SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                     For the fiscal year ended June 30, 1998

                         Commission file number 0-18902

                          Health Risk Management, Inc.
             (Exact name of registrant as specified in its charter)

         Minnesota                                              41-1407404
(State or other jurisdiction of                             (I. R. S. Employer
incorporation or organization)                            Identification Number)

               10900 Hampshire Avenue South, Minneapolis, MN 55438
             (Address of principal executive offices, the zip codes)

        Registrant's telephone number, including area code: 612/829-3500

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

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

                     Common Stock, $.01 par value per share
                         Preferred Stock Purchase Rights


Indicate  by check  mark,  whether  the  Registrant  (1) has 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) has 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 or any amendment to this
Form 10-K. [ ]

The  aggregate  market value of the Common Stock held by  non-affiliates  of the
Registrant as of September 18, 1998 was approximately $52,880,000 based upon the
closing sale price of the Registrant's Common Stock on such date.

Shares of $.01 par value Common Stock outstanding at September 18, 1998:
4,598,285 shares.

                       Documents Incorporated by Reference

                                      NONE


<PAGE>

                                     PART I

Item 1.  Business.

(a)  General Development of Business.

     Unless the  context  otherwise  requires,  references  in this Form 10-K to
     "HRM" and the "Company" refer to Health Risk  Management,  Inc., its wholly
     owned domestic  subsidiaries,  HRM Claim  Management,  Inc.,  Institute for
     Healthcare   Quality,   Inc.,   Health  Benefit   Reinsurance,   Inc.,  and
     Pennsylvania  HRM, Inc., and its wholly owned Canadian  subsidiary,  Health
     Resource  Management Ltd. Health Risk Management,  Inc. was incorporated in
     Minnesota in 1977.

     HRM provides managed  healthcare  services which includes  integrated total
     health plan management services and managed care operations.  

     The  Company's  principal  health plan  management  services  include  care
     management,  price control,  claim  administration  and risk management and
     information  services.  Revenue from such services are derived  principally
     from software licenses and subscription fees related to its QualityFIRST(R)
     Medical  Risk  Management  System.  HRM  packages  its  services  into  two
     components  based  on the  market  being  served.  The  integrated  product
     grouping   serving  the   provider   market   (e.g.,   Health   Maintenance
     Organizations  (HMOs),   governmental  health  plans,   preferred  provider
     organizations  (PPOs) and hospitals) is called the QualityFIRST(R)  Medical
     Risk Management  System,  which includes HRM's  QualityFIRST(R)  guidelines
     along with specific  financial and risk management  services.  This product
     grouping helps  organizations  manage their medical and financial risk. The
     integrated  product  grouping  serving  the payer  market  (e.g.,  employer
     self-funded  health benefit  plans,  unions,  fully insured  benefit plans,
     etc.) is called  CarePASS(R) USA. This product grouping provides  effective
     total  health plan  management  to help clients  ensure their  employees or
     health plan members have the right diagnosis,  the right therapy, the right
     setting, with the right resources, at the right time, at the right cost for
     the optimal  outcome.  This sales objective for each product grouping is to
     sell all service  components  to a client in order to provide  total health
     plan management.  Achieving this objective will maximize the  effectiveness
     and efficiency of the health plan and provide the greatest returns for both
     the client and the Company.  When all  components  cannot be sold together,
     individual  components  may be sold.  Through  product  mixing and  product
     packaging within and between the two main market categories, the Company is
     able to manage the  quality,  volume,  cost and  payment  for  health  care
     specific to the unique requirements of its payer and provider clients.

     Basic  components of health plan management  services  offered to the payer
     market include:

     o    Acute care management  (review)  services--which  apply diagnostic and
          utilization  management  for inpatient and  outpatient  acute medical,
          surgical,  and behavioral  health  cases--and other services such as a
          24-hour,  7-day-a-week  (24/7)  health  information  and  triage  line
          (CareCALL).  Care  management  is  based  primarily  on the  Company's
          QualityFIRST(R) guidelines;
     o    Coordinated care management for a variety of catastrophic or long-term
          illnesses and conditions;
     o    Price  control  management  services  such as  preferred  provider and
          centers  of  excellence  networks,  fee  negotiations  and  audits  of
          hospital and physician charges;
     o    Claim  administration  services  using  EDI  (electronic)  technology,
          reinsurance, fraud detection, pharmacy management and COBRA services.

    Basic  components of managed care operations for use by providers in helping
    control medical and financial risk include:

     o    Medical   management  (based  on  QualityFIRST(R)   Guidelines),   and
          including  disease   management,   disability   management,   pharmacy
          management, high risk pregnancy management,  emergency room management
          and personal health management (CareCALL), and others.
     o    Consulting services such as strategic communications, provider network
          analysis,  customer  satisfaction  enhancement,   strategic  planning,
          provider   contracting   and  NCQA   (National   Council   on  Quality
          Assurance)/HEDIS(Health Employer Data Information Set) consulting, and
          financial  management services such as medical loss ratio analysis and
          provider profiling.

<PAGE>

In February 1998, HRM signed, through its wholloy-owned subsidiary, HRM, PA, its
first full-risk,  total health plan management contract with Oxford Health Plans
(PA),  Philadelphia,  a  65,000-member  Medicaid HMO. The five-year  contract is
expected to produce  approximately $100 million in revenues annually.  Under the
terms of the Agreement, the Company will provide health plan management services
and assumption of the medical cost risk under the Health Choices Physical Health
Agreement  between the Commonwealth of Pennsylvania and Oxford.  HRM will manage
this anticipated growth by employing its QualityFIRST(R) Medical Risk Management
SystemSM which  integrates  virtually all of HRM's  clinical and  administrative
management systems.

(b)  Financial Information about Industry Segments.

     The Company is engaged at the present  time in only one  industry  segment,
     namely,  managed healthcare services.  Financial information concerning the
     Company's business is included in Items 6, 7, 8, and 14.

(c)  Narrative Description of Business.

     (1) Products.

         The principal health plan management  services currently offered by HRM
         (described  in "a"  above)  fall into the  following  categories:  care
         management;  coordinated  care  management;  price control  management;
         claim administration services; risk management and consulting services;
         and clinical and administrative information systems services.

         HRM's  fees  for  these  services  (sold  individually  or  in  various
         combinations depending on the needs of each client) are generally based
         on the number of lives covered by the  particular  benefit plan or on a
         fee per  transaction  basis.  The Company  typically  contracts  with a
         client to provide  24/7  CareCALLSM,  precertification  and  concurrent
         review services,  and some or all of HRM's other care management,  case
         management,   price  control   management,   or  claim   administration
         management  services  under  contracts  generally  of one to three year
         terms. The Company also offers QualityFIRST(R) software, certain health
         care information  management computer systems,  and consulting services
         on an hourly,  project or software  license and subscription fee basis.
         The Company also may enter into contracts  under which it either shares
         in the  financial  risk  for  plan  performance  or  accepts  the  full
         financial risk for the plan's total  performance.  This approach is for
         clients in the Provider  market who  contract  for the  QualityFIRST(R)
         Medical Risk Management  System.  When accepting  contracted  financial
         risk,  the Company  obtains  reinsurance  against losses above specific
         levels.  Contracts  also may include the  awarding of  specified  bonus
         payments for the achievement of specific performance targets.

         Care Management Services

         The Company's care management services are designed to maintain health;
         to improve health; to manage a timely,  resource-appropriate  return to
         health;  and to reduce the  financial  risk of health  service costs to
         employees,   employers,  health  plans,  insurers  and  providers.  The
         Company's  service begins with preventive,  personal health  management
         services,   progresses   (when   necessary)   to  management  of  acute
         occupational and non-occupational  conditions,  and includes management
         of chronic and/or  catastrophic  conditions  throughout the life of the
         patient.

         The Company's care  management  services are of maximum  benefit to HRM
         clients when utilized as a single,  integrated  health risk  management
         service. However,  individual components may be selected according to a
         client's   specific  needs.  The  Company  offers  the  following  care
         management  service  components  generally  on a fixed  monthly fee per
         covered  lives  based  on  expected  transaction  volume  or  on a  per
         transaction or case basis:

<PAGE>

         HRM CareCALL HRM's 24-hour health information,  assessment,  triage and
         referral  line  provides  personal  health  management by educating and
         empowering consumers to make appropriate  decisions about their health,
         their health care and the health care  resources  they use. At the same
         time,  CareCALL  reduces claim  expenditures  by promoting  illness and
         injury  prevention  and by  providing  information,  options and timely
         support to avoid,  for example,  unnecessary  emergency room and office
         visits.  CareCALL  nurses have 24-hour access to physician  specialists
         for  consultation,  and  are  able  to  provide  callers  with  medical
         information, health event counseling, and national and local sources of
         additional information.

         The   service   also  offers   medical   information   and   unlimited,
         confidential,  toll-free  access to more than 500 audio health  library
         topics covering  prevention,  self-care,  behavioral  health issues and
         advice on parenting.  It also enables  members to precertify  inpatient
         and outpatient care, interface with claim  administration  services and
         locate  appropriate  network medical and health care providers any time
         of the day or night. CareCALL is objective,  friendly,  easy to use and
         accessible when community health care resources are unavailable.

         Acute Health Care  Management The Company's Care  Management  Services,
         accredited  by  American   Accreditation   Healthcare   Commission/URAC
         (Utilization  Review  Accreditation  Committee)  in  Washington,  D.C.,
         promote   quality   care   and   appropriate   resource   use   through
         guideline-based  acute  medical/surgical  procedures,   long-term  care
         management, long-and-short-term disability management, outpatient care,
         active   illness   management,    collegial    specialist-to-specialist
         consultation  and resource  evaluation.  All care  management for total
         health plan  management  activity takes place within medical  specialty
         teams using QualityFIRST(R) guidelines.

         HRM's  medically  driven  approach  is  grounded in its use of clinical
         specialty teams rather than generalist care managers. HRM care managers
         are organized by clinical  specialty teams to provide the same level of
         specialization  in  managing  care  as  is  practiced  by  the  medical
         professions.   Each  case  is  evaluated  at  the  initial   stage  and
         immediately  directed to the  appropriate  specialty  team to begin the
         management of the care.  HRM's clinical  specialty  teams enable HRM to
         review  the  spectrum  of  medical,  surgical,  behavioral  health  and
         specialty care.

         The Company's care  management  teams are  constructed in the following
         specialty areas:

                    o     Cardiology                 o  Surgical
                    o     Gastroenterology           o  Obstetrics/Gynecology
                    o     Otolaryngology (EENT)      o  Orthopedics
                    o     Pediatrics                 o  Home Care
                    o     Neurology                  o  Internal Medicine
                    o     Urology/Nephrology         o  Behavioral Health
                    o     AIDS/Hospice               o  Transplants
                    o     Rehabilitation

         The specialty team  evaluates the patient's  symptoms,  diagnosis,  and
         proposed  treatment plan and setting in consultation with the patient's
         physician,  before evaluating  secondary factors such as length of stay
         and  price,   thus   reducing  the  cost  and  risk   associated   with
         inappropriate care.

         The Company's care  management  system  assesses  diagnostic  findings,
         therapeutic  modalities and  utilization  aspects for all inpatient and
         outpatient care eligible under the health plan of the clients.

         Diagnostic   assessment   determines   whether  the   provider-proposed
         diagnostic and therapeutic  selections by the hospital or physician for
         a patient's particular illness or condition are medically  appropriate.
         Utilization   management  which  follows  the  diagnostic   assessment,
         evaluates  the  appropriateness  of the  proposed  location of services
         (e.g.  hospital  intensive care unit,  hospital general ward,  hospital
         outpatient area, or physician's  office),  the proposed length of stay,
         and any proposed ancillary services.

<PAGE>

         These evaluations are performed using QualityFIRST(R)  guidelines which
         are  proprietary   clinical  practice  protocols   developed  by  HRM's
         subsidiary,  Institute of Healthcare Quality, Inc., using international
         medical  databases,  selected medical  specialist experts in the field,
         and  evidence-based  clinical  information  from a variety of  clinical
         resources and professional organizations.

         Under  HRM's  Care  Management  Services,  a  plan  participant  or the
         participant's  physician must call a toll-free telephone number several
         days prior to commencement of elective  medical or surgical  treatment,
         or whenever possible,  prior to an emergency  admission.This  toll-free
         call  can  be  placed  by the  plan  participant  or the  participant's
         physician  24 hours per day,  seven  days per week,  365 days per year.
         From these calls, HRM gathers information on the participant's  medical
         condition and the attending  physician's  proposed  treatment plan, and
         then compares these with HRM's QualityFIRST(R)  guidelines to determine
         the reasonableness of the proposed diagnosis and appropriateness of the
         proposed  treatment.  In the  event of any  discrepancies  between  the
         proposed diagnosis and treatment and HRM's QualityFIRST(R)  guidelines,
         or at the  request  of  the  attending  physician  (and  in  all  cases
         involving certain  complicated  illnesses),  these  determinations  are
         reviewed by a Company  physician who is available 24 hours a day, seven
         days per week,  365 days per year,  and,  in certain  instances,  by an
         independent  physician (second opinion).  A second opinion provides the
         patient  with  additional  information  to enable him or her to make an
         informed  decision  before  proceeding  with a certain  treatment.  The
         determination of whether the diagnosis,  plan of treatment, and setting
         for care are medically  necessary and  appropriate  is entered into the
         Company's computer system to determine health plan reimbursement and to
         communicate the determination to the client's health plan administrator
         and the patient. Under no circumstances does HRM prohibit the provision
         of any clinical services.  If HRM does not authorize the payment of the
         physician's  or  hospital's  fee,  the health  plan  administrator  may
         nonetheless   choose  to  pay  such  fee.   Even  if  the  health  plan
         administrator  chooses not to pay such fee, the patient remains free to
         engage any physician,  hospital,  or outpatient facility to perform any
         treatment based upon any diagnosis, at the patient's expense.

         The  following  Care  Management  Services  are  offered by the Company
         generally  on a fixed  monthly fee per  covered  life based on expected
         transaction volume, or on a per transaction or case basis:

         Medical/Surgical   Care  Management.   The  Company's  Care  Management
         precertification and concurrent review service for medical and surgical
         procedures is designed to enhance health care quality by helping assure
         clinical  decisions are appropriate  and consistent,  thus resulting in
         reduced employer medical and surgical costs through  identification and
         approval of reimbursing the most appropriate and cost-effective plan of
         treatment and setting for care.

         Behavioral Health Care Management. HRM also offers precertification and
         concurrent   management  of  mental  health  and  chemical   dependency
         treatment.  HRM's mental health and chemical dependency care management
         service  evaluates the clinical  necessity and  appropriateness  of the
         type, frequency and location of planned inpatient and outpatient mental
         health and chemical dependency treatment for the purpose of determining
         what  the  plan  should  consider  eligible  for  coverage.   HRM  also
         identifies clinically  appropriate  alternative  treatments and employs
         QualityFIRST(R)    Behavioral   Health    Guidelines.    HRM   uses   a
         multidisciplinary  approach to mental health and  substance  abuse care
         management.  HRM's  strategy  draws on the  professional  expertise  of
         behavioral health teams that specialize in chemical dependency;  child,
         adolescent,  and adult mental health; and behavioral medicine.  Patient
         cases are  matched  with  behavioral  health  teams  trained  to manage
         specific types of care.

         Coordinated Care (Case) Management

         Coordinated care management  services  provide special  coordination of
         the  full  range  of  managed  care   services  in  complex,   chronic,
         unpredictable  medical and social cases. These include catastrophic and
         long-term care,  behavioral  health  illnesses being managed under both
         health plans and employee assistance programs (EAPs), illnesses covered
         simultaneously  under  health plans and  workers'  compensation  plans,
         prenatal  care  management,  and  specialized  care under  chiropractic

<PAGE>

         plans. Due to the complex and long-term nature of these cases, a single
         case manager may  coordinate all health care services for a patient for
         periods  ranging from one month to several years,  to a life time. Case
         management  services outlined below are billed most frequently on a per
         hour basis or a per transaction basis.

         The following  coordinated care management  services are offered by the
         Company:

         Coordinated  Care  Management  (CCM).  The Company  manages cases which
         require  costly  medical  treatment  such  as  cancer,  complex  mental
         illness,  transplants,  chemical  dependency,  and  major  trauma.  The
         Company  identifies  these cases by reviewing  the health claim history
         and the information obtained during the precertification and concurrent
         care management process. In these cases, HRM helps identify health care
         alternatives  that might be  overlooked  in complex  cases,  as well as
         cost-effective   clinically   appropriate   health  care  alternatives,
         including  transferring  the patient from a hospital to an  alternative
         care  facility  such as a skilled  nursing  facility,  a hospice or the
         patient's home. HRM also coordinates all the services or care that will
         be required as a result of such a transfer  and may arrange for special
         pricing of required services.  In cases where the alternative treatment
         may not be covered under the  employer's  health plan,  the employer is
         advised  that it may save money by  electing to pay for these more cost
         effective  services  outside of the plan.  The  Company's  chiropractic
         review  program  involves   precertification   review  of  chiropractic
         services  involving  the spine for  authorized  length of treatment and
         proposed charges.

         HRM Disease  Management.  This service,  designed for participants with
         long-term or chronic  conditions,  is proactive and  prospective in its
         management  approach.  It is  designed  to reduce  incidences  of acute
         episodes (and  resulting  costs)  through a combination  of technology,
         medical expertise and on-going education, outreach, support and focused
         assistance.  Examples of diseases managed include asthma,  diabetes and
         cardiac  disease.   The  Company's   approach  has  four  distinct  but
         strategically linked components: identification,  intervention, ongoing
         support and evaluation.

         Employee  Assistance  Programs.  HRM and  subcontractors  have  jointly
         developed  an  employee   assistance  program  ("EAP")  which  combines
         employee  assistance  services  with HRM's  mental  health and chemical
         dependency    management   services.    EAP   services   performed   by
         subcontractors  include:  telephone and in-person  assessment of mental
         health, chemical dependency,  legal, financial,  employment,  and other
         problems; crisis intervention; specialist consultation; and referral to
         screened services.  EAP services  performed by HRM include:  diagnostic
         assessment  and  utilization  management,  large case  management,  fee
         negotiation,  auditing of  charges,  and claim  administration.  EAP is
         independently marketed by both HRM and subcontractors.

         QualityBIRTHSM Prenatal Care Management. HRM's prenatal care management
         program,  QualityBIRTH,  is a service for  expectant  mothers for early
         identification  and  management  of  pregnancies  at risk for premature
         delivery.  HRM OB/GYN specialists consult with the mother-to-be and her
         physician  to screen for risk factors  that  suggest  premature  birth,
         thereby   avoiding  the  need  for  crisis   management.   The  primary
         responsibilities of HRM's staff are patient education and advocacy, and
         support throughout the pregnancy.

         HRM    DisabilityCARESM.    HRM's   disability    management   program,
         DisabilityCARE,  promotes quality medical care and early return-to-work
         for short- and long-term  disability and workers'  compensation  cases.
         DisabilityCARE  is  initiated  with  identification  of injury  through
         24-hour access to CareCallSM and its experienced  staff,  and continues
         through  successful  return-to-work.  DisabilityCARE  care managers use
         QualityFIRST(R) Workers' Compensation/Disability  Guidelines to confirm
         the diagnosis,  to help establish a treatment  plan, and through use of
         on-line return-to-work  guidelines,  help return injured workers to the
         job as soon as medically appropriate.  These guidelines cover more than
         80%  of  the   disability/workers'   compensation   related  diagnoses.
         Additionally,   HRM  is  committed  to  reducing  its  customers'  lost
         productivity, indemnity benefit payments and medical expenses involving
         disabilities.


<PAGE>

         Price Control Management

         HRM's principal price management activities are network management, fee
         negotiation  and bill review,  and centers of  excellence.  HRM's price
         control management is designed to help locate and negotiate for clients
         and covered plan  participants  the most  reasonable  fees possible for
         health care  services.  These  services are provided for a fee based on
         the number of lives  covered based on expected  transactions,  on a per
         transaction or case basis, or on a percentage of savings basis.

         Services provided under price control management are as follows:

         HRM  Network  Management.  The  Company  offers a  national  network of
         hospitals,  physicians  and other health care providers who have agreed
         to deliver  appropriate  care at competitive,  contracted  rates.  This
         service  assists  employers with the evaluation and selection of health
         care  providers,  similar  to  traditional  PPOs.  PPOs are  groups  of
         hospitals,  key  physicians  and other health care providers that offer
         services at negotiated rates to employer groups or insurers.  Most PPOs
         negotiate a  specified  percentage  discount in prices  which does not,
         however,  prevent price increases  during the term of the PPO contract.
         HRM, on the other hand, uses its medical  expertise and claims database
         to evaluate bid prices  submitted by  participating  providers for each
         specific treatment during the contract term.

         HRM  establishes  networks in selected  markets based on the number and
         size of current and  prospective  clients in those markets,  and on the
         anticipated level of acceptance by employees in those markets.  In some
         cases,  employers  pay the  Company to develop a network in a specified
         market.

         The Company can also provide its clients with access to PPOs  organized
         by others that meet the  Company's  criteria  for  provider  selection.
         HRM's criteria in selecting PPOs established by  third-parties  are the
         same criteria used by the Company in  developing  its own network.  The
         Company  evaluates  quality,  cost,  and  financial  stability  of  the
         providers and the third-party  organization,  and reviews the contracts
         between  the  third-party  organization  and  providers.  HRM  receives
         monthly reports from the third-party organization, integrates them with
         the Company's own management  reports,  and provides HRM clients with a
         unified  report  of  savings   realized  through  the  use  of  network
         management services.

         HRM Fee  Negotiation and Bill Review.  In situations  where its clients
         are not  participants  in a PPO, HRM will negotiate the cost of covered
         services,  on a  case-by-case  basis,  on behalf of clients and covered
         participants prior to the services being performed. At the time medical
         treatments are being assessed under HRM's care management  services,  a
         separate staff of price  negotiators and bill reviewers  simultaneously
         negotiates  the amount of the covered fees with the provider.  HRM also
         retrospectively  reviews the charges billed by hospitals and physicians
         with  respect  to  covered  participants.   Under  Company  procedures,
         hospital  bills in  excess  of  specified  amounts  and the  associated
         physician  bills  are  reviewed  to  determine  whether  services  were
         actually  delivered  to the  patient  and  whether  the charges for the
         delivered  services were reasonable in view of prevailing fees for such
         services in that geographic area.

         HRM Centers of Excellence  This service  assists those in need of organ
         and bone  marrow  transplants  through a  subcontractor  network.  This
         network provides assessment of the need for transplant, coordination of
         the treatment plan,  identification of an appropriate network treatment
         facility and assistance with travel and lodging.


<PAGE>

         Claim Administration Services

         HRM's claim administration management handles processing and payment of
         health care bills under the terms of a client's health plan,  providing
         for adequate  funding  (fully  insured  premium or  self-funded),  easy
         access,  efficient  electronic  processes,  accurate payment and timely
         reporting  through  plan  design,   underwriting   services  and  claim
         administration   services  and  reinsurance  brokerage  services.   The
         Company's  claims   administration   system  maintains  enrollment  and
         eligibility  data for covered  participants and dependents and eligible
         providers  located  in all  states.  Reimbursement  rules  are based on
         levels of co-insurance, co-dependency, subrogation, provider contracts,
         care  management,  and  negotiated  fee  arrangements  specified in the
         health plan and  allowable  under ERISA  regulations.  The Company also
         administers  continuation of benefit programs for terminated  employees
         under  the  Consolidated  Omnibus  Budget  Reconciliation  Act of  1985
         ("COBRA") and flexible  benefit  programs under  Internal  Revenue Code
         (IRC) Section 125. The Company also  coordinates  benefit payments with
         other group health plans.

         Claim Adminstration Services include:

         HRM mEDIasm  Effective claim  administration  is a critical part of the
         health management system. Claim services  adjudicates  submitted claims
         for all medical, dental, prescription drug and disability claims. Claim
         management  services  are  totally  integrated  with  the  health  care
         management  system,  helping to ensure  that care and price  management
         goals are attained  within the proper  bounds of each  client's  health
         plan. Claim personnel,  using HRM's electronically  integrated systems,
         quickly  verify  that  decisions  made  during  a  patient's  care  are
         accurately    reflected   in   the   billing   process.    Consolidated
         administrative  reporting  provides clients with information to monitor
         and manage their health benefit programs effectively.  HRM's management
         report  format  combines  Care  Management  results  and claim  payment
         decisions in an easy-to-read  document.  The Company's claim subsidiary
         was the first claim administrator in North America to be awarded I.S.O.
         9002 certification.

         Electronic  data  interchange  (EDI) links  providers,  through a third
         party  clearinghouse,  to  payers,  and  enables  processing  of claims
         electronically.  Electronic  submission,  processing,  and  payment  of
         claims cuts administrative  costs and allows benefits analysts to apply
         their skills to problem cases.  EDI technology is a key to streamlining
         administrative  operations. HRM has developed software which allows its
         claim payment system to connect with third party EDI networks.

         HRM Reinsurance Health Benefit Reinsurance, Inc. (HBRe), a wholly-owned
         subsidiary of HRM, acts  independently  of HRM and  subsidiaries,  as a
         managing  general  underwriter  for  products  including  specific  and
         aggregate stop loss  insurance,  life and disability  insurance,  fully
         insured  underwriting  services and other underwriting  services needed
         for customers  that contract with HRM and  subsidiaries  or others that
         purchase  services  directly  from HBRe.  The services  offered by HBRe
         include  underwriting,  premium billing,  collection and  distribution,
         policy or certificate issue,  customer service and claim administration
         for that  product.  It can  produce  valuation  reports to support  the
         financial integrity of clients' self-funded plans, and it can also help
         produce a cost analysis of  additional  benefits and define the funding
         levels needed to support those  benefits.  HRM's systems and strategies
         support the use of  flexible  benefit  plans and can assist  clients in
         determining  flex-plan  objectives  and  deciding  whether a full-blown
         cafeteria  plan, a Section 125 plan with 401(k),  or a simple  flexible
         spending account can best suit the client's needs.

         HRM Pharmacy  Program The  Company,  through  national  subcontractors,
         provides   prescription  drug  dispensing  services  that  clients  may
         purchase as a  component  of their  health  plan.  The program  manages
         prices and fees and monitors  appropriate drug use and over-prescribing
         patterns.  The program uses a preferred  drug  formulary,  incorporates
         pharmacist review and offers mail order drug service and discounts.

         COBRA Services COBRA  administration  services help clients comply with
         the  Consolidated  Omnibus  Budget  Reconciliation  Act of 1985.  HRM's
         Client Accounting  Division provides COBRA  notification,  election and
         premium collection services along with comprehensive monthly reports.


<PAGE>

         Other  Services  Claim  administrative   management   capabilities  and
         services also include:  dental,  vision,  and  prescription  drug claim
         administration;     MedRe    (Executive    Medical)     administration;
         administrative/premium  billing;  VRU (voice response)  capable;  fraud
         detection; ID card production;  subrogation;  eligibility  coordination
         with other vendors;  PHO administration  (capitation,  withholds);  and
         price/PPO management.

         HRM fees for claim  administration  services  generally  are based on a
         monthly  fee  per  covered  life  based  on  the  expected   number  of
         transactions or on a per transaction basis.

         QualityFIRST(R) Medical Risk Management SystemSM

         This  integrated  system for  providers  offers  tools to assist in the
         management  of medical and  financial  risk,  including  control of the
         provider's   medical  loss  ratio.  It  is  based  on   QualityFIRST(R)
         guidelines,  which may be sold as a stand alone  product,  as well. The
         QualityFIRST(R) System uses guidelines to evaluate and confirm proposed
         diagnoses,  suggest  treatment  selection  options,  identify  resource
         options,  and  to  capture  decisions  for  profiling,   accountability
         reporting  and outcomes  measurement.  This  information  is especially
         valuable for financial risk and outcomes  management and for management
         of the medical loss ratio. The QualityFIRST(R)  Medical Risk Management
         System  integrates  medical  and  financial   management  to  create  a
         portfolio of risk management solutions.

         HRM  Medical  Management  This  component  includes  a broad  range  of
         integrated services (see Care Management above) designed to improve the
         quality  and  cost-efficiency  of  care  management  and  is  based  on
         QualityFIRST(R) guidelines.

         Financial  Management.  For the most  part,  the  financial  management
         component also is based on data and information derived from use of the
         QualityFIRST(R)  System.  As  noted  earlier,  these  features  include
         medical loss ratio analysis and management,  premium  collection,  cost
         tracking, underwriting,  resource management,  productivity management,
         disbursement and provider profiling.  Financial  management also offers
         contractual options ranging from no risk to full risk agreements.

         Information Services

         HRM's  information  services  are  complementary  to  its  health  plan
         management services.  These are offered by HRM on an hourly, project or
         software license fee basis.

         QualityFIRST(R)  Healthcare  Practice  Guidelines  Software and Related
         Systems  Software.   QualityFIRST(R)  guidelines  and  system  software
         provide decision support for evaluating diagnosis,  treatment selection
         and resource use for each episode of care. In addition,  the guidelines
         provide  consistent  criteria and practice standards against which care
         quality  and  related  costs can be  measured.  These  diagnosis-driven
         guidelines,  which promote  consistency in decision making, are used to
         influence quality of care;  promote  clinically  appropriate  decisions
         prospectively,   concurrently,  and  retrospectively;  promote  optimal
         outcomes;  and allow the practitioner  flexibility in care decisions on
         the  basis of  individual  patient  factors.  The  guidelines  software
         operates under a standard,  easy-to-use  platform and provides  primary
         baseline data needed for Continuous  Quality  Improvement (CQI) such as
         usage  characteristics and patterns of care for a given organization or
         practitioner.

         The  clinical  evidence-based  guideline  content is  supported by full
         academic  research and clinical  outcome  analysis  and  addresses  the
         clinical value of a particular intervention both on an individual basis
         and  on an  aggregate  long-term  basis.  On-line  access  to  clinical
         documentation of guideline recommendations, research abstracts and full
         bibliographic  references to the clinical literature  contribute to the
         product's high acceptance.  The interactive operating platform promotes
         quality care through its ability to facilitate  and document acute care
         clinical decisions.  The patented,  directed questioning format mirrors
         the sequential  "decision  tree" process of clinical  decision  making,
         promotes  clinical  consistency  and is user  friendly.  The  product's
         capability  to document  clinical  decisions,  including  variances  to
         guideline   recommendations,   provides  a   consistent   baseline  for
         measurement, assessment, education and continuous quality improvement.


<PAGE>

          QualityFIRST(R)   offers   Medical/Surgical,   Workers'  Compensation/
          Disability,  Behavioral Health, and Specialist  Referral guidelines as
          well as Alternative  Setting  indicators.  These modules comprise over
          450 guidelines and 3,100 treatments/procedures  covering approximately
          90%    of     significant     clinical     events.     The    Workers'
          Compensation/Disability    package   includes   on-line-return-to-work
          parameters  to  identify  the  expected  length of  disability  and to
          expedite return to work as well as on-line access to individual  state
          workers'  compensation  treatment guidelines to facilitate  compliance
          with local  workers'  compensation  regulations.  Alternative  Setting
          indicators  are designed to help  streamline the transfer of care from
          an acute setting to the next  appropriate care level based on medical,
          physical, economic and psychosocial issues particular to each patient.
          Specialist  Referral  guidelines  are used to facilitate  the referral
          decision  process from the primary care  physician to the  specialist.
          These guidelines are designed to help ensure appropriate referrals and
          appropriate  timing of referrals,  to support first line  treatment by
          the primary care physician and to document  referral  decisions so the
          result  is  optimal,   cost-effective  care.  Each  of  the  Company's
          guidelines  is reviewed at least yearly and is updated as necessary to
          reflect the latest clinical advances.

         QualityFIRST(R)  software  is made  available  to clients on a software
         license basis. In late fiscal 1992, HRM entered into its first software
         license   agreement.   Its  licensees  include   hospitals,   insurance
         companies,  HMOs,  and  others.  Fees  are  based on a  license  fee at
         inception  with a  monthly  subscription  fee  during  the  term of the
         license  agreement  based on  covered  lives or number of  workstations
         using the guidelines.

         Health Care  Information  Management.  The Company  manages health care
         data for large  organizations and governments,  including  acquisition,
         verification and analysis of health care data,  comparison of data sets
         to normative data  standards  developed by HRM, and  interpretation  of
         practice and  utilization  standards.  HRM seeks to obtain the right to
         use internally in HRM's managed health care services data collected and
         developed in such projects. Clients are generally charged a set fee for
         information  management  projects,  payable  in  installments  over the
         anticipated length of the project,  or incorporated into the basic fees
         charged  for  care  management,  price  control  management,  or  claim
         administration management services.

         HRM's information  management  services also provide various reports to
         employers to define current services,  identify  inappropriate practice
         patterns and utilization problems,  and compare costs to normative data
         sets prepared by the Company.  Recommendations for benefit plan changes
         and managed care services are provided. Clients are generally charged a
         fee based on hourly rates and required resources for these services, or
         these products are incorporated  into the basic fee charged for managed
         care, price control, or claim administration management services.

         Health  Benefit  Plan Design and  Consulting  Services.  HRM works with
         clients,  independent  brokers,  and consultants in designing  specific
         health care  management  programs and health plans to meet the needs of
         individual clients.  These services include assistance in the design of
         plan  documents  describing  benefit  coverage.  Health  benefit  plans
         designed by HRM use  employee  co-payments,  deductibles,  and flexible
         benefits  to  improve  the   effectiveness   of  employer  health  care
         management  programs.  The Company also designs continuation of benefit
         programs for terminated  employees  under COBRA,  and flexible  benefit
         programs  under IRC Section 125.  HRM also  produces  health  education
         pamphlets,  brochures, videos, educational talks and other materials to
         explain the  client's  benefit  plan to its  employees.  The  Company's
         client  service  representatives  and sales  personnel work together to
         implement  each  health care  benefit  program.  Clients are  generally
         charged  a  fixed  hourly  rate  for  HRM's  benefit  plan  design  and
         consulting services.


<PAGE>

     (2) Status of products in development.

         HRM  continually  expands its medical  and cost  databases  and medical
         expertise for self-funded  benefit plans,  fully insured benefit plans,
         HMOs,  providers,  and workers'  compensation and disability  insurance
         programs;  refines  its  QualityFIRST(R)  System  to  address  an  ever
         enlarging number of provider organizations medical conditions, and will
         continue  expanding its software package  containing HRM's  proprietary
         QualityFIRST(R)  System for license to third parties.  HRM also expects
         to continue to develop  programs for management of health care services
         and costs  associated  with  particular  illnesses or  conditions.  HRM
         anticipates   that,  as  computer   hardware,   computer  software  and
         telecommunications equipment become more technologically sophisticated,
         the Company will create new or enhanced software products utilizing the
         Company's medical expertise,  database system and technology.  HRM will
         also respond to changes required by healthcare reform in the nation.


     (3) Source and Availability of Raw Materials.

         Not applicable.

     (4) Patents, trademarks, licenses, franchises and concessions.

         The Company has filed  patent  applications  covering  its "Health Care
         Management System" which is an automated, real-time, interactive health
         care  management   data   processing   system  for  use  by  hospitals,
         physicians,   insurance  companies,  health  maintenance  organizations
         (HMOs) and others in the  health  care field to serve as a  diagnostic,
         evaluation   and   utilization   tool  for  health  care  providers  to
         individuals.  The  system  is  implemented  on  computer  hardware  and
         software and is used by the Company in providing health care management
         services. One U. S. patent has been issued on a component of the health
         care management system. Three other applications remain pending.

         HRM claims copyrights to software developed by the Company. In addition
         HRM has obtained  perpetual  licenses to use certain software developed
         by other companies which HRM uses in providing services to its clients.
         HRM has various safeguards in place, including  authorization codes and
         encryption,  to limit access to the  Company's  databases and operating
         systems.  HRM markets its services and products under a number of trade
         names  and  trademarks.  The  following  are  principal  trademarks  or
         registered trademarks of HRM or its subsidiaries:  HRM(R), AutoPILOTTM,
         CareCALLSM,  CarePASS(R),  CarePLUSSM,  DisabilityCARESM,   HRMMEDIASM,
         QualityBIRTH(R), ReviewPLUS(R), QualityFIRST(R), Together We Can Make a
         Healthy Difference(R), Institute for Healthcare Quality(R), and IHQ(R).
         HRM relies to varying  degrees  upon its common law rights of trademark
         ownership, copyrights and registration of its trademarks.

     (5) Seasonality.

         HRM's health plan management revenues have, in recent history, not been
         seasonal.  In April 1998, the Company began its managed care operations
         which accounted for approximately 26% of fiscal 1998 revenues. However,
         such operations are not expected to be seasonal.


<PAGE>


     (6) Working Capital.

         HRM's  working  capital  requirements  are  not  generally  subject  to
         significant  fluctuations.  The  consolidated  statements of cash flows
         show sources and uses of working capital.

     (7) Major Customers.

         The  Company  services  a small  number  of  large  clients  that  have
         accounted for a significant  portion of the Company's revenues in prior
         years. Oxford Health Plan (PA) Inc., became a new client in fiscal 1998
         and accounted for approximately  26% of revenue.  Keystone Mercy Health
         Plan  (KMHP)  accounted  for  approximately  16% and 17% of revenues in
         fiscal  1998 and  1997,  respectively.  The  contract  with  KMHP  will
         terminate  September 30, 1998.  See "Item 3."  Columbia/HCA  Healthcare
         Corporation  accounted  for 16% and 17% in fiscal 1997 and fiscal 1996,
         respectively. Ohio Permanente Medical Group (OPMG) accounted for 11% of
         revenues in fiscal 1996, and  transitioned the majority of the services
         provided by HRM back to OPMG effective at the beginning of fiscal 1997.

     (8) Backlog.

         The Company's  revenues are principally  derived through the provisions
         of services as and when needed by the contracting client and no backlog
         amounts are maintained.

     (9) Government contracts.

         No  material   portion  of  the   Company's   business  is  subject  to
         renegotiation of profits or termination of contracts or subcontracts at
         the election of the government.

    (10) Competition.

         The  health  care  management  industry  historically  has been  highly
         fragmented  and  competitive.   The  Company  competes   directly  with
         approximately  100  independent  utilization  review  firms  as well as
         approximately  120 insurance  carriers,  approximately  200 third-party
         administrators  that  have  established  their own  utilization  review
         procedures,  and a limited number of software vendors.  In addition the
         Company's care  management  services  compete  indirectly with HMOs and
         several   hundred  PPOs.   Some  of  the  Company's   competitors   are
         substantially  larger and possess greater financial  resources than the
         Company.  The  Company,   however,   believes  that  the  trend  toward
         consolidation  of services  will  continue as employers  recognize  the
         convenience   of  dealing   with  a  single   health  care   management
         organization.  HRM's  principal  competitive  strengths are its medical
         expertise,  medical  and  cost  databases,  QualityFIRST(R)  healthcare
         practice guidelines,  and the proprietary software systems. The Company
         is able to provide clients with a full range of integrated  health care
         management services,  focusing not only on reducing the price of health
         care, but also on improving its quality.

    (11) Research and development.

         HRM  continually   enhances  its  databases  and  proprietary  software
         systems.  Costs capitalized for these enhancements,  excluding acquired
         software,  by the Company were $9,057,000 in fiscal 1998, $7,396,000 in
         fiscal 1997 and $5,779,000 in fiscal 1996.


<PAGE>

    (12) Effect of environmental regulation.

         To the extent that the Company's management can determine, there are no
         federal,   state  or  local  provisions  regulating  the  discharge  of
         materials into the environment or otherwise  relating to the protection
         of the environment,  with which compliance by the Company has had or is
         expected  to have a  material  effect  upon the  capital  expenditures,
         earnings, or competitive position of the Company.

    (13) Employees.

         As of September 1998, the Company employed  approximately  920 persons,
         including  approximately  300  physicians,  nurses,  and  other  health
         professionals.   The  Company  uses   approximately   150   independent
         consulting physicians.  None of the Company's employees is covered by a
         collective bargaining agreement.

(d)  Foreign Operations and Export Sales.

     In Canada,  health care prices and payments are set and administered by the
     provincial governments. HRM markets all of its managed health care services
     and software,  other than price control services,  to employers,  insurance
     companies,  hospitals  and  governmental  agencies in Canada  through HRM's
     wholly owned Canadian subsidiary. Revenues derived from Canada totaled U.S.
     $195,000 in fiscal 1998, U. S. $325,000 in fiscal 1997 and U.S. $233,000 in
     fiscal 1996. The Company's assets  attributable to Canada consist of leased
     offices in Alberta.



Item 2.  Properties.

HRM's principal  corporate  offices consist  currently of approximately  142,500
square  feet in a building  in  Minneapolis,  Minnesota,  31,000  square feet in
Kalamazoo,  Michigan and 4,000 square feet in Sacramento,  California. The lease
on the Minneapolis  office expires in or by 2009 and the Sacramento office lease
expires in or by 1999. The lease on the Kalamazoo  office expires in or by 2001.
The  Company  also  leases  space for four sales  offices  located in the United
States and Canada  generally  for one-year  terms or less.  All of the Company's
facilities  are used  exclusively  by the Company  for office  space or computer
operations and are anticipated to be adequate,  but will be expanded as business
needs require.



<PAGE>

Item 3.  Legal Proceedings.

The  Company is not a party to any  material  pending  legal  proceedings.  Care
Management  Services  provided  by the  Company  are  advisory  in  nature,  and
determinations  as to payment or  nonpayment  of  benefits  are made by the plan
sponsor or its  administrator,  which can be the  Company as a health plan third
party  administrator.  All determinations as to the medical care rendered to the
patient  are  made  by the  patient  or the  attending  physician.  Nevertheless
patients or others  might assert  claims  against the Company for damages due to
adverse medical  consequences.  New or existing legal theories by which patients
or  attending  physicians  may seek to assert  liability  against the Company or
other  companies  in the health care  industry  are  evolving  and are expect to
continue to evolve. Although the Company believes that its procedures for making
care  management  and claims  benefit  recommendations  and decisions  result in
reasonable  and accurate  recommendations,  there can be no  assurance  that the
Company's  procedures  for limiting  liability are effective or that the Company
will not be subject to liability from litigation  which might  adversely  affect
the Company's business.  The Company maintains  professional liability insurance
and such other coverages as the Company  believes are reasonable in light of the
Company's experience to date.

In July 1998,  Keystone  Mercy  Health Plan  commenced  arbitration  proceedings
seeking to  terminate  its  contract  with the  Company and  asserting  that the
Company  had  breached  the  contract  to provide  health  care cost  management
services to Keystone.  The Company strongly believed the claim was without merit
and asserted monetary  counterclaims  against Keystone,  also alleging breach of
contract.  On September 12, 1998,  Keystone and the Company reached a settlement
agreement  providing  for a mutual  release  of claims  and  termination  of the
contract as of September 30, 1998,  one year earlier than its normal  expiration
date. On September 25, 1998,  Keystone filed a complaint in U.S.  District Court
for the Eastern  District of Pennsylvania  against the Company in which Keystone
alleges  the  Company has failed to  perform,  through  the  September  30, 1998
termination  date,  the  services  required of it under the  September  12, 1998
settlement  agreement.  Keystone is seeking  injunctive  relief and  unspecified
monetary damages for such alleged breach of the settlement agreement.

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

No matter  was  submitted  to a vote of the  Company's  shareholders  during the
quarter ended June 30, 1998.


<PAGE>


                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

a)   Health  Risk  Management,  Inc.  Common  Shares  are  traded on the  Nasdaq
     National  Market  under the symbol  HRMI.  The  following  table  shows the
     quarterly  range of high and low sale  prices of the  Common  Shares on the
     National Market during the fiscal periods indicated.

                                      High                      Low

         Fiscal 1997
         First Quarter                16-3/4                     9-3/4
         Second Quarter               16-1/2                    14
         Third Quarter                16-5/8                     9-3/8
         Fourth Quarter               13-7/8                     9-1/2

         Fiscal 1998
         First Quarter                14-1/8                    11
         Second Quarter               16                         9-5/8
         Third Quarter                16-1/8                     8-3/8
         Fourth Quarter               16-3/8                    13-1/8

b)   Holders

     As of September 18, 1998 there were  approximately 125 holders of record of
     the Company's Common Stock.

c)   Dividends

     The Company has never paid cash  dividends on its Common  Shares and has no
     present  intention to pay cash dividends in the foreseeable  future.  Under
     the Company's  Revolving  Credit and Term Loan Agreement with its bank, the
     Company is prohibited  from paying cash  dividends on its stock without the
     bank's consent.



<PAGE>


Item 6.  Selected Financial Data.

                          Health Risk Management, Inc.

                      SELECTED CONSOLIDATED FINANCIAL DATA
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                           Fiscal Year Ended June 30,
                                                            ---------------------------------------------------------
                                                               1994       1995       1996        1997        1998
                                                            ----------  ---------  ---------  ---------   ---------
                                                                     (in thousands, except per share data)

Revenues:
<S>                                                           <C>         <C>        <C>        <C>         <C>    
Health plan management services                               $45,824     $49,302    $54,507    $62,723     $70,282
Managed care operations                                            --          --         --         --      24,218
Investment income                                                   65        128        158        187         337
                                                            ----------  ---------  ---------  ---------   ---------
     Total revenues                                            45,889      49,430     54,665     62,910      94,837

Operating expenses:
   Cost of health plan management services                     31,369      35,834     38,106     44,640      53,969
   Cost of managed care operations                                  0           0          0          0      23,625
   Selling, marketing and administration                       11,919      11,458     12,602     13,691      14,558
   Interest expense                                               436         759        708        535         489
   Merger costs                                                     0           0          0        390           0
                                                            ----------  ---------  ---------  ---------   ---------
     Total operating expenses                                  43,724      48,051     51,416     59,256      92,641
                                                            ----------  ---------  ---------  ---------   ---------

Income before income taxes and cumulative
   effect of accounting change                                  2,165       1,379      3,249      3,654       2,196

Income taxes                                                      449         535      1,253      1,413         868
                                                            ----------  ---------  ---------  ---------   ---------

Income before cumulative effect
   of accounting change                                         1,716         844      1,996      2,241       1,328

Cumulative effect
   of accounting change, net of
   income tax benefit of $1,342(1)                                  0           0          0          0      (2,371)
                                                            ----------  ---------  ---------  ---------   ---------

Net income (loss)                                             $ 1,716     $   844  $   1,996   $  2,241   $  (1,043)
                                                            ==========  =========  =========  =========   =========

Basic earnings per share(2):
Income before cumulative effect
   of accounting change                                     $     .44     $   .21  $     .49   $    .52   $     .29
Cumulative effect of accounting change (1)                         --          --         --         --        (.52)
                                                            ----------  ---------  ---------  ---------   ---------
Net income (loss)                                           $     .44     $   .21  $     .49   $    .52   $    (.23)
                                                            ==========  =========  =========  =========   =========

Diluted earnings per share(2):
Income before cumulative effect
   of accounting change                                     $     .43     $   .21  $     .47   $    .50   $     .29
Cumulative effect of accounting change (1)                         --          --         --         --         (51)
                                                            ----------  ---------  ---------  ---------   ---------
Net income (loss)                                           $     .43   $     .21  $     .47  $     .50   $    (.22)
                                                            ==========  =========  =========  =========   =========

Weighted average number of shares outstanding:
   Basic                                                        3,930       3,947      4,081      4,291       4,524
   Diluted                                                      4,015       3,982      4,219      4,458       4,663


</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                           Fiscal Year Ended June 30,
                                                            ---------------------------------------------------------
                                                               1994       1995       1996        1997        1998
                                                               ----       ----       ----        ----        ----
<S>                                                          <C>          <C>       <C>        <C>         <C>     
Balance Sheet Data:
Working capital                                              $  5,491     $ 3,763   $  5,246   $  8,578    $  3,474
Total assets                                                   37,844      39,962     44,822     51,723      70,514
Current portion of notes payable and capitalized equipment
   leases                                                       1,950       1,946      2,427      1,988       5,025
Long term portion of notes payable and capitalized
   equipment leases                                             6,046       5,155      4,550      3,487       3,047
Shareholders' equity                                           23,677      25,101     28,474     34,044      33,785
</TABLE>
------------------------

(1)  As  discussed  in  Note 2 of the  consolidated  financial  statements,  the
     Company  changed  its  method of  accounting  for  health  plan  management
     revenue.  On a pro-forma  basis,  this change would have decreased 1997 net
     income by $1,382,000, increased 1996 net income by $494,000, decreased 1995
     net income by $79,000 and decreased 1994 net income by $493,000.

(2)  Earnings per share  amounts prior to 1998 have been restated as required to
     comply with Statement of Financial  Accounting Standards No. 128, "Earnings
     Per Share." For further  discussion of earnings per share, see the notes to
     the consolidated financial statements.

(3)  Certain  items in the  1994,  1995,  1996 and  1997  selected  consolidated
     financial data have been reclassified to conform to the 1998 presentation.


<PAGE>


Item 7. Management's Discussion and Analysis of Financial Condition and Results 
        of Operations.

Overview

A majority of the Company's  revenues consist of fees for health plan management
and managed care operations.

The  Company's  expenses  are  comprised  of its cost of health plan  management
services  (consisting  primarily of compensation of personnel,  including nurses
and physicians,  telephone expenses, depreciation and amortization,  rent, costs
related to the Company's computer operations, costs related to customer service,
and  costs  related  to  development  of new  services),  cost of  managed  care
operations   (consisting   primarily  of  the  cost  of  medical   services  and
reinsurance,  net of  recoveries),  and selling,  and  marketing  administration
expenses  (including sales  commissions,  advertising,  sales account management
personnel, bad debts, compensation and depreciation).

Results of Operations

The  following  table  sets  forth  certain  consolidated  financial  data  as a
percentage  of total  revenues  for the three  fiscal years ended June 30, 1996,
1997, and 1998 and compares the percentage change in the dollar amounts of these
items for the period indicated.

<TABLE>
<CAPTION>

                                                    Year Ended June 30,          Period to Period Increase (Decrease)
                                                  --------------------------     ------------------------------------
                                                   1996       1997      1998     1996 vs 1997        1997 vs 1998
                                                   ----       ----      ----     ------------        ------------

<S>                                                <C>        <C>       <C>       <C>                 <C>
Revenues                                           100%       100%      100%       15%                 51%
                                                   ====       ====      ====

Operating expenses:
   Cost of health plan management services          70(1)      71(1)     77(1)     17                  21
Cost of managed care operations                     --         --        98(2)     --                  --
Selling, marketing and administration               23(1)      22(1)     21(1)      9                   6
Interest expense                                     1(3)       1(3)      1(3)    (24)                 (9)
Merger costs                                         0          1         0        --                  --
                                                   ----       ----      ----
         Total operating expenses                   93(3)      94(3)     98(3)     15                  56
                                                   ----       ----      ----
Income before income taxes and cumulative
   effect of accounting change                       6          6         2        12                 (40)

Income taxes                                         2          2         1        13                 (39)
                                                   ----       ----      ----
Income before cumulative effect
   of accounting change                              4          4         1        12                 (41)
Cumulative effect of accounting change
   net of income tax                                 0          0        (2)       --                  --
                                                   ----       ----       ----
Net income (loss)                                    4%         4%       (1)%      12                (147)
                                                   ====       ====       ====
</TABLE>

(1) Computed as a % of health plan management revenues.

(2) Computed as a % of managed care operations revenues.

(3) Computed as a % total revenues.

 
<PAGE>

Total Revenues:  Total revenues increased  $31,927,000 (51%) from fiscal 1997 to
fiscal 1998 (from  $62,910,000 to $94,837,000),  and increased  $8,245,000 (15%)
from  fiscal  1996 to fiscal  1997  (from  $54,665,000  to  $62,910,000).  These
increases are primarily  attributable  to revenues from managed care  operations
which began April 16, 1998,  and  increases in the number of clients and covered
participants enrolled in the Company's health plan management services, sales of
additional   products  to  existing   clients   and   increased   sales  of  the
QualityFIRST(R)  Medical Risk Management  System.  Revenues for fiscal 1997 also
reflect  the  resolution  of  certain  financial  matters  with a  large  client
resulting in an amended contract in October, 1997.

Following is a breakout of revenue:
<TABLE>
<CAPTION>

                                           1996                 1997                  1998
                                           ----                 ----                  ----
<S>                                    <C>                  <C>                   <C>          
   Health plan management services     $  54,507,000        $  62,723,000         $  70,282,000
   Managed care operations                        --                   --            24,218,000
   Investment income                         158,000              187,000               337,000
                                       -------------        -------------         -------------
   Total revenues                      $  54,665,000        $  62,910,000         $  94,837,000
                                       =============        =============         =============
</TABLE>


Revenues for health plan management  services increased 12% or $7,559,000,  from
fiscal 1997 to fiscal 1998  (increasing  from  $62,723,000 to  $70,282,000)  and
increased 15% or $8,216,000,  from fiscal 1996 to fiscal 1997  (increasing  from
$54,507,000  to  $62,723,000).  This  increase  was the  result of the growth of
existing business and new contracts entered into by the Company.

Revenues  from the managed care  operations  were the result of obtaining in the
fourth quarter of fiscal 1998 the revenue from a client contract under which the
Company  is at risk  for  the  total  medical  services  costs  and  receives  a
significant  portion of the total  premium of an HMO.  The  Company did not have
this business in fiscal 1996, fiscal 1997 and the first three quarters of fiscal
1998.

Investment  income  increased  80% or  $150,000  from fiscal 1997 to fiscal 1998
(increasing  from  $187,000  to  $337,000).  This  increase  is  the  result  of
higher levels of short-term investments in fiscal 1998.

Cost of Health Plan  Management  Services:  Cost of services  increased 21% from
fiscal 1997 to fiscal 1998 (from $44,640,000 to $53,969,000),  and increased 17%
from  fiscal  1996 to  fiscal  1997  (from  $38,106,000  to  $44,640,000).  As a
percentage of health plan management  revenues,  cost of services increased from
71% in fiscal 1997 to 77% in fiscal 1998. The increase in fiscal 1998 of cost of
services as a  percentage  of revenues was  primarily  due to  additional  costs
related to payroll and expenses for increased business,  including  depreciation
and amortization,  the start up of a major client in April 1998, and a change of
accounting  principles  (described  in  Note  2 in  the  Notes  to  Consolidated
Financial Statements) at the beginning of fiscal 1998.

Cost of Managed Care Operations:  The cost of managed care operations  increased
by  $23,625,000  in  fiscal  1998  over  fiscal  1997  due to the  managed  care
operations  beginning in April 1998. As a percentage  of managed care  revenues,
this cost in fiscal 1998 was 98%.

Selling,  Marketing and  Administration:  Selling,  marketing and administration
expenses  increased  6% from  fiscal 1997 to fiscal  1998 (from  $13,691,000  to
$14,558,000), and increased 9% from fiscal 1996 to fiscal 1997 (from $12,602,000
to $13,691,000). This expense as a percentage of health plan management revenues
(23%, 22%, and 21%) for fiscal 1996, fiscal 1997 and fiscal 1998,  respectively.
The increases were due primarily to additional staff,  travel,  commission,  bad
debts, insurance, training programs and other expenses.


<PAGE>

Interest Expense:  Interest expense decreased 9% from fiscal 1997 to fiscal 1998
(from $535,000 to $489,000),  and decreased as a percentage of revenue from 0.9%
to 0.5%.  Interest  expense  decreased 24% from fiscal 1996 to fiscal 1997 (from
$708,000 to $535,000)  and  decreased  as a  percentage  of revenue from 1.3% to
0.9%.  Interest  expense  was  impacted  in fiscal 1998 and fiscal 1997 by lower
interest rates and lower average principal balances outstanding.

Merger  Termination  Costs : On March  10,  1997,  the  Company  and  HealthPlan
Services  Corporation  (HPS) announced that the merger agreement dated September
12, 1996, had been terminated by mutual arrangement.  In the quarter ended March
31, 1997, the Company  recorded a one-time  charge of $390,000 for the write-off
of costs related to the terminated merger agreement with HPS.

Income  Taxes:  Income  taxes  decreased  in  fiscal  1998 from  fiscal  1997 by
$545,000,  or 39% (from  $1,413,000 to  $868,000),  and increased in fiscal 1997
from fiscal 1996 by $160,000,  or 13% (from $1,253,000 to $1,413,000)  primarily
due to  fluctuations  in levels of income  before  income  taxes and  cumulative
effect of  accounting  change.  Net income had been  reported  as fully taxed in
fiscal year 1998,  1997 and 1996 at the effective tax rate of 39%. See Note 8 in
the Notes to Consolidated Financial Statements.

Cumulative effect of accounting  change: See Note 2 in the Notes to Consolidated
Financial Statements.


Liquidity and Capital Resources

The Company's cash flow from  operations was  $23,685,000  and  $10,127,000  for
fiscal 1998 and 1997,  respectively.  Cash flow from operations has exceeded net
income primarily due to non-cash charges such as depreciation and  amortization,
deferred income taxes, cumulative effect of the accounting change and changes in
operating assets and liabilities, particularly the medical services payable.

Cash has been used to invest in software  and program  enhancements  ($9,057,000
and $7,396,000 in fiscal 1998 and fiscal 1997,  respectively).  The Company also
acquired property and equipment of $2,734,000 and $2,966,000 for fiscal 1998 and
1997,  respectively.  HRM expects to continue to acquire  property and equipment
and enhance software and products.

HRM also used approximately  $2,153,000 and $2,277,000 in fiscal 1998 and fiscal
1997, respectively,  to repay principal on notes payable and capital leases. The
Company  borrowed  $4,750,000  and  $1,275,000  in fiscal 1998 and fiscal  1997,
respectively.  The Company  received  cash  proceeds of $784,000 and $775,000 in
fiscal 1998 and fiscal  1997,  respectively,  from stock  option  exercises  for
common stock by current or former  employees and directors,  and $2,500,000 from
the sale of 200,000 shares of unregistered common stock in fiscal 1997.

The Company's  current ratio was 1.1 at June 30, 1998, and 1.8 at June 30, 1997.
The Company's working capital was $3,474,000 and $8,578,000 at June 30, 1998 and
1997, respectively.

The Company has a net operating loss  carryforward of approximately  $14,500,000
for income tax  purposes at June 30, 1998,  which can be used to reduce  taxable
income and reduce the current cash flow necessary to pay taxes.

The Company believes that its cash and cash flow from operations,  together with
credit facilities which the Company has obtained,  will be sufficient to finance
the Company's  anticipated  normal  expansion in fiscal 1998.  The Company has a
term loan and revolving loan  (principal  balance of $3,742,000 and  $3,000,000,
respectively as of June 30, 1998) with its bank and a revolving  credit facility
expiring  January 31,  1999,  under  which the Company may borrow an  additional
$3,258,000 at June 30, 1998.  The revolving  credit and term loan are secured by
liens  on the  assets  of the  Company.  In light of  changes  in the  Company's
accounting  policy and in the Company's core business,  the Company did not meet
three covenants under its bank loan documents  (namely;  consolidated net worth,
consolidated  leverage  ratio and  consolidated  cash flow leverage) at June 30,
1998.  Management has discussed  these  covenants with the bank and the bank has
indicated  orally that it has waived  these  covenants at June 30, 1998 and will
waive these covenants for the current fiscal year.


<PAGE>

Year 2000 

The Company is reliant on technology to deliver its managed healthcare services.
If a computer  system or  software  application  used by the  Company or a third
party  dealing with the Company  fails because of the inability of the system or
application to properly read the year "2000," the results could conceivably have
a material adverse effect on the Company.

Management is monitoring a program to prepare the Company's  computer systems or
software applications and external  relationships for the year 2000. Utilizing a
national  consulting firm, the Company has completed a systematic  survey of its
hardware,  software and facilities. A strategy for achieving compliance for each
system  component has been  prepared.  Costs of the Company's  Year 2000 Project
through June 30, 1999,  are  estimated  at  approximately  $1.4 million of which
approximately  $.3 million has been incurred  through June 30, 1998. The cost of
the Year 2000 Project will be expensed as incurred.

The Company has targeted  its Year 2000 efforts to address the critical  systems
that support and interface  with our clients and vendors.  The Company is in the
process of requesting information from critical vendors regarding their state of
readiness.  As of June 30, 1998,  QualityFIRST(R)  is Year 2000 ready in that it
processes  four-digit  year dates.  The Company's  claims system is scheduled to
complete Year 2000 testing in the Fall of 1998 and the  remediation  of the care
management  system is scheduled  to be completed in the quarter  ending June 30,
1999. There ae expected to be ongoing maintenance tasks which will continue into
the year 2000. These tasks are not expected to be significant.

Successful  completion  of the  Company's  Year 2000 Project is affected by many
factors,   and  the  information   contained  in  this  statement  is  based  on
management's  best  estimates.  However,  there can be no  guarantee  that these
estimates  will be achieved,  and actual  results could differ  materially  from
those  anticipated  based on factors such as availability  and cost of personnel
trained in this area, the ability to identify  relevant  computer codes, and the
impact  of the  Company's  external  relationships.  The  Company  will be using
contingency  plans  already in place and will be  developing  additional  and/or
supplemental  contingency  plans  where  necessary  in an effort to be  prepared
should a Year 2000 issue arise.

Forward Looking Statements

Forward  looking  statements in this report  reflected as  expectations,  plans,
anticipations,  prospects or future  estimates  are subject to the risks and the
uncertainties  present in the Company's business and the competitive  healthcare
market  place  where  clients  and  vendors  commonly   experience   mergers  or
acquisitions,   reconciliations,  volume  fluctuations,  participant  enrollment
fluctuations,  fixed price contracts, contract disputes, contract modifications,
contract  renewals  and  non-renewals,  various  business  reasons for  delaying
contract closings,  and the operational  challenges of matching case volume with
optimum  staffing,  having fully trained staff,  having  computer and telephonic
supported  operations  and managing  turnover of key  employees  and  outsourced
services to performance standards.  While occurrences of these risks, and others
detailed in this report and the Company's other SEC reports, cannot be predicted
exactly,  such  occurrences  can be expected to have an impact on the  Company's
anticipated level of revenue growth or profitability.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The  Company's  market risk is limited to interest  rate risk on unpaid term and
revolving  loans and capital lease  obligations.  The risk to the Company is not
material since such debt has floating rates.


Item 8.  Financial Statements and Supplementary Data.

The  consolidated  financial  statements of the Company and its subsidiaries are
included in a separate section of this report. See Part IV, Item 14.


Item 9.  Changes In and Disagreements with Accountants on Accounting and 
         Financial Disclosure.

None.


<PAGE>


                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

Directors

The following table provides  certain  information with respect to all directors
of the Company.
<TABLE>
<CAPTION>

Name of Director                     Current Position(s)              Principal Occupation(s)             Director
(Class)                    Age          with Company                   During Past Five Years               Since

<S>                         <C>   <C>                        <C>                                            <C> 
Gary T. McIlroy, M.D.       58    Chairman of the Board,     Chairman and Chief Executive Officer of        1977
(Class C)                         Chief Executive Officer    the Company since 1977.  Dr. McIlroy is
                                  and Director               married to Marlene O. Travis.

Marlene O. Travis           59    President, Chief           President of the Company since 1987 and        1977
(Class B)                         Operating Officer,         Chief Operating Officer of the Company
                                  Secretary and Director     from 1987 to 1992 and since June 1993;
                                                             and Chief Administrative Officer from
                                                             1992 to June 1993.  Ms. Travis is married
                                                             to Gary T. McIlroy, M.D.

Gary L. Damkoehler          59    Director                   Chairman, Chief Executive Officer and          1996
(Class A)                                                    President since 1988 of JSA Healthcare
                                                             Corporation of St. Petersburg, Florida, a
                                                             direct provider of healthcare services.

Raymond G. Schultze,        64    Director                   Professor of Medicine at the UCLA School       1996
M.D. (Class A)                                               of Medicine from 1978 to 1997. Dr. Schultze
                                                             served as Director of the UCLA Medical
                                                             Center from 1980 to 1995, and Administrative
                                                             Vice Chancellor for UCLA from 1986 to
                                                             1992. Dr. Schultze currently is providing
                                                             consulting services to the County of
                                                             Los Angeles for the re-engineering of
                                                             their healthcare system.

Vance Kenneth Travis        72    Director                   Chairman of the Board of Triad                 1984
(Class B)                                                    International, Inc., a plant engineering
                                                             and project management operation for
                                                             petro-chemical and refinery process
                                                             plants located in Calgary, Alberta,
                                                             Canada.  Mr. Travis is Marlene Travis'
                                                             uncle.

Ronald R. Hahn              54    Director                   Chairman and President, ESE Partners,          1992
(Class C)                                                    LLC, a venture capital management
                                                             company, since 1996 and President of
                                                             Stroben & Hahn, Inc., a venture
                                                             capital management company, since
                                                             1981.  Consultant regarding the U.S.
                                                             healthcare industry to Union d'Etudes
                                                             et d'Investissements ("UI"), the
                                                             merchant banking subsidiary of Credit
                                                             Agricole. Mr. Hahn currently serves on
                                                             the Board of Directors of Protein Databases,
                                                             Inc., a publicly traded computer software
                                                             company, and JAMS/Endispute, a provider of
                                                             dispute  resolution services.

Robert L. Montgomery        61    Director                   President-Western Division of Sutter           1993
(Class C)                                                    Health since 1996.  Prior to this, he was
                                                             President and Chief Executive Officer
                                                             of Alta Bates Health System of Emeryville,
                                                             California, a vertically integrated full
                                                             service  healthcare system, from  1989 to
                                                             1996, and from 1979 to March 1983.
</TABLE>
<PAGE>

The  Company's  Articles  of  Incorporation  provide  for the  election of three
classes of directors with terms  staggered so as to require the election of only
one class of directors each year.  The term of the Class A directors  expires at
the 1999 annual meeting,  the term of the Class B directors  expires at the 2000
annual meeting, and the term of the Class C Directors expires at the 2001 annual
meeting.

Executive Officers

The following sets forth the names and ages of current executive officers of the
Company, in addition to information  regarding their positions with the Company,
their periods of service in such positions, and their business experience for at
least the past five years.

Name                           Age                         Position

Gary T. McIlroy, M. D.         58       Chairman of the Board, Chief Executive
                                        Officer and Director

Marlene O. Travis              59       President, Chief Operating Officer,
                                        Secretary and Director

Thomas P. Clark                50       Senior Vice President, Finance and Chief
                                        Financial Officer

Adele M. Kimpell               52       Executive Vice President, Health Plan 
                                        and Systems Development

Gerald E. Osband               50       Executive Vice President, Corporate 
                                        Medical Director

Russell A. Peterson            57       Chief Information Officer

William M. Smith               38       Vice President, Managed Care Sales

Steven K. Isaacs               43       Vice President, Indemnity Sales

Michael T. McKim               54       Vice President and General Counsel

Gary T. Mcllroy, M. D., a co-founder of the Company,  has been an officer of the
Company since 1977 and Chairman of the Board,  Chief  Executive  Officer,  and a
director of the Company  since 1984.  Dr.  McIIroy has owned and operated  three
medically-related  businesses. Dr. McIIroy was co-founder,  President, and Chief
Executive Officer of Midwest Laboratory Associates, a medical testing laboratory
from 1977 until its sale in 1980.  From 1973 to 1978, he was President and Chief
Executive  Officer of Upper  Mississippi  Pathologists,  P.A.,  serving  several
hospitals  in central  Minnesota.  Dr.  McIIroy  holds an M. D.  degree from the
University of California-Los  Angeles,  and is Board Certified in Anatomical and
Clinical Pathology following four years of specialty training at the Mayo Clinic
in  Rochester,  Minnesota.  He is  also a  member  of the  American  College  of
Utilization Review Physicians. Dr. McIIroy is married to Marlene O. Travis.

Marlene O.  Travis,  a  co-founder  of the Company,  has been the  Secretary,  a
director  and an officer of the Company  since  1977,  and  currently  serves as
President and Chief Operating Officer.  Ms. Travis has served as Chief Operating
Officer  since June 1993 and also held the  position  from  January 1987 through
December   1991.   Ms.  Travis  has  been   President   since  1987,  and  Chief
Administrative  Officer  from  January  1992 to June 1993,  and  Executive  Vice
President prior to 1987. Ms. Travis is Chairman and Chief  Executive  Officer of
the Company's  subsidiaries,  Health Resource  Management Ltd. and Institute for
Healthcare Quality, Inc. Ms. Travis was co-founder,  Vice President and Director
of  Operations  of  Midwest  Laboratory  Associates  from 1977 to 1980.  She was
Business Manager of Upper Mississippi Pathologists, P. A. from 1973 to 1978. Ms.
Travis is married to Dr. Gary T. McIIroy.


<PAGE>

Thomas P. Clark , joined the Company as Controller in 1985,  and has been Senior
Vice President,  Finance and Chief Financial  Officer of the Company since 1986.
From 1976 to 1985,  Mr. Clark  maintained  his own public  accounting  practice.
Prior to such time Mr. Clark was an accountant with the accounting firms of KPMG
Peat Marwick and Breitman, Orenstein & Schweitzer.

Adele M. Kimpell, R. N., became Executive Vice President, Health Plan Operations
in March, 1996, and had previously served as Senior Vice President,  Health Plan
Operations  since  August,  1993,  and Senior Vice  President,  Care  Management
Services  since  August  1993.  Ms.  Kimpell  joined  the  Company as a Clinical
Reviewer in March 1985. Ms. Kimpell has served in various  capacities within HRM
since January 1990, including Vice President, Strategic Business Implementation,
Vice President,  Special Projects,  Vice President,  Claims  Administration  and
Assistant Vice  President,  Sales  Operations.  Ms. Kimpell has a B.S. degree in
nursing and had 15 years  experience in intensive  care and emergency room units
prior to joining HRM.

Gerald  E.  Osband,  M.D.,  joined  the  Company  as  Executive  Vice  President
andCorporate Medical Director in January 1998. Prior to joining the Company, Dr.
Osband was Vice President of Medical Affairs  Company in Wausau,  Wisconsin from
1991 to 1998. Dr. Osband served as a Family Practice physician for Family Health
Specialists  from 1981 to 1991.  Dr.  Osband  received his B.A.  degree from the
University  of  California-Los  Angeles,  and  holds  an M.D.  degree  from  the
University of California San Francisco.  He is a member of the American  College
of Physician Executives,  American Academy of Family Physicians and the American
Medical Association.

Russell  A.  Peterson,  became  Chief  Information  Officer in April  1998.  Mr.
Peterson  joined the Company as Vice President,  Applications  Software in March
1993.  Prior to joining the Company,  Mr. Peterson was a director for Medtronic,
Inc. in Fridley  Minnesota  from 1989 to 1992.  Mr.  Peterson  received his B.A.
degree from  Macalester  College in 1963 and his MBA from the  University of St.
Thomas in 1979.

William M. Smith, joined the Company as Vice President,  Managed Care Markets in
June 1997. Prior to joining the Company, Mr. Smith was Vice President, Sales and
Marketing for Healthsource, Inc. in Aurora, OH from 1992 to 1997. He also served
as Sales District Manager for Plymouth Savings Bank in Foxborough,  MA from 1988
to 1992. Mr. Smith  received his B.S.B.A.  from Central  Michigan  University in
1983.

Steven K. Isaacs joined the Company as Vice President,  Sales,  Payer Markets in
September  1997.  Prior to  joining  the  Company,  Mr.  Isaacs  served  as Vice
President,  Group Sales,  for Ameritas Life Insurance  Corporation  from 1993 to
1997. He also served as Regional Vice  President for Fortis  Benefits  Insurance
Company in Kansas City, MO from 1986-1993. Mr. Issacs received his B.S.B.A. from
the University of Nebraska in 1978.

Michael T. McKim, Esq., joined the Company as Vice President and General Counsel
in December 1992.  Prior to joining the Company,  Mr. McKim was a partner in the
Minneapolis  law firm of Larkin,  Hoffman,  Daly & Lindgren,  Ltd.  from 1986 to
1992.  Mr. McKim received his B. A. degree from the University of Notre Dame and
his J. D.  degree  from  Creighton  University  School of Law in Omaha.  He is a
member  of  the  Ramsey   County,   Minnesota   State  and  Nebraska  State  Bar
associations, where he serves on various standing and ad hoc committees.

Compliance with Section 16(a) of the Exchange Act

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
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
(the "SEC").  Such forms  include:  Form 3, due within 10 days after becoming an
officer, director or greater than ten-percent holder; Form 4, due within 10 days
after any calendar  month during which a reportable  transaction  occurred;  and
Form 5 due within 45 days after the end of the fiscal year. Officers,  directors
and greater than  ten-percent  shareholders  are required by SEC  regulation  to
furnish the Company with copies of all Section 16(a) forms they files.

Based on its  review of the  copies of such  forms  received  by it, or  written
representations from certain reporting persons that no Forms 5 were required for
those persons,  the Company  believes that,  during the period from July 1, 1997
through June 30, 1998, all Section 16(a) filing  requirements  applicable to its
current and former officers,  directors, and greater than ten-percent beneficial
owners  were  complied  with  except  that one Form 5 was  filed  late by Robert
Montgomery.


<PAGE>


Item 11. Executive Compensation.

Summary Compensation Table

The following table sets forth the cash and noncash compensation for each of the
last three fiscal years, of the Company's  Chief Executive  Officer and the four
other highest paid executive  officers of the Company whose salary and bonus for
fiscal 1998 exceeded $100,000.
<TABLE>
<CAPTION>

                                                                         Long-Term Compensation
                                                                   ---------------------------------
                                    Annual Compensation                    Awards
                          --------------------------------------   ----------------------
                                                         Other
                                                         Annual    Restircted  Securities
                                                        Compen-      Stock     Underlying     LTIP       All Other
Name and Position         Year    Salary      Bonus    sation(1)     Awards      Options     Payouts   Compensation
-----------------         ----    ------      -----    ---------   ----------  ----------    -------   ------------
<S>                       <C>     <C>       <C>        <C>            <C>       <C>            <C>       <C>       
Gary T. McIlroy, M.D.     1998    $278,000  $    0(2)  $9,837(10)                40,000(4)                $23,484(6)
   Chairman & CEO          1997   $278,000  $    0(2)  $9,395(10       0         15,000(2)      0         $23,150(6)
                                                                                 40,000(4)
                           1996    278,000     13,510   9,395(10)      0         33,138(3)      0          22,655(6)


Marlene Travis             1998   $250,000       0(2)   9,837(10)                30,000(4)                 20,336(7)
   President & COO         1997    250,000       0(2)   9,395(10)      0         12,500(2)      0          20,150(7)
                                                                                 33,333(4)
                           1996    222,000     13,510   9,395(10)      0         23,298(3)      0          19,655(7)


Thomas P. Clark            1998   $200,000       0(2)  10,902(10)                30,000(4)                  9,555(8)
   CFO                     1997    200,000       0(2)  10,460(10)      0         10,000(2)      0           9,150(8)
                                                                                 26,667(4)
                           1996    167,500     11,580  10,460(10)      0         17,759(3)      0           8,655(8)


Adele M. Kimpell           1998   $156,420       0(2)                             3,600(4)                  3,361(5)
   Executive V.P.,         1997    153,542       0(2)      0           0          4,000(2)      0           2,663(5)
   Health Plan                                                                    9,000(4)
   and System              1996    128,169      6,000      0           0          5,000(3)      0           1,882(5)
   Development             


William M. Smith           1998    128,181     15,000      0           0          6,000(4)      0          11,074(9)
   Vice President
   Managed Care Sales
</TABLE>

(1)  Does not include the payment of  professional  and monthly club dues,  term
     group life insurance and other personal  benefits,  the aggregate amount of
     which was less than 10% of the individual's listed compensation.

(2)  Stock  options were issued under the Amended and  Restated  1992  Long-Term
     Incentive  Plan or the 1990 Stock  Option  Plan in lieu of cash bonus under
     the annual Executive Incentive Plan and are fully exercisable.

(3)  Stock  options were issued  under the 1990 Stock  Option  Plan,  and become
     exercisable in annual increments of one-fourth per year.

(4)  Stock  options were issued under the Amended and  Restated  1992  Long-Term
     Incentive Plan and become exercisable in annual increments of one-third per
     year.

(5)  The Company matching contribution under its 401(k) Salary Savings Plan.


<PAGE>

(6)  The  amount  reflected  includes  $2,655,  $3,150,  and  $3,484 as  Company
     matching  contributions  under  its  401(k)  Salary  Savings  Plan or other
     retirement  payments for fiscal 1996,  1997,  and 1998,  respectively,  and
     $20,000  per year for the total  premiums  paid by the  Company on the life
     insurance policy covered by the Split-Dollar Agreement referred to below in
     "Employment Agreements" for fiscal 1996, 1997 and 1998, respectively.

(7)  The  amount  reflected  includes  $2,655,  $3,150,  and  $3,336 as  Company
     matching  contributions  under  its  401(k)  Salary  Savings  Plan or other
     retirement  payments  for fiscal  1996,  1997 and 1998,  respectively,  and
     $17,000  per  year for a total  premiums  paid by the  Company  on the life
     insurance policy covered by the Split-Dollar Agreement referred to below in
     "Employment Agreements" for fiscal 1996, 1997 and 1998, respectively.

(8)  The  amount  reflected  includes  $2,655,  $2,150,  and  $3,555 as  Company
     matching  contributions  under  its  401(k)  Salary  Savings  Plan or other
     retirement  payments  for fiscal  1996,  1997 and 1998,  respectively,  and
     $6,000  per year for the total  premiums  paid by the  Company  on the life
     insurance policy covered by the Split-Dollar Agreement referred to below in
     "Employment Agreements" for fiscal 1996, 1997 and 1998, respectively.

(9)  The amount  reflected  includes  $2,492 as Company  matching  contributions
     under its  401(k)  Salary  Savings  Plan for 1998 and moving  allowance  of
     $8,582.

(10) Includes auto allowance and medical coverage.

The  following  two stock option  tables  summarize  option grants and exercises
during  fiscal 1998 for the Chief  Executive  Officer and other named  executive
officers,  and the values of options granted during fiscal 1998 and held by such
persons at June 30, 1998.
<TABLE>
<CAPTION>

                       Stock Option Grants in Fiscal 1998

                                                                         Potential Realizable Value at Assumed Annual
                                                                       Rates of Stock Price Appreciation for Option Term
                                                                         ---------------------------------------------
                                   Individual Grants                            5%(3)                   10%(3)
                    -------------------------------------------------    ---------------------    --------------------
                    Number of    % of Total
                    Securities    Options
                    Underlying   Granted to
                    Options      Employees    Exercise    Expiration      Stock                   Stock
       Name          Granted     in Fiscal    or Base      Date(1)        Price    Gain           Price      Gain
                                    Year        Price
-----------------   ----------   ----------   --------    ----------     -------   -------        ------   -------

<S>                  <C>             <C>       <C>        <C>             <C>      <C>            <C>     <C>     
Gary McIlroy, M.D.   40,000(1)       16.8%     $12.625    06/30/02        $15.60   $119,000       $19.10  $259,000

Marlene Travis       30,000(1)       12.6%     $12.625    06/30/02        $15.60    $89,250       $19.10  $194,220

Thomas P. Clark      30,000(1)       12.6%     $12.625    06/30/02        $15.60    $89,250       $19.10  $194,250

Adele M. Kimpell      3,600(1)        1.5%     $12.625    06/30/02        $15.60    $10,710       $19.10   $23,310

William M. Smith      6,000(2)        2.5%     $12.875    06/30/02        $16.24    $20,190       $20.26   $44,310
</TABLE>

(1)  One-third  of the stock  options  granted as a long-term  incentive  to the
     individuals  become exercisable one year after January 1, 1998, the date of
     grant, and the next two anniversaries of the date of grant. Under the terms
     of the Plan,  the Board may provide for the  protection of all optionees to
     whom  options  have been  granted  in the  event of a merger,  liquidation,
     reorganization or similar transaction.

(2)  One-third  of the stock  options  granted as a long-term  incentive  became
     exercisable  one year after  September 24, 1997, the date of grant,  and on
     the next two  anniversaries  of the date of  grant.  Under the terms of the
     Plan,  the Board may provide for the  protection  of all  optionees to whom
     options  have  been  granted  in  the  event  of  a  merger,   liquidation,
     reorganization or similar transaction.


<PAGE>

(3)  The  stock  price is  calculated  using a 5% and 10%  rate of  appreciation
     (solely for illustrative  purposes) for the term of the option,  compounded
     annually.  The gain is the  difference  between the resulting  illustrative
     compounded  stock price and the exercise  price times the number of options
     granted.

<TABLE>
<CAPTION>


                    Aggregated Option Exercises in Fiscal 1998 and Fiscal Year-End Option Value

                                                                Number of Securities
                                                               Underlying Unexercised       Value of Unexercised
                                                                  Options at Fiscal         In-the-Money Options
                               Shares Acquired        Value     Year-End Exercisable/      at Fiscal Year-End(1)
                               on Exercise          Realized        Unexercisable         Exercisable/Unexercisable
                               ---------------      --------   ----------------------     -------------------------
<S>                              <C>                 <C>           <C>                       <C>    
Gary T. McIlroy, M.D.            20,000              $122,500      103,188/74,950            $683,110/$218,391
Marlene Travis                   15,000               $91,615       81,585/58,046            $536,154/$165,418
Thomas P. Clark                  15,000               $68,445       32,209/52,217            $160,848/$146,489
Adele M. Kimpell                   --                  --           10,750/10,850             $50,188/$30,512
William M. Smith                   --                  --            2,000/4,000               $4,750/$9,500
</TABLE>

(1)  Market  value of  underlying  securities  at June 30,  1998  ($15.25),  the
     closing price of the Common Stock, minus the exercise price.

Director Fees and Options

Annual  Retainer and Meeting Fees.  All directors of the Company are  reimbursed
for expenses incurred by them in connection with attending meetings of the Board
and  performing  duties as a director.  Each  nonemployee  director  receives an
annual  retainer  of $12,500 and  meeting  fees as follows:  $750 for each Board
meeting  attended;  $500 ($650 for committee  chairs) for each committee meeting
attended  unless  the  committee  meeting  is held in  conjunction  with a Board
meeting;  $500 for each meeting of the board of directors of a subsidiary of the
Company that is attended;  $500 for each Board meeting in which the  nonemployee
director participates by telephone; and $250 for each committee meeting in which
the nonemployee  director  participates by telephone.  A director of the Company
may elect to receive the payment of his or her annual retainer, meeting fees and
committee  fees on a monthly  basis or in one lump sum at the end of the  fiscal
year.

Deferred Compensation Plan for Directors.  The Board of Directors of the Company
adopted the Deferred Compensation Plan for Directors, effective for fiscal 1994,
and for all fiscal  years  thereafter  until the Plan is  terminated.  Under the
Deferred  Compensation  Plan,  members of the  Company's  Board of Directors and
members of the Board of any subsidiary may elect,  prior to July 1 of any fiscal
year,  to defer the  receipt of all or any  portion of any annual  retainer  and
meeting  fees that may be payable  to the  director  during the fiscal  year for
which the election is effective.  The Deferred Compensation Plan is administered
by the Compensation Committee. All amounts deferred by the director are credited
to an account established for the director for accounting purposes only, and the
amounts  credited  to  such  account   generally  accrue  interest,   compounded
quarterly,  at a rate equal to two  percentage  points above the Prime Rate. The
Deferred  Compensation  Plan is and will remain unfunded,  and the director will
stand in the  position  of a general  unsecured  creditor  of the  Company  with
respect to all payments made pursuant to the Deferred Compensation Plan.

Director Options.  Under the Amended and Restated 1992 Long-Term Incentive Plan,
directors  who are not  employees of the Company are  eligible for  nonqualified
stock  options.  As  specified  in the Plan,  an option for 3,800  shares of the
Company's Common Stock was granted to each nonemployee  director who was serving
on the Board on September 14, 1992,  the date the Board  originally  adopted the
Plan and is granted to each new  nonemployee  director on the date that such new
director is first  elected to the Board.  All  nonemployee  directors  will also
receive an option for 1,900 shares of the  Company's  Common Stock at the end of
each fiscal year during which such director continues to serve on the Board. The
Board may, in its discretion,  grant  additional  nonqualified  stock options to
nonemployee  directors,  subject to such terms and  conditions  as the Board may
deem appropriate.
<PAGE>

In  addition,  a  nonemployee  director  may  elect  in  writing  to  receive  a
nonqualified  stock option in lieu of all or any portion of the annual  retainer
and  meeting  fees to which  such  director  may be  entitled  and  which  would
otherwise  be payable  to such  director  during  the fiscal  year for which the
election  has been  made.  The  number  of  shares  subject  to such  option  is
determined by dividing the total dollar amount  specified in the election by 75%
of the fair market value of the Company's Common Stock as of the date the option
is  granted,  which  shall be the  last day of the  fiscal  year for  which  the
election has been made.  Any election by the  nonemployee  director to receive a
nonqualified  stock  option in lieu of annual  retainer and meeting fees must be
made prior to the date the option is granted.

Except for options granted in lieu of retainer or meeting fees, the option price
per share for all nonqualified stock options granted to nonemployee directors is
generally the fair market value of a share of the  Company's  Common Stock as of
the  date  such  option  is  granted.  The  exercise  price  per  share  for all
nonqualified stock options granted to nonemployee  directors in lieu of retainer
or meeting fees pursuant to the election  described above equals 75% of the fair
market value of a share of the Company's Common Stock as of the date such option
is granted. All nonqualified stock options granted to the nonemployee  directors
ordinarily  expire  five  years  after the date  they are  granted,  and  become
exercisable  as to one-third of the shares  subject to the option on each of the
succeeding three anniversaries of the option grant.

Employment Agreements

The Company  has an  Employment  Agreement,  dated June 20,  1996,  with Gary T.
McIlroy,  M.D.  whereby Dr.  McIlroy will  continue to serve as Chief  Executive
Officer with the term continuing  indefinitely unless terminated under the terms
of the Agreement. Dr. McIlroy received a base salary for fiscal 1998 of $278,000
(subject to increase  upon annual  review by the  Compensation  Committee of the
Board) and is eligible to receive an annual  incentive bonus under the Executive
Incentive Plan. The Employment Agreement is terminable by the Company for cause,
in which case the Company is  obligated to pay only Dr.  McIlroy's  accrued base
salary and a portion of annual  incentive bonus for the fiscal year in which his
termination  occurs. The Agreement is also terminable by the Company upon thirty
(30) days written notice,  without cause, in which case the Company is obligated
to (i) pay the then-current  annualized base salary and provide health,  dental,
life and other benefits for a twenty-four  month period;  (ii) pay out-placement
services;  (iii) pay a portion of any annual incentive bonus for the fiscal year
in which his termination occurs; and (iv) transfer to Dr. McIlroy all cash value
and life  insurance  policies  owned by the  Company.  In the event Dr.  McIlroy
resigns  for "good  reason"  or within  twelve  (12)  months  after a "change of
control" of the  Company,  the Company is  obligated to make all of the payments
and provide all of the benefits described in the preceding  sentence,  and shall
accelerate the vesting of all stock options which shall then remain  exercisable
until the options expire.  The Agreement also addresses the benefits payable and
the  treatment  of  the  life  insurance  policies  owned  by the  Company  upon
termination  for death or disability  and, in the event of disability,  provides
for supplemental  disability payments and health, dental and life benefits for a
twelve (12) month period.

The  Company  also has a Split  Dollar  Agreement,  dated  June 5,  1991,  which
requires the Company to pay the premiums on a life insurance policy owned by Dr.
McIlroy (or his assignee) and which requires  repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater,  upon Dr.  McIlroy's  death or  termination  of  employment.  Under the
Employment Agreement, if Dr. McIlroy's employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company,  or if Dr.
McIlroy  resigns for "good  reason," the repayment  obligations  under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.


<PAGE>

The Company has an  Employment  Agreement,  dated June 21,  1996,  with  Marlene
Travis  whereby  Ms.  Travis  will  continue  to serve as  President  and  Chief
Operating  Officer  with the  term  continuing  indefinitely  unless  and  until
terminated  under the terms of the Agreement.  Ms. Travis received a base salary
for fiscal 1998 of $250,000 (subject to increase upon annual review by the Chief
Executive  Officer) and is eligible to receive an annual  incentive  bonus under
the Executive  Incentive  Plan.  The  Employment  Agreement is terminable by the
Company  for cause,  in which  case the  Company  is  obligated  to pay only Ms.
Travis' accrued base salary and a portion of any annual  incentive bonus for the
fiscal year in which her termination occurs. The Agreement is also terminable by
the Company upon thirty (30) days written  notice,  without cause, in which case
the Company is obligated to (i) pay the then-current  annualized base salary and
provide  health,  dental,  life and other benefits for a twenty-four  (24) month
period;  (ii) pay  out-placement  services;  (iii) pay a portion  of any  annual
incentive  bonus for the fiscal year in which her termination  occurs;  and (iv)
transfer to Ms. Travis all cash value and life  insurance  policies owned by the
Company. In the event Ms. Travis resigns for "good reason" or within twelve (12)
months after a "change of control" of the  Company,  the Company is obligated to
make all of the  payments  and  provide  all of the  benefits  described  in the
preceding  sentence and shall  accelerate the vesting of all stock options which
shall then remain  exercisable  until the options  expire.  The  Agreement  also
addresses the benefits payable and the treatment of the life insurance  policies
owned by the Company upon  termination for death or disability and, in the event
of disability,  provides for supplemental disability payments and health, dental
and life benefits for a twelve (12) month period.

The  Company  also has a Split  Dollar  Agreement,  dated  June 5,  1991,  which
requires the Company to pay the premiums on a life insurance policy owned by Ms.
Travis (or her assignee) and which  requires  repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater,  upon Ms.  Travis'  death  or  termination  of  employment.  Under  the
Employment  Agreement,  if Ms. Travis' employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company,  or if Ms.
Travis  resigns for "good  reason," the  repayment  obligations  under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.

The Company has an  Employment  Agreement  dated June 21,  1996,  with Thomas P.
Clark whereby Mr. Clark will continue to serve as Chief Financial Officer,  with
the term continuing  indefinitely unless and until terminated under the terms of
the  Agreement.  Mr.  Clark  received  an annual  base salary for fiscal 1998 of
$200,000 (subject to increase upon annual review by the Chief Executive Officer)
and is  eligible  to  receive  an annual  incentive  bonus  under the  Executive
Incentive Plan. The Employment Agreement is terminable by the Company for cause,
in which case the Company is  obligated  to pay only Mr.  Clark's  accrued  base
salary and a portion of any annual  incentive bonus for the fiscal year in which
his  termination  occurs.  The Agreement is also  terminable by the Company upon
thirty (30) days written  notice,  without  cause,  in which case the Company is
obligated to (i) pay the then-current annualized base salary and provide health,
dental,  life and other benefits for a twenty-four  (24) month period;  (ii) pay
out-placement  services;  (iii) pay a portion of any annual  incentive bonus for
the fiscal year in which his termination  occurs; and (iv) transfer to Mr. Clark
all cash value and life insurance policies paid by the Company. In the event Mr.
Clark  resigns for "good reason" or within twelve (12) months after a "change of
control" of the  Company,  the Company is  obligated to make all of the payments
and provide all of the benefits  described in the  preceding  sentence and shall
accelerate the vesting of all stock options which shall then remain  exercisable
until the options expire.  The Agreement also addresses the benefits payable and
the  treatment  of  the  life  insurance  policies  owned  by the  Company  upon
termination  for death or disability  and, in the event of disability,  provides
for supplemental  disability payments and health, dental and life benefits for a
twelve (12) month period.

The Company also has a Split Dollar  Agreement,  dated September 19, 1991, which
requires the Company to pay the premiums on a life insurance policy owned by Mr.
Clark (or his  assignee) and which  requires  repayment to the Company of either
the premiums paid or the policy's accumulated cash surrender value, whichever is
greater,  upon Mr.  Clark's  death  or  termination  of  employment.  Under  the
Employment  Agreement,  if Mr. Clark's employment is terminated without cause or
within twelve (12) months after a "change of control" of the Company,  or if Mr.
Clark  resigns for "good  reason,"  the  repayment  obligations  under the Split
Dollar Agreement cease and the Company must release any collateral assignment in
the life insurance policy.


<PAGE>


Performance Graph

Set  forth  below are line  graphs  comparing  the  Company's  cumulative  total
shareholder  return on the Company's Common Stock,  from June 30, 1993,  through
June 30, 1998, with the cumulative total return of The Nasdaq Market Index (U.S.
Companies) and of the selected peer group (the "SIC Peer Group Index").  The SIC
Peer Group Index includes all Nasdaq companies which are in the same three-digit
SIC  ("Standard  Industrial  Classification")  labeled 632  Accident  and Health
Insurance and Medical Service Plans.

<TABLE>
<CAPTION>

                        06/30/93       06/30/94       06/30/95        06/30/96       06/30/97       06/30/98
                        --------       --------       --------        --------       --------       --------
<S>                      <C>             <C>           <C>             <C>            <C>            <C>   
HRM                      100.00          76.47         123.53          123.53         158.82         179.41
Peer Group Index         100.00         112.39         113.98          147.80         192.45         203.24
Nasdaq Market            100.00         109.66         128.61          161.89         195.02         258.52
</TABLE>

The Nasdaq  Market  Index and SIC Peer Group Index is provided by Media  General
Financial  Services.  The Peer Group  includes the following  companies:  Aetna,
Inc.;  AFLAC  Incorporated;  American  Medical  SEC  Inc.,  Chartwell  RE Corp.;
Citizens  Financial  Corp.;   Compdent   Corporation;   Conseco,   Inc.  Everest
Reinsurance Hld.; First  Commonwealth of America;  Health Power,  Inc.;  Humana,
Inc.;  Maxicare  Health  Plans;  Medical  Control,  Inc.;  Mid Atlantic  Medical
Services,  Inc.; Oxford Health Plans,  Inc.;  Pacificare Health Services,  Inc.;
Penncorp  Financial  Group;  Physicians  Health Services;  Reinsurance  Group of
America  RightChoice Managed Care;  Safeguard Health Enterprises;  Sierra Health
Services,  Inc.;  Torchmark  Corporation;   Transamerica   Corporation;   Trigon
Healthcare, Inc.; United Dental Care, Inc.; United Healthcare Corporation;  Unum
Corporation; and Westbridge Capital Corp.



<PAGE>


Item 12.   Security Ownership of Certain Beneficial Owners and Management.

The  following  table sets forth the  number of shares of the  Company's  Common
Stock beneficially owned by each person known to the Company to beneficially own
more than 5% of the  Company's  Common Stock,  by each of the Company's  current
directors, by each executive officer named in the Summary Compensation Table (on
page 21), and by all of the Company's  current  directors and current  executive
officers as a group, as of September 18, 1998.

Name of Director, Executive Officer   Number of Shares Beneficially   Percent of
or Identity of Group                             Owned(1)                Class
-----------------------------         -----------------------------   ----------

Chiplease, Inc.                                   672,500(2)             14.69%
 640 N. LaSalle Street, Suite 300            
 Chicago, IL 60610                           
                                             
Summit Capital Management, LLC                    507,108(3)             11.03%
 601 Union Street Suite 3900                 
 Seattle, WA 98101                           
                                             
NOLA, LLC                                         643,738(4)             14.05%
 916 Sommerset Street                        
 Watchung, NJ 07060                          
                                             
Dimensional Fund Advisors, Inc.                   237,800(5)              5.17%
 1299 Ocean Avenue, 11th Floor               
 Santa Monica, CA 90401                      
                                             
Gary T. McIlroy, M.D.                             311,158(6)              6.62%
 8000 West 78th Street                       
 Minneapolis, MN 55439                       
                                             
Marlene Travis                                    356,533(7)              7.62%
 8000 West 78th Street                        
 Minneapolis, MN 55439                       
                                             
Thomas P. Clark                                    79,777(8)              1.72%
                                             
Adele M. Kimpell                                   10,750(9)               *
                                             
W. Michael Smith                                   2,000(10)               *
                                             
Vance Kenneth Travis                              10,344(11)               *
                                             
Ronald R. Hahn                                    11,401(12)               *
                                             
Robert L. Montgomery                              15,771(13)               *
                                             
Gary L. Damkoehler                                10,168(14)               *
                                             
Raymond G. Schultze, M.D                           3,168(15)               *
                                             
All Current Executive Officers and           
   Current Directors as a                    
   Group (14 persons)                            822,504(16)             16.63%
                                        
-----------


<PAGE>
 *       Less than one percent.

(1)      Except as otherwise noted,  each person or group named in the table has
         sole voting and  investment  power with respect to all shares of Common
         Stock  listed  opposite  the name of such  person or group.  Shares not
         outstanding but deemed  beneficially  owned by virtue of the right of a
         person to acquire them as of September  18, 1998,  or within 60 days of
         such date are treated as outstanding  only when  determining the amount
         and percent owned by such person or group named in the table.

(2)      Includes  672,500 shares for which  Chiplease,  Inc.  represents it has
         sole voting power and which was owned on August 28,  1998,  the date of
         the  most  recent  Schedule  13D  received  by the  Company  from  such
         shareholder.

(3)      Includes  507,108  shares  for which  Summit  Capital  Management,  LLC
         represents  it has sole  voting  power and which was owned on March 13,
         1998, the date of the most recent  Schedule 13D received by the Company
         from such shareholder.

(4)      Includes  643,738  shares for which NOLA,  LLC  represents  it has sole
         voting power and which was owned on September 14, 1998, the date of the
         most recent Schedule 13D received by the Company from such shareholder.

(5)      In its most recent Schedule 13G filing with the Securiites and Exchange
         Commission  on February  28,  1998,  Dimensional  Fund  Advisors,  Inc.
         represents  it has sole  voting  power as to 158,700 of such shares and
         sole dispositive power over all such shares.

(6)      The number of shares set forth in the above table (I) includes  207,970
         shares held by Gary T. McIlroy  Revocable  Trust, for which Dr. McIlroy
         is grantor and trustee,  (ii) includes 103,188 shares which Dr. McIlroy
         has the right to acquire upon  exercise of options,  (iii)  excludes 75
         shares  beneficially  owned  by Dr.  McIlroy's  and Ms.  Travis'  adult
         children,  and  (iv)  excludes  the  shares  beneficially  owned by Ms.
         Travis.  Dr. McIlroy  disclaims  beneficial  ownership of such excluded
         shares.

(7)      The number of shares set forth in the above table (i) includes  274,948
         shares  held by the Marlene O. Travis  Revocable  Trust,  for which Ms.
         Travis is grantor and trustee,  (ii)  includes 81, 585 shares which Ms.
         Travis  has the  right to  acquire  upon  exercise  of  options,  (iii)
         excludes 75 shares  beneficially owned by Ms. Travis' and Dr. McIlroy's
         adult children,  and (iv) excludes the shares beneficially owned by Dr.
         McIlroy.  Ms. Travis  disclaims  beneficial  ownership of such excluded
         shares.

(8)      Includes  47,568  shares held by Mr.Clark  and 32,209  shares which Mr.
         Clark has the right to acquire upon exercise of options.

(9)      Includes  10,500 shares which Ms. Kimpell has the right to acquire upon
         exercise of options.

(10)     Includes  2,000  shares  which Mr.  Smith has the right to acquire upon
         exercise of options.

(11)     Includes  4,643  shares held by Mr.  Travis and 5,701  shares which Mr.
         Travis has the right to acquire upon exercise of options.

(12)     Includes 7,600 shares held by Mr. Hahn and  3,801shares  which Mr. Hahn
         has the right to acquire upon exercise of options.

(13)     Includes 9,163 shares held by Mr. Montgomery and 6,608 shares which Mr.
         Montgomery has the right to acquire upon exercise of options.

(14)     Includes 7,000 shares held by Mr. Damkoehler and 3,168 shares which Mr.
         Damkoehler has the right to acquire upon exercise of options.

(15)     Includes 3,168 shares which Mr.  Schultze has the right to acquire upon
         exercise of options.

(16)     Includes 559,542 shares held by the current officers and directors, and
         262,962 shares that current executive officers and directors as a group
         have the right to acquire as of September  18, 1998,  or within 60 days
         of such date, upon exercise of options.

Item 13. Certain Relationships and Related Transactions.

None.
<PAGE>


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)      Documents filed as part of this report.

         (1)  Financial  Statements.  The financial  statements listed below are
              included  in  this  Annual  Report  on  Form  10-K  on  the  pages
              indicated.

                                                                    Page in this
                                                                      Form 10-K

              Report of Independent Auditors..............................    44

              Consolidated Balance Sheets as of June 30, 1998
              and 1997....................................................    46

              Consolidated Statements of Operations for the years
              ended June 30, 1998, 1997 and 1996..........................    47

              Consolidated Statements of Changes in Shareholders'
              Equity for the years ended June 30, 1998, 1997
              and 1996....................................................    48

              Consolidated Statements of Cash Flows for the years
              ended June 30, 1998, 1997 and 1996..........................    49

              Notes to Consolidated Financial Statements..................    50

         (2)  Financial Statement Schedules.  The following schedule is included
              in this Annual Report on Form 10-K on the pages indicated.

                                                                    Page in this
                                                                       Form 10-K

              II.  Valuation and Qualifying Accounts......................    63

              Schedules  I, III,  IV, and V are omitted for the reason that they
              are not  applicable,  not required or the information is presented
              in the consolidated financial statements or related notes.



<PAGE>


(3)      Exhibits.

3.1      Amended and Restated Articles of  Incorporation,  as amended to date --
         incorporated  by  reference  to  Exhibit 3 to the  Company's  Quarterly
         Report on Form 10-Q for the quarter  ended March 31, 1998 (SEC File No.
         0-18902).

3.2      Composite Bylaws of the Company,  as of May 17,  1997--incorporated  by
         reference to Exhibit 3.2 to the  Company's  Annual  Report on Form 10-K
         for the year ended June 30, 1997 (SEC File No. 0-18902)

4.1      Specimen form of the Company's Common Share Certificate -- incorporated
         by reference to Exhibit 4.1 to the Company's  Registration Statement on
         Form S-1 (SEC File No. 33-37595).

4.2      Amended and Restated Articles of Incorporation, as amended to date (see
         Exhibit 3.1).

4.3      Composite Bylaws of the Company, as of May 17, 1997 (see Exhibit 3.2).

4.4      Rights  Agreement  dated  as of  April  4,  1997  between  health  Risk
         Management,  Inc. and Norwest  Bank  Minnesota,  N.A. as Rights  Agent,
         together with the following exhibits thereto:

         (a)  Certificate of Designations of Series A Preferred Stock,
         (b)  Summary of Rights to Purchase Shares of Series A Preferred Stock,
         (c)  Form of Rights Certificate --

         incorporated  by  reference  to  Exhibit  1 to the  Company's  Form 8-A
         Registration Statement filed April 10, 1997 (SEC File No. 0-18902).

10.1     Lease  Agreement  dated  August 14, 1987  between The Mutual  Insurance
         Company of New York and Health  Risk  Management,  Inc.,  as amended by
         First Amendment to Lease dated June 25, 1990,  related to the Company's
         offices  at  7900  West  78th   Street,   Minneapolis,   Minnesota   --
         incorporated by reference to Exhibit 10.1 to the Company's Registration
         Statement on Form S-1 (SEC File No. 33-37595).

10.2     Lease  Agreement  dated  August 14, 1987  between The Mutual  Insurance
         Company of New York and Health  Risk  Management,  Inc.,  as amended by
         First Amendment to Lease dated October 8, 1987 and Second  Amendment to
         Lease dated June 25,  1990,  related to the  Company's  offices at 8000
         West 78th Street,  Minneapolis,  Minnesota -- incorporated by reference
         to Exhibit  10.2 to the  Company's  Registration  Statement on Form S-1
         (SEC File No. 33-37595).

10.3*    Employment  Agreement  dated as of June 20,  1996  between  Health Risk
         Management,  Inc. and Dr. Gary T. McIlroy --  incorporated by reference
         to Exhibit  10.3 to the  Company's  Annual  Report on Form 10-K for the
         fiscal year ended June 30, 1996 (SEC File No. 0-18902).

10.4*    Split Dollar  Agreement  dated as of June 5, 1991  between  Health Risk
         Management,  Inc.  and Dr. Gary T.  McIlroy and the  Amendment to Split
         Dollar  Agreement  dated July 28, 1992 between Health Risk  Management,
         Inc. and Gary T. McIlroy --  incorporated  by reference to Exhibit 10.4
         to the  Company's  Annual Report on Form 10-K for the fiscal year ended
         June 30, 1996 (SEC File No. 0-18902).

10.5*    Employment  Agreement  dated as of June 21,  1996  between  Health Risk
         Management,  Inc. and Marlene O. Travis -- incorporated by reference to
         Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal
         year ended June 30, 1996 (SEC File No. 0-18902).

10.6*    Split Dollar  Agreement  dated as of June 5, 1991  between  Health Risk
         Management,  Inc.  and  Marlene O.  Travis and the  Amendment  to Split
         Dollar  Agreement  dated July 28, 1992 between Health Risk  Management,
         Inc. and Marlene O. Travis -- incorporated by reference to Exhibit 10.6
         to the  Company's  Annual Report on Form 10-K for the fiscal year ended
         June 30, 1996 (SEC File No. 0-18902).


<PAGE>

10.7*    Employment   Agreement   dated  June  21,  1996  between   Health  Risk
         Management,  Inc. and Thomas P. Clark --  incorporated  by reference to
         Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal
         year ended June 30, 1996 (SEC File No. 0-18902).

10.8*    Split Dollar  Agreement  dated as of  September 1, 1991 between  Health
         Risk Management,  Inc. and Thomas P. Clark -- incorporated by reference
         to Exhibit  10.8 to the  Company's  Annual  Report on Form 10-K for the
         fiscal year ended June 30, 1996 (SEC File No. 0-18902).

10.9*    Health Risk Management,  Inc. 1990 Stock Option Plan -- incorporated by
         reference to Exhibit 10.16 to the Company's  Registration  Statement on
         Form S-1 (SEC File No. 33-37595).

10.10*   Form of Stock Option Agreement to be used pursuant to 1990 Stock Option
         Plan --  incorporated  by reference to Exhibit  10.16 to the  Company's
         Annual Report on Form 10-K for the fiscal year ended June 30, 1991 (SEC
         File No. 0-18902).

10.11    Second Amendment to Lease dated January 8, 1992 for the Lease Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at 7900 West 78th Street,  Minneapolis,  Minnesota --  incorporated  by
         reference to Exhibit 10.20 to the Company's  Annual Report on Form 10-K
         for the fiscal year ended june 30, 1992 (SEC File No. 0-18902).

10.12    Third  Amendment to Lease dated January 8, 1992 for the Lease Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at 8000 West 78th Street,  Minneapolis,  Minnesota --  incorporated  by
         reference to Exhibit 10.20 to the Company's  Annual Report on Form 10-K
         for the fiscal year ended June 30, 1992 (SEC File No. 0-18902).

10.13*   Amended and Restated 1992  Long-Term  Incentive  Plan--incorporated  by
         reference to Exhibit 10.13 to the Company's  Annual Report on Form 10-K
         for the year ended June 30, 1997 (SEC File No. 0-18902).

10.14*   Form of Non-Employee Director Initial/Annual Option Agreement under the
         1992 Long-Term  Incentive Plan --  incorporated by reference to Exhibit
         10.30 to the  Company's  Annual Report on Form 10-K for the fiscal year
         ended June 30, 1992 (SEC File No. 0-18902).

10.15*   Form of Non-Employee  Director Elective Option Agreement under the 1992
         Long-Term  Incentive Plan -- incorporated by reference to Exhibit 10.31
         to the  Company's  Annual Report on Form 10-K for the fiscal year ended
         June 30, 1992 (SEC File No. 0-18902).

10.16*   Form of  Incentive  Stock  Option  Agreement  under the 1992  Long-Term
         Incentive  Plan --  incorporated  by reference to Exhibit  10.32 to the
         Company's Annual Report on Form 10-K for the fiscal year ended June 30,
         1992 (SEC File No. 0-18902).

10.17*   Form of  Non-Qualified  Stock Option Agreement under the 1992 Long-Term
         Incentive  Plan --  incorporated  by reference to Exhibit  10.33 to the
         Company's Annual Report on Form 10-K for the fiscal year ended June 30,
         1992 (SEC File No. 0-18902).

10.18*   Form of Performance Unit Award under the 1992 Long-Term  Incentive Plan
         -- incorporated  by reference to Exhibit 10.34 to the Company's  Annual
         Report on Form 10-K for the fiscal  year ended June 30,  1992 (SEC File
         No. 0-18902).

10.19*   Deferred  Compensation  Plan for Directors -- incorporated by reference
         to Exhibit  10.35 to the  Company's  Annual Report on Form 10-K for the
         fiscal year ended June 30, 1992 (SEC File No. 0-18902).


<PAGE>

10.20*   Executive   Incentive  Plan  --   incorporated   by  reference  to  the
         description of such Plan as set forth under  "Compensation  Pursuant to
         Plans - Executive  Incentive Plan" in the Company's Proxy Statement for
         its 1992 Annual Meeting of Shareholders (SEC File No. 0-18902).

10.21    Lease Agreement dated January 11, 1993 between Thomas L. Koster,  Inc.,
         d/b/a/  Realvesco  Properties  and Health  Risk  Management,  Inc.,  as
         amended by First  Amendment to Lease  Agreement dated January 29, 1993,
         related to the Company's offices at 5250 Lovers Lane, Portage, Michigan
         -- incorporated  by reference to Exhibit 10.34 to the Company's  Annual
         Report on Form 10-K for the fiscal  year ended June 30,  1993 (SEC File
         No. 0-18902).

10.22    Second  Amendment to Lease dated July 22, 1997 for the Lease  Agreement
         dated January 11, 1993 between Thomas L. Koster, Inc., d/b/a/ Realvesco
         Properties and Health Risk Management,  Inc.,  related to the Company's
         offices  at  5250  Lovers  Lane,  Portage,   Michigan--incorporated  by
         reference to Exhibit 10.22 to the Company's  Annual Report on Form 10-K
         for the year ended June 30, 1997 (SEC File No. 0-18902).

10.23    Fourth  Amendment to Lease dated July 12, 1993 for the Lease  Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at  7900  and  8000  West  78th  Street,   Minneapolis,   Minnesota  --
         incorporated  by reference  to Exhibit  10.27 to the  Company's  Annual
         Report on Form 10-K for the fiscal  year ended June 30,  1994 (SEC File
         No. 0-18902).

10.24    Fifth  Amendment  to Lease dated May 12,  1994 for the Lease  Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at 8000 West 78th Street,  Minneapolis,  Minnesota --  incorporated  by
         reference to Exhibit 10.28 to the Company's  Annual Report on Form 10-K
         for the fiscal year ended June 30, 1994 (SEC File No. 0-18902).

10.25    Sixth Amendment to Lease dated October 18, 1995 for the Lease Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at 8000  West  78th  Street,  Minneapolis,  Minnesota--incorporated  by
         reference to Exhibit 10.25 to the Company's  Annual Report on Form 10-K
         for the year ended June 30, 1997 (SEC File No. 0-18902).

10.26    Third  Amendment  to Lease dated May 12,  1994 for the Lease  Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at 7900 West 78th Street,  Minneapolis,  Minnesota --  incorporated  by
         reference to Exhibit 10.29 to the Company's  Annual Report on Form 10-K
         for the fiscal year ended June 30, 1994 (SEC File No. 0-18902).

10.27    Fourth  Amendment  to  Lease  dated  October  18,  1995  for the  Lease
         Agreement  dated  August 14, 1987  between  The Mutual  Life  Insurance
         Company of New York and Health Risk  Management,  Inc.,  related to the
         Company's   offices   at   7900   West   78th   Street,    Minneapolis,
         Minnesota--incorporated  by reference to Exhibit 10.27 to the Company's
         Annual  Report on Form 10-K for the year ended June 30,  1997 (SEC File
         No. 0-18902).

10.28    Revolving  Credit and Term Loan  Agreement  dated June 24, 1994 between
         First Bank National  Association  and Health Risk  Management,  Inc. --
         incorporated  by reference  to Exhibit  10.30 to the  Company's  Annual
         Report on Form 10-K for the fiscal  year ended June 30,  1994 (SEC File
         No. 0-18902).

10.29    First Amendment to Revolving Credit and Term Loan Agreement dated March
         31, 1995 for the Revolving  Credit and Term Loan  Agreement  dated June
         24,  1994  between  First Bank  National  Association  and Health  Risk
         Management,  Inc. --  incorporated by reference to Exhibit 10.27 to the
         Company's Annual Report on Form 10-K for the fiscal year ended June 30,
         1995 (1994 (SEC File No. 0-18902).


<PAGE>

10.30    Second  Amendment to  Revolving  Credit and Term Loan  Agreement  dated
         January 19, 1996 for the Revolving Credit and Term Loan Agreement dated
         June 24, 1994 between First Bank National  Association  and Health Risk
         Management,  Inc. --  incorporated by reference to Exhibit 10.27 to the
         Company's Annual Report on Form 10-K for the fiscal year ended June 30,
         1996 (SEC File No. 0-18902).

10.31    Third  Amendment  to  Revolving  Credit and Term Loan  Agreement  dated
         January 31, 1997 for the Revolving Credit and Term Loan Agreement dated
         June 24, 1994 between First Bank National  Association  and Health Risk
         Management,  Inc--incorporated  by  reference  to Exhibit  10.31 to the
         Company's  Annual  Report on Form 10-K for the year ended June 30, 1997
         (SEC File No. 0-18902).

10.32    Security Agreement dated June 24, 1994 relating to Revolving Credit and
         Term  Loan  Agreement  of same date --  incorporated  by  reverence  to
         Exhibit  10.31 to the  Company's  Annual  Report  on Form  10-K for the
         fiscal year ended June 30, 1994 (SEC File No. 0-18902).

10.33    Managed  Health Care  Service  Agreement  dated  April 4, 1994  between
         Health Risk Management,  Inc. and Hospital  Corporation of America,  as
         amended by Amendment No. 1 to the Managed Health Care Service Agreement
         dated  May  11,  1995  between   Health  Risk   Management,   Inc.  and
         Columbia/HCA  Healthcare  Corporation --  incorporated  by reference to
         Exhibit  10.29 to the  Company's  Annual  Report  on Form  10-K for the
         fiscal year ended June 30, 1995 (SEC File No. 0-18903).

10.34    Second  Amendment to Managed  Health Care Service  Agreement  effective
         January 1, 1996 for the Managed  Health Care  Service  Agreement  dated
         April 4, 1994 between  Health Risk  Management,  Inc. and  Columbia/HCA
         Healthcare Corporation -- incorporated by reference to Exhibit 10.30 to
         the Company's Annual Report on Form 10-K for the fiscal year ended June
         30, 1996 (SEC File No. 0-18903).

10.35    Claim  Administration  Service  Agreement  dated April 4, 1994  between
         Health Risk Management,  Inc. and Hospital  Corporation of America,  as
         amended  by  Amendment  No.  1  to  the  Claim  Administration  Service
         Agreement dated May 11, 1995 between Health Risk  Management,  Inc. and
         Columbia/HCA  healthcare  Corporation --  incorporated  by reference to
         Exhibit  10.30 to the  Company's  Annual  Report  on Form  10-K for the
         fiscal year ended June 30, 1996 (SEC File No. 0-18903).

10.36    Second Amendment to Claim  Administration  Service Agreement  effective
         January 1, 1996 for the Claim  Administration  Service  Agreement dated
         April 4, 1994 between  Health Risk  Management,  Inc. and  Columbia/HCA
         Healthcare Corporation -- incorporated by reference to Exhibit 10.32 to
         the Company's Annual Report on Form 10-K for the fiscal year ended June
         30, 1996 (SEC File No. 0-18903).

10.37    Lease  Agreement dated May 26, 1989 between The Hornet Group and Health
         Program Managers,  Inc. related to the Company's offices at 7801 Folsom
         Boulevard,   Sacramento,   California  and  First  Amendment  to  Lease
         Agreement  dated  December 12, 1994 between the Hornet Group and Health
         Program Managers,  Inc -- incorporated by reference to Exhibit 10.33 to
         the Company's Annual Report on Form 10-K for the fiscal year ended June
         30, 1996 (SEC File No. 0-18903).


<PAGE>

10.38    Managed Care Service  Agreement  dated October 29, 1996 between  Health
         Risk Management,  Inc. and Keystone Mercy Health  Plan--incorporated by
         reference to Exhibit 10.38 to the Company's  Annual Report on Form 10-K
         for the year  ended  June 30,  1997  (SEC  File No.  0-18902). 

10.39    QualityFIRST(R)  License  Agreement  dated July 11, 1996 between Health
         Risk Management,  Inc. and Keystone Mercy Health  Plan--incorporated by
         reference to Exhibit 10.39 to the Company's  Annual Report on Form 10-K
         for the year ended June 30, 1997 (SEC File No. 0-18902).

10.40    Amendment No. 1 to the Managed Care Service  Agreement  between  Health
         Risk Management,  Inc. and Keystone Mercy Health Plan effective October
         1,  1997--incorporated  by reference to Exhibit  10.40 to the Company's
         Annual  Report on Form 10-K for the year ended June 30,  1997 (SEC File
         No. 0-18902).

10.41    Management   Services   Agreement  dated  February  24,  1998,  between
         Pennsylvania  HRM,  Inc.  (a wholly  owned  subsidiary  of Health  Risk
         Management, Inc) and Oxford Health Plans (PA), Inc.

10.42    Health Care Excess Risk Insurance Policy dated April 13, 1998,  between
         Pennsylvania  HRM,  Inc.  (a wholly  owned  subsidiary  of Health  Risk
         Management, Inc) and Kentucky Medical Insurance Company.

10.43    Lease agreement  dated May 5, 1998,  between MEPC O &I, Inc. and Health
         Risk  Management,  Inc.  related  to the  Company's  offices  at  10900
         Hampshire Avenue South,  Minneapolis,  Minnesota and Amendment of Lease
         dated September 16, 1998.

10.44    Amended and Restated  Revolving Credit and Term Loan Agreement  between
         Health Risk Management,  Inc. and U.S. Bank National  Association dated
         May 1, 1998.

18.      Letter regarding change in accounting principle.

21.      List of subsidiaries.

23.      Consent of Independent Auditors.

27.1     Financial  Data  Schedule  for the Year ended June 30,  1998  (filed in
         electronic format only).

27.2     Restated  Financial Data Schedule for the 3 months ended  September 30,
         1997 (filed in electronic format only).

27.3     Restated  Financial  Data Schedule for the 6 months ended  December 31,
         1997 (filed in electronic format only).

27.4     Restated  Data Schedule for the 9 months ended March 31, 1998 (filed in
         electronic format only).

--------------
*    Indicates  a  management  contract  or  compensatory  plan  or  arrangement
     required to be filed as an exhibit to Form 10-K.


(b)      Reports on Form 8-K.

         The Company  filed no reports on Form 8-K during the quarter ended June
         30, 1998.

<PAGE>
                         Report of Independent Auditors

Board of Directors and Shareholders
     of Health Risk Management, Inc.

We have  audited the  accompanying  consolidated  balance  sheets of Health Risk
Management,  Inc.  as of June 30, 1998 and 1997,  and the  related  consolidated
statements of  operations,  changes in  shareholders'  equity and cash flows for
each of the three  years in the period  ended  June 30,  1998.  Our audits  also
included the  financial  statement  schedule  listed in the Index at Item 14(a).
These financial  statements and schedule are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedule 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 consolidated financial position of Health
Risk Management, Inc. at June 30, 1998 and 1997, and the consolidated results of
its  operations  and its cash  flows for each of the three  years in the  period
ended  June  30,  1998,  in  conformity  with  generally   accepted   accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly in all material respects the information set forth therein.

As discussed in Note 2 of the  consolidated  financial  statements,  the Company
changed its method of accounting for health plan  management  revenue during the
year ended June 30, 1998.



September 23, 1998


<PAGE>


                          HEALTH RISK MANAGEMENT, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)

                                     ASSETS
<TABLE>
<CAPTION>

                                                                                               June 30,
                                                                                  ------------------------------------
                                                                                       1998                1997
                                                                                  ---------------     ----------------
<S>                                                                               <C>                 <C>          
Current assets:
   Cash and cash equivalents                                                      $       20,624      $       5,349
   Accounts receivable, less of allowance for doubtful accounts of                        11,019             12,367
     $265 ($260 in 1997)
Deferred income taxes                                                                        900                350
Other                                                                                        837                989
                                                                                        --------           --------
     Total current assets                                                                 33,380             19,055

Computer software costs, less amortization of $17,940 ($12,782 in 1997)                   24,284             20,385
Property and equipment, less accumulated depreciation of 
  $14,299 ($11,103 in 1997)                                                                8,670              9,215
Other assets                                                                               4,180              3,068
                                                                                         -------            -------
                                                                                  $       70,514      $      51,723
                                                                                         =======            =======

                                        LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                               $        2,125      $       1,645
   Medical services payable
                                                                                          15,452                --
Accrued expenses                                                                           3,596              3,018
Unearned revenues                                                                          3,708              3,826
Current maturities of notes payable                                                        4,429              1,134
Current portion of capitalized equipment leases                                              596                854
                                                                                        --------          ---------
     Total current liabilities                                                            29,906             10,477

Deferred income taxes                                                                      3,776              3,715
Long-Term portion of notes payable                                                         2,313              2,166
Long-Term portion of capitalized equipment leases                                            734              1,321
Commitments
Shareholders' equity:
Undesignated shares, $.01 par value, 9,700,000 authorized,  none issued Series A
preferred shares, $.01 par value, 300,000 authorized, none issued Common shares,
$.01 par value, 20,000,000 shares authorized, 4,583,694
     issued and outstanding (4,478,245 in 1997)                                               46                 45
Additional paid-in capital                                                                31,728             30,945
Retained earnings                                                                          2,011              3,054
                                                                                        --------          ---------
     Total shareholders' equity                                                           33,785             34,044
                                                                                        --------          ---------
                                                                                  $       70,514      $      51,723
                                                                                        ========          =========
</TABLE>

See accompanying notes.
<PAGE>


                          HEALTH RISK MANAGEMENT, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
<TABLE>
<CAPTION>

                                                              Year Ended June 30,
                                                      -------------------------------
                                                        1998       1997        1996
                                                      --------    --------   --------
<S>                                                   <C>         <C>        <C>       
     Revenues:
       Health plan management services                $ 70,282    $ 62,723   $ 54,507
       Managed care operations                          24,218        --         --
                                                      --------    --------   --------
        Investment income                                  337         187        158
                                                      --------    --------   --------
          Total revenues                                94,837      62,910     54,665

     Operating expenses:
        Cost of health plan management services         53,969      44,640     38,106
        Cost of managed care operations                 23,625        --         --
     Selling, marketing and administration              14,558      13,691     12,602
        Interest expense                                   489         535        708
     Merger costs                                         --           390       --
                                                      --------    --------   --------
          Total operating expenses                      92,641      59,256     51,416
                                                      --------    --------   --------

     Income before income taxes and cumulative
       effect of accounting change                       2,196       3,654      3,249

     Income taxes                                          868       1,413      1,253
                                                      --------    --------   --------

     Income before cumulative effect
       of accounting change                              1,328       2,241      1,996

     Cumulative effect of accounting change,
       net of income tax benefit of $1,342              (2,371)       --         --
                                                      --------    --------   --------

     Net income (loss)                                $ (1,043)   $  2,241   $  1,996
                                                      ========    ========   ========
                                                                            
     Basic earnings per share:
       Income before cumulative effect
          of accounting change                        $    .29    $    .52   $    .49
       Cumulative effect of accounting change             (.52)         --         --
                                                      --------    --------   --------
       Net income (loss)                              $   (.23)   $    .52   $    .49
                                                      ========    ========   ========
     Diluted earnings per share:
       Income before cumulative effect
          of accounting change                        $    .29    $    .50   $    .47
       Cumulative effect of accounting change             (.51)         --         --
                                                      --------    --------   --------
     Net income (loss) 
                                                      $   (.22)   $    .50   $    .47
                                                      ========    ========   ========

     Pro forma net income and per share amounts
       assuming the new revenue recognition 
       accounting policy is approved retroactively:
          Net income                                  $  1,328    $    859   $  2,490
          Basic earnings per share                    $    .29    $    .20   $    .61
          Diluted earnings per share                  $    .29    $    .19   $    .59
 
     Weighted average number of shares outstanding:
       Basic                                             4,524       4,291      4,081
                                                      ========    ========   ========
       Diluted                                           4,663       4,458      4,219
                                                      ========    ========   ========
</TABLE>
See accompanying notes.
<PAGE>


                          HEALTH RISK MANAGEMENT, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                        (in thousands, except share data)

<TABLE>
<CAPTION>


                                           Common Shares
                                            Outstanding                 Additional         Retained
                                   -------------------------------
                                    Number of                             Paid-In          Earnings
                                      Shares            Amount            Capital          (Deficit)        Total
                                   -------------     -------------     --------------   ------------     -----------

<S>                                 <C>              <C>               <C>              <C>              <C>       
Balance at June 30, 1995            4,029,699        $       40        $    26,244      $   (1,183)      $   25,101
Options to purchase common
   shares issued for services                                                   19                               19
Options exercised, including
   tax benefit of $120                143,277                 2              1,275                            1,277
Common shares issued for
contract rights                         7,500                                   81                               81
Net income                                                                                   1,996            1,996
                                   -------------     -------------     --------------   ------------     ------------
Balance at June 30, 1996            4,180,476                42             27,619             813           28,474

Common shares issued                  200,000                 2              2,462                            2,464
Options exercised, including
   tax benefit of $90                  97,769                 1                864                              865
Net income                                                                                   2,241            2,241
                                   -------------     -------------     --------------   ------------     ------------
Balance at June 30, 1997            4,478,245                45             30,945           3,054           34,044
                        
Options exercised                     105,449                 1               783                               784
Net loss                                                                                    (1,043)          (1,043)
                                   =============     =============     ==============   ============     ============
Balance at June 30, 1998            4,583,694        $       46        $    31,728      $    2,011       $   33,785
                                   =============     =============     ==============   ============     ============
</TABLE>
See accompanying notes.


<PAGE>


                          HEALTH RISK MANAGEMENT, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                     Year Ended June 30,
                                                                      ------------------------------------------------
                                                                          1998             1997               1996
                                                                      -------------    -------------     -------------

<S>                                                                   <C>              <C>               <C>        
Cash flows from operating activities:
   Net income (loss)                                                  $    (1,043)     $     2,241       $     1,996
   Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
       Depreciation                                                         3,199            2,816             2,832
       Amortization                                                         5,558            4,830             4,115
       Cumulative effect of accounting change                               2,371               --                --
       Provision for deferred income taxes                                   (489)           1,398             1,231
       Changes in operating assets and liabilities:
         Accounts receivable                                               (1,023)          (2,557)           (2,071)
                                                                                      
         Other assets                                                      (1,360)               7            (1,002)
         Accounts payable                                                     560             (238)               (6)
         Medical services payable                                          15,452               --                --
         Accrued expenses                                                     578              382                39
         Unearned revenues                                                   (118)           1,248               282
                                                                      -------------    -------------     -------------
Net cash provided by operating activities                                  23,685           10,127             7,416

Cash flows from investing activities:
Acquisition of net assets, net of cash acquired                                --             (139)               --
Property and equipment                                                     (2,734)          (2,827)           (2,256)
Capitalized software                                                       (9,057)          (7,396)           (5,779)
                                                                      -------------    -------------     -------------
Net cash used in investing activities                                     (11,791)         (10,362)           (8,035)

Cash flows from financing activities:
Proceeds from notes payable                                                 4,750            1,275             1,500
Principal payments on notes payable                                        (1,308)          (1,278)             (904)
Principal payments on capital leases                                         (845)            (999)           (1,152)
Issuance of common shares                                                     784            3,239             1,174
                                                                      -------------    -------------     -------------
Net cash provided by financing activities                                   3,381            2,237               618
                                                                      -------------    -------------     -------------

Increase (decrease) in cash                                                15,275            2,002                (1)
Cash and cash equivalents at beginning of year                              5,349            3,347             3,348
                                                                      -------------    -------------     -------------

Cash and cash equivalents at end of year                              $    20,624      $     5,349       $     3,347
                                                                      ===========      ===========       ===========

</TABLE>
See accompanying notes.

<PAGE>


                          HEALTH RISK MANAGEMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 1998

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     A.  Principles of Consolidation

         The  consolidated  financial  statements  include  the  accounts of the
         Company and its wholly owned subsidiaries. All significant intercompany
         transactions have been eliminated.

     B.  Nature of Operations

         The Company engages in a single business of managed healthcare services
         which  includes  health  plan  management  services  and  managed  care
         operations.

         The Company's  principal  health plan management  services include care
         management,  price  control,  claims  administration,  and  information
         services  revenues which are derived  principally from software license
         and  subscription  fees  related to its  QualityFIRST(R)  Medical  Risk
         Management  System.  A significant  percentage of the Company's  health
         plan managment revenues are derived from the care management and claims
         administration  management services.  Integrated health plan management
         and  information  services  are  marketed  to  self-insured  employers,
         unions,  government  entities,  insurance  companies,  HMOs,  PPOs  and
         hospitals.  Contractual  relationships  maintained  by the Company with
         such clients subject the Company to revenue fluctuations resulting from
         changes in client employment levels or covered lives,  restructuring of
         benefit  plan  offerings,  and price  adjustments  based upon  contract
         experience, and performance bonuses.

         The Company's  managed care operations began on April 16, 1998 when the
         Company's wholly owned subsidiary, Pennsylvania HRM, Inc., entered into
         a five-year contract with Oxford Health Plans (PA), Inc.  (Oxford).  In
         addition to providing health plan management services, the Company also
         assumes the medical cost risk under the  HealthChoices  Physical Health
         Agreement  between the Commonwealth of Pennsylvania and Oxford.  Oxford
         is a  health  maintenance  organization  (HMO)  duly  licensed  by  the
         Commonwealth  of Pennsylvania  to offer certain  insurance  products to
         covered  members in the  HealthChoices  program for Medical  Assistance
         recipients  in the Oxford  service area.  The Company  receives a fixed
         amount per enrolled member per month to assume the medical cost risk.

         In 1998,  revenues from two clients were  twenty-six  percent (26%) and
         sixteen percent (16%) of total  revenues.  The contract with the client
         representing 16% of 1998 revenues will terminate September 30, 1998. In
         1997,  revenues  from two  clients  were  seventeen  percent  (17%) and
         sixteen  percent (16%) of total revenues.  The markets  serviced by the
         Company are principally domestic.

     C.  Uses of Estimates

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and assumptions  that affect the amounts  reported in the  consolidated
         financial  statements and  accompanying  notes, the most significant of
         which  relates to  incurred  but not yet  reported  claims  included in
         medical  services  payable and performance  bonus accruals  included in
         accounts receivable. Actual results could differ from such estimates.


<PAGE>

     D.  Revenue Recognition

         Revenue for health plan management services and managed care operations
         is generally  recognized  ratably over the contract  periods.  See also
         Note 2.  Included in health plan  management  services  and manged care
         operations  revenue are estimated  amounts for performance  bonuses and
         contract  adjustments.  These  estimates are recognized when reasonably
         determinable.  Adjustments  to these  estimates are recorded in current
         operations

     E.  Unearned Revenues

         Unearned revenues represent amounts billed to clients for contract
         services yet to be performed.

     F.  Computer Software Costs

         The Company  capitalizes  computer  software  costs in accordance  with
         Statement of Financial  Accounting Standards No. 86, Accounting for the
         Costs of Computer Software to be Sold,  Leased, or Otherwise  Marketed.
         The capitalized  costs are amortized based on the greater of the amount
         computed  using (a) the ratio of current gross revenues for the product
         to the total of current and anticipated  future gross revenues or (b) a
         straight-line  basis over their  estimated  useful lives,  ranging from
         three to ten years.

         In March  1998,  the AICPA  issued SOP 98-1  "Accounting  for  Computer
         Software Developed For or Obtained For Internal Use" (the SOP) which is
         effective  for the  Company  beginning  on July 1,  1999.  The SOP will
         require the  capitalization of certain costs incurred after the date of
         adoption in  connection  with  developing  or  obtaining  software  for
         internal use. The Company currently  capitalizes  internal-use software
         related  to its  Care  Management  software  and  Claim  Administration
         software. The Company has not completed its assessment of the impact of
         the SOP's provisions.

     G.  Property and Equipment

         Property and  equipment  are stated at cost.  Depreciation  is provided
         over the  estimated  useful  lives of the  assets  using  straight-line
         methods for financial  reporting  purposes and accelerated  methods for
         tax  purposes.  Estimated  useful  lives range from three to ten years.
         Equipment  under  capital  leases  is  amortized  over  the term of the
         respective  lease or over the  service  lives of the  assets  for those
         leases which substantially transfer ownership.

     H.  Income Taxes

         The Company  reports  income  taxes in  accordance  with  Statement  of
         Financial  Accounting  Standards No. 109,  Accounting for Income Taxes.
         The statement  requires that all deferred tax balances be determined by
         using  the tax  rate  expected  to be in  effect  when the  taxes  will
         actually be paid. A deferred income tax provision or credit is provided
         based on changes in deferred tax asset or liability balances.

     I.  Cost of Managed Care Operations

         Cost of managed care  operations  principally  includes  the  estimated
         ultimate net cost of all reported and unreported claims incurred during
         the year.  The  liability  for medical  services  payable is  estimated
         primarily by the use of cost per contract data and  completion  factors
         developed  from  historical  lag  patterns.  Because the Company  began
         managed care operations in April 1998, limited  historical  information
         is  available  to  determine  such  estimate.   Although   considerable
         variability is inherent in such estimates, management believes that the
         liability for medical services  payable is adequate.  The estimates are
         continually  reviewed  and  adjusted  as  experience  develops  or  new
         information  becomes known.  Such  adjustments  are included in current
         operations.


<PAGE>

     J.  Net Income (Loss) Per Common Share

         In February  1997,  the  Financial  Accounting  Standards  Board (FASB)
         issued Statement No. 128,  "Earnings Per Share." Statement 128 replaced
         the previously  reported primarily and fully diluted earnings per share
         with basic and diluted earninsg per share.  Unlike primary earnings per
         share,  basic  earnings  per share  excludes  any  dilutive  effects of
         options.  Diluted  earnings per share is very similar to the previously
         reported  fully  diluted  earnings  per share.  All  earnings per share
         amounts for all periods have been  restated to conform to the Statement
         128 requirements.

         The  following  table sets forth the  computation  of basic and diluted
         earnings  per share for the years ended June 30 (in  thousands,  except
         per share data)
<TABLE>
<CAPTION>

                                                                           1998             1997              1996
                                                                       -------------    -------------    -------------

<S>                                                                    <C>              <C>              <C>        
     Numerator:
       Income before cumulative effect of
         accounting change                                             $     1,328      $     2,241      $     1,996
       Cumulative effect of accounting change                               (2,371)              --               --
                                                                       -------------    ------------     ------------
       Net income (loss)                                               $    (1,043)     $     2,241      $     1,996
                                                                       =============    ============     ============

     Denominator:
       Weighted-average shares-basic
       Effect of dilutive stock options                                      4,524            4,291            4,081
       Weighted-average shares-diluted                                         139              167              138
                                                                       =============    ============     ============
                                                                             4,663            4,458            4,219
                                                                       =============    ============     ============
     Basic earnings per share:
       Income before cumulative effect of
         accounting change                                             $       .29      $       .52      $       .49
       Cumulative effect of accounting change                                 (.52)              --               --
                                                                       =============    ============     ============
       Net income (loss)                                               $      (.23)     $       .52      $       .49
                                                                       =============    ============     ============

     Diluted earnings per share:
       Income before cumulative effect of
         accounting change                                             $       .29      $       .50      $       .47
       Cumulative effect of accounting change                                 (.51)              --               --
                                                                       -------------    -------------    -------------
       Net income (loss)                                               $      (.22)     $       .50      $       .47
                                                                       =============    =============    =============
</TABLE>


     K.  Shareholder Rights Plan

         On April 4, 1997, the HRM Board of Directors  established a shareholder
         rights plan which provides for a dividend distribution of one preferred
         stock purchase right (a "Right") to be attached to each share of common
         stock of HRM then  outstanding  or  thereafter  issued.  The Rights are
         currently not exercisable or transferable  apart from the common stock.
         Each Right  entitles the holder to purchase from HRM one  one-hundredth
         of a share of Series A Preferred  Stock of HRM at a price of $50.00 per
         one  one-hundredth  of a preferred  share,  subject to adjustment.  The
         Rights become  exercisable if a person or group acquires 15% or more of
         HRM common  stock or  announces  a tender  offer for 15% or more of HRM
         common stock,  subject to certain  exceptions.  After the Rights become
         exercisable, each Right entitles the holder (other than the 15% holder)

<PAGE>

         to purchase  HRM's  common stock having a market value of two times the
         Right's  exercise  price.  Also, if after a person acquires 15% without
         Board  approval,  HRM is acquired  in a merger or similar  transaction,
         each  right  thereafter  would  entitle  a holder  (other  than the 15%
         holder)  to acquire  shares of the  acquiring  company or an  affiliate
         having a market  value of two times the Right's  exercise  price.  Each
         Right is  redeemable at $.001 at any time up to ten days after a person
         acquires 15% of HRM's common stock.  The Rights expire on April 4, 2007
         unless earlier redeemed by HRM.


     L.  Cash and Cash Equivalents

         Short-term   investments   purchased   within  three  months  of  their
         maturities are considered cash equivalents. The Company invests in U.S.
         government  securities and high rated money market funds.  The carrying
         amount  reported in the  consolidated  balance sheets for cash and cash
         equivalents approximates its fair value.

     M.  Merger Termination

         On March  10,  1997,  HRM and  HealthPlan  Services  Corporation  (HPS)
         announced that the merger  agreement dated September 12, 1996, had been
         terminated by mutual arrangement and HPS purchased 200,000 unregistered
         shares of common stock from HRM at a price of $2.5 million  ($12.50 per
         share).  The  consolidated  net income for the year ended June 30, 1997
         includes a one-time charge of $390,000 ($0.05 per share diluted, net of
         tax  benefit)  for the  write-off  of costs  related to the  terminated
         merger agreement with HPS.

     N.  Segment Reporting

         In June 1997, the FASB issued SFAS No. 131  "Disclosure  about Segments
         of an  Enterprise  and  Related  Information"  (SFAS No.  131) which is
         effective  for  fiscal  years   beginning   after  December  15,  1997.
         Accordingly, the Company plans to adopt SFAS No. 131 in the fiscal year
         ending  June 30,  1999.  SFAS No.  131  requires  that a  publicly-held
         company  report  financial  and  descriptive   information   about  its
         operating  segments in financial  statements issued to shareholders for
         interim  and  annual  periods.  SFAS No. 131 also  requires  additional
         disclosures with respect to products and services,  geographic areas of
         operation,  and major  customers.  While  the  Company  has  previously
         disclosed  that it is engaged  in only one  industry  segment,  namely,
         providing managed  healthcare  services,  it has not yet determined the
         segment or other disclosure impacts of SFAS No. 131. Since SFAS No. 131
         deals only with  footnote  disclosures,  it will not have any impact on
         the  consolidated  financial  results  or  financial  condition  of the
         Company.

     O.  Comprehensive Income

         In the year ended  June 30,  1998,  the  Company  adopted  SFAS No. 130
         "Reporting  Comprehensive  Income."  The  adoption had no impact on the
         consolidated financial statements of the Company.

     P.  Reclassification

         Certain  items  in the 1997 and 1996  financial  statements  have  been
         reclassified to conform to the 1998 presentations.

2.   Accounting Change

         Effective  July 1, 1997,  the Company  changed its method of accounting
         for service  revenue  related to the Company's  health plan  management
         services from a policy of revenue being generally  recognized  based on
         an estimate of the services to be provided over the service period to a
         policy  under which  revenue is  recognized  ratably  over the contract
         period. The change was made

<PAGE>

     because management believes that the new method will provide for consistent
     accounting  methods for its health plan management revenue services and the
     Company's new managed care  operations  revenue,  is more  prevalent in the
     health management industry, and will reduce the administrative burden.

     The cumulative effect of the change in accounting  principles as of July 1,
     1997 resulted in a pre-tax, non-cash charge of $3,713,000 ($2,371,000 after
     tax  benefit  or $.52 per share for basic and $.51 per share for  diluted).
     Income before  cumulative effect of accounting change and basic and diluted
     earnings  per share for 1998  would  have been  $1,826,000,  $.40 and $.39,
     respectively,  without the accounting  change compared to $1,328,000,  $.29
     and $.29,  respectively,  with the accounting  change. On a pro-forma basis
     this change  would have  decreased  1997 and  increased  1996 net income by
     $1,382,000 and $494,000,  respectively. The pro-forma impact on the related
     basic and diluted  earnings per share would have been a decrease in 1997 of
     $.32 per share and $.31 per share, respectively, and an increase in 1996 of
     $.12 per share for each.


3.   COMPUTER SOFTWARE COSTS

     Computer software costs consist of the following at June 30:

<TABLE>
<CAPTION>

                                                                                           1998              1997
                                                                                              (in thousands)

<S>                                                                                     <C>               <C>      
         Care Management Software
              Cost.....................................................                 $  17,268         $  12,932
              Less accumulated amortization............................                     7,391             5,177
                                                                                          -------            ------
              Net book value...........................................                     9,877             7,755
         Claim Administration Software
              Cost.....................................................                     8,852             7,601
              Less accumulated amortization............................                     3,708             2,913
                                                                                          -------           -------
              Net book value...........................................                     5,144             4,688
         Guidelines, Protocols and Medical Analysis Software
              Cost.....................................................                    16,104            12,634
              Less accumulated amortization............................                     6,841             4,692
                                                                                          -------           -------
              Net book value...........................................                     9,263             7,942
                                                                                          -------            ------

         Computer Software Costs, .....................................                 $  24,284         $  20,385
                                                                                           ======            ======
</TABLE>

     Amortization of these costs was as follows for the years ended June 30:

<TABLE>
<CAPTION>

                                                                        1998             1997              1996
                                                                   -------------   --------------     ---------
                                                                                   (in thousands)

<S>                                                                     <C>              <C>               <C>     
         Care Management Software.............................          $  2,214         $  1,791          $  1,485
         Claim Administration Software........................               795              735               645
         Guidelines, Protocols and Medical Analysis Software..             2,149            1,617             1,279
                                                                           -----            -----             -----

         Amortization Expense.................................          $  5,158         $  4,143          $  3,409
                                                                           =====            =====             =====
</TABLE>


<PAGE>

4.   PROPERTY AND EQUIPMENT

     Property and equipment consists of the following at June 30:

<TABLE>
<CAPTION>

                                                                                         1998              1997
                                                                                        --------             -----
                                                                                              (in thousands)

         Owned

<S>                                                                                      <C>               <C>     
         Office equipment, furniture and fixtures......................                  $  5,788          $  5,435
         Leasehold improvements........................................                     1,719             1,594
         Data processing equipment.....................................                    10,348             8,175
                                                                                         --------             -----
                                                                                           17,855            15,204
         Less accumulated depreciation.................................                    10,676             8,374
                                                                                         --------             -----

         Net property and equipment owned..............................                     7,179             6,830
                                                                                          -------             -----

         Capitalized leases

         Office equipment and furniture................................                     1,271             1,271
         Data processing equipment.....................................                     3,843             3,843
                                                                                          -------             -----
                                                                                            5,114             5,114
         Less accumulated depreciation.................................                     3,623             2,729
                                                                                          -------             -----

         Net capitalized leases........................................                     1,491             2,385
                                                                                           ------             -----

         Property and equipment........................................                  $  8,670          $  9,215
                                                                                            =====             =====
</TABLE>

5.   NOTES PAYABLE

     Notes payable consist of the following at June 30:
<TABLE>
<CAPTION>

                                                                                            1998              1997
                                                                                         ---------         ----------
                                                                                                (in thousands)
<S>                                                                                      <C>               <C>         
     Term  loans  payable  to bank in  monthly  installments  of  $119,084  plus
     interest at bank's  reference  rate plus 0.375%  (8.875% at June 30, 1998),
     with  the  last  payment  due  December  31,  2002.   Secured  by  accounts
     receivable, equipment, fixtures and general intangibles........................     $  3,742          $  3,246

     Note payable to bank under revolving credit agreement with interest payable
     monthly at the bank's reference rate plus 0.375% (8.875% at June 30, 1998),
     due January 31, 1999.  Secured by accounts receivable, equipment, fixtures 
     and general intangibles........................................................        3,000                --

     Note payable to bank...........................................................           --                54
                                                                                            -----             -----
                                                                                            6,742             3,300
     Less Current Maturities........................................................        4,429             1,134
                                                                                            -----             -----
     Long-Term Portion..............................................................     $  2,313          $  2,166
                                                                                            =====             =====
</TABLE>
<PAGE>

     The Company's  revolving  credit agreement with a bank permits it to borrow
     up to $10,000,000  under a revolving loan. The revolving  credit  agreement
     terminates on January 31, 1999. The Company had available  $3,258,000 under
     the revolving credit facility at June 30, 1998.

     The carrying  amounts of the Company's  borrowings  under its term loan and
     notes payable approximate their fair value.

     Under terms of the revolving credit and term loan  agreements,  the Company
     is  prohibited  from  paying  dividends  on its stock  without  the  bank's
     consent.

     Scheduled  payments by fiscal year under terms of the notes payable will be
     $4,429,000 in 1999,  $905,000 in 2000,  $734,000 in 2001,  $499,000 in 2002
     and $175,000 in 2003.

     Total interest paid on notes payable was $335,000,  $299,000,  and $281,000
     for the years ended June 30, 1998, 1997 and 1996, respectively.

6.   REINSURANCE AGREEMENT

     The  Company  maintains  a  reinsurance  contract  to control  exposure  to
     potential  medical losses arising from large risks  associated with managed
     care  operations.  To the  extent  that  the  reinsurer  does  not meet its
     obligations  assumed under the  reinsurance  contract,  the Company remains
     primarily  liable  for  the  medical  losses.  Reinsurance  premiums,  were
     $445,000 in 1998 and are  included in cost of managed care  operations.  No
     amounts were recoverable under terms of the reinsurance  contract in fiscal
     1998.

7.   OPTIONS

     At June 30, 1998, the Company's 1992 Long-Term  Incentive Plan and the 1990
     Stock Option Plan ("the Plans") permitted the granting of 1,200,000 options
     to officers,  directors and employees.  These can be either incentive stock
     options or non-qualified options. Options are generally granted at not less
     than  market  value at the  date of grant  and  generally  for a  five-year
     period.  The Options  have been  granted at prices  ranging  from $4.875 to
     $15.50. A total of 108, 462 common shares are available for future issuance
     under the Plans at June 30, 1998.

     Transactions related to outstanding options during the last three years are
     summarized as follows:

                                                                   Weighted
                                                                    Average
                                    Total       Exercisable     Exercise Price


     Balance at June 30, 1995       689,027        435,244         $  9.04
         Granted                    139,283             --            9.04
         Became exercisable              --        224,117            8.26
         Exercised                 (143,277)      (143,277)           8.05
         Expired                   (151,219)      (151,219)          11.09
                                    -------        -------           -----
     Balance at June 30, 1996       533,814        364,865            8.72
         Granted                    260,550             --           12.32
         Became exercisable              --         99,324            7.41
         Exercised                  (97,769)       (97,769)           9.06
         Expired                    (24,536)       (24,536)           8.85
                                   --------       --------           -----
     Balance at June 30, 1997       672,059        341,884           10.06
         Granted                    237,600             --           12.61
         Became exercisable              --        161,523           10.36
         Exercised                 (105,449)      (105,449)           8.89
         Expired                    (77,341)       (71,041)          11.23
                                   --------       --------           -----
     Balance at June 30, 1998       726,869        326,917          $10.72 
                                   ========       ========           =====



<PAGE>

     The following table summarizes  information about the stock options at June
     30, 1998

<TABLE>
<CAPTION>

                                         Options Outstanding                        Options Exercisable
                       ---------------------------------------------------  --------------------------------
                                            Weighted
                                             Average            Weighted                          Weighted
        Range of                            Remaining            Average                           Average
     Exercise Prices        Number      Contractual Life      Exercise Price       Number       Exercise Price
     ---------------        ------      ----------------      --------------       ------       --------------
<S>                             <C>             <C>              <C>               <C>             <C>    
     $4.875 - $6.50              14,723          1.00             $  5.29           14,723          $  5.29
     $7.00                      103,250          1.59                7.00          103,250             7.00
     $7.25 - $8.50               91,613          2.34                7.97           69,404             7.96
     $9.75                       10,500          0.14                9.75           10,500             9.75
     $10.125                     72,150          4.00               10.13           32,668            10.13
     $10.375-$10.69              24,533          3.23               10.44           14,634            10.47
     $11.00                      52,000          4.00               11.00           45,670            11.00
     $11.25-$12.00               31,600          3.01               11.58           25,068            11.54
     $12.625                    181,600          4.00               12.63            2,500            12.63
     $12.875-$13.25             126,900          4.00               13.21            5,000            12.88
     $14.75 - $15.50             18,000          4.75               14.83            3,500            15.04
                                 ------          ----               -----            -----            -----
     $4.875-$15.50              726,869          3.28              $10.72          326,917          $  8.81
                                =======          ====               =====          =======           ======
</TABLE>

     The number of options scheduled to expire by fiscal year is 29,023 in 1999,
     112,507 in 2000, 117,689 in 2001, 454,150 in 2002, and 13,500 in 2003.

     As permitted by FAS 123,  "Accounting  for Stock-Based  Compensation",  the
     Company  has  elected to follow  Accounting  Principles  Board  Opinion 25,
     "Accounting  for Stock Issued to Employees," to measure  compensation  cost
     for employee  stock  options.  Under APB 25, if the  exercise  price of the
     Company's  employee stock options equals the market price of the underlying
     stock on the date of grant, no compensation expense is recognized.

     Pro forma  information  regarding  net  income  and  earnings  per share is
     required by Statement  123, and has been  determined  as if the Company had
     accounted  for its employee  stock  options  under the fair value method of
     that Statement.  The fair value for these options was estimated at the date
     of grant using a  Black-Scholes  option  pricing  model with the  following
     weighted  average  assumptions  for the years ended June 30, 1998 and 1997:
     risk-free  interest  rates  ranging  from  5.25% to 5.625% in 1998 and from
     5.85% to 6.73% in 1997 and 1996; dividend yield of 0%; volatility factor of
     the expected market price of the Company's common stock of .577 in 1998 and
     .513 in 1997 and 1996; and a weighted  average  expected life of the option
     of 3.5 years.


<PAGE>

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
     estimating  the  fair  value  of  traded  options  which  have  no  vesting
     restriction  and are fully  transferable.  In  addition,  option  valuation
     models  require the input of highly  subjective  assumptions  including the
     expected  stock price  volatility.  Because the  Company's  employee  stock
     options have characteristics  significantly  different from those of traded
     options,  and  because  changes in the  subjective  input  assumptions  can
     materially  affect the fair value estimate,  in management's  opinion,  the
     existing models do not necessarily  provide a reliable  measure of the fair
     value of its employee stock options.

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
     options is amortized over the option's vesting period. Had the compensation
     cost been  determined  consistent with FAS 123, on a pro-forma  basis,  the
     Company's net loss for 1998 would have increased $282,000 or $.06 per share
     for basic and diluted  earnings per share purposes.  For 1997 and 1996, net
     income would have been reduced $324,000 and $233,000, respectively, or $.07
     and $.06 per  share  for basic and  diluted  earnings  per share  purposes,
     respectively.

8.   INCOME TAXES

     The  components of the provision for income taxes for the three years ended
     June 30 were as follows:


                                       1998              1997             1996
                                    -----------   --------------    ----------
                                                  (in thousands)
         Current:
              Federal.............   $     --       $      5         $      8
              State...............         15             10               14
         Deferred.................        853          1,398            1,231
                                      -------        -------            -----
                                     $    868       $  1,413         $  1,253
                                      =======        =======           ======

     Deferred income taxes reflect the net tax effects of temporary  differences
     between  the  carrying  amounts of assets  and  liabilities  for  financial
     reporting  purposes  and the  amounts  used for  income tax  purposes.  The
     components of the deferred  income tax liabilities and assets as of June 30
     were as follows:

                                                       1998              1997
                                                            (in thousands)
         Deferred tax liabilities:
              Prepaid expenses......................   $     58       $     24
              Other assets..........................        172            253
              Computer software costs...............      8,519          7,437
              Tax over book depreciation............      1,016            758
                                                          -----          -----
                  Total deferred tax liabilities....      9,765          8,472


         Deferred tax assets:
              Receivables...........................      1,747             94
              Accrued expenses......................        428            280
              Net operating loss carryforwards......      5,487          5,248
                                                          -----          -----
                  Total deferred tax assets.........      7,662          5,622
         Less valuation allowance...................       (773)          (515)
                                                          -----          -----
                  Total net deferred tax assets.....      6,889          5,107
                                                          -----          -----

         Net deferred tax liabilities...............   $  2,876       $  3,365
                                                          =====          =====
<PAGE>

     A reconciliation  of the statutory federal income tax rate to the effective
     tax rate is as follows:

                                               1998          1997          1996
                                              ------        ------        ------

          Statutory rate................       34.0%         34.0%        34.0%
          State income taxes............        2.8%          2.7%         2.7%
          Non-deductible meals and 
           entertainment expenses.......        1.4%           .8%          .7%
          Other.........................        1.3%          1.2%         1.2%
                                              -----         -----        -----
                                               39.5%         38.7%        38.6%
                                              =====         =====        =====

     At June 30, 1998, the Company had net operating loss (NOL) carryforwards of
     $14,500,000  for income tax purposes only that expire in years 2000 through
     2012.  Included  in  the  NOL is  approximately  $2,124,000  of  deductions
     resulting  from  stock  options.  These  deductions  currently  have a full
     valuation allowance and when realized for financial statement purposes they
     will not result in a reduction in income tax expense.
     Rather, the benefit will be recorded as additional paid-in capital.

     Total income tax paid for the years ended June 30, 1998,  1997 and 1996 was
     $14,786, $15,090 and $20,600, respectively.

9.   COMMITMENTS

     The  Company  leases its office  facilities  and  various  equipment  under
     operating and capital leases. Rental expense was approximately  $4,276,000,
     $3,564,000  and  $2,881,000,  for the years ended June 30, 1998,  1997, and
     1996, respectively.  The following is a schedule by years of future minimum
     rental  payments  required under  operating  leases as of June 30, 1998 (in
     thousands):

     Year ending June 30:

         1999                           $3,302
         2000                            2,846
         2001                            2,486
         2002                            1,580
         2003                            1,475
         Thereafter                      9,861
                                       -------
     Total minimum rental payments     $21,550
                                       =======

     In addition to the above amounts,  additional rental payments are due under
     the office facility leases based on the lessor's operating costs.






<PAGE>

     The following is a schedule of future  minimum lease payments under capital
     leases as of June 30, 1998 (in thousands):

     Years ending June 30:

         1999                                  $  682
         2000                                     303
         2001                                     295
         2002                                     223
                                               ------
                              
     Total minimum lease payments               1,503
     Less amount representing interest            173
                                               ------

     Net minimum lease payments                 1,330
     Less current maturities                      596
                                               ------
     Long-Term portion                         $  734
                                               ======

     The Company entered into no capital leases in the year ended June 30, 1998.
     The Company entered into capital lease agreements aggregating $460,000, and
     $432,000  for the years  ended  June 30,  1997 and 1996,  respectively,  in
     connection with the purchase of office  equipment,  furniture and fixtures,
     and data processing equipment.

10.  SAVINGS PLAN

     The  Company  has a tax  deferred  savings  plan  in  accordance  with  the
     provisions  of  Section  401(k)  of  the  Internal  Revenue  Code  covering
     substantially all employees.  Under the plan, the Company matches a minimum
     of 10% of  eligible  employees'  contributions  up to 6% of the  employee's
     salary.  Employee  and  employer  matching  contributions  to the  plan are
     remitted to a trustee on a biweekly basis.  Company  contribution  expenses
     were  $442,000,  $350,000  and  $240,000 for the years ended June 30, 1998,
     1997, and 1996, respectively.


<PAGE>

11.  QUARTERLY FINANCIAL DATA (Unaudited)

     The following table presents certain unaudited quarterly results for fiscal
1998 and 1997 (in thousands, except per share data).

<TABLE>
<CAPTION>


                                                                           Fiscal 1998
                                         -----------------------------------------------------------------------
                                            First           Second         Third          Fourth
                                          Quarter           Quarter       Quarter         Quarter          Year
                                          -------          -------        -------         -------        -------

<S>                                       <C>              <C>             <C>           <C>            <C>    
     Total revenues(1)                    $17,046          $17,989         $16,972       $42,830        $94,837
                                           ======           ======          ======       ======         ======
                                                                                       
     Income (loss) before cumulative                                                   
     effect of accounting change(1)      $    751        $     787       $      31       $  (241)       $ 1,328
                                                                                       
     Cumulative effect of                                                              
     accounting change                     (2,371)              --              --            --         (2,371)
                                           -------      ----------      ----------       ----------     -------
                                                                                       
     Net Income (loss)                   $ (1,620)       $     787       $      31       $  (241)       $(1,043)
                                          ========        ========      ==========       =========      ========
                                                                                       
     Basic earnings per share:                                                         
                                                                                       
     Income (loss) before cumulative                                                   
     effect of accounting change(1)      $     .17(3)    $     .18      $      .01       $  (.05)       $   .29
                                                                                       
     Accounting change                        (.53)             --              --            --           (.52)
                                          ---------     ----------      ----------       ----------     --------
                                                                                       
     Net income (loss)                   $    (.36)      $     .18      $      .01       $  (.05)       $   (.23)
                                          =========      =========      ==========       ===========    ========
                                                                                     
     Diluted earnings per share:

     Before accounting change            $     .16(3)    $     .17      $      .01       $  (.05)       $    .29

     Accounting change                        (.51)             --             --             --            (.51)
                                          ---------      ----------     ----------       ----------      ---------

     Net income (loss)                   $    (.35)      $     .17      $      .01       $  (.05)       $   (.22)

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                                                           Fiscal 1997
                                          ----------------------------------------------------------------------
                                            First          Second          Third          Fourth
                                          Quarter          Quarter        Quarter        Quarter          Year

<S>                                       <C>              <C>             <C>            <C>            <C>    
     Total revenues                       $14,439          $15,628         $16,100        $16,743        $62,910
                                           ======           ======          ======         ======         ======

     Net Income                           $   438          $   697         $   438(2)     $   668        $ 2,241
                                           ======           ======          ======         ======         ======

      Earnings per share:

        Basic(3)                          $   .10          $   .17         $   .10(2)     $   .15        $   .52
                                          =========         ======         =======         ======         ======

       Diluted(3)                         $   .10          $   .16         $   .10(2)     $   .15        $   .50
                                          =========         ======         =======         ======         ======

</TABLE>



(1)  Amounts for the quarters ended  September 30, 1997,  December 31, 1997, and
     March 31, 1998 have been restated from the amounts previously reported. The
     restated  amounts  reflect  the change in  accounting  method  for  revenue
     recognition  of health  plan  management  services  adopted  in the  fourth
     quarter but effective  under  Accounting  Principles  Board Opinion No. 20,
     Accounting  Changes,  as of July 1, 1997. The effect of the restatement was
     to recognize in the first quarter ended  September 30, 1997 the  cumulative
     effect of this change in accounting principle,  which reduced net income by
     $2,371,000 ($.52 per share for basic and $.51 per share for diluted, and to
     increase net income before  cumulative  effect of the accounting  change by
     $179,000  ($.04 per share diluted) and $142,000 ($.03 per share diluted) in
     the first and second  quarters  ended  September  30 and December 31, 1997,
     respectively,  and reduce net income for the third  quarter ended March 31,
     1998 by  $139,000  ($.03  per share  diluted)  from the  amount  previously
     reported.

(2)  Includes a one-time charge of $239,000,  net of tax benefit ($.05 per share
     diluted),  for the  write-off  of costs  related to the  terminated  merger
     agreement with HPS.

(3)  The earnings per share amounts have been restated to comply with  statement
     of Financial Accounting Standards No. 128, Earnings per share.


<PAGE>


                                                                     Schedule II

                          HEALTH RISK MANAGEMENT, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>



                                             Balance at     Charged to     Charged to                     Balance at
                                            Beginning of     Costs and       Other                          End of 
                                               Period        Expenses       Accounts     Deductions         Period
                                            ------------    -----------    ----------    ----------       ----------

<S>                                              <C>            <C>          <C>          <C>               <C>     
Year ended June 30, 1998:
   Allowance for uncollectible accounts          $260,000       $113,339                  $108,339(1)       $265,000

Year ended June 30, 1997:
   Allowance for uncollectible accounts          $200,000       $127,014                   $67,014(1)       $260,000

Year ended June 30, 1996:
   Allowance for uncollectible accounts          $300,000       $241,725                  $341,725(1)       $200,000
----------------
(1)  Uncollectible accounts written off.
</TABLE>



<PAGE>

                                   SIGNATURES

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

                                                HEALTH RISK MANAGEMENT, INC.

September 28, 1998                              By: /s/ Gary T. McIlroy, M.D.
                                                     Gary T. McIlroy, M.D.
                                                     Chief Executive 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 dates indicated.

September 28, 1998          By: /s/ Gary T. McIlroy, M.D.
                                 Gary T. McIlroy, M.D.
                                 Chairman of the Board, Chief Executive Officer
                                 and Director (principal executive officer)

September 28, 1998          By: /s/ Marlene Travis
                                 Marlene Travis
                                 President, Secretary, Chief Operating Officer
                                 and Director

September 28, 1998          By: /s/ Thomas P. Clark
                                 Thomas P. Clark
                                 Senior Vice President, Finance and Chief
                                 Financial Officer (principal   financial
                                 officer and  principal accounting officer)

September 28, 1998          By: /s/ Vance Kenneth Travis
                                 Vance Kenneth Travis, Director

September 28, 1998          By: /s/ Gary L. Damkoehler
                                 Gary L. Damkoehler, Director

September 28, 1998          By: /s/ Raymond G. Schultze, M.D.
                                 Raymond G. Schultze, M.D., Director

September 28, 1998          By: /s/ Ronald R. Hahn
                                 Ronald R. Hahn, Director

September 28, 1998          By: /s/ Robert L. Montgomery
                                 Robert L. Montgomery, Director


<PAGE>


                                  EXHIBIT INDEX

No.      Description

3.1      Amended and Restated Articles of  Incorporation,  as amended to date --
         incorporated  by  reference  to  Exhibit 3 to the  Company's  Quarterly
         Report on Form 10-Q for the quarter  ended March 31, 1998 (SEC File No.
         0-18902).

3.2      Composite Bylaws of the Company,  as of May 17,  1997--incorporated  by
         reference to Exhibit 3.2 to the  Company's  Annual  Report on Form 10-K
         for the year ended June 30, 1997 (SEC File No. 0-18902)

4.1      Specimen form of the Company's Common Share Certificate -- incorporated
         by reference to Exhibit 4.1 to the Company's  Registration Statement on
         Form S-1 (SEC File No. 33-37595).

4.2      Amended and Restated Articles of Incorporation, as amended to date (see
         Exhibit 3.1).

4.3      Composite Bylaws of the Company, as of May 17, 1997 (see Exhibit 3.2).

4.4      Rights  Agreement  dated  as of  April  4,  1997  between  health  Risk
         Management,  Inc. and Norwest  Bank  Minnesota,  N.A. as Rights  Agent,
         together with the following exhibits thereto:

         (a)  Certificate of Designations of Series A Preferred Stock,
         (b)  Summary of Rights to Purchase Shares of Series A Preferred Stock,
         (c)  Form of Rights Certificate --

         incorporated  by  reference  to  Exhibit  1 to the  Company's  Form 8-A
         Registration Statement filed April 10, 1997 (SEC File No. 0-18902).

10.1     Lease  Agreement  dated  August 14, 1987  between The Mutual  Insurance
         Company of New York and Health  Risk  Management,  Inc.,  as amended by
         First Amendment to Lease dated June 25, 1990,  related to the Company's
         offices  at  7900  West  78th   Street,   Minneapolis,   Minnesota   --
         incorporated by reference to Exhibit 10.1 to the Company's Registration
         Statement on Form S-1 (SEC File No. 33-37595).

10.2     Lease  Agreement  dated  August 14, 1987  between The Mutual  Insurance
         Company of New York and Health  Risk  Management,  Inc.,  as amended by
         First Amendment to Lease dated October 8, 1987 and Second  Amendment to
         Lease dated June 25,  1990,  related to the  Company's  offices at 8000
         West 78th Street,  Minneapolis,  Minnesota -- incorporated by reference
         to Exhibit  10.2 to the  Company's  Registration  Statement on Form S-1
         (SEC File No. 33-37595).

10.3*    Employment  Agreement  dated as of June 20,  1996  between  Health Risk
         Management,  Inc. and Dr. Gary T. McIlroy --  incorporated by reference
         to Exhibit  10.3 to the  Company's  Annual  Report on Form 10-K for the
         fiscal year ended June 30, 1996 (SEC File No. 0-18902).

10.4*    Split Dollar  Agreement  dated as of June 5, 1991  between  Health Risk
         Management,  Inc.  and Dr. Gary T.  McIlroy and the  Amendment to Split
         Dollar  Agreement  dated July 28, 1992 between Health Risk  Management,
         Inc. and Gary T. McIlroy --  incorporated  by reference to Exhibit 10.4
         to the  Company's  Annual Report on Form 10-K for the fiscal year ended
         June 30, 1996 (SEC File No. 0-18902).

10.5*    Employment  Agreement  dated as of June 21,  1996  between  Health Risk
         Management,  Inc. and Marlene O. Travis -- incorporated by reference to
         Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal
         year ended June 30, 1996 (SEC File No. 0-18902).

10.6*    Split Dollar  Agreement  dated as of June 5, 1991  between  Health Risk
         Management,  Inc.  and  Marlene O.  Travis and the  Amendment  to Split
         Dollar  Agreement  dated July 28, 1992 between Health Risk  Management,
         Inc. and Marlene O. Travis -- incorporated by reference to Exhibit 10.6
         to the  Company's  Annual Report on Form 10-K for the fiscal year ended
         June 30, 1996 (SEC File No. 0-18902).


<PAGE>

10.7*    Employment   Agreement   dated  June  21,  1996  between   Health  Risk
         Management,  Inc. and Thomas P. Clark --  incorporated  by reference to
         Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal
         year ended June 30, 1996 (SEC File No. 0-18902).

10.8*    Split Dollar  Agreement  dated as of  September 1, 1991 between  Health
         Risk Management,  Inc. and Thomas P. Clark -- incorporated by reference
         to Exhibit  10.8 to the  Company's  Annual  Report on Form 10-K for the
         fiscal year ended June 30, 1996 (SEC File No. 0-18902).

10.9*    Health Risk Management,  Inc. 1990 Stock Option Plan -- incorporated by
         reference to Exhibit 10.16 to the Company's  Registration  Statement on
         Form S-1 (SEC File No. 33-37595).

10.10*   Form of Stock Option Agreement to be used pursuant to 1990 Stock Option
         Plan --  incorporated  by reference to Exhibit  10.16 to the  Company's
         Annual Report on Form 10-K for the fiscal year ended June 30, 1991 (SEC
         File No. 0-18902).

10.11    Second Amendment to Lease dated January 8, 1992 for the Lease Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at 7900 West 78th Street,  Minneapolis,  Minnesota --  incorporated  by
         reference to Exhibit 10.20 to the Company's  Annual Report on Form 10-K
         for the fiscal year ended june 30, 1992 (SEC File No. 0-18902).

10.12    Third  Amendment to Lease dated January 8, 1992 for the Lease Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at 8000 West 78th Street,  Minneapolis,  Minnesota --  incorporated  by
         reference to Exhibit 10.20 to the Company's  Annual Report on Form 10-K
         for the fiscal year ended June 30, 1992 (SEC File No. 0-18902).

10.13*   Amended and Restated 1992  Long-Term  Incentive  Plan--incorporated  by
         reference to Exhibit 10.13 to the Company's  Annual Report on Form 10-K
         for the year ended June 30, 1997 (SEC File No. 0-18902).

10.14*   Form of Non-Employee Director Initial/Annual Option Agreement under the
         1992 Long-Term  Incentive Plan --  incorporated by reference to Exhibit
         10.30 to the  Company's  Annual Report on Form 10-K for the fiscal year
         ended June 30, 1992 (SEC File No. 0-18902).

10.15*   Form of Non-Employee  Director Elective Option Agreement under the 1992
         Long-Term  Incentive Plan -- incorporated by reference to Exhibit 10.31
         to the  Company's  Annual Report on Form 10-K for the fiscal year ended
         June 30, 1992 (SEC File No. 0-18902).

10.16*   Form of  Incentive  Stock  Option  Agreement  under the 1992  Long-Term
         Incentive  Plan --  incorporated  by reference to Exhibit  10.32 to the
         Company's Annual Report on Form 10-K for the fiscal year ended June 30,
         1992 (SEC File No. 0-18902).

10.17*   Form of  Non-Qualified  Stock Option Agreement under the 1992 Long-Term
         Incentive  Plan --  incorporated  by reference to Exhibit  10.33 to the
         Company's Annual Report on Form 10-K for the fiscal year ended June 30,
         1992 (SEC File No. 0-18902).

10.18*   Form of Performance Unit Award under the 1992 Long-Term  Incentive Plan
         -- incorporated  by reference to Exhibit 10.34 to the Company's  Annual
         Report on Form 10-K for the fiscal  year ended June 30,  1992 (SEC File
         No. 0-18902).

10.19*   Deferred  Compensation  Plan for Directors -- incorporated by reference
         to Exhibit  10.35 to the  Company's  Annual Report on Form 10-K for the
         fiscal year ended June 30, 1992 (SEC File No. 0-18902).


<PAGE>

10.20*   Executive   Incentive  Plan  --   incorporated   by  reference  to  the
         description of such Plan as set forth under  "Compensation  Pursuant to
         Plans - Executive  Incentive Plan" in the Company's Proxy Statement for
         its 1992 Annual Meeting of Shareholders (SEC File No. 0-18902).

10.21    Lease Agreement dated January 11, 1993 between Thomas L. Koster,  Inc.,
         d/b/a/  Realvesco  Properties  and Health  Risk  Management,  Inc.,  as
         amended by First  Amendment to Lease  Agreement dated January 29, 1993,
         related to the Company's offices at 5250 Lovers Lane, Portage, Michigan
         -- incorporated  by reference to Exhibit 10.34 to the Company's  Annual
         Report on Form 10-K for the fiscal  year ended June 30,  1993 (SEC File
         No. 0-18902).

10.22    Second  Amendment to Lease dated July 22, 1997 for the Lease  Agreement
         dated January 11, 1993 between Thomas L. Koster, Inc., d/b/a/ Realvesco
         Properties and Health Risk Management,  Inc.,  related to the Company's
         offices  at  5250  Lovers  Lane,  Portage,   Michigan--incorporated  by
         reference to Exhibit 10.22 to the Company's  Annual Report on Form 10-K
         for the year ended June 30, 1997 (SEC File No. 0-18902).

10.23    Fourth  Amendment to Lease dated July 12, 1993 for the Lease  Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at  7900  and  8000  West  78th  Street,   Minneapolis,   Minnesota  --
         incorporated  by reference  to Exhibit  10.27 to the  Company's  Annual
         Report on Form 10-K for the fiscal  year ended June 30,  1994 (SEC File
         No. 0-18902).

10.24    Fifth  Amendment  to Lease dated May 12,  1994 for the Lease  Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at 8000 West 78th Street,  Minneapolis,  Minnesota --  incorporated  by
         reference to Exhibit 10.28 to the Company's  Annual Report on Form 10-K
         for the fiscal year ended June 30, 1994 (SEC File No. 0-18902).

10.25    Sixth Amendment to Lease dated October 18, 1995 for the Lease Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at 8000  West  78th  Street,  Minneapolis,  Minnesota--incorporated  by
         reference to Exhibit 10.25 to the Company's  Annual Report on Form 10-K
         for the year ended June 30, 1997 (SEC File No. 0-18902).

10.26    Third  Amendment  to Lease dated May 12,  1994 for the Lease  Agreement
         dated August 14, 1987 between The Mutual Life Insurance  Company of New
         York and Health Risk Management, Inc., related to the Company's offices
         at 7900 West 78th Street,  Minneapolis,  Minnesota --  incorporated  by
         reference to Exhibit 10.29 to the Company's  Annual Report on Form 10-K
         for the fiscal year ended June 30, 1994 (SEC File No. 0-18902).

10.27    Fourth  Amendment  to  Lease  dated  October  18,  1995  for the  Lease
         Agreement  dated  August 14, 1987  between  The Mutual  Life  Insurance
         Company of New York and Health Risk  Management,  Inc.,  related to the
         Company's   offices   at   7900   West   78th   Street,    Minneapolis,
         Minnesota--incorporated  by reference to Exhibit 10.27 to the Company's
         Annual  Report on Form 10-K for the year ended June 30,  1997 (SEC File
         No. 0-18902).

10.28    Revolving  Credit and Term Loan  Agreement  dated June 24, 1994 between
         First Bank National  Association  and Health Risk  Management,  Inc. --
         incorporated  by reference  to Exhibit  10.30 to the  Company's  Annual
         Report on Form 10-K for the fiscal  year ended June 30,  1994 (SEC File
         No. 0-18902).

10.29    First Amendment to Revolving Credit and Term Loan Agreement dated March
         31, 1995 for the Revolving  Credit and Term Loan  Agreement  dated June
         24,  1994  between  First Bank  National  Association  and Health  Risk
         Management,  Inc. --  incorporated by reference to Exhibit 10.27 to the
         Company's Annual Report on Form 10-K for the fiscal year ended June 30,
         1995 (1994 (SEC File No. 0-18902).


<PAGE>

10.30    Second  Amendment to  Revolving  Credit and Term Loan  Agreement  dated
         January 19, 1996 for the Revolving Credit and Term Loan Agreement dated
         June 24, 1994 between First Bank National  Association  and Health Risk
         Management,  Inc. --  incorporated by reference to Exhibit 10.27 to the
         Company's Annual Report on Form 10-K for the fiscal year ended June 30,
         1996 (SEC File No. 0-18902).

10.31    Third  Amendment  to  Revolving  Credit and Term Loan  Agreement  dated
         January 31, 1997 for the Revolving Credit and Term Loan Agreement dated
         June 24, 1994 between First Bank National  Association  and Health Risk
         Management,  Inc--incorporated  by  reference  to Exhibit  10.31 to the
         Company's  Annual  Report on Form 10-K for the year ended June 30, 1997
         (SEC File No. 0-18902).

10.32    Security Agreement dated June 24, 1994 relating to Revolving Credit and
         Term  Loan  Agreement  of same date --  incorporated  by  reverence  to
         Exhibit  10.31 to the  Company's  Annual  Report  on Form  10-K for the
         fiscal year ended June 30, 1994 (SEC File No. 0-18902).

10.33    Managed  Health Care  Service  Agreement  dated  April 4, 1994  between
         Health Risk Management,  Inc. and Hospital  Corporation of America,  as
         amended by Amendment No. 1 to the Managed Health Care Service Agreement
         dated  May  11,  1995  between   Health  Risk   Management,   Inc.  and
         Columbia/HCA  Healthcare  Corporation --  incorporated  by reference to
         Exhibit  10.29 to the  Company's  Annual  Report  on Form  10-K for the
         fiscal year ended June 30, 1995 (SEC File No. 0-18903).

10.34    Second  Amendment to Managed  Health Care Service  Agreement  effective
         January 1, 1996 for the Managed  Health Care  Service  Agreement  dated
         April 4, 1994 between  Health Risk  Management,  Inc. and  Columbia/HCA
         Healthcare Corporation -- incorporated by reference to Exhibit 10.30 to
         the Company's Annual Report on Form 10-K for the fiscal year ended June
         30, 1996 (SEC File No. 0-18903).

10.35    Claim  Administration  Service  Agreement  dated April 4, 1994  between
         Health Risk Management,  Inc. and Hospital  Corporation of America,  as
         amended  by  Amendment  No.  1  to  the  Claim  Administration  Service
         Agreement dated May 11, 1995 between Health Risk  Management,  Inc. and
         Columbia/HCA  healthcare  Corporation --  incorporated  by reference to
         Exhibit  10.30 to the  Company's  Annual  Report  on Form  10-K for the
         fiscal year ended June 30, 1996 (SEC File No. 0-18903).

10.36    Second Amendment to Claim  Administration  Service Agreement  effective
         January 1, 1996 for the Claim  Administration  Service  Agreement dated
         April 4, 1994 between  Health Risk  Management,  Inc. and  Columbia/HCA
         Healthcare Corporation -- incorporated by reference to Exhibit 10.32 to
         the Company's Annual Report on Form 10-K for the fiscal year ended June
         30, 1996 (SEC File No. 0-18903).

10.37    Lease  Agreement dated May 26, 1989 between The Hornet Group and Health
         Program Managers,  Inc. related to the Company's offices at 7801 Folsom
         Boulevard,   Sacramento,   California  and  First  Amendment  to  Lease
         Agreement  dated  December 12, 1994 between the Hornet Group and Health
         Program Managers,  Inc -- incorporated by reference to Exhibit 10.33 to
         the Company's Annual Report on Form 10-K for the fiscal year ended June
         30, 1996 (SEC File No. 0-18903).


<PAGE>

10.38    Managed Care Service  Agreement  dated October 29, 1996 between  Health
         Risk Management,  Inc. and Keystone Mercy Health  Plan--incorporated by
         reference to Exhibit 10.38 to the Company's  Annual Report on Form 10-K
         for the year  ended  June 30,  1997  (SEC  File No.  0-18902). 

10.39    QualityFIRST(R)  License  Agreement  dated July 11, 1996 between Health
         Risk Management,  Inc. and Keystone Mercy Health  Plan--incorporated by
         reference to Exhibit 10.39 to the Company's  Annual Report on Form 10-K
         for the year ended June 30, 1997 (SEC File No. 0-18902).

10.40    Amendment No. 1 to the Managed Care Service  Agreement  between  Health
         Risk Management,  Inc. and Keystone Mercy Health Plan effective October
         1,  1997--incorporated  by reference to Exhibit  10.40 to the Company's
         Annual  Report on Form 10-K for the year ended June 30,  1997 (SEC File
         No. 0-18902).

10.41    Management   Services   Agreement  dated  February  24,  1998,  between
         Pennsylvania  HRM,  Inc.  (a wholly  owned  subsidiary  of Health  Risk
         Management, Inc) and Oxford Health Plans (PA), Inc.

10.42    Health Care Excess Risk Insurance Policy dated April 13, 1998,  between
         Pennsylvania  HRM,  Inc.  (a wholly  owned  subsidiary  of Health  Risk
         Management, Inc) and Kentucky Medical Insurance Company.

10.43    Lease agreement  dated May 5, 1998,  between MEPC O &I, Inc. and Health
         Risk  Management,  Inc.  related  to the  Company's  offices  at  10900
         Hampshire Avenue South,  Minneapolis,  Minnesota and Amendment of Lease
         dated September 16, 1998.

10.44    Amended and Restated  Revolving Credit and Term Loan Agreement  between
         Health Risk Management,  Inc. and U.S. Bank National  Association dated
         May 1, 1998.

18.      Letter regarding change in accounting principle.

21.      List of subsidiaries.

23.      Consent of Independent Auditors.

27.1     Financial  Data  Schedule  for the Year ended June 30,  1998  (filed in
         electronic format only).

27.2     Restated  Financial Data Schedule for the 3 months ended  September 30,
         1997 (filed in electronic format only).

27.3     Restated  Financial  Data Schedule for the 6 months ended  December 31,
         1997 (filed in electronic format only).

27.4     Restated  Data Schedule for the 9 months ended March 31, 1998 (filed in
         electronic format only).

--------------
*    Indicates  a  management  contract  or  compensatory  plan  or  arrangement
     required to be filed as an exhibit to Form 10-K.