however, such stockholder approval was not obtained.

     On September 9, 1996, the Company entered into a new employment agreement
with James R. Mieszala to serve as Chief Operating Officer of the Company.  The
term of Mr. Mieszala's employment ends on April 30, 1998.  Pursuant to the
terms of the employment agreement, Mr. Mieszala is entitled to receive an
annual base salary of $225,000.  Mr. Mieszala may receive, at the sole
discretion of the Company, a performance bonus based upon the Executive
Incentive Compensation Plan to be approved and adopted by the Board of
Directors.  On April 3, 1996, the Executive Committee of the Board of Directors
of the Company granted Mr. Mieszala and certain other employees of the Company
options with an exercise price of $4.975 per share, subject to a waiver of
previously granted options.  Such options were repriced to $4.16 per share on
September 9, 1996.  Mr. Mieszala's option was with respect to 200,000 shares of
Common Stock.  Pursuant to the employment agreement, if (i) the Company
terminates Mr. Mieszala other than for disability or for cause or (ii) Mr.
Mieszala resigns pursuant to the agreement upon a change of control of the
Company or upon a material reduction by the company of Mr. Mieszala's scope
and/or authority, then Mr. Mieszala will be entitled to receive a severance
payment equal to his base salary for the remaining term of the agreement and
all of the options granted to Mr. Mieszala under the agreement shall become
vested and immediately exercisable.  If the Company terminates Mr. Mieszala
other than for disability or for cause, then Mr. Mieszala will also be entitled
to receive a prorated portion of any bonus to which he may be entitled. On
August 11, 1997, in anticipation of his added responsibility as Chief Executive
Officer and President of the Company, the Board of Directors voted to grant a
bonus of $15,000 to Mr. Mieszala and increase his salary by $10,000 per month
effective August, 1997.

     On November 13, 1996, in connection with the execution of the Merger
Agreement and Stock Purchase Agreement, the Company entered into letter
agreements (collectively, the "Letter Agreements"), amending the existing
agreements, with W. James Nicol and James R. Mieszala relating to their
employment by the Company.

     Pursuant to the Letter Agreement with Mr. Nicol, he agreed to continue to
serve as Chief Executive Officer and President of the Company through the
Effective Time and the Company agreed to pay Mr. Nicol $50,000 upon the closing
under the Stock Purchase Agreement (which the Company has paid) and $50,000 on
June 30, 1997 if the Merger has been consummated by such date.  The Letter
Agreement provided that if Mr. Nicol's employment were terminated by the
Company prior to or after the Effective

                                      47

<PAGE>   48

Time, or if Mr. Nicol were to voluntarily elect to terminate his employment
after the Effective Time, the Company would continue to pay Mr. Nicol his base
salary, which is $300,000 per annum through June 30, 1998 (in lieu of other
amounts payable under his employment agreement).  In the absence of the Letter
Agreement, Mr. Nicol's employment agreement with the Company provided that,
upon the occurrence of a change in control of the Company (such as the closing
of the Stock Purchase Agreement), Mr. Nicol would be entitled to resign and to
be paid his base salary in periodic installments through the end of the term of
his employment agreement on April 30, 1999.  On August 10, 1997, Mr. Nicol's
employment with the Company was terminated and Mr. Nicol agreed to receive his
accrued vacation pay and base salary through December 31, 1997 in lieu of any
other severance payments.

     Pursuant to the Letter Agreement with Mr. Mieszala, the transactions
contemplated by the Merger Agreement, the Stock Purchase Agreement and the
assumption by Transworld of the Company's senior debt will not constitute a
change of control under Mr. Mieszala's employment agreement provided (a) the
Company pays Mr. Mieszala $50,000 on January 2, 1997 (which the Company has
paid), $50,000 on June 30, 1997 (which the Company has paid), and $225,000 on
January 2, 1998, (b) Transworld issues to Mr. Mieszala, upon consummation of
the Merger, stock options for 100,000 shares of Transworld common stock at an
exercise price equal to the fair market value of the Transworld common stock at
the Effective Time, which stock options will vest over a two year period, and
(c) the Company pays him an amount equal to twelve months of his base salary
upon termination of his employment, provided such termination occurs after June
30, 1998.  In the absence of the Letter Agreement, Mr. Mieszala's employment
agreement with the Company provides that, upon the occurrence of a change in
control of the Company (such as the closing of the Stock Purchase Agreement),
Mr. Mieszala would be entitled to resign and to be paid his base salary in
periodic installments through the end of the term of his employment agreement
on April 30, 1998.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Board of Directors has a compensation committee which consists of Mr.
Dimitriadis and Dr. Triche, with Dr. Triche serving as chairman.  Mr.
Dimitriadis and Dr. Triche are independent non-employee directors and were
appointed by the Board of Directors to serve as members of the committee on
February 18, 1996.

Report of the Compensation Committee of the Board of Directors on Executive
Compensation

Introduction

     During the fiscal year ended April 30, 1997 the Compensation Committee
consisted of two independent non-employee directors, Dr. Triche and Mr.
Dimitriadis who were appointed on February 18, 1996.  The Compensation
Committee is responsible for establishing executive compensation for the
Company's top level executives, administering the Company's current long-term
incentive program and implementing any additional short and long-term
compensation programs for executives which the Committee believes are
appropriate in the future.  All decisions by the Compensation Committee are
subject to the approval of the Board of Directors or the executive

                                      48
<PAGE>   49
Committee thereof.  The Compensation Committee met 4 times during the fiscal
year ended April 30, 1997.

Philosophy

     Generally, the compensation philosophy of the Company is to develop and
implement policies that will encourage and reward outstanding performance, seek
to increase the profitability of the Company, and maximize the Company's return
on equity so as to increase stockholder value.  Maintaining competitive
compensation levels in order to attract and retain executives who bring
valuable experience and skills to the Company is also an important
consideration.  Over the past year, the Company has attempted to maintain and
incentivize employees by rewarding them for their increased duties performed
during the course of a difficult period at the Company.  The Compensation
Committee has been particularly focused on the substantial demands the Company
has made on its senior management team during the course of the year.

Compensation of the Chief Executive Officer

     Mr. Nicol, who was appointed Chief Executive Officer as of May 1, 1996,
received an annual base salary of $300,000 in the fiscal year ending April 30,
1997 plus a bonus of $50,000.  The Compensation Committee believes that Mr.
Nicol's salary was reasonable in light of the unusual demands which were placed
on him during the year.

     Effective August 11, 1997, Mr. Mieszala was appointed Chief Executive
Officer and President and will earn a base annual salary of $225,000 plus
$10,000 per month beginning August 1997. Since the end of the fiscal year, 
Mr. Mieszala has been paid a bonus of $50,000 and is eligible to be paid an
additional $15,000.  The Compensation Committee believes that Mr. Mieszala's
salary is reasonable in light of the unusual demands which will be placed on
him during the upcoming year, that his compensation level reflects the
Compensation Committee's confidence in Mr. Mieszala and the Company's desire to
retain his talents during an extremely difficult period.

Executive Compensation for Fiscal Year 1998

     In the fiscal year ending April 30, 1998, total compensation of top
executives will be targeted in order to retain such executives during the
Company's period of financial uncertainty.   It is anticipated that total 
compensation will consist of base salary and bonuses, and that given the 
Company's present condition no stock or other equity compensation will be 
granted.

Conclusion

     The Compensation Committee believes that the compensation paid to its
executive officers is comparable to compensation paid by similar companies and
companies under difficult circumstances similar to those of the Company.

                                       49
<PAGE>   50
     This report by the Compensation Committee shall not be deemed to be
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, and shall not
otherwise be deemed filed under such Acts.

     DR. TIMOTHY TRICHE

STOCK PERFORMANCE CHART



     The following graph compares cumulative total returns to the holders of
the Common Stock from May 1, 1992 through the end of the fiscal year ended
April 30, 1997 to a peer group consisting of Health Care service companies
listed on the NASDAQ National Market, and to the NASDAQ Market Index.  Total
return values were calculated based on the assumption of $100 invested and on
cumulative total return values assuming reinvestment of dividends.  The stock
price performance shown on the graph below is not necessarily indicative of
future price performance.


                                       50
<PAGE>   51
                 COMPARISON OF MAY 1, 1992 TO APRIL 30, 1997
                           CUMULATIVE TOTAL RETURN
         AMONG HEALTH MANAGEMENT, INC., HEALTH CARE SERVICE COMPANIES
          LISTED ON THE NASDAQ SMALLCAP MARKET, AND THE NASDAQ INDEX

                                 [LINE GRAPH]
<TABLE>
<CAPTION>
             NASDAQ NAT'L           NASDAQ MARKET             
             MARKET INDEX              INDEX               HMI
<S>               <C>                   <C>                <C>
1992              100                   100                100
1993              114                   104                174
1994              127                   132                283
1995              148                   134                308
1996              210                   210                 91
1997              224                   162                  3

</TABLE>

















                                      51



<PAGE>   52



     The foregoing stock price performance graph shall not be deemed to be
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, and shall not
otherwise be deemed filed under such Acts.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

     The following information is submitted as of August 15, 1997 with respect
to the Company's voting securities owned beneficially by each person known by
the Company owning more than 5% of the Common Stock of the Company (this being
the only class of voting securities now outstanding), by Named Executive
Officers of the Company and by all directors, officers both individually and as
a group:

<TABLE>
<CAPTION>
                                                            Amount and Nature
Name of Beneficial               Address                      of Beneficial            Percentage
Owner                            of Beneficial Owner           Ownership                of Class
-----------------------------------------------------------------------------------------------------
<S>                             <C>                          <C>                         <C>   
IMH Acquisition Corp.            75 Terminal Avenue           9,711,005(1)                51.0%
                                 Clark, New Jersey 07066                        

Clifford E. Hotte                51 Prospect Road             1,006,432(2)                 5.5%
                                 Center Port, New York                          
                                 11721                                          

James R. Mieszala                c/o 1371-A Abbott Court        133,333(3)                   *
                                 Buffalo Grove,                                 
                                 Illinois 60089                                 

Paul S. Jurewicz                 2261 Churchill Lane
                                 Libertyville, 
                                 Illinois 60048

Robert C. Clifton                26 Hermitage Street             11,666(4)                   *
                                 Wading River, New York                         
                                 11792                                         

Andre C. Dimitriadis             c/o 1371-A Abbott Court         39,500(5)                   *
                                 Buffalo Grove,                                 
                                 Illinois 60089                                 

W. James Nicol                   c/o 1371-A Abbott Court             -0-                     *
                                 Buffalo Grove,                                 
                                 Illinois  60089                                

D. Mark Weinberg                 c/o 1371-A Abbott Court         10,000(6)                   *
                                 Buffalo Grove,                                 
                                 Illinois  60089                                

Dr. Timothy J. Triche            c/o 1371-A Abbott Court         10,000(7)                   *
                                 Buffalo Grove,                                 
                                 Illinois  60089                                

All Current Directors and                                       204,499                    1.1%
Officers as a Group (5
</TABLE>


                                      52



<PAGE>   53
Persons) (3) (5) (6) (7)                                        


     *Less than one percent (1.0%)

(1)  Includes 746,713 Shares issuable upon exercise of the Transworld Option
     with an exercise price of $1.00 per Share.  Does not include 264,532
     Shares (based on the Company's calculations) into which the subordinated
     convertible note acquired by Hyperion Partners II, L.P., the principal
     stockholder of Transworld, from Caremark, Inc. is currently convertible, .

(2)  Does not include Shares beneficially owned by Virginia Belloise, Clifford
     E. Hotte's wife.


(3)  Includes 133,333 Shares subject to options with an exercise price that
     exceeds the Merger Consideration.

(4)  Includes 11,666 Shares subject to options with an exercise price that
     exceeds the Merger Consideration.

(5)  Includes 18,500 Shares subject to options with an exercise price that
     exceeds the Merger Consideration.  Does not include 4,000 Shares which Mr.
     Dimitriadis will be entitled to receive upon consummation of the Merger;
     the rights to which Shares were to vest on the fifth anniversary of the
     date on which Mr. Dimitriadis was elected to the Board of Directors, but
     which vesting accelerates upon a merger of the Company.

(6)  Includes 10,000 Shares subject to options with an exercise price that
     exceeds the Merger Consideration.

(7)  Includes 10,000 Shares subject to options with an exercise price that
     exceeds the Merger Consideration.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On November 13, 1996 Transworld acquired the bank debt of the Company and
entered into the Stock Purchase Aagreement and the Merger Agreement with the
Company.  On January 13, 1997, pursuant to the Stock Purchase Agreement,
Transworld acquired 49% of the outstanding shares of the Company's Common Stock
and option to purchase additional shares of the Company's common stock which,
if exercised,  would result in Transworld owning 51% of the outstanding shares
of the Company's Common Stock.  The Merger Agreement is currently in effect but
Transworld has not yet been able to obtain the necessary bank consent in order
to consummate the Merger. In addition, Hyperion Partners II, L.P., the majority
stockholder of Transworld, acquired the obligations of the Company due to
Foxmeyer Drug Co., Bindley Western, Inc. and
                                      






                                      53




<PAGE>   54

Caremark, Inc. which, in the aggregate, amount to approximately $18.3 million.
Hyperion has agreed to contribute the obligations purchased from Foxmeyer Drug
Co., and Bindley Western Inc. to Transworld in exchange for stock of
Transworld.
For more information concerning the transactions with Transworld and Hyperion,
see "Business-Transactions with Transworld Health Care, Inc." above.


     Transworld has asserted that under the terms of the $28,350,000 bank debt
it purchased, Transworld is owed $650,000 related to the forbearance agreement
related to that debt. The Company has accrued this forbearance fee in interest
expense.










                                      
                                      54




<PAGE>   55



                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  Documents Filed As A Part of This Report

     (1) Financial Statements. The financial statements of Health Management,
     Inc. and Subsidiaries for the year ended April 30, 1997, together with the
     Report of Independent Certified Public Accountants, are set forth
     beginning on page F-1 hereof.

     (2) Financial Statement Schedules. Financial statement schedules required
     by Items 8 and 14(d) of this Report are set forth following page S-1 of
     the financial statements.

(b)  Reports on Form 8-K



     The  Company filed one current report on Form 8-K, dated March 26, 1997,
     with the Securities and Exchange Commission, during the fourth quarter of
     the fiscal year ended April 30, 1997.  The Form 8-K related to matters
     described under Item 5.

(c)  Exhibits



3.1    Certificate of Incorporation of the Company, as filed with the Secretary
       of State of Delaware on March 25, 1986 (incorporated by reference to
       Registration Statement on Form S-1, Registration No. 33-04485).

3.2    Certificate of Amendment to Certificate of Incorporation of the Company,
       as filed with the Secretary of State of Delaware on March 9, 1988
       (incorporated by reference to Form 10-K for year ended April 30, 1988).

3.3    Certificate of Amendment to Certificate of Incorporation of the Company,
       as filed with the Secretary of State of Delaware on March 31, 1992
       (incorporated by reference to Registration Statement on Form S-1, No.
       33-46996).

3.4    Certificate of Amendment to Certificate of Incorporation of the Company,
       as filed with the Secretary of State of Delaware on October 27, 1994
       (incorporated by reference to Form 10-K for year ended April 30, 1995).

3.5    Certificate of Amendment of Certificate of Incorporation of



                                       55


<PAGE>   56

       the Company, as filed with the Secretary of State of Delaware on
       November 8, 1996 (incorporated by reference to Form 10-Q for the
       quarter ended January 31, 1997).

3.6    Amended and Restated By-Laws of the Company (incorporated by reference to
       Form 10-Q for the quarter ended January 31, 1996).

4.1    Form of 10% Convertible Subordinated Debenture (incorporated by reference
       to Form 8-K dated March 4, 1991).

4.2    Specimen Form of Certificate for Common Stock (incorporated by reference
       to Registration Statement on Form S-1, Registration No. 33-46996).

4.3    Form of Representatives' Purchase Warrant (incorporated by reference to
       Amendment Number 2 to Registration Statement on Form S-1, Registration 
       No. 33-46996).

4.4    Form of Selling Shareholders' Power of Attorney (incorporated by
       reference to Registration Statement on Form S-1, Registration No.
       33-46996).

4.5    Form of Selling Shareholders' Custody Agreement (incorporated by
       reference to Registration Statement on Form S-1, Registration No.
       33-46996).

10.1   Stock Purchase Agreement dated December 8, 1988 (incorporated by
       reference to Form 8-K dated December 23, 1988).

10.3*  1989 Stock Option Plan (incorporated by reference to Registration
       Statement on Form S-1, Registration No. 33-46996).

10.4   Lease dated April 20, 1990 on Company's Ronkonkoma, New York facility
       between the Company and Four L Realty Co (incorporated by reference to
       Registration Statement on Form S-1, Registration No. 33-46996).

10.5   Amendment, dated March 16, 1992 to Lease dated April 20, 1990 on
       Company's Headquarters between the Company and Four L Realty Co.
       (incorporated by reference to Form 10-K for year ended April 30, 1992).

10.6*  Company 401(k) Plan (incorporated by reference to Amendment Number 1 to
       Registration Statement on Form S-1, Registration
       No. 33-46996).

10.7*  Employment Agreement, dated as of May 1, 1996, between the


                                       56








<PAGE>   57

        Company and W. James Nicol (incorporated by reference to Annual Report
        on Form 10-K for the fiscal year ended April 30, 1996).

10.8*   Letter Agreement dated November 13, 1996, between W. James Nicol and the
        Company and guaranteed by Transworld Home HealthCare, Inc. (incorporated
        by reference to Form 10-Q for the quarter ended January 31, 1997).

10.9*+  Severance Agreement dated August 10, 1997, between W. James Nicol and
        the Company.

10.10*  Employment Agreement, dated as of September 9, 1996, between the Company
        and James R. Mieszala (incorporated by reference to Current Report on 
        Form 8-K dated September 16, 1996).

10.11*  Letter Agreement dated November 13, 1996, between James R. Mieszala and
        the Company and guaranteed by Transworld Home HealthCare, Inc.
        (incorporated by reference to Form 10-Q for the quarter ended January 
        31, 1997).

10.12*  Employment Agreement, dated as of September 9, 1996, between the Company
        and Paul S. Jurewicz (incorporated by reference to Current Report on 
        Form 8-K dated September 16, 1996).

10.13*  Letter Agreement dated November 13, 1996, between Paul S. Jurewicz and
        the Company and guaranteed by Transworld Home HealthCare, Inc.
        (incorporated by reference to Form 10-Q for the quarter ended January 
        31, 1997).

10.14   Assets Purchase Agreement, dated as of March 27, 1994, between the
        Registrant, Murray Pharmacy Too, Inc. and the Shareholders named therein
        (incorporated by reference to Current Report on Form 8-K dated April 1,
        1994).

10.15   Assets Purchase Agreement, dated as of March 27, 1994, between HMI
        Retail Corp., Murray Pharmacy, Inc. and the Shareholders named therein
        (incorporated by reference to Annual Report on Form 10-K filed August 2,
        1994).

10.16   First Amendment to Asset Purchase Agreement, dated as of March 31, 1995,
        between Caremark Inc. and Health Management, Inc. (incorporated by
        reference to Current Report on Form 8-K dated April 14, 1995).

10.17   Transition Agreement, dated as of March 31, 1995, between
        Caremark Inc. and HMI Illinois (incorporated by reference to Current
        Report on Form 8-K dated April 14, 1995).

10.18   Credit Agreement, dated as of March 31, 1995 among Health



                                       57








<PAGE>   58

        Management, Inc., Home Care Management, Inc., HMI Pennsylvania, Inc.,
        HMI Illinois, Inc., Chemical Bank, and the Guarantors and Lenders named
        therein (incorporated by reference to Current Report on Form 8-K dated
        April 14, 1995).

10.19   Security Agreement, dated as of March 31, 1995, among Health Management,
        Inc., Home Care Management, Inc., Health Reimbursement Corporation, HMI
        Retail Corp., Inc., HMI Pennsylvania, Inc. and HMI Maryland, Inc. and
        Chemical Bank for itself and the Lenders named therein (incorporated by
        reference to Current Report on Form 8-K dated April 14, 1995).

10.20   Security Agreement and Mortgage Trademarks and Patent, dated as of March
        31, 1994, among Health Management, Inc., Home Care Management, Inc.,
        Health Reimbursement Corporation, HMI Retail Corp., Inc., HMI
        Pennsylvania, Inc. and HMI Maryland, Inc. and Chemical Bank for itself
        and the Lenders named therein (incorporated by reference to Current
        Report on Form 8-K dated April 14, 1995).

10.21   Forbearance Agreement, dated July 26, 1996 among Health Management,
        Inc., Home Care Management, Inc., HMI Illinois, Inc., HMI Pennsylvania,
        Inc., Health Reimbursement Corporation, HMI Retail Corp., Inc., HMI PMA,
        Inc., HMI Maryland, Inc., Chase Manhattan Bank, as lender and agent, and
        European American Bank, as lender (incorporated by reference to Annual
        Report on Form 10-K for the fiscal year ended April 30, 1996).

10.22   Forbearance Agreement, dated as of November 13, 1996, between the
        Company and Transworld Home Healthcare, Inc. (incorporated by reference
        to the Form 8-K dated November 13, 1996).

10.23   Agreement of Lease by and between Joseph M. Rosenthal and the Company
        dated December 13, 1994 (incorporated by reference to Form 10-K for the
        year ended April 30, 1995).

10.24   Lease by and between Irwin Hirsh and Lloyd N. Myers and HMI
        Pennsylvania, Inc. dated March 27, 1994 (incorporated by reference to
        Form 10-K for the year ended April 30, 1995).

10.25   Lease by and between Irwin Hirsh and HMI Retail Corp., Inc. dated March
        27, 1994 (incorporated by reference to Form 10-K for the year ended
        April 30, 1995).

10.26   Stipulation of Partial Settlement dated September 16, 1996,
        between the Company and the Representative Plaintiffs (incorporated by
        reference to Form 8-K dated September, 1996).

10.27   Amended Stipulation of Partial Settlement dated December 19,


                                       58


      



<PAGE>   59

        1996, between the Company and the Representative Plaintiffs
        (incorporated by reference to Form 8-K, dated December 23, 1996).

10.28   Agreement and Plan of Merger, dated November 13, 1996, as amended, among
        IMH Acquisition Corp., Transworld Home HealthCare, Inc. and the Company
        (incorporated by reference to Annex I to the definitive Proxy Statement
        on Schedule 14A dated June 16, 1997).

10.29   Stock Purchase Agreement dated as of November 13, 1996, between the
        Company and Transworld Home HealthCare, Inc. (incorporated by reference
        to Form 8-K dated November 13, 1996).

10.30*  1996 Non-Employee Director Stock Option Plan (incorporated by reference
        to Schedule 14A dated October 9, 1996).

10.31*  1996 Employee Stock Option Plan (incorporated by reference to Schedule
        14A dated October 9, 1996)

10.32*  1997 Employee Stock Purchase Plan (incorporated by reference to Schedule
        14A dated October 9, 1996)

10.33+  Restated Stipulation of Partial Settlement, dated April 23, 1997,
        between the Company and the Representative Plaintiffs.

10.34+  Amendment to Merger Agreement, dated July 7, 1997, between the Company,
        Transworld HealthCare, Inc. and IMH Acquisition Corp.

10.35   Letter Agreement, dated August 13, 1997, between the Company and Counsel
        Corporation (incorporated by reference to Form 8-K dated August 15,
        1997).

11+     Statement re Computation of Per Share Earnings.

27+     Financial Data Schedule

99.1+   Final Judgement and Order of Partial Dismissal of Action, dated 
        June 9, 1997.

*    Management contract or compensatory plan or arrangement.

+    Filed with this Report.


                                       59

<PAGE>   60

                           HEALTH MANAGEMENT, INC.
                                  AND SUBSIDIARIES

                                  

                          
--------------------------------------------------------------------------------


                                               CONSOLIDATED FINANCIAL STATEMENTS
                                    FORM 10-K - ITEM 8 AND ITEM 14(a)(1) AND (2)
                                                       YEAR ENDED APRIL 30, 1997


<PAGE>   61




                  HEALTH MANAGEMENT, INC. AND SUBSIDIARIES

          
                                                                   CONTENTS
--------------------------------------------------------------------------------

    REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                  F-3


    FINANCIAL STATEMENTS
      Consolidated Balance Sheets                                       F-4
      Consolidated Statements of Operations                             F-5
      Consolidated Statements of Stockholders' Equity (Deficit)         F-6
      Consolidated Statements of Cash Flows                       F-7 - F-8
      Notes to Consolidated Financial Statements                 F-9 - F-43






                                     F-2



<PAGE>   62


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois

We have audited the accompanying consolidated balance sheets of Health
Management, Inc. and Subsidiaries as of April 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended April 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Health Management,
Inc. and Subsidiaries at April 30, 1997 and 1996, and the results of their
operations and cash flows for each of the three years in the period ended April
30, 1997, in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.  As discussed in Note 1 to
the consolidated financial statements, the Company's ability to continue as a
going concern depends on (a) the consummation of the merger agreement with
Transworld Healthcare, Inc. ("Transworld") and the continuing financial and
operating support of Transworld or, should the merger not occur, alternative
means of financial or operating support; (b) continuing satisfactory relations
with its suppliers; and (c) the satisfactory resolution of the litigation
discussed in Note 8(d).  In addition, should Transworld exercise its rights
under the credit agreement (Notes 5(a) and 12(b)) or not extend the forbearance
agreement, which expired July 15, 1997, the Company may seek protection under
federal bankruptcy laws.  Accordingly, there is substantial doubt about the
Company's ability to continue as a going concern.  The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


                                                                BDO Seidman, LLP
Chicago, Illinois
July 30, 1997, except for Note 12(b) which is
as of August 14, 1997



                                     F-3



<PAGE>   63




                           CONSOLIDATED FINANCIAL
                                       STATEMENTS


                           ----------------------

<PAGE>   64




-------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                            
April 30,                                                            1997             1996
-----------------------------------------------------------------------------------------------
<S>                                                               <C>               <C>     
ASSETS (Note 5)
CURRENT ASSETS
  Cash and cash equivalents                                      $   1,133,595    $   3,280,195
  Accounts receivable, less allowance for doubtful accounts of
    approximately $16 million and $10 million (Note 6(b))           26,898,281       36,457,199
  Inventories                                                        7,107,859        6,800,820
  Tax refund receivable (Note 7)                                     2,861,033        8,037,030
  Deferred taxes (Note 7)                                                    -        1,807,000
  Prepaid expenses                                                     442,391          655,358
-----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                38,443,159       57,037,602

IMPROVEMENTS AND EQUIPMENT, less accumulated depreciation and
  amortization (Notes 3 and 5)                                       2,326,680        3,825,974

GOODWILL (Note 2)                                                            -       34,008,496

OTHER                                                                  219,161        1,043,607
-----------------------------------------------------------------------------------------------




                                                                 $  40,989,000    $  95,915,679
===============================================================================================
</TABLE>


<PAGE>   65




                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------

<TABLE>
<CAPTION>
April 30,                                                                  1997              1996
----------------------------------------------------------------------------------------------------
<S>                                                              <C>                <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
  Accounts payable
    Trade                                                          $     5,815,888    $   20,714,836
    Due to Hyperion (Note 11)                                           15,329,884                 -
  Accrued unusual charges and settlement costs (Notes 6 and 8(d))        1,453,303         3,559,000
  Accrued expenses (Note 4)                                              4,043,051         1,526,119
  Current maturities of debt and other obligations (Note 5)
    Due to Transworld                                                   30,167,766                 -
    Due to Hyperion                                                      3,000,000                 -
    Other                                                                  890,374        28,746,028
----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                               60,700,266        54,545,983

DEBT AND OTHER OBLIGATIONS, less current maturities (Note 5)               935,911         4,006,077
----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                       61,636,177        58,552,060
----------------------------------------------------------------------------------------------------

COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Notes 8 and 9)

STOCKHOLDERS' EQUITY (DEFICIT) (Notes 9 and 11)
  Preferred stock - $.01 par value - shares authorized 1,000,000;
    issued and outstanding, none                                                 -                 -
  Common stock - $.03 par value - shares authorized 39,000,000;
    issued and outstanding 18,294,474 and 9,328,240                        548,834           279,848
  Additional paid-in capital                                            45,957,786        38,138,771
  Accumulated deficit                                                  (67,153,797)       (1,055,000)
----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                                   (20,647,177)       37,363,619
----------------------------------------------------------------------------------------------------
                                                                   $    40,989,000    $   95,915,679
====================================================================================================
</TABLE>

         See accompanying notes to consolidated financial statements.

                                     F-4

<PAGE>   66



                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES



                      CONSOLIDATED STATEMENTS OF OPERATIONS

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended April 30,                                     1997               1996             1995
-----------------------------------------------------------------------------------------------------
<S>                                             <C>                <C>                <C>
REVENUES                                          $   158,419,205    $   158,859,638    $  88,456,028

COST OF SALES (including an unusual charge of
  $2.8 million in 1996) (Note 6)                      128,719,403        120,223,528       63,708,021
-----------------------------------------------------------------------------------------------------
Gross profit                                           29,699,802         38,636,110       24,748,007
-----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
  Selling                                               5,446,241          4,649,697        2,898,208
  General and administrative                           26,383,150         24,324,490       10,648,792
  Provision for doubtful accounts (Note 6)             18,910,557         14,714,606        7,978,189
  Unusual charges, including impairment
    write-down of $30.9 million in 1997 (Note 6)       35,156,787          5,600,000                -
-----------------------------------------------------------------------------------------------------
Total operating expenses                               85,896,735         49,288,793       21,525,189
-----------------------------------------------------------------------------------------------------
(Loss) income from operations                         (56,196,933)       (10,652,683)       3,222,818

SETTLEMENT COSTS (Note 6)                              (4,825,000)                 -                -

INTEREST EXPENSE (Note 5)                              (4,813,941)        (2,717,155)        (269,316)

INTEREST INCOME                                            13,467             37,651          333,077
-----------------------------------------------------------------------------------------------------
(Loss) income before income taxes (benefit)           (65,822,407)       (13,332,187)       3,286,579

INCOME TAXES (BENEFIT) (Note 7)                           276,390         (2,404,846)       1,340,391
-----------------------------------------------------------------------------------------------------
NET (LOSS) INCOME                                 $   (66,098,797)   $   (10,927,341)   $   1,946,188
=====================================================================================================
(LOSS) EARNINGS PER SHARE OF COMMON STOCK -
  primary and fully diluted                       $         (5.52)   $         (1.16)   $        0.21
=====================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - primary          11,982,000          9,414,500        9,408,300
=====================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - fully
  diluted                                              11,982,000          9,414,500        9,420,816
=====================================================================================================
</TABLE>

         See accompanying notes to consolidated financial statements.

                                     F-5
<PAGE>   67



                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                 Common Stock                                                      Unearned
                                                $.03 Par Value             Additional           Retained         Restricted   
                                           -------------------------          Paid-in           Earnings              Stock
                                              Shares          Amount          Capital          (Deficit)       Compensation
---------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>           <C>              <C>                <C>
BALANCE, May 1, 1994                       9,104,431      $  273,133    $  35,953,281    $     7,926,153    $      (57,065)

Common stock issued upon acquisitions of
  Pharmaceutical Marketing Alliance           20,000             600          242,775                  -                 -     
  Maryland Pharmacies                        108,757           3,263        1,356,112                  -                 -     
                                                                                                                               
Common stock issued upon exercise of                                                                                           
  stock warrants                              78,996           2,370          424,208                  -                 -     
                                                                                                                               
Common stock issued upon exercise of                                                                                           
  stock options                                2,833              85           24,414                  -                 -     
                                                                                                                               
Common stock issued to directors               1,000              30           18,720                  -                 -     
                                                                                                                               
Compensation under restricted stock                -               -                -                  -            57,065     
                                                                                                                               
Net income for the year ended April 30,                                                                                        
  1995                                             -               -                -          1,946,188                 -     
---------------------------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1995                    9,316,017         279,481       38,019,510          9,872,341                 -

Common stock issued upon exercise of
  stock options                               12,223             367          119,261                  -                 -
                                                                                                                       
Net loss for the year ended April 30,
  1996                                             -               -                -        (10,927,341)                -
---------------------------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1996                    9,328,240         279,848       38,138,771         (1,055,000)                -

Common stock issued (Note 9(a))                1,942              58            6,942                  -                 -

Sale of common stock to Transworld
  Healthcare, Inc., net of expenses
  (Note 9(a))                              8,964,292         268,928        7,812,073                  -                 -

Net loss for the year ended April 30,
  1997                                             -               -                -        (66,098,797)                -
---------------------------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1997                   18,294,474      $  548,834    $  45,957,786    $   (67,153,797)   $            -
===========================================================================================================================
</TABLE>

         See accompanying notes to consolidated financial statements.
                                      
                                     F-6



<PAGE>   68


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

Year ended April 30,                                           1997               1996               1995
------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net (loss) income                                     $  (66,098,797)    $  (10,927,341)   $     1,946,188
  Adjustments to reconcile net (loss) income to net
    cash used in operating activities
    Depreciation and amortization                            2,692,971          2,127,400            846,869
    Provision for doubtful accounts                         18,910,557         14,714,606          7,978,189
    Unusual charges                                         34,137,427            950,156                  -
    Forbearance fee                                            650,000                  -                  -
    Deferred taxes                                           1,807,000          1,326,300         (2,516,300)
    Loss from disposition of rental equipment                        -                  -            287,287
    Compensation under restricted stock                              -                  -             57,065
    Common stock issued to director                                  -                  -             18,750
    Increase (decrease) in cash flows from                 
      changes in operating assets and liabilities, net
      of effects of purchase of CPMB and other
      acquisitions in 1995:
      Accounts receivable, net                              (9,351,639)       (19,831,996)       (16,706,549)
      Tax refund receivable                                  5,175,997         (6,210,030)        (1,827,000)
      Inventories                                             (737,398)           986,841         (1,826,911)
      Prepaid expenses                                         212,967            508,183           (976,058)
      Other assets                                             634,356             98,008           (239,758)
      Accounts payable                                         430,936          8,384,845          4,870,054
      Accrued unusual charges and settlement            
        costs                                               (2,105,697)         3,559,000                  -
      Accrued expenses                                       2,516,932           (336,288)           396,332
      Income taxes payable                                           -                  -         (1,759,590)
------------------------------------------------------------------------------------------------------------ 
Net cash used in operating activities                      (11,124,388)        (4,650,316)        (9,451,432)
------------------------------------------------------------------------------------------------------------

</TABLE>

                                     F-7



<PAGE>   69



                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended April 30,                                         1997                 1996              1995
------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                <C>                <C>
CASH FLOWS FROM INVESTING ACTIVITIES
  Cash used in acquisition of CPMB                     $             -    $      (324,366)    $  (20,630,212)
  Other acquisitions                                                 -                  -         (2,167,500)
  Collection of receivable from the seller of         
    Murray Group                                                     -                  -          1,444,426
  Capital expenditures                                        (986,940)        (1,491,722)          (948,368)
  Proceeds from sale of pharmacies                           1,041,781                  -            214,598
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities             54,841         (1,816,088)       (22,087,056)
------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from debt and other obligations                   3,200,000         16,450,000         23,000,000
  Principal payments on debt and other obligations          (2,032,234)       (11,000,000)                 -
  Net payments on capital leases                              (325,820)          (385,741)          (123,357)
  Proceeds from sale of common stock, net                    8,081,001                  -                  -
  Cash paid for deferred borrowing fees                              -                  -           (722,000)
  Proceeds from exercise of warrants                                 -                  -            426,578
  Proceeds from exercise of options                                  -            119,628             24,499
------------------------------------------------------------------------------------------------------------

Net cash provided by financing activities                    8,922,947          5,183,887         22,605,720
------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                   (2,146,600)        (1,282,517)        (8,932,768)

CASH AND CASH EQUIVALENTS, at beginning of year              3,280,195          4,562,712         13,495,480
------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of year              $     1,133,595    $     3,280,195    $     4,562,712
============================================================================================================

</TABLE>

See accompanying notes to consolidated financial statements.


                                     F-8



<PAGE>   70



                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1. BASIS OF PRESENTATION    
   AND SUMMARY OF 
   ACCOUNTING POLICIES

   ORGANIZATION AND PRINCIPLES OF CONSOLIDATION                               

   The consolidated financial statements include Health Management, Inc. (the
   "Company") (a Delaware  corporation) and its wholly-owned subsidiaries:  Home
   Care Management, Inc. ("HMI-NY"); HMI Pennsylvania, Inc.; HMI Retail Corp.
   Inc.; Health Reimbursement Corp.; HMI PMA, Inc.; HMI Maryland, Inc.; and HMI
   Illinois, Inc.  All material intercompany accounts and transactions have been
   eliminated in consolidation.

   DESCRIPTION OF BUSINESS

   The Company provides integrated pharmaceutical management services to
   patients with chronic medical conditions which may be complicated by a higher
   risk of patient noncompliance with the prescribed pharmaceutical regimen, and
   to the health care professionals, pharmaceutical manufacturers and
   third-party payors involved in the care of such patients.  Services offered
   include the distribution of prescription drugs, drug utilization review,
   patient compliance monitoring, assistance in insurance coverage, verification
   and reimbursement. The Company has expanded its business primarily through
   acquisitions to include the oncology, HIV/AIDS, infertility and
   schizophrenia markets.

   BASIS OF PRESENTATION

   The Company's consolidated financial statements have been presented on a
   going-concern basis, which contemplates the realization of assets and
   satisfaction of liabilities in the normal course of business.  As more fully
   discussed in Note 5, the Company is in violation of its loan agreements,
   resulting in the related debt being classified as current liabilities. 
   Transworld HealthCare, Inc. ("Transworld"), formerly Transworld Home
   HealthCare, Inc., acquired the Company's term and revolving credit loans and
   Transworld's majority stockholder, Hyperion Partners II L.P. ("Hyperion"),
   assumed the Company's subordinated note payable and certain supplier accounts
   payable.  Effective January 13, 1997, Transworld acquired 49% of the
   Company's common stock (Note 9(a)) and received an option to purchase at $1
   per share a number of shares of the Company's outstanding common stock such
   that upon exercise Transworld would 

                                     F-9

<PAGE>   71

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

   own 51% of the Company's common stock.  The Company is subject to a
   forbearance agreement assumed by Transworld, which expired on July 15, 1997. 
   The Company's merger agreement with Transworld for the acquisition of the
   remaining outstanding common stock of the Company was approved by the
   Company's stockholders on July 11, 1997 and is pending approval and closing
   by Transworld.  The merger agreement is subject to termination by either
   party for any reason after July 31, 1997. Also, as described in Note 8(d),
   the Company is a defendant in significant litigation and is the subject of an
   investigation by the Enforcement Division of the Securities and Exchange
   Commission.

   The Company's ability to continue as a going concern depends on (a) the
   consummation of the merger agreement with Transworld and the continuing
   financial and operating support of Transworld or, should the merger not
   occur, alternative means of financial and operating support; (b) continuing
   satisfactory relations with its suppliers; and (c) the satisfactory
   resolution of the litigation discussed in Note 8(d). Accordingly, there
   continues to be substantial doubt about the  Company's ability to continue as
   a going concern.

   If the forbearance agreement is not extended, the merger is not consummated
   or the other matters discussed above are not adequately resolved, the Company
   may seek protection under federal bankruptcy laws.  Should the Company seek
   bankruptcy, it is likely the carrying value of assets will be adversely
   affected. See Note 12(b).
   
   The consolidated financial statements do not include any adjustments that
   might result from the outcome of this uncertainty.
   
   USE OF ESTIMATES AND CONCENTRATION

   In preparing financial statements in conformity with generally accepted
   accounting principles, management is required to make estimates and
   assumptions that affect the reported amounts of assets and liabilities and
   the disclosure of contingent assets and liabilities at the date of the
   financial statements and revenues and expenses during the reporting period. 
   Actual results could differ from those estimates.

                                     F-10

<PAGE>   72

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

   Approximately 40% of the Company's revenues are currently attributable to the
   sale of three products which are manufactured solely by one pharmaceutical
   manufacturer.  If the Company were unable to purchase these three products,
   its results of operations would be materially and adversely affected.  In
   addition, the Company has credit limitations with this and other suppliers. 
   If this credit were further reduced or eliminated the operations of the
   Company could be adversely impacted.



   CREDIT RISK                 

   Financial instruments which potentially subject the Company to concentrations
   of credit risk consist principally of temporary cash investments and trade
   receivables.  The Company places its temporary cash investments with high
   credit, quality financial institutions and limits the amount of credit
   exposure to any one financial institution.  At times, such cash investments
   exceed the Federal Deposit Insurance Corporation insurance limit. 
   Concentrations of credit risk with respect to trade receivables are limited
   due to the diverse group of patients whom the Company services.  No single
   customer accounted for a significant amount of the Company's revenues in the
   years ended April 30, 1997, 1996 and 1995.  Approximately 57%, 44% and 40% of
   the Company's revenues are reimbursed under arrangements with federal and
   state medical assistance programs for the years ended April 30, 1997, 1996
   and 1995, respectively.  Such arrangements are subject to audit by the
   applicable authorities, which may require subsequent adjustment (Note
   8(d)(2)).  At April 30, 1997 and 1996, approximately 54% and 43%,
   respectively, of the Company's accounts receivable are from federal and state
   medical assistance programs.  The Company establishes an allowance for
   doubtful accounts based upon factors surrounding the credit risk of specific
   customers, historical trends and other information.

   INVENTORIES                 

   Inventories are valued at the lower of cost or market.  Cost is determined by
   the first-in, first-out ("FIFO") method. Inventories are principally 
   comprised of prescription and over-the-counter drugs.


                                     F-11

<PAGE>   73

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

   REVENUE RECOGNITION         

   Revenues are recognized on the date services and related products are
   provided to patients and are recorded at amounts estimated to be received
   from patients or under reimbursement arrangements with third-party
   payors.

   CASH AND CASH EQUIVALENTS                 

   The Company considers all highly liquid investments with a maturity of three
   months or less when purchased to be cash equivalents.

   IMPROVEMENTS AND EQUIPMENT                              

   Improvements and equipment are stated at cost.  Depreciation of equipment and
   amortization of leasehold improvements are computed over the estimated useful
   lives of the assets and the lease terms, respectively, ranging from 3 to 7
   years for equipment and 5 years to the life of the lease for improvements. 
   Accelerated methods (double declining balance methods) are used for both book
   and tax purposes for all classes except for leasehold improvements, which    
   are amortized using the straight-line method.

   GOODWILL AND OTHER LONG-LIVED ASSETS         

   Goodwill represents the excess of the purchase price over the fair value of
   net assets acquired through business combinations, accounted for as purchases
   (Note 2), and is amortized on a straight-line basis over the estimated period
   to be benefitted - 30 years.

   The carrying value of long-lived assets is reviewed for impairment whenever
   events or changes in circumstances indicate that the carrying amount may not
   be recoverable.  The amount of impairment is computed based on the excess of
   the asset's carrying value over its fair value. Long-lived assets acquired in
   business combinations accounted for using the purchase method include the
   goodwill that arose in those transactions allocated on a pro rata basis using
   the relative fair values of the long-lived assets, identifiable intangibles
   acquired and liabilities assumed at the acquisition date. Generally, the
   Company uses its best current estimate of future undiscounted cash flows for 
   evaluating the carrying value of its goodwill.  See Note 6(d).


                                     F-12

<PAGE>   74

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
   INCOME TAXES

   Deferred taxes are recorded to reflect the temporary differences in the tax
   bases of assets and liabilities and their reported amounts in the
   consolidated financial statements.  The differences relate principally to the
   allowance for doubtful accounts, unusual charges, settlement costs, net
   operating loss carryforward and goodwill.  A valuation allowance is
   established to the extent Company management believes future realization of  
   deferred tax assets is unlikely.

   EARNINGS (LOSS) PER SHARE

   Earnings (loss) per share are computed on the basis of the weighted average
   number of common shares and common stock equivalents outstanding during the
   year.  Fully diluted earnings per share result mainly from considering the
   shares issuable upon the conversion of the convertible subordinated
   debentures and adjusting the net income by adding back the after-tax effect
   of the interest expense thereon.

   The Financial Accounting Standards Board issued Statement of Financial
   Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), in
   February 1997, effective for fiscal years ending after December 15, 1997. 
   This statement provides for a different method of calculating earnings per
   share, which includes (a) basic earnings per share with no dilution, computed
   as income or loss per common share divided by the weighted average number of
   common shares outstanding for the period and (b) diluted earnings per share
   which reflects the potential dilution of securities that could share in the
   earnings of an entity.  Management does not anticipate a significant effect,
   if any, on the earnings (loss) per share as a result of implementing SFAS 
   No. 128.

                                     F-13

<PAGE>   75

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
   FAIR VALUE OF FINANCIAL INSTRUMENTS

   The carrying amounts of certain financial instruments, including cash,
   accounts receivable and nonaffiliated accounts payable, approximate fair
   value as of April 30, 1997 because of the relatively short-term maturity of
   these instruments.  In light of the related party relationship with certain
   creditors and the Company's current financial condition, which has
   deteriorated since 1996, it is not practical to estimate the fair value of
   the debt and other obligations.  In November and December 1996, Transworld
   and Hyperion assumed certain of the Company's debt and payables (Notes 5 and
   11) at discounts of approximately $14.1 million or approximately 30% of      
   the carrying value of the related obligations.

   STOCK-BASED COMPENSATION

   The Financial Accounting Standards Board Statement of Financial Accounting
   Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
   123"), became effective in 1996.  SFAS No. 123 encourages companies to
   recognize expense for stock options and other stock-based employee
   compensation plans based on their fair value at the date of grant.  As
   permitted by SFAS No. 123, the Company has and will retain its prior
   accounting policy under APB Opinion Number 25, "Accounting for Stock Issued
   to Employees", in 1997 and future years.  The Company has concluded that
   certain disclosures required by SFAS No. 123, including the pro forma effect
   on net loss and net loss per share as if the fair-value based method was
   applied, would not be meaningful because (a) of the deteriorating financial
   condition of the Company; (b) currently outstanding options, all at exercise
   prices substantially greater than current market prices, will be cancelled
   upon consummation of the merger agreement with Transworld, if it occurs; and
   (c) the pro forma effect would not be material.

   RECLASSIFICATIONS

   Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
   presentation.

                                     F-14

<PAGE>   76


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. ACQUISITIONS             

   (a) On March 31, 1995, HMI Illinois, Inc., a wholly-owned subsidiary of the
   Company, acquired certain assets subject to certain liabilities of Caremark
   Inc.'s Clozaril Patient Management Business ("CPMB").  The aggregate purchase
   price was approximately $23,260,000, consisting of $20,060,000 in cash
   provided by bank financing, a $200,000 escrow deposit and a $3,000,000
   five-year subordinated note with an annual interest rate of 8% payable
   semi-annually.

   The acquisition has been accounted for by the purchase method of accounting. 
   The purchase price has been allocated to the assets acquired based on the
   estimated fair values of each asset and liability.  The purchased assets
   consist primarily of inventory and equipment.  The excess of purchase price
   over fair value of the assets acquired was approximately $22,860,000.  
   See Note 6(d).

   The unaudited pro forma condensed combined statement of income for the year
   ended April 30, 1995, giving effect to the acquisition of CPMB by the Company
   as if it had occurred as of the beginning of the year, is as follows:

                             Year ended April 30,                       1995
                             --------------------------------------------------
                                                                 (in thousands)
                             Revenues                                 $ 133,178
                             ==================================================
                             Income                                   $   6,237
                             ==================================================
                             Net income                               $   3,505
                             ==================================================

                             Earnings per share
                               Primary                                $    0.37
                               Fully diluted                          $    0.37
                             ==================================================


                                     F-15



<PAGE>   77


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
   Pro forma adjustments included in the pro forma condensed combined statement
   of income consisted of amortization of goodwill of $666,000, interest
   expenses of $2,340,000, allowance for doubtful accounts of $634,000 and      
   increase in cost of sales of $500,000.

   (b) On February 6, 1995, the Company acquired substantially all of the
   assets, subject to certain liabilities, of two specialty pharmacies located
   in Maryland. Immediately following this acquisition, the Company contributed
   all of the acquired assets, subject to assumed liabilities, to HMI Maryland,
   Inc., a newly formed subsidiary wholly owned by the Company ("HMI-Maryland").
   The aggregate purchase price for the two specialty pharmacies approximated
   $3,172,000 and consisted of $1,812,500 in cash and cash equivalents and
   108,757 newly issued shares of common stock of the Company discounted at
   25% and valued at $1,359,375.

   The acquisition has been accounted for by the purchase method of accounting. 
   The purchase price has been allocated to the assets acquired based on the
   estimated fair value of each asset.  The excess of purchase price over fair
   value of the assets was approximately $2,454,000.  See Note 6(d).

   Certain assets related to the retail pharmacies acquired in this acquisition
   were sold during the fiscal year ended April 30, 1997 for approximately $1   
   million.  (See Notes 2(c) and 6).




                                     F-16



<PAGE>   78

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
                                                                                

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

  (c) Goodwill at April 30, 1997 and 1996 is summarized as 
      follows:
<TABLE>
<CAPTION>

      April 30,                            1997                    1996
      ----------------------------------------------------------------------
    <S>                               <C>                 <C>
      Goodwill resulting from the    
        acquisitions of              
        CPMB                            $      -             $    22,860,251
        Maryland pharmacies                    -                   2,453,959
        Murray Pharmacy, Inc. and  
          Murray Pharmacy Too, Inc.  
          acquired in 1994                     -                  10,099,860
        Other                                  -                     250,000
      ----------------------------------------------------------------------
                                               -                  35,664,070
      Less accumulated amortization            -                   1,655,574
      ----------------------------------------------------------------------
                                        $      -             $    34,008,496
      ======================================================================
</TABLE>

   As a result of the closing or sale of three retail pharmacies in fiscal 1997,
   $2,352,000 of goodwill was written off in 1997 (Note 6) and $500,000 of
   proceeds from one of the sales was used to reduce the related goodwill.      

   See Note 6(d) with respect to events occurring after April 30, 1997 resulting
   in the write-off of goodwill in fiscal 1997. 




                                     F-17



<PAGE>   79

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -------------------------------------------------------------------

   3. IMPROVEMENTS AND EQUIPMENT                         

   Improvements and equipment consist of the following:
<TABLE>
<CAPTION>

   April 30,                                  1997                1996
   -------------------------------------------------------------------       
  <S>                               <C>                  <C>
   Furniture and equipment            $  2,708,597        $  2,485,068
   Computer equipment and software       3,082,978           2,689,619
   Leasehold improvements                  417,280             365,743
   -------------------------------------------------------------------         
                                         6,208,855           5,540,430
   Less accumulated depreciation and              
     amortization                        3,882,175           1,714,456
   -------------------------------------------------------------------       
                                      $  2,326,680        $  3,825,974
   ===================================================================
</TABLE>

   During the year ended April 30, 1997, the Company provided additional
   depreciation of $950,000 to write down assets, to their estimated
   realizable value, related to certain facilities expected to be closed or
   sold in fiscal 1998 (Note 6(d)). Depreciation for the years ended April 30,
   1997, 1996 and 1995 was $1,431,813, $951,063 and $375,368, respectively. 

   4. ACCRUED EXPENSES    

   Accrued expenses consist of the following:
<TABLE>
<CAPTION>
   April 30,                                  1997                1996
   -------------------------------------------------------------------
 <S>                                 <C>               <C>
   Compensation, benefits and related                                 
     expenses                         $  2,021,130        $    741,583
   Interest                                840,000             352,626
   Professional fees                     1,054,033                   -
   Other                                   127,888             431,910
   -------------------------------------------------------------------
                                      $  4,043,051        $  1,526,119
   ===================================================================
</TABLE>
                                     F-18

<PAGE>   80

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

   At April 30, 1996, accrued legal and professional fees generally related
   to litigation and restatements of fiscal 1995 financial statements and were
   included in accrued unusual charges and settlement costs (Note 6).

   5. DEBT AND OTHER OBLIGATIONS   
Debt and other obligations consist of the following:
<TABLE>
<CAPTION>
   April 30,                                      1997             1996
   --------------------------------------------------------------------
  <S>                                  <C>              <C>
   Term loan and revolving credit (a)    $  26,317,766    $  28,350,000
   Forbearance fee due Transworld (a)          650,000                -
   Advance from Transworld for                
     litigation settlement (b)               3,200,000                -
   Subordinated note payable (c)             3,000,000        3,000,000
   Amounts due New York State                 
     Department of Social Services            
     related to certain overpayments,         
     due in installments through              
     November 1998, plus interest at          
     10.25% (Note 8(d)(2)).                    750,000                -
   Capitalized leases and notes payable       
     requiring monthly payments of 
     $38,400, including assumed interest 
     ranging from 3.2% to 24%,
     collateralized by equipment with 
     a book value of $1,142,945  
     (Note 8(a)).                            1,076,285        1,402,105
   --------------------------------------------------------------------
                                            34,994,051       32,752,105
   Less current maturities                  34,058,140       28,746,028
   --------------------------------------------------------------------
                                         $     935,911    $   4,006,077
   ====================================================================
</TABLE>

   (a) On April 4, 1995, the Company borrowed $21,000,000 on a term loan to fund
   the cash portion of the acquisition of CPMB (Note 2(a)).  In November 1996,
   Transworld acquired the 

                                     F-19

<PAGE>   81

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   ---------------------------------------------------------------------------

   outstanding balance under this term loan and the revolving credit agreement,
   which aggregated $28.35 million.  The terms of the indebtedness remained
   unchanged as a result of this transaction.   Transworld is charging interest
   at the prime rate (8.5% at April 30, 1997) plus 1-1/2%. 

   The term loan and the revolving credit facility are collateralized by an 
   assignment of a security interest in all assets of the Company and its 
   subsidiaries.

   The credit agreement contains restrictions and financial covenants, as well
   as principal payment provisions, of which the Company is in default. 
   Accordingly, all borrowings due Transworld and Hyperion are due on demand and
   classified as current in the accompanying 1997 consolidated financial
   statements. 

   In addition, Transworld assumed, in November 1996, the forbearance agreement
   which the Company had with its senior lender.  Under this agreement,
   Transworld agreed, subject to certain conditions, to forbear from exercising
   any of its contractual or equitable rights or remedies in respect of any of
   the existing events of default.  The forbearance agreement also provided a
   revolving credit facility up to $5 million.  However, the amounts borrowed
   under this credit facility were paid in January 1997 and the credit facility
   was not available through April 30, 1997.  Subsequent to April 30, 1997,
   the Company borrowed $1.4 million through July 30, 1997 under the credit
   facility.  Transworld has periodically extended the forbearance agreement in
   short-term intervals, the last of which expired July 15, 1997. 

   The Company may owe Transworld $650,000 as a fee under the initial
   forbearance agreement, which is accrued as of April 30, 1997 and included in
   interest expense in the fourth quarter of fiscal 1997. 

                                     F-20

<PAGE>   82

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   --------------------------------------------------------------------------

   (b) In April 1997, Transworld advanced the Company $3.2 million which the    
   Company placed in escrow for the settlement of the class action litigation
   (Note 8(d)(1)).  This advance is due on demand and carries interest at the
   prime rate plus 1-1/2%. 

   (c) In connection with the CPMB acquisition (Note 2(a)), the Company is
   obligated on a $3,000,000 unsecured subordinated note, bearing interest at
   an annual rate of 8% and maturing March 31, 2000.  This obligation was
   acquired by Hyperion in November 1996.

   As a result of the restatement of the Company's April 30, 1995 financial
   statements and the provision of unusual charges (Note 6), the Company did not
   meet certain of the financial ratios as required by the note.  As a result,
   the note became convertible into the Company's common stock upon notice
   received from the holder of the note.  The conversion price is based upon 
   the average closing price of the Company's common stock for the ten trading
   days immediately preceding the conversion date and the ten trading days
   immediately subsequent to the conversion date. Based on the Company's
   calculations, the note is convertible into approximately 264,532 shares of   
   common stock at approximately $11.87 per share.  The Company has not received
   notice from Hyperion for conversion. 

   The maximum amount of short-term borrowings outstanding during the years
   ended April 30, 1996 and 1995 was $10,350,000 and $2,300,000, respectively. 
   The average amounts outstanding for the years ended April 30, 1996 and 1995
   were $7,696,000 and $592,000, respectively.  The average borrowing rates were
   8.37% and 8.875% for the years ended April 30, 1996 and 1995, respectively.
   During fiscal 1997, as a result of the Company being in default under
   its principal loan agreements, the majority of its debt has been classified
   as short-term.

                                     F-21

<PAGE>   83

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   --------------------------------------------------------------------------

   Long-term debt matures as follows: 
                    <TABLE>
                    <CAPTION>
                    Year ending April 30,
                    -------------------------------------
                    <S>                      <C>
                    1998                     $ 34,058,140 
                    1999                          589,219 
                    2000                          269,024 
                    2001                           77,668 
                    -------------------------------------
                                             $ 34,994,051 
                    =====================================
                    </TABLE>

   Interest expense in 1997 includes $2,869,000 for obligations due to 
   affiliates, including the forbearance fee discussed in (a) above and interest
   accrued on certain accounts payable due Hyperion.

6. UNUSUAL CHARGES, SETTLEMENT COSTS AND OTHER CHARGES 

   The unusual charges, settlement costs and other charges included in the
   accompanying consolidated statements of operations are as follows:

<TABLE>
<CAPTION>
   Year ended April 30,                    1997             1996         1995
   ----------------------------------------------------------------------------
 <S>                              <C>            <C>             <C>
   Included in cost of sales
     Write-off of medical device
       inventory (a)                $         -     $  2,840,000   $        -
   ============================================================================
   Included in the provision for                 
     doubtful accounts                            
     Additional provisions reflect-               
       ing changes in estimation 
       of the allowance 
       for doubtful accounts (b)    $10,000,000     $  8,400,000   $        -
   ============================================================================

</TABLE>
                                     F-22



<PAGE>   84

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
   Year ended April 30,                     1997         1996             1995
   ----------------------------------------------------------------------------
 <S>                              <C>            <C>              <C>
   Unusual charges
     Write-off of goodwill and
       certain facilities for 
       impairment in value (d)      $ 30,944,067   $        -       $        -
     Costs and other expenses                 
       related to the closing                 
       or sale of three retail                
       pharmacies, including a                
       goodwill write-off of                  
       approximately $2.4 million             
       (Note 2(c))                     2,812,720            -                -
     Costs associated with                    
       overpayments from New                  
       York State Medicaid                    
       (Note 8 (d)(2))                 1,400,000            -                -
     Costs associated with organi-            
       zational consolidation and             
       other cost reduction                   
       programs (c)                            -    3,600,000                -
     Professional fees related to             
       litigation and restatements            
       of fiscal 1995 financial               
       statements                              -    2,000,000                -
   ----------------------------------------------------------------------------
                                    $ 35,156,787  $ 5,600,000       $        -
   ============================================================================
   Settlement costs                           
     Estimated for the settlement             
       of stockholder class                   
       action (Note 8(d)(1))        $  4,550,000  $         -       $        -
     Other (Note 8(d)(4))                275,000            -                -
   ----------------------------------------------------------------------------
                                    $  4,825,000  $         -       $        -
   ============================================================================
</TABLE>

                                              


                                     F-23



<PAGE>   85
                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------

   (a) Through January 31, 1996, the Company purchased approximately $3.5
   million of medical device inventory under a purchase agreeement which
   provided for a total purchase commitment of approximately $5.4 million in
   return for an exclusive right to distribute in the home care market.  A
   substantial portion of the $3.5 million was purchased during the nine months
   ended January 31, 1996.

   This device was originally targeted for use in the multiple sclerosis market
   but was not being utilized in the treatment of such condition because of the
   concerns of drug manufacturers and physicians that the device could affect
   the molecular stability of the drug being administered.  The lack of
   acceptance of such device was conclusively identified during the third
   quarter of fiscal 1996. 

   As a result, in January 1996, the Company notified the manufacturer of this
   device that the Company would cease further purchase of such product.  The
   Company also negotiated a return agreement whereby the manufacturer of the
   device purchased back the inventory in return for the forgiveness of
   $322,000 payable to the manufacturer from the Company and payment to the
   Company of $338,000.  Accordingly, the Company wrote down its medical device
   inventory by $2,840,000. 

   (b) The Company had evaluations of its allowance for doubtful accounts
   completed in the third quarters of fiscal 1997 and 1996, using a statistical
   sampling approach of its receivables. Based on the result of this sampling,
   the Company concluded that its allowance for doubtful accounts was
   understated by $10 million in 1997 and $8.4 million in 1996.  Accordingly,
   the Company provided additional allowances during the quarters ended January
   31, 1997 and 1996 when it revised its estimates of the required allowance 
   for doubtful accounts.   

                                     F-24


<PAGE>   86

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   ----------------------------------------------------------------------------

   (c) The organizational consolidation costs of $3,600,000 include termination
   benefits accrued totaling $1,271,000 related to the Company's January 1996
   plan of termination of approximately 30 employees as part of the
   consolidation of the Company's accounting and executive offices in Buffalo
   Grove, Illinois.

   The remaining organizational consolidation costs and other cost reduction 
   programs, totaling $2,329,000, can be summarized as follows:
   <TABLE>

   <S>                                          <C>
   Estimated lease termination costs            $   766,000
   Write-off of PMA goodwill                        553,000
   Write-off of PMA and New York fixed assets       397,000
   Write-off of deferred financing costs            613,000
   --------------------------------------------------------
                                                $ 2,329,000
   ========================================================
   </TABLE>

   Estimated lease termination costs represent the lease expense for the
   remaining lease term of the New York headquarters, which was closed in fiscal
   1997.  The write-off of PMA goodwill represents the carrying value of
   goodwill of HMI-PMA, which was closed in fiscal 1996.  HMI-PMA acquired
   certain assets of Pharmaceutical Marketing Alliance in June 1994.  The
   write-off of PMA and New York fixed assets represents the net book value of
   leasehold improvements of PMA and the New York headquarters.  Write-off of
   deferred financing costs represents deferred financing costs resulting from
   the Company's April 1995 term loan and credit agreement under which the
   Company was in default. 

   The majority of the costs accrued at April 30, 1996 were paid in fiscal 1997.



                                     F-25



<PAGE>   87


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
 

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

   (d) As a result of a July 1997 advisory committee recommendation to the Food
   and Drug Administration ("FDA"), it is probable that the frequency of blood
   monitoring of Clozaril patients will be decreased from its current weekly
   monitoring to bi-weekly after six months of therapy and monitoring after one
   year may become voluntary.  While this preliminary recommendation is subject
   to approval by the FDA, the Company believes it is probable that the future
   profitability and cash flows of the CPMB business have been impaired
   sufficiently to result in a write-off of the related goodwill.  Further,
   given the significance of the CPMB business to the total cash flows of the
   Company and the deteriorating financial condition of the Company, it is
   likely the Company will need to restructure its future operations with or
   without the potential merger with Transworld.  The Company's estimate of
   future cash flows was based on their best estimate for the next five years.  
   While definitive restructuring plans have not been finalized, the Company 
   has concluded to write off, in the fourth quarter of fiscal 1997, the
   remainder of its goodwill and approximately $950,000 of assets related to
   facilities expected to be closed or sold (Note 3).

   7. INCOME TAXES        
      
   The income tax expense (benefit) comprises the following:

<TABLE>
<CAPTION>
   Year ended April 30,           1997             1996            1995
   --------------------------------------------------------------------
  <S>                    <C>            <C>              <C>
   Current                       
     Federal               $(1,807,000)   $  (4,398,902)   $  2,793,223
     State and local           276,390          667,756       1,063,468
   --------------------------------------------------------------------
                            (1,530,610)      (3,731,146)      3,856,691
   --------------------------------------------------------------------
   Deferred                           
     Federal                 1,807,000          989,000      (1,851,000)
     State and local                 -          337,300        (665,300)
   --------------------------------------------------------------------
                             1,807,000        1,326,300      (2,516,300)
   --------------------------------------------------------------------
   Total income tax expense                  
     (benefit)             $   276,390    $  (2,404,846)   $  1,340,391
   ====================================================================
</TABLE>                                   
                                 

                                     F-26



<PAGE>   88


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

   The following reconciles the federal statutory tax rate with the actual 
   effective rate:
<TABLE>
<CAPTION>
   Year ended April 30,                       1997         1996        1995
   --------------------------------------------------------------------------
  <S>                                       <C>           <C>          <C>
   Statutory rate                            (34)%         (34)%        34%
   Increase in tax rate resulting from   
     State and local taxes, net of federal      
       benefit                                 -             5           7
     Change in deferred tax assets           
       valuation allowance                    34            11           -
   --------------------------------------------------------------------------
   Effective rate                              -%          (18)%        41%
   ==========================================================================
</TABLE>
<TABLE>
<CAPTION>
   Deferred tax assets (liabilities) consist of the following:
--------------------------------------------------------------------------------

   April 30,                                       1997               1996
   --------------------------------------------------------------------------
<S>                                       <C>                    <C>
   Deferred tax assets resulting from                         
     Allowance for doubtful accounts      $    5,005,000         $  4,532,000
     Net operating loss carryforward           4,700,000                    -
     Unusual charges and settlement                                
       costs, except goodwill                    788,000              535,000
     Alternative minimum tax credit                                
       carryforward                              482,000                    -
     Other                                       714,000                    -
     Deferred tax asset (liability) -                              
       difference in carrying value                                
       of goodwill for book and tax           10,027,000             (734,000)
   --------------------------------------------------------------------------
     Total                                    21,716,000            4,333,000
     Valuation allowance                     (21,716,000)          (2,526,000)
   --------------------------------------------------------------------------
     Deferred tax asset                   $            -         $  1,807,000
   ==========================================================================
</TABLE>

                                                                


                                     F-27



<PAGE>   89


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

   A valuation allowance for the deferred tax assets was provided because of the
   uncertainty as to future realization of the net deferred tax assets
   (exclusive of the remaining carryback benefit in 1996), as a result of the
   substantial doubt about the Company's ability to continue as a going concern
   (Note 1). 

   As of April 30, 1997, the Company recorded a $2.9 million tax refund
   receivable, for the estimated refund claim due to the 1997 net operating loss
   carryback.  The April 30, 1996 tax refund receivable of $8.0 million
   consisted of $5.5 million refund claims for 1996 and 1995 and $2.5 million
   for estimated taxes paid in 1996.    

   The Company has a net operating loss carryforward of approximately $13.9
   million, which expires in 2012.  The utilization of this net operating loss
   carryforward is subject to certain limitations.




   8. COMMITMENTS AND CONTINGENCIES
   
   (a) Leases
                                                
   The Company leases its offices, warehouse and retail pharmacies under
   operating leases expiring at various times through August 2002.  The Company
   also leases data processing equipment under agreements which expire at       
   various times through 2000.  These leases have been classified as capital
   leases (Notes 3 and 5).



                                     F-28



<PAGE>   90



                    HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------
   
   As of April 30, 1997, future net minimum lease payments under capital leases
   and noncancellable operating lease agreements are as follows: 
   <TABLE>
   <CAPTION>

                                                 Capital      Operating
   --------------------------------------------------------------------
   <S>                                      <C>             <C>
   1998                                     $    460,730    $ 1,001,016
   1999                                          380,492        713,218
   2000                                          287,327        695,032
   2001                                           76,456        140,030
   --------------------------------------------------------------------
   Total minimum lease payments                1,205,005      2,549,296

   Less amounts representing                                    
     interest                                    128,720              -
   --------------------------------------------------------------------
   Net minimum lease payments               $  1,076,285    $ 2,549,296
   ====================================================================
   </TABLE>

   Rent expense for the years ended April 30, 1997, 1996 and 1995 amounted to
   $1,300,382, $1,544,788 and $364,448, respectively, which included rent
   expense for buildings owned by two shareholders amounting to $97,500,
   $106,400 and $106,410 for the years ended April 30, 1997, 1996 and 1995,
   respectively.

   (b) Retirement Plan
                                     
   Effective August 1, 1990, the Company established a 401(k) plan for eligible
   salaried employees.  The contribution for any participant may not exceed
   statutory limits.  After one year of employment, the Company will match 40%
   of each employee participant's contributions up to the first 5% of
   compensation.  The total matching contributions charged against operations
   amounted to $185,245, $178,844 and $71,281 for the years ended April 30,
   1997, 1996 and 1995, respectively.
                                


                                     F-29



<PAGE>   91


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   ---------------------------------------------------------------------------
   
   (c) Employment Agreements 
  
   The Company has in effect employment agreements with two key officers, with 
   compensation to be paid through 1998.  Total salaries under these
   agreements amount to approximately $525,000 annually, excluding certain
   bonuses relating to the consummation of the merger with Transworld.

   (d) Litigation and Other Matters 

   (1) The Company, certain of its former directors and officers and its outside
   auditors, BDO Seidman, LLP, have been named as defendants in a consolidated
   class action securities fraud lawsuit filed on February 29, 1996 in the 
   United States District Court for the Eastern District of New York entitled 
   In re Health Management, Inc. Securities Litigation, Master File No. 96 
   Civ. 0889 (ADS).  This consolidated action alleged claims under Sections
   10(b) and 20(a) of the Securities Exchange Act of 1934 arising out of alleged
   misrepresentations and omissions by the Company in connection with certain of
   its previous securities filings.  The consolidated action represented a class
   of persons who purchased the Company's common stock between August 25, 1994
   and February 27, 1996, the date the Company announced that it would have to
   restate certain of its financial statements.  The consolidated action sought
   unspecified monetary damages reflecting the decline in the trading price of
   the Company's stock that allegedly resulted from the Company's February 1996
   announcements.  The Company entered into a Stipulation of Partial Settlement
   with plaintiffs' counsel and on September 18, 1996 such Stipulation of
   Partial Settlement received preliminary court approval (the "Original
   Settlement").  The Original Settlement provided for, among other things, the
   payment by the Company of $2 million in cash, the issuance of 2.2 million
   shares of the Company's common stock and warrants to purchase 2.2 million
   shares of the Company's common stock.  As a condition to Transworld's
   obligation to close the Stock Purchase Agreement, preliminary court approval
   was obtained with respect to a modified 

                                     F-30

<PAGE>   92

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------
   settlement providing for a $7.2 million cash payment in lieu of the
   consideration provided in the Original Settlement, to be paid after the
   merger is consummated.  This settlement was further amended on April 23,
   1997, to provide for the settlement of such consolidated action for a reduced
   settlement amount of $4.55 million, of which $1.35 million is conditioned on
   the merger with Transworld being consummated.  Court approval was received on
   June 9, 1997.  The $4.55 million is included in settlement costs in the
   accompanying consolidated statement of operations for the year ended April
   30, 1997 (Note 6).  The recorded settlement amount was reduced to $4.55
   million in the fourth quarter of fiscal 1997 from the $7.2 million recorded
   in the second quarter of fiscal 1997. The Company placed $3.2 million in
   escrow on April 29, 1997, with respect to this settlement, which was released
   from escrow when the court's approval became final.  This $3.2 million was
   borrowed by the Company from Transworld (Note 5(b)), with the remaining $1.35
   million included in accrued unusual charges and settlement costs at April 30,
   1997.  The Company is in the process of negotiating with its directors and
   officers liability insurance carrier with respect to coverages for damages in
   connection with the stockholder class action lawsuit.  Certain payments,
   if any, received from such carrier may reduce the Company's liability with
   respect to such settlement.  No amounts have been recorded with respect to
   any such potential recoveries.



                                     F-31



<PAGE>   93

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------
                   
   Certain of the Company's current and former officers and directors, including
   Messrs. Bergman, Hotte, Clifton and Dimitriadis and Ms. Belloise, have been
   named as defendants, and the Company has been named as a nominal defendant,
   in a consolidated derivative action filed on March 15, 1996 in the United
   States District Court for the Eastern District of New York entitled In re
   Health Management, Inc. Stockholders' Derivative Litigation, Master File No.
   96 Civ. 1208 (TCP).  The consolidated action alleges claims for breach of
   fiduciary duty and contribution against the individual director defendants
   arising out of alleged misrepresentations and omissions contained in certain
   of the Company's previous securities filings.  The consolidated action 
   seeks unspecified monetary damages on behalf of the Company, as well as
   declaratory and injunctive relief.  An amended consolidated complaint was
   served on the Company on August 12, 1996.  The Company filed a motion to
   dismiss the amended consolidated complaint on June 2, 1997.  The Company's
   motion argued, among other things, that plaintiffs failed to serve a presuit
   demand upon the Company's Board of Directors and that plaintiffs will lose
   standing upon the consummation of the merger with Transworld.  A hearing on
   the Company's motion is currently scheduled to take place on October 17,     
   1997.  In December 1996, the Company and the plaintiffs' counsel tentatively
   agreed on a cash settlement of $175,000; however, the parties subsequently
   were unable to agree on the other terms of the settlement and currently there
   is no settlement offer pending.

   BDO Seidman, LLP has been named as a defendant, and the Company has been
   named as a nominal defendant, in a derivative lawsuit filed on June 12, 1996
   in the Supreme Court for the State of New York, County of New York entitled
   Howard Vogel, et al. v. BDO Seidman, LLP, et al., Index No. 96-603064.  The
   complaint alleges claims for breach of contract, professional malpractice,
   negligent misrepresentation, contribution and indemnification against BDO
   Seidman, LLP arising out of alleged misrepresentations and omissions
   contained in certain of the Company's previous securities  

                                     F-32

<PAGE>   94

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------
   
   filings. BDO Seidman, LLP was the Company's auditor at the time those filings
   were made and has continued to serve as such.  The complaint seeks
   unspecified monetary damages on behalf of the Company, as well as declaratory
   and injunctive relief.  Pursuant to stipulation, the Company's time to answer
   or otherwise move against the complaint in this action has been adjourned
   indefinitely.  The Company is unable to make an estimate of the anticipated
   loss, if any, arising from this suit. 

   The enforcement division of the Securities and Exchange Commission has a
   formal order of investigation relating to matters arising out of the
   Company's public announcement on February 27, 1996 that the Company would
   have to restate its financial statements for prior periods as a result of
   certain accounting irregularities.  The Company is fully cooperating with
   this investigation and has responded to the Commission's requests for
   documentary evidence. 

   (2) As a result of a New York State Medicaid audit, the Company settled with
   the New York State Department of Social Services regarding certain
   overpayments to the Company.  The Company's liability was approximately $1.4
   million, of which approximately $0.5 million was held in escrow by the 
   State. The remaining amounts will be paid in installments through November 
   1998, plus interest (Note 5).  The $1.4 million is included in unusual 
   charges for the year ended April 30, 1997 in the accompanying consolidated 
   statements of operations (Notes 5 and 6).

   (3) On April 3, 1995, American Preferred Prescription, Inc. ("APP") filed a
   complaint against the Company, Preferred Rx, Inc., Community Prescription
   Services and Sean Strub in the New York Supreme Court for tortious
   interference with existing and prospective contractual relationships, for
   lost customers and business opportunities resulting from allegedly 
   slanderous statements and for allegedly false advertising and promotions.  
   Four separate causes of action were alleged, each for up to $10 million in 
   damages.  By motion dated March 12, 

                                     F-33

<PAGE>   95


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------
   
   1996, APP moved, in the Supreme Court of the State of New York, to amend its
   complaint to add, among other things, a cause of action against the Company
   alleging that a proposed plan of reorganization presented by the Company to
   the Bankruptcy Court in APP's bankruptcy case was based on financial
   statements of the Company that were allegedly fraudulent.  On September 17,
   1996, the Court granted APP's motion to amend its complaint to add a
   fifth cause of action.  The Company noticed an appeal of this order in
   November 1996 and has filed its initial brief on the matter.         
   Management believes APP's suit against it to be without merit, intends to
   defend the proceeding vigorously and believes the outcome will not have a
   material adverse effect on the Company's consolidated results of operations
   or financial position.

   On or about August 4, 1995, APP commenced an action in the Supreme Court of
   the State of New York, County of Nassau, against a former APP employee who
   is currently employed by the Company, and Charles Hutson, Susan Hutson and
   Hutson Consulting Services (collectively, the "Hutsons").  The Company is
   not named as a defendant in this lawsuit.  The complaint in this action
   alleges,  among other things, that the employee provided to the Hutsons, who
   formed and subsequently discontinued a joint marketing venture with APP,
   confidential information which was disclosed to competitors of APP,
   including the Company.  The action was removed to the United States
   Bankruptcy Court of the Eastern District of New York, and subsequently
   remanded to the Supreme Court of the State of New York, Nassau County.  The
   Hutsons noticed their appeal of this order and have moved to dismiss the
   action against them, asserting that they are not subject to the jurisdiction
   of the New York State court.  The Company is presently paying certain
   expenses of its employee in connection with this litigation. 

   (4) The Company and Transworld had been named as defendants in a lawsuit
   filed on March 11, 1997 in the Chancery Court of the State of Delaware for
   New Castle County entitled Drew 

                                     F-34

<PAGE>   96

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------
   
   Bergman v. Health Management, Inc. and Transworld Home HealthCare, Inc., CA
   No. 15609NC.  The plaintiff in that case sought reimbursement and
   advancement of legal fees and expenses and, on April 29, 1997, that suit was
   settled for $275,000 (Note 6).

   (5) The Company and Messrs. Nicol, Jurewicz and Mieszala have been named as
   defendants in an alleged class action lawsuit filed on April 3, 1997 in the
   United States District Court for the Eastern District of New York entitled
   Nicholas Volonnino et al. v. Health Management, Inc., W. James Nicol, Paul S.
   Jurewicz and James Mieszala, 97 Civ. 1646.  This action alleges claims under
   Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
   10b-5 promulgated thereunder arising out of misrepresentations and omissions
   by the Company in connection with certain of its previous securities filings
   and press releases.  The action purports to represent a class of persons who
   purchased shares between September 15, 1996 and March 17, 1997, the date the
   Company announced that it would have to restate certain of its financial
   statements and that it was renegotiating its deal with Transworld.  The
   action seeks unspecified compensatory damages.  The Company has not responded
   to the complaint and the plaintiff has indicated that it will file an
   amended complaint by September 2, 1997.  The Company intends to vigorously
   defend itself in such action.



                                     F-35



<PAGE>   97


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------

   (6) Under the Company's Certificate of Incorporation and Bylaws, certain
   officers and directors may be entitled to indemnification, or advancement
   of expenses for legal fees in connection with the above suits.  The
   Company may be required to make payments in respect thereof in the future. 
   As of April 30, 1997, no amounts have been accrued related to these expenses.
   
   (7) On May 22, 1997, a Writ of Summons was sent to the Company in respect of
   action brought in the Superior Court at Nashua, New Hampshire, entitled
   Linley v. Health Management, Inc.  Mr. Linley alleges, among other things,
   breach of contract, estoppel, negligent misrepresentation, fraud and breach
   of fiduciary duties and obligation of good faith and fair dealing in
   connection with an alleged joint venture between plaintiff and the Company.  
   Management believes this action to be without merit and not material to the 
   Company's consolidated results of operations or financial condition. 

   As of April 30, 1997, the Company has recorded the estimated minimum losses
   expected to result from the litigation discussed above.  The final resolution
   of these matters could have a material adverse effect in the near term on
   the Company's consolidated financial position and results of operations. 

   If the merger with Transworld is not consummated, the outcomes of certain of
   the foregoing lawsuits and the investigation are uncertain and the ultimate 
   outcomes could have a material adverse effect on the Company. 

                                     F-36

<PAGE>   98


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
   -----------------------------------------------------------------------------
   
   9. CAPITAL TRANSACTIONS                                          
                  
   (a) 1997 Common Stock Issuances 

   During the fiscal year ended April 30, 1997, the Company (a) issued 1,942
   common shares (valued at $7,000), primarily for the purchase of a marketing  
   product and (b) sold 8,964,292 newly issued unregistered common shares (49%
   of the Company's outstanding common stock) to Transworld, effective January
   13, 1997, at $1 per share, less related expenses of $883,291.



   (b) Options and Warrants

   Stock options and warrants activities are shown below:

<TABLE>
<CAPTION>
                                      Omnibus  Incentive              
                                    Incentive      Stock             
                                        Stock     Option              Directors'         Other
                                       Option   Plan (2)   Warrants  Options (3)     Plans (5)
                                     Plan (1)                       
   -------------------------------------------------------------------------------------------
 <S>                              <C>            <C>       <C>          <C>         <C>
   Shares covered                   1,000,000     50,000    130,662       54,000     3,750,000
   ===========================================================================================
   Outstanding at May 1, 1994         420,000     11,055     90,332       19,000             -
     Granted                          132,500          -          -        4,000             -
     Exercised                         (2,000)      (833)   (78,996)           -             -
     Cancelled                              -          -          -            -             -
   -------------------------------------------------------------------------------------------
   Outstanding at April 30,                                            
     1995                             550,500     10,222     11,336       23,000             -
     Granted                          709,000          -          -        3,000             -
     Exercised                        (11,000)    (1,223)         -            -             -
     Cancelled                       (309,500)         -          -            -             -
   -------------------------------------------------------------------------------------------
   Outstanding at April 30,                                            
     1996                             939,000      8,999     11,336       26,000             -
     Granted                          487,500          -          -       32,500             -
     Exercised                              -          -          -            -             -
     Cancelled                       (725,167)    (8,999)         -            -             -
   -------------------------------------------------------------------------------------------
   Outstanding at April 30,                                            
     1997                             701,333          -     11,336       58,500             -
   ===========================================================================================
                                                                 
</TABLE>


                                     F-37



<PAGE>   99


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                    Omnibus                                                 
                                  Incentive  Incentive                                      
                                      Stock      Stock                                      
                                     Option     Option              Directors'         Other
                                   Plan (1)   Plan (2)   Warrants  Options (3)     Plans (5)
   -------------------------------------------------------------------------------------------
 <S>                              <C>            <C>       <C>          <C>         <C>

   At April 30, 1997
     Price range                 $  4.16-        $  .90    $  5.40     $  1.62-         -
                                 $  16.25        $ 4.50                $  18.84

     Shares exercisable           503,834             -     11,336       45,500         -
     Available for grant                -             -          -            -         -
     Weighted average                                                
       exercise price            $   2.94             -    $  5.40     $   7.65         -
</TABLE>

   (1) On May 26, 1993 the Compensation Committee authorized, and on October 14,
   1993 the stockholders approved, the establishment of an omnibus incentive
   stock option plan to provide incentives for key employees and members of the
   Board of Directors.  The maximum number of shares issuable under the plan is
   10% of the outstanding shares up to 1,000,000 shares.  The exercise period   
   for an option shall not exceed ten years from the date of grant, except in
   the case of a more than 10% stockholder such period shall not exceed five
   years.  The option price per share shall be not less than the average market
   value or, in the case of a 10% stockholder with respect to incentive stock
   options, 110% of fair value on the date of grant.

   The Company granted a total of 487,500 options at an exercise price of 
   $4.16 on September 9, 1996.
   
   (2) On February 16, 1990, the Company approved the adoption of an incentive
   stock option plan covering 50,000 common shares.  The options are exercisable
   over a ten-year period.  The remaining options were cancelled during the year
   ended April 30, 1997. 

                                     F-38

<PAGE>   100


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------
   
   (3) During the years ended April 30, 1997, 1996 and 1995, the Company granted
   a total of 32,500, 3,000 and 4,000 options, respectively, to its outside
   directors at an exercise price of $1.62, $18.84 and $16.77, respectively, the
   market price on the date of the grant. 

   (4) Pursuant to a special meeting of the executive committee of the board of 
   directors on April 3, 1996, members of the special committee of the board of
   directors were granted a total of 25,000 options.

   The per-share exercise price for the stock options is a price equal to the
   average closing price of the shares for the five trading days preceding
   September 30, 1996 or $4.16.  The vesting schedule for each of the stock
   options is one-half upon the appointment of the permanent Chief Executive
   Officer (May 1, 1996) and one-half on May 1, 1997. 

   (5) On November 6, 1996, the Company's stockholders approved the 1996
   Employee Stock Option Plan, the 1997 Employee Stock Purchase Plan and the 
   1996 Nonemployee Director Stock Option Plan. 

                                     F-39

<PAGE>   101

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------
   
   (a) The Company has reserved 2,000,000 shares of common stock under the 1997
   Employee Stock Purchase Plan.  The plan is available to all eligible
   employees, with the first offering period from January 1, 1997 to June 30,
   1997.  The purchase price for shares shall be the lesser of 85% of the
   closing price at the beginning of the offering period or 85% of the closing
   price at the end of the offering period.  Share purchases are limited to
   $25,000 per calendar year or 5% of voting power.  No shares or options were
   granted or issued for the year ended April 30, 1997. 

   (b) The Company has reserved 1,500,000 shares of common stock for issuance
   under the 1996 Employee Stock Option Plan for key employees and members of
   the board of directors.  The exercise period for an option shall not exceed
   10 years from the date of grant.  The option price per share shall not be
   less than 100% of the fair market value on the date of grant.  No shares
   or options were granted or issued for the year ended April 30, 1997. 

   (c) The Company has reserved 250,000 shares of common stock for issuance
   under the 1996 Nonemployee Director Stock Option Plan for new nonemployee
   directors elected after the 1996 annual meeting.  The exercise period for an
   option shall not exceed 10 years from the date of grant and the options shall
   become exercisable in four equal annual installments.  The option price
   per share shall be 100% of the fair market value on the date of grant.  No
   shares or options were granted or issued for the year ended April 30, 1997.


   As a condition of completing the merger agreement with Transworld (Note 11),
   the Company's stock option plans will be terminated.

                                     F-40



<PAGE>   102


                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------

   10. SUPPLEMENTAL CASH FLOW INFORMATION   

   (a) Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>

   Year ended April 30,                        1997             1996            1995
   ---------------------------------------------------------------------------------
 <S>                                   <C>              <C>             <C>
   Cash paid for interest expense       $ 3,599,000      $ 2,382,000     $   174,000
   Cash (refunded) paid for income
     taxes                               (6,286,000)       1,949,000       7,745,000
</TABLE>

    (b) Supplemental disclosures of noncash investing and financing activities:

        (1) The Company financed $1,361,000 and $177,000 of new equipment during
            the years ended April 30, 1996 and 1995, respectively.

        (2) During the year ended April 30, 1995, $3,000,000 of the purchase 
            price of CPMB was a five-year subordinated note (Note 2(a)).

        (3) During the year ended April 30, 1995, the Company issued 128,757 
            shares of nonregistered common stock in connection with 
            acquisitions.

        (4) During the year ended April 30, 1997, 1,942 shares of common stock 
            were issued, primarily for the purchase of a marketing product 
            (Note 9(a)).
   
   11.  OTHER MATTERS                                  

   The Company entered into Stock Purchase and Merger Agreements with Transworld
   in November 1996 for Transworld to eventually acquire all the outstanding
   common stock of the Company. Transworld or its majority stockholder,
   Hyperion, have assumed the Company's senior debt (approximately $28.35
   million), debt previously owed to Caremark, Inc. ($3 million) and certain
   supplier accounts payable (approximately $15.3 million), as well as acquiring
   49% of the Company's common stock (Note 9(a)), with an option to acquire
   additional shares at $1 per share, which option, if exercised, 

                                     F-41

<PAGE>   103

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   -----------------------------------------------------------------------------

   would result in Transworld owning 51% of the outstanding shares of common
   stock of the Company. 

   On March 26, 1997, Transworld and the Company agreed to reduce the cash
   consideration to be paid to the Company's stockholders (other than
   Transworld) to $0.30 per share from $1.50 per share and an amendment to the
   merger agreement among Transworld, IMH Acquisition Corporation (a wholly
   owned subsidiary of Transworld) and the Company was executed.  The merger
   agreement was approved by the Company's stockholders on July 11, 1997 and 
   is pending, among other things, approval of Transworld's lenders and a 
   closing.  The merger agreement is subject to termination by either party for
   any reason after July 31, 1997.  See Note 12(b).

   12.  SUBSEQUENT EVENTS       

   (a) In June 1997, the Company announced the closing of three pharmaceutical
   locations.  The estimated cost of these closings is approximately $261,000. 

   (b) On August 1, 1997, Transworld indicated that it was unable to obtain the
   consent of its bank to conclude the merger with the Company.  Neither
   Transworld or the Company has terminated the merger agreement; however, the
   merger agreement is subject to termination by either party for any
   reason.  Transworld and the Company are discussing potential alternative
   transactions. 

   If (a) the Company is unsuccessful in pursuing alternative transactions or
   extending the forbearance agreement with Transworld, which expired July 15,
   1997, or (b) Transworld elects to exercise its rights under the credit
   agreement (Note 5(a)), which is in default, the Company may seek protection 
   under the federal bankruptcy laws. 

                                     F-42

<PAGE>   104

                   HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   On August 14, 1997 Transworld announced an agreement with Counsel
   Corporation ("Counsel"), a Canadian corporation, to potentially sell the
   Company's business and operations to Counsel.  The letter agreement calls
   for the purchase of a substantial portion of the Company's assets by Counsel
   for cash of approximately $40 million.  As a part of the agreement,
   Transworld would guarantee the collection of at least $20 million of the
   Company's accounts receivable.  Counsel does not intend to assume any of the
   Company's liabilities other than obligations under real property leases,
   etc. related to facilities acquired.  The purchase is subject to various
   conditions and the Company has agreed to refrain from pursuing potential
   alternative transactions until September 30, 1997 or such earlier date after
   September 3, 1997, as instructed by Transworld.  The agreement is also
   subject to approval by Transworld's banks.  Also, prior to any closing of
   the purchase, Transworld will either have acquired the remaining common
   stock of the Company not already owned or determine an alternative method to
   sell the Company's assets to Counsel. 




                                     F-43

<PAGE>   105

                                                         HEALTH MANAGEMENT, INC.
                                                                AND SUBSIDIARIES
                                       -----------------------------------------

                                                            FORM 10-K ITEM 14(d)
                                       CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
                                                                  APRIL 30, 1997

<PAGE>   106


                  HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
 
             INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

            --------------------------------------------------------

            REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS   S-3

            SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
              RESERVES                                           S-4

                                     S-2


<PAGE>   107

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois

The audits referred to in our report dated July 30, 1997, except for Note 12(b)
which is as of August 14, 1997, relating to the consolidated financial
statements of Health Management, Inc. and subsidiaries, which is contained in
Item 8 of this Form 10-K, included the audit of the accompanying schedule of
valuation and qualifying accounts.  This financial statement schedule is the
responsibility of the Company's management.  Our responsibility is to express
an opinion on this financial statement schedule based upon our audits.

In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.




BDO Seidman, LLP



Chicago, Illinois
July 30, 1997



                                     S-3



<PAGE>   108

                  HEALTH MANAGEMENT, INC. AND SUBSIDIARIES


                   SCHEDULE II - VALUATION AND QUALIFYING
                            ACCOUNTS AND RESERVES
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                        Balance at         Additions         
                                      Beginning of        Charged to                           Balance at                 
Classification                                Year        Operations         Deductions       End of Year
---------------------------------------------------------------------------------------------------------
<S>                              <C>                <C>               <C>                <C>  
Allowance for doubtful accounts
 Year ended April 30, 1997         $    10,070,000    $  23,901,000*    $  (17,951,000)    $   16,020,000
=========================================================================================================
 Year ended April 30, 1996         $     7,998,000    $   14,714,000    $  (12,642,000)    $   10,070,000
=========================================================================================================
 Year ended April 30, 1995         $     2,206,000    $    7,978,000    $   (2,186,000)    $    7,998,000
=========================================================================================================
</TABLE>

*    Includes $4,990,000 of contractual allowances, which are contra revenue
     accounts, and $18,911,000 provision for doubtful account.


                                     S-4

<PAGE>   109



                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                          HEALTH MANAGEMENT, INC.

August 27, 1997                           /s/ JAMES R. MIESZALA
                                          James R. Mieszala, Chief 
                                          Executive Officer, President 
                                          (Principal Executive Officer) and
                                          Assistant Secretary 


August 27, 1997                           /s/ DENNIS CONLEY
                                          Dennis Conley, Vice
                                          President -  Finance and Treasurer
                                          (Principal Accounting Officer) 
                                             


Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.



August 27, 1997                           /s/ ANDRE C. DIMITRIADES
                                          Andre C. Dimitriades, Chairman of the
                                          Board  


                                         
August 27, 1997                           /s/ W. JAMES NICOL
                                          W. James Nicol, Director and Secretary




August 27, 1997                           /s/ D. MARK WEINBERG
                                          D. Mark Weinberg, Director




August 27, 1997                           /s/ DR. TIMOTHY TRICHE
                                          Dr. Timothy Triche, Director










<PAGE>   110
                              INDEX TO EXHIBITS


  EXHIBIT                                                               PAGE
  -------                                                               ----


     3.1  Certificate of Incorporation of the Company, as
          filed with the Secretary of State of Delaware on March
          25, 1986 (incorporated by reference to Registration
          Statement on Form S-1, Registration No. 33-04485).

     3.2  Certificate of Amendment to Certificate of
          Incorporation of the Company, as filed with the Secretary
          of State of Delaware on March 9, 1988 (incorporated by
          reference to Form 10-K for year ended April 30, 1988).

     3.3  Certificate of Amendment to Certificate of
          Incorporation of the Company, as filed with the Secretary
          of State of Delaware on March 31, 1992 (incorporated by
          reference to Registration Statement on Form S-1, No.
          33-46996).

     3.4  Certificate of Amendment to Certificate of
          Incorporation of the Company, as filed with the Secretary
          of State of Delaware on October 27, 1994 (incorporated by
          reference to Form 10-K for year ended April 30, 1995).

     3.5  Certificate of Amendment of Certificate of
          Incorporation of the Company, as filed with the Secretary
          of State of Delaware on November 8, 1996 (incorporated by
          reference to Form 10-Q for the quarter ended January 31,
          1997).

     3.6  Amended and Restated By-Laws of the Company
          (incorporated by reference to Form 10-Q for the quarter
          ended January 31, 1996).

     4.1  Form of 10% Convertible Subordinated Debenture
          (incorporated by reference to Form 8-K dated March 4,
          1991).

     4.2  Specimen Form of Certificate for Common Stock
          (incorporated by reference to Registration
          Statement on Form S-1, Registration No. 33-46996).



<PAGE>   111



     4.3    Form of Representatives' Purchase Warrant
            (incorporated by reference to Amendment Number 2 to
            Registration Statement on Form S-1, Registration No.
            33-46996).

     4.4    Form of Selling Shareholders' Power of Attorney
            (incorporated by reference to Registration Statement on
            Form S-1, Registration No. 33-46996).

     4.5    Form of Selling Shareholders' Custody Agreement
            (incorporated by reference to Registration Statement on
            Form S-1, Registration No. 33-46996).

     10.1   Stock Purchase Agreement dated December 8, 1988
            (incorporated by reference to Form 8-K dated December 23,
            1988).

     10.3*  1989 Stock Option Plan (incorporated by reference
            to Registration Statement on Form S-1, Registration No.
            33-46996).

     10.4   Lease dated April 20, 1990 on Company's Ronkonkoma,
            New York facility between the Company and Four L Realty
            Co (incorporated by reference to Registration Statement
            on Form S-1, Registration No. 33-46996).

     10.5   Amendment, dated March 16, 1992 to Lease dated
            April 20, 1990 on Company's Headquarters between the
            Company and Four L Realty Co. (incorporated by reference
            to Form 10-K for year ended April 30, 1992).

     10.6*  Company 401(k) Plan (incorporated by reference to
            Amendment Number 1 to Registration Statement on Form S-1,
            Registration No. 33-46996).

     10.7*  Employment Agreement, dated as of May 1, 1996, between
            the Company and W. James Nicol (incorporated by reference
            to Annual Report on Form 10-K for the fiscal year ended
            April 30, 1996).

     10.8*  Letter Agreement dated November 13, 1996, between W.
            James Nicol and the Company and guaranteed by
            Transworld Home HealthCare, Inc. (incorporated by
            reference to Form 10-Q for the quarter ended January 31,
            1997).

     10.9*+ Severance Agreement dated August 10, 1997,









<PAGE>   112

             between W. James Nicol and the Company.

     10.10*  Employment Agreement, dated as of September 9, 1996,
             between the Company and James R. Mieszala (incorporated
             by reference to Current Report on Form 8-K dated
             September 16, 1996).

     10.11*  Letter Agreement dated November 13, 1996, between James
             R. Mieszala and the Company and guaranteed by Transworld
             Home HealthCare, Inc. (incorporated by reference to Form
             10-Q for the quarter ended January 31, 1997).

     10.12*  Employment Agreement, dated as of September 9, 1996,
             between the Company and Paul S. Jurewicz (incorporated by
             reference to Current Report on Form 8-K dated September
             16, 1996).

     10.13*  Letter Agreement dated November 13, 1996, between Paul
             S. Jurewicz and the Company and guaranteed by Transworld
             Home HealthCare, Inc. (incorporated by reference to Form
             10-Q for the quarter ended January 31, 1997).

     10.14   Assets Purchase Agreement, dated as of March 27, 1994,
             between the Registrant, Murray Pharmacy Too, Inc. and the
             Shareholders named therein (incorporated by reference to
             Current Report on Form 8-K dated April 1, 1994).

     10.15   Assets Purchase Agreement, dated as of March 27, 1994,
             between HMI Retail Corp., Murray Pharmacy, Inc. and the
             Shareholders named therein (incorporated by reference to
             Annual Report on Form 10-K filed August 2, 1994).

     10.16   First Amendment to Asset Purchase Agreement, dated as of
             March 31, 1995, between Caremark Inc. and Health
             Management, Inc. (incorporated by reference to Current
             Report on Form 8-K dated April 14, 1995).

     10.17   Transition Agreement, dated as of March 31, 1995, between
             Caremark Inc. and HMI Illinois (incorporated by reference
             to Current Report on Form 8-K dated April 14, 1995).

     10.18   Credit Agreement, dated as of March 31, 1995 among Health
             Management, Inc., Home Care Management, Inc., HMI
             Pennsylvania, Inc., HMI Illinois, Inc.,









<PAGE>   113

          Chemical Bank, and the Guarantors and Lenders named therein
          (incorporated by reference to Current Report on Form 8-K dated April
          14, 1995).
     
   10.19  Security Agreement, dated as of March 31, 1995, among Health
          Management, Inc., Home Care Management, Inc., Health Reimbursement
          Corporation, HMI Retail Corp., Inc., HMI Pennsylvania, Inc. and HMI
          Maryland, Inc. and Chemical Bank for itself and the Lenders named
          therein (incorporated by reference to Current Report on Form 8-K dated
          April 14, 1995).
     
   10.20  Security Agreement and Mortgage Trademarks and Patent, dated as of
          March 31, 1994, among Health Management, Inc., Home Care Management,
          Inc., Health Reimbursement Corporation, HMI Retail Corp., Inc., HMI
          Pennsylvania, Inc. and HMI Maryland, Inc. and Chemical Bank for itself
          and the Lenders named therein (incorporated by reference to Current
          Report on Form 8-K dated April 14, 1995).
     
   10.21  Forbearance Agreement, dated July 26, 1996 among Health
          Management, Inc., Home Care Management, Inc., HMI Illinois, Inc., HMI
          Pennsylvania, Inc., Health Reimbursement Corporation, HMI Retail
          Corp., Inc., HMI PMA, Inc., HMI Maryland, Inc., Chase Manhattan Bank,
          as lender and agent, and European American Bank, as lender
          (incorporated by reference to Annual Report on Form 10-K for the
          fiscal year ended April 30, 1996).
     
   10.22  Forbearance Agreement, dated as of November 13, 1996, between the
          Company and Transworld Home Healthcare, Inc. (incorporated by
          reference to the Form 8-K dated November 13, 1996).
          
   10.23  Agreement of Lease by and between Joseph M. Rosenthal and the
          Company dated December 13, 1994 (incorporated by reference to Form
          10-K for the year ended April 30, 1995).
     
   10.24  Lease by and between Irwin Hirsh and Lloyd N. Myers and HMI
          Pennsylvania, Inc. dated March 27, 1994 (incorporated by reference to
          Form 10-K for the year ended April 30, 1995).
     
   10.25  Lease by and between Irwin Hirsh and HMI
     
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          Retail Corp., Inc. dated March 27, 1994 (incorporated by reference to
          Form 10-K for the year ended April 30, 1995).
    
   10.26  Stipulation of Partial Settlement dated September 16, 1996,
          between the Company and the Representative Plaintiffs (incorporated by
          reference to Form 8-K dated September, 1996).
    
   10.27  Amended Stipulation of Partial Settlement dated December 19,
          1996, between the Company and the Representative Plaintiffs
          (incorporated by reference to Form 8-K, dated December 23, 1996).
    
   10.28  Agreement and Plan of Merger, dated November 13, 1996, as
          amended, among IMH Acquisition Corp., Transworld Home HealthCare, Inc.
          and the Company (incorporated by reference to Annex I to the
          definitive Proxy Statement on Schedule 14A dated June 16, 1997).
    
   10.29  Stock Purchase Agreement dated as of November 13, 1996, between
          the Company and Transworld Home HealthCare, Inc. (incorporated by
          reference to Form 8-K dated November 13, 1996).
    
   10.30* 1996 Non-Employee Director Stock Option Plan (incorporated by
          reference to Schedule 14A dated October 9, 1996).
    
   10.31* 1996 Employee Stock Option Plan (incorporated by reference to
          Schedule 14A dated October 9, 1996)
    
   10.32* 1997 Employee Stock Purchase Plan (incorporated by reference to
          Schedule 14A dated October 9, 1996)

   10.33+ Restated Stipulation of Partial Settlement, dated April 23, 1997,
          between the Company and the Representative Plaintiffs.

   10.34+ Amendment to Merge Agreement dated July 7, 1997, between the 
          Company, Transword HealthCare, Inc. and IMH Acquisition Corp.
    
   10.35  Letter Agreement, dated August 13, 1997, between the Company and
          Counsel Corporation (incorporated by reference to Form 8-K dated
          August 15, 1997).

      11+ Statement re Computation of Per Share Earnings.

      27+ Financial Data Schedule

    99.1+ Final Judgement and Order of Partial Dismissal of Action, dated 
          June 9, 1997.