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, 1997

                         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)

                  8000 West 78th Street, Minneapolis, MN 55439
             (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 October 7, 1997 was  approximately  $62,250,000  based upon the
closing sale price of the Registrant's Common Stock on such date.

Shares of $.01 par value Common Stock outstanding at October 7, 1997: 
                                4,502,019 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 of
     Healthcare  Quality,  Inc.,  Health Benefit  Reinsurance,  Inc., and Health
     Program Managers,  Inc., and its wholly owned Canadian  subsidiary,  Health
     Resource  Management Ltd. Health Risk Management,  Inc. was incorporated in
     Minnesota in 1977.

     HRM provides  comprehensive,  integrated  total health plan  management and
     information  services from diagnosis through claim payment supported by the
     Company's  QualityFIRST(R)  clinical  practice  guidelines for  self-funded
     health  benefit  plans,  fully  insured  health  benefit  plans,   workers'
     compensation  care and disability care using  electronic  data  interchange
     (EDI)  technology.  The Company  provides these  services for  self-insured
     employers,  unions,  governmental  entities,  insurance  companies,  health
     maintenance  organizations (HMOs), preferred provider organizations (PPOs),
     hospitals,  and others to manage the quality, volume, cost, and payment for
     health care. The Company's managed healthcare services include a 24-hours a
     day, 7 days a week (24/7) health  information line ; care review management
     services,  which apply diagnostic and utilization  review;  case management
     services  for  a  variety  of  catastrophic  or  long-term   illnesses  and
     conditions;  price control  management  services such as preferred provider
     networks,  fee negotiations,  and audits of hospital and physician charges;
     claims  administration  management  services;  and health care  information
     management  and software  services.  The Company has  developed its managed
     healthcare  services based upon  proprietary  clinical  practice  protocols
     (QualityFIRST(R) Healthcare Practice Guidelines), Company-developed medical
     and cost databases, and extensive medical expertise.

(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  services currently offered by HRM are 24/7 CareCALL(SM)
          (health information  hotline),  care review management (both inpatient
          and outpatient),  case management,  price control  management,  claims
          administration management, and information services.

          HRM's fees for these  services  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  CareCALL(SM), precertification  and  concurrent  review
          services, and some or all of HRM's other care review 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)  Healthcare  Practice
          Guidelines  software,   certain  health  care  information  management
          computer  systems,  and consulting  services on an hourly,  project or
          software license and subscription fee basis.
<PAGE>
         Care Review Management

         HRM's Care Review  Management  Services,  accredited by the Utilization
         Review  Accreditation  Committee  (URAC) in Washington,  D.C.,  promote
         quality  care though the  software  technology  and  medical  expertise
         required for prospective, concurrent, and retrospective care management
         of  significant  health  care  events:   medical/surgical   procedures,
         long-term  care  management,  prenatal  care  management  and  selected
         outpatient  medical/surgical care. All care management for total health
         plan  management  activity takes place within medical  specialty  teams
         using  QualityFIRST(R)  guidelines for self-funded benefit plans, fully
         insured benefit plans,  HMOs,  providers and workers'  compensation and
         disability insurance programs.

         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  review 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 review team to begin
         the review process. HRM's clinical specialty review teams enable HRM to
         review the spectrum of medical, surgical and specialty care.

         HRM's review teams are constructed in the following specialty areas:

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

         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 Review Management applies diagnostic and utilization
         review for all inpatient and outpatient  care eligible under the health
         plan of HRM's clients.

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

         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  clinical  information  from a variety of  clinical  resources  and
         professional organizations.
<PAGE>

         Under  HRM's  Care  Management  Services,  a  plan  participant  or the
         participant's physician must call a toll-free telephone number a number
         of  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 against HRM's  QualityFIRST(R)
         guidelines  to  determine  the  reasonableness  of  the  diagnosis  and
         appropriateness of 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  concerning the  advisability  of 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:

         24/7 CareCALL.  HRM's 24-hour health information line provides personal
         health management by educating and empowering  consumers to make better
         decisions  about their  healthcare  and the resources  they use. At the
         same  time,  it  reduces  claim  expenditures   through  reductions  in
         unnecessary emergency room and office visits.

         The health  information  line is staffed by  registered  nurses who use
         on-line  pediatric and adult triage  guidelines to assess  symptoms and
         triage callers to the appropriate level of care.

         In addition,  this service provides medical  information and unlimited,
         confidential  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 and locate  appropriate  network  providers any time of
         the day or night. HRM's health line is objective, friendly, easy to use
         and accessible when community healthcare resources are unavailable.

         Medical/Surgical    Review.   The   Company's   Care   and   Management
         precertification and concurrent review service for medical and surgical
         procedures is designed to reduce employer medical and surgical costs by
         identifying and approving for  reimbursement  the most  appropriate and
         cost-effective plan of treatment and setting for care.

         Behavioral  Health  Review.  HRM  also  offers   precertification   and
         concurrent review of mental health and chemical  dependency  treatment.
         HRM's mental health and chemical  dependency  review service  evaluates
         the medical 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 alternative
         treatments.  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.  Cases are matched with  behavioral  health teams
         trained to manage specific types of care.
<PAGE>
          Case Management

          Case  management  services  provide  special  coordination of the full
          range of managed care services in complex,  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 plans. Due to the
          complex and long-term nature of these cases, a single case manager may
          coordinate all managed care services for a patient for periods ranging
          from one month to several years.  Case management  services are billed
          most frequently on a per hour basis or a per transaction basis.

          The following case management services are offered by the Company:

          Coordinated  Care  Management  (CCM).  The Company manages cases which
          require costly medical treatment such as AIDS, cancer,  complex mental
          illness,  transplants,  chemical  dependency,  and major  trauma.  The
          Company  identifies these cases by reviewing the health claims history
          and  the  information   obtained  during  the   precertification   and
          concurrent  review  process.   In  these  cases,  HRM  helps  identify
          cost-effective  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 of 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.

          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 review.  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  and
          utilization review, large case management,  fee negotiation,  auditing
          of charges, and claims  administration.  EAP is independently marketed
          by both HRM and subcontractors.

          QualityBIRTH(SM) 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.

          DisabilityCARE(SM).     HRM's    disability     management    program,
          DisabilityCARE, promotes quality medical care and early return-to-work
          for short- and long-term  disability and worker's  compensation cases.
          DisabilityCARE  is initiated  with  identification  of injury  through
          24-hour access to CareCall(SM), seven-days-a-week, 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,  establish a treatment  plan, and
          through  use of on-line  return-to-work  guidelines,  help get injured
          workers  back  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
          customer's lost  productivity,  indemnity benefit payments and medical
          expenses surrounding disabilities.
<PAGE>
         Price Control Management

         HRM's  principal  price  management  activities  are  fee  negotiation,
         preferred  provider  contract  pricing,  and bill  review.  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:

         Preferred  Provider  Organizations  (PPOs).  HRM's CarePASS(R)  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  CarePASS 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 which meet the  Company's  criteria  for provider  selection.
         HRM's criteria in selecting PPOs established by  third-parties  are the
         same as are used by the  Company in  developing  CarePASS.  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 received monthly reports
         from the third-party  organization,  integrates them with the Company's
         own management reports, and provides the clients with a unified report.

         Prospective  Case-by-Case  Fee  Negotiation.  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 reviewed under HRM's care review services,
         a separate staff of price negotiators and bill reviewers simultaneously
         negotiates the amount of the covered fees with the provider.

         Audit of Hospital and Physician Bills. 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.
<PAGE>

         Claims Administration Management

         HRM's claims  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 processes, accurate payment and timely reporting
         through plan  design,  underwriting  services and claim  administration
         services.  The Company's  claims  administration  management  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,  segregation, 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.

         Effective  claim  administration  is a  critical  part  of  the  health
         management system. Claims administrative  management services highlight
         the value of HRM's totally integrated process by working 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 processes 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  offers a full range of  administrative  services  to help  clients
         manage and supplement their health plans. HRM's  underwriting  division
         can produce  valuation  reports to support the  financial  integrity of
         clients'  self-funded  plans. HRM 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's underwriting group provides a variety of
         reinsurance  and stop-loss  insurance  strategies  and products to meet
         clients'  needs,  including  group life and term  disability  products.
         COBRA administration services are also available to help clients handle
         COBRA compliance.
<PAGE>

         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.

         During fiscal year 1996, the Company formed a wholly-owned  subsidiary,
         Health Benefit Reinsurance,  Inc. (HBRe) to act, independent 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 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.

         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  standard,  easy-to-use  software 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 Company offers Medical/Surgical,  Workers' Compensation/Disability,
         Behavioral  Health,   Specialist   Referral  and  Alternative   Setting
         guideline software packages or modules. These modules comprise over 430
         guidelines   and  2,700   treatments/procedures   covering   more  than
         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
<PAGE>
         guidelines 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 ensure  appropriate  referrals,  to
         ensure 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 and systems are 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 PPOs. 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  utilizing
         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
         set 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 utilize 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 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.

     (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) healthcare practice guidelines to
         address  an ever  enlarging  number of  conditions,  and will  continue
         expanding   its   software   package   containing   HRM's   proprietary
         QualityFIRST(R)  healthcare  practice  guidelines  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.
<PAGE>
     (3) Source and Availability of Raw Materials.

         Not applicable.

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

         The Company has filed a patent  application  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 healthcare  management
         services.

          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  of  its
          subsidiaries:   HRM(R),   AutoPILOT(TM), CareCALL(SM),    CarePASS(R),
          CarePLUS(SM), DisabilityCARE(SM),    HRMMEDIA(SM),    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 revenues have historically been higher in the second half of each
         fiscal  year than in the first half.  Because a large  number of health
         plans  operate on a calendar year basis,  a significant  portion of the
         Company's  new  clients  become  clients  as of January 1, which is the
         beginning of HRM's third quarter. The Company recognizes revenues as it
         performs services under a contract,  and the Company typically performs
         a greater  portion of annual  services during the first few months of a
         new contract.  In fiscal 1997, 1996 and 1995 revenues  totaled 48%, 50%
         and 48% in the first  half of the fiscal  year and 52%,  50% and 52% in
         the second half of the fiscal year, respectively.

     (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.  Columbia/HCA  Healthcare Corporation accounted for 16%, 17% and
         16% in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. Keystone
         Mercy Health Plan was a new customer and  accounted  for  approximately
         17% of revenues in fiscal 1997.  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, but continues as a QualityFIRST(R) customer.
<PAGE>
     (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.  The  Company's  revenues  from  care  review
         management,   price  control  management,   and  claim   administration
         management  services  are  generally  derived  pursuant  to  contracts,
         generally for a term of one to three years, obligating clients to pay a
         fixed monthly  charge for each covered  employee  based on  anticipated
         case or claim volume  experience  basis,  or on a case or percentage of
         savings basis. Revenues from information services are generally derived
         from  QualityFIRST(R)  license  fees and  subscription  fees,  and from
         contracts to perform  specific  projects or  consulting  services for a
         specific  fee or  hourly  basis.  Revenues  from  case  management  are
         generally derived on a case-by-case or hourly basis.

     (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-part
         administrators  which 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 $7,396,000 in fiscal 1997, $5,779,000 in
         fiscal 1996, and $5,337,000 in fiscal 1995.

     (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,  1997, the Company employed approximately 950 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.
<PAGE>
(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.  $325,000  in fiscal  1997,  U.S.  $233,000  in fiscal  1996,  and U. S.
     $174,000  in fiscal  1995.  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  125,000
square feet in two adjacent buildings in Minneapolis,  Minnesota,  31,000 square
feet in Kalamazoo, Michigan and 4,000 square feet in Sacramento, California. The
leases on the Minneapolis and Sacramento offices expire in or by 1998. The lease
on the Kalamazoo office expires in or by 2001. The Company also leases space for
three  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.

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.

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, 1997.
<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 1995
         First Quarter                     7-1/4                      5-3/4
         Second Quarter                    8-1/4                      4-1/2
         Third Quarter                     8-1/8                      5-3/16
         Fourth Quarter                   11-1/2                      7-3/8

         Fiscal 1996
         First Quarter                    11-1/2                      9-1/2
         Second Quarter                   10-7/8                      7-3/4
         Third Quarter                    18-1/8                      9-1/4
         Fourth Quarter                   18-3/8                     10

         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                    14-3/11                    11

b)   Holders

     As of October 7, 1997 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  form 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,
                                                            ---------------------------------------------------------
                                                               1993       1994       1995        1996        1997
                                                                     (in thousands, except per share data)
<S>                                                           <C>         <C>        <C>        <C>         <C>   
Statement of Operations Data:

Revenues                                                      $40,871     $45,824    $49,302    $54,507     $62,723

Operating expenses:
   Cost of Services                                            24,135      26,784     30,290     31,762      37,657
   Depreciation and amortization, principally cost of
     services                                                   4,331       5,227      6,127      6,947       7,646
   Selling and marketing                                        5,605       6,485      6,064      6,767       7,346
   Administration                                               4,177       4,792      4,811      5,232       5,682
   Merger costs                                                     0           0          0          0         390
                                                            ---------   ---------  ---------  ---------     -------
     Total operating expenses                                  38,248      43,288     47,292     50,708      58,721

Operating income                                                2,623       2,536      2,010      3,799       4,002

Other income (expense):
   Interest income                                                 64          65        128        158         187
   Interest expense                                              (373)       (436)      (759)      (708)       (535)
                                                              -------     -------    -------    -------     -------
Income before income taxes                                      2,314       2,165      1,379      3,249       3,654

Provision for income taxes:
   Current                                                         20          24         12         22          15
   Deferred                                                         0         425        523      1,231       1,398
                                                            ---------      ------     ------     ------      ------
     Total income taxes                                            20         449        535      1,253       1,413

Net income                                                   $  2,294    $  1,716    $   844   $  1,996    $  2,241
                                                            =========     =======     ======     ======      ======
Net income per  common and common equivalent share(1)        $    .57    $    .43    $   .21   $    .47    $    .50
                                                            =========     =======     ======     ======      ======

Weighted average common and common equivalent shares(1)         3,993       4,015      3,982      4,219       4,458

                                                                                    June 30,
                                                            ---------------------------------------------------------
                                                               1993       1994       1995        1996        1997
                                                               ----       ----       ----        ----        ----
Balance Sheet Data:
Working capital                                              $  3,089    $  5,491   $  3,763   $  5,246    $  8,578
Total assets                                                   32,501      37,844     39,962     44,822      51,723
Current portion of notes payable and capitalized equipment
   leases                                                       3,499       1,950      1,946      2,427       1,988
Long term portion of notes payable and capitalized
   equipment leases                                             2,394       6,046      5,155      4,550       3,487
Shareholders' equity                                           21,668      23,677     25,101     28,474      34,044
</TABLE>

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

(1)  Earnings per share is computed using the weighted  average number of Common
     Shares and Common Share equivalents  outstanding during the period.  Common
     Share  equivalents  include  dilutive  stock options and warrants using the
     treasury stock method.
<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 services provided under
contracts  obligating  clients to pay a fixed  monthly  charge for each  covered
employee based on anticipated case volume experience, a percentage of savings, a
transaction or case fee, or on an hourly basis. In addition,  each new client is
typically  charged a  one-time  set-up  fee to cover the  related  set-up  costs
incurred by the  Company.  Such revenue is  recognized  as services are rendered
under each contract.

The  Company's  expenses  are  comprised  of its  cost of  services  (consisting
primarily  of  compensation  of  personnel,  including  nurses  and  physicians,
telephone  expenses,  rent, costs related to the Company's computer  operations,
costs  related to customer  service,  and costs  related to  development  of new
services),   selling  and  marketing  expenses   (including  sales  commissions,
advertising,  and account  management  personnel),  general  and  administration
expenses  (including  bad debts and  compensation  of personnel in the corporate
finance,   human  resources,   and  general   administration   departments)  and
depreciation  and  amortization  (primarily  capitalized  leased  equipment  and
software costs).

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, 1995,
1996, and 1997 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)
                                                    -------------------        ------------------------------------
                                                  1995       1996      1997       1995 vs 1996        1996 vs 1997
                                                  ----       ----      ----       ------------        ------------
<S>                                                <C>        <C>       <C>        <C>                 <C>   

Revenues                                           100%       100%      100%       11%                 15%
                                                   ===        ===       ====

Operating expenses:
   Cost of services                                 62         58         60        5                  19
   Depreciation and amortization,
     principally cost of services                   12         13         12       13                  10
   Selling and marketing                            12         12         12       12                   9
   Administration                                   10         10          9        9                   9
   Merger costs                                     --         --          1       --                  --
                                                   ---        ---       ----
         Total operating expenses                   96         93         94        7                  16
                                                    --         --         --

Operating income                                     4          7          6       89                   5
                                                    --         --         --

Other income (expense):
   Interest income                                   *          *          *       23                  18
   Interest expense                                 (1)        (1)        (1)      (7)                (24)
                                                    --         --         --

Income before taxes                                  3          6          6      136                  12
Income taxes                                        (1)        (2)        (2)     134                  13
                                                    --         --         --

Net income                                           2%         4%         4%     136                  12
                                                   ===        ===        ===
</TABLE>

  *Less than 1% on a rounded basis.
<PAGE>
Revenues:  Total revenues increased  $8,216,000 (15%) from fiscal 1996 to fiscal
1997 (from  $54,507,000 to  $62,723,000),  and increased  $5,205,000  (11%) from
fiscal 1995 to fiscal 1996 (from  $49,302,000 to  $54,507,000).  These increases
are  primarily  attributable  to  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)  healthcare practice  guidelines.  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 the  approximate  breakout of revenue by class of similar  service
categories:
<TABLE>
<CAPTION>
                                                             1995                 1996                  1997
                                                             ----                 ----                  ----
<S>                                                         <C>                  <C>                   <C>  

   Care review and case management                          $  21,640,000        $  21,935,000         $  25,798,000
   Price control management                                     4,300,000            3,913,000             4,219,000
   Claim administration management                             19,942,000           23,291,000            24,726,000
   Information management                                       3,420,000            5,368,000             7,980,000
                                                               ----------           ----------            ----------
                                                            $  49,302,000        $  54,507,000         $  62,723,000
                                                               ==========           ==========            ==========
</TABLE>

There are  variations  between the  percentage  increases of revenue  categories
because  clients  purchasing  services  may  choose  all or a  portion  of these
services and this varies from client to client and year to year.

Revenues  for care  review  and  case  management  services  increased  18%,  or
$3,863,000,  from fiscal 1996 to fiscal 1997  (increasing  from  $21,935,000  to
$25,798,000)  and  increased  1%, or  $295,000,  from fiscal 1995 to fiscal 1996
(increasing from $21,640,000 to $21,935,000).  In fiscal 1996, growth in revenue
came from  disability  management  services,  with an overall  decrease  in care
review  revenue in general.  In fiscal 1996,  there was a decrease in revenue in
the fourth  quarter,  from  approximately  $1.5  million of growth for the first
three  quarters  of  fiscal  1996,  down to $.3  million  growth  for  the  year
principally because a significant client transitioned  services to itself during
the fourth quarter. The client continues to use HRM's QualityFIRST(R)  software.
In fiscal 1997, growth was mainly the result of adding a large customer.

Revenues for price control  services  increased 8%, or $306,000 from fiscal 1996
to fiscal 1997 (from  $3,913,000 to  $4,219,000),  and decreased 9%, or $387,000
from fiscal 1995 to fiscal 1996 (from  $4,300,000  to  $3,913,000).  Revenues in
fiscal 1996  decreased  in the first half of the year because of the loss of two
major customers in fiscal 1995.  Growth in revenues in the second half of fiscal
1996  and in  fiscal  1997  are  primarily  the  result  of an  increase  in the
CarePASS(R) customer base.

Claim administration  services revenue increased 6%, or $1,435,000,  from fiscal
1996 to fiscal 1997 (from  $23,291,000  to  $24,726,000),  and  increased 17% or
$3,349,000  from fiscal 1995 to fiscal 1996 (from  $19,942,000  to  $23,291,000)
because of an increase in the customer base or claim volume.

Information  management revenues increased 49%, or $2,612,000,  from fiscal 1996
to fiscal 1997 (from  $5,368,000 to $7,980,000) and increased 57%, or $1,948,000
from fiscal 1995 to fiscal 1996 (from $3,420,000 to $5,368,000). In fiscal 1997,
fiscal 1996 and fiscal 1995, revenue of $7,577,000,  $4,910,000, and $2,628,000,
respectively,  was  related to  QualityFIRST(R)  software  and system  licensing
revenues.  The balance of revenue in the three years was from  communication and
consulting services.

Cost of Services: Cost of services increased 19% from fiscal 1996 to fiscal 1997
(from  $31,762,000 to $37,657,000),  and increased 5% from fiscal 1995 to fiscal
1996 (from  $30,290,000 to  $31,762,000).  As a percentage of revenues,  cost of
services  increased  from 58% in fiscal 1996 to 60% in fiscal 1997. The increase
in fiscal 1997 of cost of services as a percentage of revenues was primarily due
to additional costs related to payroll and expenses for increased business,  and
underutilization of the managed care, disability, and 24/7 CareCALL(SM) units.
<PAGE>
Depreciation and Amortization:  Depreciation and amortization increased 10% from
fiscal 1996 to fiscal 1997 (from  $6,947,000 to $7,646,000),  and decreased from
13% to 12% as a percentage of revenue.  Depreciation and amortization  increased
13% from  fiscal  1995 to fiscal  1996  (from  $6,127,000  to  $6,949,000),  and
increased  from 12% to 13% as a  percentage  of revenue.  The  increases in each
period were  primarily  the result of  depreciation  from  additional  computer,
telephone,  and office  equipment,  and amortization of additional  software and
contract costs.  Approximately  92% of depreciation and amortization  expense is
related to cost of services for fiscal 1997 and prior years.

Selling and Marketing:  Selling and marketing  expenses increased 9% from fiscal
1996 to fiscal 1997 (from  $6,767,000  to  $7,346,000),  and  increased 12% from
fiscal  1995 to  fiscal  1996  (from  $6,064,000  to  $6,767,000).  Selling  and
marketing  expenses as a  percentage  of revenue  remained  unchanged at 12% for
fiscal  1997,  fiscal  1996,  and fiscal  1995.  The increase in fiscal 1997 and
fiscal  1996 was  primarily  due to  changes  in  marketing,  sales and  account
management personnel, sales commissions and travel expenses.

Administration:  Administration expenses increased 9% from fiscal 1996 to fiscal
1997 (from  $5,232,000  to  $5,682,000),  and  increased  9% from fiscal 1995 to
fiscal 1996 (from  $4,811,000 to  $5,232,000),  but decreased as a percentage of
revenues from 10% to 9% in fiscal 1997. The increase in administration  expenses
in fiscal 1996 and 1997 was due to the expense of  additional  staff,  and other
expenses,  including salaries,  bad debts, training programs and insurance.  Bad
debt expense was $127,000,  $242,000,  and $333,000 in fiscal 1997,  fiscal 1996
and fiscal 1995, respectively.

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.

Interest:  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  decreased  7% from  fiscal  1995 to fiscal  1996 (from
$759,000 to $708,000)  and  decreased  as a  percentage  of revenue from 1.5% to
1.3%.  Interest  expense  was  impacted  in fiscal 1997 and fiscal 1996 by lower
interest rates and lower average principal balances outstanding.

Interest income was $187,000, $158,000, and $128,000 for fiscal years 1997, 1996
and 1995, respectively,  and increased in fiscal 1997 and fiscal 1996 because of
additional available funds invested in short-term investments.

Income  Taxes:  Income  taxes  increased  in  fiscal  1997 from  fiscal  1996 by
$160,000,  or 13% (from $1,253,000 to $1,413,000),  and increased in fiscal 1996
from fiscal 1995 by $718,000, or 134% (from $535,000 to $1,253,000).  Net income
had been  reported  as fully  taxed in fiscal  year  1997,  1996 and 1995 at the
effective  tax rate of 39%.  See Note 6 in the Notes to  Consolidated  Financial
Statements.

Liquidity and Capital Resources

The Company's  cash flow from  operations  was  $10,127,000  and  $7,435,000 for
fiscal 1997 and 1996,  respectively.  Cash flow from operations has exceeded net
income primarily due to non-cash charges such as depreciation and  amortization,
deferred income taxes, and changes in operating assets and liabilities.

Cash has been used to invest in software  and program  enhancements  ($7,396,000
and $5,799,000 in fiscal 1997 and fiscal 1996,  respectively).  The Company also
acquired property and equipment of $2,966,000 and $2,256,000 for fiscal 1997 and
1996,  respectively.  HRM expects to continue to acquire  property and equipment
and enhance software and products.
<PAGE>
HRM also used approximately  $2,277,000 and $2,056,000 in fiscal 1997 and fiscal
1996, respectively,  to repay principal on notes payable and capital leases (net
of proceeds from notes payable).  The Company borrowed $1,275,000 and $1,500,000
in fiscal 1997 and fiscal 1996, respectively. The Company received cash proceeds
of $775,000 and  $1,157,000 in fiscal 1997 and fiscal 1996,  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.

The Company's  current ratio was 1.8 at June 30, 1997, and 1.6 at June 30, 1996.
The Company's working capital was $8,578,000 and $5,246,000 at June 30, 1997 and
1996, respectively.

The Company has a net operating loss  carryforward of approximately  $14,100,000
for income tax  purposes at June 30, 1997,  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  (principal  balance of  $1,048,000 as of June 30, 1997) with its bank
due June 30, 1999 and a revolving  credit  facility  expiring  January 31, 1998,
under  which the  Company  may borrow a total of  $3,750,000.  The  Company  had
available  $1,552,000 under the $3,750,000 revolving credit facility at June 30,
1997.  The revolving  credit and term loan are secured by liens on the assets of
the Company.

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 can not 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.

Not applicable.

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.

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.       57    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           58    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          58    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,        63    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        71    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              53    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, currently, Mr. Hahn also  
                                                             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.
<PAGE>

Robert L. Montgomery        60    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>

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 C directors  expires at
the 1998 annual meeting,  the term of the Class A directors  expires at the 1999
annual meeting, and the term of the Class B Directors expires at the 2000 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.
<TABLE>
<CAPTION>
Name                                Age                                Position
----                                ---                                --------
<S>                                 <C>              <C>    
Gary T. McIlroy, M. D.              57               Chairman of the Board, Chief Executive Officer and
                                                     Director

Marlene O. Travis                   58               President, Chief Operating Officer, Secretary and
                                                     Director

Thomas P. Clark                     49               Senior Vice President, Finance and Chief Financial
                                                     Officer

Adele M. Kimpell                    51               Executive Vice President, Healthplan Operations

John R. Higbee                      54               Chief Information Officer

Alexander E. Gourley                59               President, Canadian Operations

Michael T. McKim                    53               Vice President and General Counsel
</TABLE>

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.

John R.  Higbee,  became Chief  Information  Officer in August,  1994.  Prior to
joining HRM, Mr. Higbee was with Blue Cross Blue Shield of Minnesota in 1993 and
1994 in the  capacity of  Director,  Dedicated  Service  Units.  Mr.  Higbee was
employed by Blue Cross Blue Shield of Michigan from 1968 through 1992 and served
in several  capacities  including  Vice  President,  Information  Systems  Group
(1988-1992),  Vice President,  Government Business Group (1985-1988),  Director,
Membership Rating and Utilization Review Systems (1982-1985), and Director, Data
Conversion (1979-1982).

Alexander E. Gourley became  President,  Canadian  Operations in July, 1991, and
had been Executive Vice President since May 1990. Mr. Gourley joined the Company
in 1984 and served as Vice President,  Finance from July 1985 to August 1986, as
Executive Vice President, Provider Contracting from August 1986 to May 1990, and
as a  director  from 1984 to 1986.  Mr.  Gourley  was  Managing  Partner  of the
Edmonton, Canada management consulting office of Woods Gordon (now Ernst & Young
LLP) from 1967 to 1984. Mr. Gourley is a Chartered  Accountant  (Canada),  and a
Fellow of the Institute of Management  Consultants of Alberta,  and has 25 years
of business and management consulting experience.

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, 1996
through June 30, 1997, 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 Adele M.
Kimpell, and one Form 5 was filed late by Michael T. McKim.
<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 1997 exceeded $100,000.
<TABLE>
<CAPTION>
                                                                         Long-Term Compensation
                                                                         ----------------------
                                  Annual Compensation(1)                   Awards
                                  ----------------------                   ------
                                                         Other
                                                         Annual    Restircted  Securities
                                                        Compen-      Stock     Underlying     LTIP       All Other
Name and Position         Year    Salary      Bonus      sation      Awards      Options     Payouts   Compensation
-----------------         ----    ------      -----     -------    ----------  -----------   -------   ------------
<S>                        <C>    <C>       <C>        <C>             <C>       <C>            <C>       <C>

Gary T. McIlroy, M.D.      1997   $278,000  $    0(2)  $9,395(10)      0         15,000(2)      0         $23,150(6)
   Chairman & CEO                                                                40,000(4)
                           1996    278,000     13,510   9,395(10)      0         33,138(3)      0          22,655(6)
                           1995    278,000       0(2)   9,395(10)      0          4,000(2)      0          23,127(6)
                                                                                 16,000(4)
                                                                                 30,000(9)

Marlene Travis             1997    250,000       0(2)   9,395(10)      0         12,500(2)      0          20,150(7)
   President & COO                                                               33,333(4)
                           1996    222,000     13,510   9,395(10)      0         23,298(3)      0          19,655(7)
                           1995    222,000       0(2)   9,395(10)      0          3,500(2)      0          19,943(7)
                                                                                 12,000(4)
                                                                                 25,000(9)

Thomas P. Clark            1997    200,000       0(2)  10,460(10)      0         10,000(2)      0           9,150(8)
   CFO                                                                           26,667(4)
                           1996    167,500     11,580  10,460(10)      0         17,759(3)      0           8,655(8)
                           1995    167,500       0(2)  10,460(10)      0          3,000(2)      0           8,388(8)
                                                                                 12,000(4)
                                                                                 20,000(9)

Adele M. Kimpell           1997    153,542       0(2)      0           0          4,000(2)      0           2,663(5)
   Executive V.P.,                                                                9,000(4)
   Health Plan             1996    128,169      6,000      0           0          5,000(3)      0           1,882(5)
   Operations              1995    106,795      6,000      0           0          2,000(2)      0           1,796(5)

John R. Higbee             1997    128,544       0(2)      0           0          1,500(2)      0           2,671(3)
   CIO                                                                            1,500(4)
                           1996    122,400        0        0           0              0         0           1,101(5)
                           1995    107,840     10,000      0           0          4,500(2)      0               0(5)
</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.
<PAGE>
(5)  The Company matching contribution under its 401(k) Salary Savings Plan.

(6)  The  amount  reflected  includes  $3,127,  $2,655,  and  $3,150 as  Company
     matching  contributions  under its  (401(k)  Salary  Savings  Plan or other
     retirement  payments for fiscal 1995,  1996,  and 1997,  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 1995, 1996 and 1997, respectively.

(7)  The  amount  reflected  includes  $2,943,  $2,655,  and  $3,150 as  Company
     matching  contributions  under  its  402(k)  Salary  Savings  Plan or other
     retirement  payments  for fiscal  1995,  1996 and 1997,  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 1995, 1996 and 1997, respectively.

(8)  The  amount  reflected  includes  $2,388,  $2,655,  and  $3,150 as  Company
     matching  contributions  under  its  401(k)  Salary  Savings  Plan or other
     retirement  payments  for fiscal  1995,  1996 and 1997,  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 1995, 1996 and 1997, respectively.

(9)  Stock options were issued to Dr.  McIIroy,  Ms.  Travis and Mr. Clark,  for
     30,000, 25,000 and 20,000 shares, respectively, in lieu of performance unit
     awards for fiscal 1995,  cancellation of performance unit awards for fiscal
     1994 and fiscal 1993 issued under the 1992  Long-Term  Incentive  Plan, and
     cancellation  of stock options issued in fiscal 1993 of 27,643,  19,588 and
     15,827 respectively,  which were originally issued in lieu of a cash bonus.
     One-half of these stock options  became  exercisable on August 1, 1995, and
     one-half became exercisable on August 1, 1996.

(10)  Includes auto allowance and medical coverage.

The  following  two stock option  tables  summarize  option grants and exercises
during  fiscal 1997 for the Chief  Executive  Officer and other named  executive
officers,  and the values of options granted during fiscal 1997 and held by such
persons at June 30, 1997.
                       Stock Option Grants in Fiscal 1997
<TABLE>
<CAPTION>
                                                                         Potential Realizable Value at Assumed Annual
                                                                             Rates of Stock Price Appreciation for
                                                                                           Option Term
                                                                         ---------------------------------------------
                                   Individual Grants                            5%(2)                   10%(3)
                    -------------------------------------------------    ---------------------    --------------------
                    Number of    % of Total
                    Securities    Options
                    Underlying   Granted to
                    Options     Employees in  Exercise or    Expiration     Stock                    Stock
       Name          Granted    Fiscal Year   Base Price      Date(1)       Price      Gain          Price      Gain
       ----         ---------   ------------  -----------    ----------     -----      ----          -----      ---- 
<S>                  <C>               <C>        <C>       <C>             <C>      <C>            <C>        <C>

Gary McIlroy, M.D.   15,000(1)          5.7%      $11.00    06/30/02        $14.04    $45,600       $17.72     $100,800
                     40,000(2)         15.1%      $13.25    06/30/02        $16.91   $146,400       $21.34     $323,600
Marlene Travis       12,500(1)          4.7%      $11.00    06/30/02        $14.04    $38,000       $17.72      $84,000
                     33,333(2)         12.6%      $13.25    06/30/02        $16.91   $121,999       $21.34     $269,664
Thomas P. Clark      10,000(1)          3.8%      $11.00    06/30/02        $14.04    $30,400       $17.72      $67,200
                     26,667(2)         10.1%      $13.25    06/30/02        $16.91    $97,601       $21.34     $215,736
Adele M. Kimpell      4,000(1)          1.5%      $11.00    06/30/02        $14.04    $12,160       $17.72      $26,880
                      9,000(2)          3.4%      $13.25    06/30/02        $16.91    $32,940       $21.34      $72,810
John R. Higbee        1,500(1)          0.6%      $11.00    06/30/02        $14.04     $4,560       $17.72      $10,080
                      1,500(2)          0.6%      $13.25    06/30/02        $16.91     $5,490       $21.34      $12,135
</TABLE>
-----------------
(1)  The stock  options  granted as fiscal 1997  incentives  to the  individuals
     become  exercisable  six months after May 23, 1997,  the date of the 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>

(2)  One-third  of the stock  options  granted as a long-term  incentive  to the
     individuals  became  exercisable  one year after June 30, 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.

(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.


   Aggregated Option Exercises in Fiscal 1997 and Fiscal Year-End Option Value
<TABLE>
<CAPTION>

                                                                  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.            16,862               $82,211       81,235/76,903            $456,450/$173,301
Marlene Travis                   11,202               $54,615       63,149/61,482            $357,570/$129,653
Thomas P. Clark                  42,241              $302,550       19,880/49,546            $ 83,090/$106,500
Adele M. Kimpell                   --                  --           7,000/15,500             $ 30,000/$ 26,000
John R. Higbee                     --                  --            4,500/3,000              $ 29,875/$ 4,125
</TABLE>

(1)  Market  value of  underlying  securities  at June 30,  1997  ($13.50),  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.
<PAGE>

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.

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 25%
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 1997 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  all cash  value and life
insurance policies owned by the Company to Dr. McIlroy. 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 1997 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 all cash value and life insurance  policies owned by the Company to Ms.
Travis.  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 1997 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  all cash
value and life insurance policies paid by the Company to Mr. Clark. 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>
Report of the Compensation Committee on Executive Compensation

                     Compensation Committee's Responsibility

The Compensation  Committee's (the "Committee")  principal  responsibility  with
respect to executive  level  compensation  is to ensure the Company's  executive
compensation   plans  are  aligned  with  and  support  the  Company's  business
objectives. The Committee evaluates the overall design and administration of the
plans in order to fulfill  its  responsibility.  In  addition,  to  enhance  the
objectivity  and  independence  of the  Committee,  it is comprised  entirely of
outside directors.

                             Compensation Philosophy

The primary elements of the executive  officers' total compensation  program are
based on salary, annual incentives,  and long-term incentives.  The elements are
designed to:

     (i)  motivate  executive  officers to achieve  strategic  objectives  which
promote the future success of the Company and increase shareholder value;

     (ii) reward  outstanding  performance  at the  corporate,  department,  and
individual levels;

     (iii) aid the Company in  attracting  and retaining  executives  capable of
assuring the future success of the Company; and

     (iv)  promote a  pay-for-performance  philosophy  by placing a  significant
portion  of the  total  compensation  "at  risk"  while  providing  compensation
opportunities which are comparable to market levels.

Recent tax law  changes  may  disallow  deductions  for  compensation  paid by a
company to each of the company's named executives if the officer's  compensation
exceeds $1 million.  Special rules apply for  "performance-based"  compensation,
including compensation resulting from stock options. The Company intends to take
steps as are  necessary to comply with the deduction  limits  imposed by the new
tax provisions.

                                   Base Salary

Base salaries for certain executive officers are reviewed by the Committee on an
annual basis. Each year the Committee assesses the executive employees' level of
responsibility, experience, individual performance, accountabilities relative to
other Company executives, and external market practices. Each year the Committee
also reviews  Company  performance  and  recommends to the full Board the salary
levels for the coming year, and the base salaries are adjusted  accordingly.  In
fiscal 1997,the base salary for the chief executive was the same as fiscal 1996,
which was generally  toward the  mid-point of base salary levels for  comparable
health care organizations. In fiscal 1997, the chief executive's base salary was
the same as fiscal 1996  because of a  pay-for-performance  philosophy  for base
compensation  which places a significant  portion of the total  compensation "at
risk" while providing compensation  opportunities which are comparable to market
levels.  Other  executives'  salaries are reviewed annually and changed based on
their performance and responsibilities.

                                Annual Incentives

Executive  Incentive  Plan.  The  Company's  Board of Directors has an Executive
Incentive  Plan which  provides for the payment of annual  incentive  bonuses to
certain executive employees. The Executive Incentive Plan is administered by the
Compensation  Committee,  whose members are not eligible to  participate  in the
Executive Incentive Plan.
<PAGE>

Generally,  an  executive  employee  does not earn a bonus  under the  Executive
Incentive Plan unless specified  revenue,  net profit or other performance goals
are met by the Company. The Compensation  Committee sets a range of bonus levels
based on the  performance  goals set for the year. The Committee  determines the
amount of such cash bonus that may be paid to an executive  employee by applying
a payment  percentage that corresponds to such goals to the employee's salary at
the beginning of the  applicable  fiscal year.  The Committee may also use stock
options if it believes that stock options will provide  executive  officers with
appropriate  incentives.  Fiscal  1997  incentives  under  this Plan were  stock
options and no cash bonuses were paid.  These options  become fully  exercisable
November 23, 1997.

For fiscal 1997, the chief executive  officer received options for 15,000 shares
as an annual incentive and did not receive any cash bonus under the Plan.

                              Long-Term Incentives

The Company may grant some executive level employees long-term awards, including
stock  options,  performance  awards,  and  restricted  stock  pursuant  to  the
Long-Term Incentive Plan. The purpose of these awards are to:

     (i) focus  executives on the  achievement of performance  objectives  which
enhance shareholder value;

     (ii)  emphasize the  importance  of balancing  present  business  needs and
long-term goals critical to the future success of the Company; and

     (iii) attract and retain executives of superior ability.

Stock  Options.  Stock  options allow the  executives to purchase  shares of the
Company's  common  stock at an exercise  price equal to the fair market value at
the date of grant  over a period of five  years.  Generally,  one-third  to one-
fourth of the  executive's  option becomes  exercisable  within the first six to
twelve months after grant with the remainder  over a period  ranging up to three
or four years  following  the date of grant.  During fiscal 1997, in addition to
the options for 15,000  shares  discussed  above under  Annual  Incentives,  the
Company  issued the chief  executive  officer  options  for 40,000  shares at an
exercise price of $13.25 per share under the Amended and Restated 1992 Long-Term
Incentive Plan on June 30, 1997.

Performance Units. The Compensation  Committee  authorized awards of performance
units  ("Units")  in fiscal  1993 and  fiscal  1994 that  generally  would  have
provided executive recipients with the opportunity to receive cash awards if the
Company's  financial  goals and other business  objectives  were achieved over a
three-year period.

In fiscal 1995, the Committee  determined  that only annual cash  incentives and
stock options  should be granted to executives  to simplify  their  compensation
program,  canceled the Units  previously  awarded and decided that no additional
Units should be granted under the Amended and Restated 1992 Long-Term  Incentive
Plan for the foreseeable future.

                                Ronald R. Hahn, Chairperson
                                V. Kenneth Travis
                                Robert L. Montgomery
                                Raymond G. Schultze, M.D.
<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, 1992,  through
June 30, 1997, 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.

[GRAPHIC OMITTED]
<TABLE>
<CAPTION>

                        06/30/92        06/30/93        06/30/94        06/30/95        06/30/96         06/30/97
                     --------------- --------------- --------------- --------------- ---------------- ---------------
<S>                      <C>             <C>             <C>             <C>              <C>             <C>
HRM                      100.00          141.67          108.33          175.00           175.00          225.00
Peer Group Index         100.00          134.93          151.65          153.79           199.42          259.67
Nasdaq Index             100.00          122.76          134.61          157.88           198.73          239.40
</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; Chartwell RE Corp.; Citizens Financial Corp.; Compdent
Corporation;  Conseco,  Inc.;  Equisure,  Inc..; Everest Reinsurance Hld.; First
Commonwealth of America;  Health Power, Inc.;  Healthplex,  Inc.;  Healthsource,
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;  Provident American
Corp.;  RightChoice Managed Care;  Safeguard Health  Enterprises;  Sierra Health
Services,  Inc.;  Torchmark  Corporation;   Transamerica   Corporation;   Trigon
Healthcare,  Inc.;  Union American  Holding;  United Dental Care,  Inc.;  United
Healthcare  Corporation;  United Wisconsin  Services;  Unum  Corporation;  Value
Health, Inc.; Washington National CP; 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 October 7, 1997.
<TABLE>
<CAPTION>
Name of Director, Executive Officer or Identity of Group       Number of Shares Beneficially    Percent of
                                                                          Owned(1)                 Class
--------------------------------------------------------       -----------------------------    ----------
<S>                                                                     <C>                         <C> 
NOLA, LLC
916 Sommerset Street
Watchung, NJ 07060                                                      293,565( 2)                6.52%

Chiplease, Inc.
640 N. LaSalle Street, Suite 300
Chicago, IL 60610                                                       270,000( 3)                6.00%

Gary T. McIlroy, M.D.
8000 West 78th Street
Minneapolis, MN 55439                                                   309,322( 4)                6.72%

Marlene Travis
8000 West 78th Street
Minneapolis, MN 55439                                                   356,309( 5)                7.78%

Thomas P. Clark                                                          91,448( 6)                2.02%

Adele M. Kimpell                                                         11,000( 7)                  *

John R. Higbee                                                            7,000( 8)                  *

Vance Kenneth Travis                                                      9,502( 9)                  *

Ronald R. Hahn                                                            9,500(10)                  *

Robert L. Montgomery                                                      5,700(11)                  *

Gary L. Damkoehler                                                        1,267(12)                  *

Raymond G. Schultze, M.D                                                  1,267(13)                  *

All Current Executive Officers and Current Directors as a
   Group (12 persons)                                                   821,765(14)                17.24%

</TABLE>
-----------
 *       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 October 7, 1997,  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.
<PAGE>
(2)  Includes  293,565  shares for which NOLA, LLC represents it has sole voting
     power  and  which was  owned on May 1,  1997,  the date of the most  recent
     Schedule 13D received by the Company from such shareholder.

(3)  Includes  270,000 shares for which Chiplease,  Inc.  represents it has sole
     voting  power and which was owned on March 21,  1997,  the date of the most
     recent Schedule 13D received by the Company from such shareholder.

(4)  The  number of shares  set forth in the above  table (i)  includes  207,753
     shares held by the Gary T. McIlroy  Revocable  Trust, for which Dr. McIlroy
     is grantor and trustee,  (ii) includes 101,569 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.

(5)  The  number of shares  set forth in the above  table (i)  includes  276,660
     shares held by the Marlene O. Travis  Revocable Trust, for which Ms. Travis
     is grantor and trustee,  (ii)  includes  79,649 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.

(6)  Includes  57,568 shares held by Mr. Clark and 33,880 shares which Mr. Clark
     has the right to acquire upon exercise of options.

(7)  Includes  11,000  shares  which Ms.  Kimpell has the right to acquire  upon
     exercise of options.

(8)  Includes  1,000 shares held by Mr. Higbee and 6,000 shares which Mr. Higbee
     has the right to acquire upon exercise of options.

(9)  Includes  3,802 shares held by Mr. Travis and 5,700 shares which Mr. Travis
     has the right to acquire upon exercise of options.

(10) Includes  3,800 shares held by Mr. Hahn and 5,700 shares which Mr. Hahn has
     the right to acquire upon exercise of options.

(11) Includes  5,700 shares which Mr.  Montgomery  has the right to acquire upon
     exercise of options.

(12) Includes  1,267 shares which Mr.  Damkoehler  has the right to acquire upon
     exercise of options.

(13) Includes  1,267  shares  which Mr.  Schultze  has the right to acquire upon
     exercise of options.

(14) Includes  556,033 shares held by the current  officers and  directors,  and
     265,732  shares that current  executive  officers and  directors as a group
     have the right to acquire as of October 7, 1997,  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............................     37

          Consolidated Balance Sheets as of June 30, 1997
          and 1996..................................................     38

          Consolidated Statements of Net Income for the years
          ended June 30, 1997, 1996 and 1995........................     39

          Consolidated Statements of Changes in Shareholders'
          Equity for the years ended June 30, 1997, 1996
          and 1995..................................................     40

          Consolidated Statements of Cash Flows for the years
          ended June 30, 1997, 1996 and 1995........................     41

          Notes to Consolidated Financial Statements................     42

     (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.............            53

          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, 1997 (SEC File No.
          0-18902).

     3.2  Composite Bylaws of the Company, as of May 17, 1997.

     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).

     10.3fEmployment  Agreement  dated as of June 20, 1996  between  Health Risk
          Management,  Inc. and Dr. Gary T. McIlroy --  incorporated by refernce
          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).

     10.4fSplit 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 refernce 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).

     10.5fEmployment  Agreement  dated as of June 21, 1996  between  Health Risk
          Management,  Inc. and Marlene O. Travis -- incorporated by refernce 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). 

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

     10.6fSplit 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 refernce 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).

     10.7fEmployment   Agreement   dated  June  21,  1996  between  Health  Risk
          Management,  Inc. and Thomas P. Clark --  incorporated  by refernce 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).

     10.8fSplit Dollar  Agreement  dated as of September 1, 1991 between  Health
          Risk Management,  Inc. and Thomas P. Clark -- incorporated by refernce
          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).

     10.9fHealth 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).

     10.10f 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).

     10.11Second  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).

     10.12Third  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).

     10.13f Amended and Restated 1992 Long-Term Incentive Plan.

     10.14f 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).

     10.15f 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).

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

     10.17f  Form  of  Non-Qualified  Stock  Option  Agreement  under  the  1992
          Long-Term Incentive Plan -- incorporated by reference to Exhibit 10.33
          to  theCompany's  Annual Report on Form 10-K for the fiscal year ended
          June 30, 1992 (SEC File No. 0-18902).
--------------
f    Indicates  a  management  contract  or  compensatory  plan  or  arrangement
     required to be filed as an exhibit to Form 10-K.
<PAGE>
     10.18f Form of Performance  Unit Award under the 1992  Long-Term  Incentive
          Plan --  incorporated  by reference to Exhibit  10.34 to  theCompany's
          Annual  Report on Form 10-K for the fiscal  year  ended June 30,  1992
          (SEC File No. 0-18902).

     10.19f  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).

     10.20f  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).

     10.21Lease  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).

     10.22Second  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.

     10.23Fourth  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).

     10.24Fifth  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).

     10.25Sixth  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.

     10.26Third  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).

     10.27Fourth  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.
--------------
f    Indicates  a  management  contract  or  compensatory  plan  or  arrangement
     required to be filed as an exhibit to Form 10-K.
<PAGE>
     10.28Revolving  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).

     10.29First  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).

     10.30Second  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).

     10.31Third  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.

     10.32Security  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).

     10.33Managed  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).

     10.34Second  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).

     10.35Claim  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, 1995 (SEC File No. 0-18903).

     10.36Second 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).
--------------
f    Indicates  a  management  contract  or  compensatory  plan  or  arrangement
     required to be filed as an exhibit to Form 10-K.
<PAGE>
     10.37Lease 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).

     10.38Managed Care Service  Agreement  dated October 29, 1996 between Health
          Risk Management, Inc. and Keystone Mercy Health Plan.

     10.39QualityFIRST(R)License  Agreement  dated July 11, 1996 between  Health
          Risk Management, Inc. and Keystone Mercy Health Plan.

     10.40Amendment No. 1 to the Managed Care Service  Agreeement between Health
          Risk Management, Inc. and Keystone Mercy Health Plan effective October
          1, 1997.

     11.  Statement of computation of earnings per share.

     21.  List of subsidiaries.

     23.  Consent of Independent Auditors.

     27.  Financial Data Schedule (filed in electronic format only).


(b)  Reports on Form 8-K.

     The Company  filed no reports on Form 8-K during the quarter ended June 30,
     1997.

<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, 1997 and 1996,  and the  related  consolidated
statements  of net income,  changes in  shareholders'  equity and cash flows for
each of the three  years in the period  ended  June 30,  1997.  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, 1997 and 1996, and the consolidated results of
its  operations  and its cash  flows for each of the three  years in the  period
ended  June  30,  1997,  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.


/s/ Ernst & Young LLP


October 10, 1997


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

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                               June 30,
                                                                                  ------------------------------------
                                                                                       1997                1996
                                                                                  ---------------     ----------------
<S>                                                                               <C>                 <C>    
Current assets:
   Cash and cash equivalents                                                      $        5,349      $       3,347
   Accounts receivable-net of allowance for doubtful accounts of
     $260 ($200 in 1996)                                                                   5,257              5,134
   Unbilled receivables                                                                    7,110              4,642
   Deferred income taxes                                                                     350                235
   Other                                                                                     989              1,394
                                                                                        --------         ----------
     Total current assets                                                                 19,055             14,752

Computer software costs, net of amortization of $12,782 ($9,816 in 1996)                  20,385             17,132
Property and equipment less accumulated depreciation of $11,103 ($9,272 in
   1996)                                                                                   9,215              9,788
Contract rights, net of amortization of $914 ($748 in 1996)                                  893              1,030
Other assets                                                                               2,175              2,120
                                                                                         -------            -------
                                                                                  $       51,723      $      44,822
                                                                                         =======            =======
                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                               $        1,645      $       1,863
   Accrued expenses                                                                        3,018              2,638
   Unearned revenues                                                                       3,826              2,578
   Current maturities of notes payable                                                     1,134              1,076
   Current portion of capitalized equipment leases                                           854              1,351
                                                                                        --------            -------
     Total current liabilities                                                            10,477              9,506

Deferred income taxes                                                                      3,715              2,292
Long-Term portion of notes payable                                                         2,166              2,152
Long-Term portion of capitalized equipment leases                                          1,321              2,398
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,
     4,478,245 issued and outstanding (4,180,476 in 1996)                                     45                 42
   Additional paid-in capital                                                             30,945             27,619
   Retained earnings                                                                       3,054                813
                                                                                         -------           --------
     Total shareholders' equity                                                           34,044             28,474
                                                                                         -------           --------
                                                                                  $       51,723      $      44,822
                                                                                         =======           ========
</TABLE>

<PAGE>

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

                                                                                     Year Ended June 30,
                                                                      ------------------------------------------------
                                                                          1997             1996               1995
                                                                      -------------    -------------     -------------
<S>                                                                   <C>              <C>               <C>   

Revenues                                                              $    62,723      $    54,507       $    49,302

Operating expenses:
   Cost of services                                                        37,657           31,762            30,290
   Depreciation and amortization, principally cost of services              7,646            6,947             6,127
   Selling and marketing                                                    7,346            6,767             6,064
   Administration                                                           5,682            5,232             4,811
   Merger costs                                                               390               --                --
                                                                         --------       ----------        ----------
     Total operating expenses                                              58,721           50,708            47,292
                                                                         --------       ----------        ----------

Operating income                                                            4,002            3,799             2,010

Other income (expense):
   Interest income                                                            187              158               128
   Interest expense                                                          (535)            (708)             (759)
                                                                         --------         --------          --------
     Total other expense                                                    ( 348)           ( 550)            ( 631)
                                                                         --------         --------          --------

Income before income taxes                                                  3,654            3,249             1,379

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

Net income                                                            $     2,241      $     1,996       $       844
                                                                          =======          =======           =======

Net income per common and common equivalent share                     $       .50      $       .47       $       .21
                                                                         ========         ========          ========

Weighted average common and common equivalent shares                    4,458,101        4,219,186         3,982,093
                                                                        =========        =========         =========
</TABLE>
<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, 1994            3,943,199        $       39        $    25,665             $ (2,027)     $   23,677
Options to purchase common
   shares issued for services                                                   18                                   18
Option exercised                       85,500                 1                554                                  555
Common shares issued for
   services                             1,000                                    7                                    7
Net income                                                                                          844             844
                                   -------------     -------------     --------------    ---------------     ------------
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
                                   =============     =============     ==============    ===============     ============
</TABLE>

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

                                                                                     Year Ended June 30,
                                                                      ------------------------------------------------
                                                                          1997             1996               1995
                                                                      -------------    -------------     -------------
<S>                                                                   <C>              <C>               <C>    

Cash flows from operating activities:
   Net income                                                         $     2,241      $     1,996       $       844
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Depreciation                                                         2,816            2,832             2,406
       Amortization                                                         4,830            4,115             3,721
       Provision for deferred income taxes                                  1,398            1,231               523
       Other                                                                   --               19                25
       Changes in operating assets and liabilities:
         Accounts receivable                                                  (89)          (2,374)              153
         Unbilled receivables                                              (2,468)             303            (1,371)
         Other assets                                                           7           (1,002)               51
         Accounts payable                                                    (238)              (6)              318
         Accrued expenses                                                     382               39               416
         Unearned revenues                                                  1,248              282               228
                                                                      -------------    -------------     -------------
Net cash provided by operating activities                                  10,127            7,435             7,314

Cash flows from investing activities:
   Acquisition of net assets, net of cash acquired                           (139)              --                --
   Property and equipment                                                  (2,827)          (2,256)           (1,891)
   Capitalized software                                                    (7,396)          (5,779)           (5,337)
                                                                      -------------    -------------     -------------
Net cash used in investing activities                                     (10,362)          (8,035)           (7,228)

Cash flows from financing activities:
   Proceeds from notes payable                                              1,275            1,500                --
   Principal payments on notes payable                                     (1,278)            (904)             (935)
   Principal payments on capital leases                                      (999)          (1,152)           (1,231)
   Issuance of common shares                                                3,239            1,155               555
                                                                      -------------    -------------     -------------
Net cash provided by (used in) financing activities                         2,237              599            (1,611)
                                                                      -------------    -------------     -------------

Increase (decrease) in cash                                                 2,002               (1)           (1,525)
Cash and cash equivalents at beginning of year                              3,347            3,348             4,873
                                                                      -------------    -------------     -------------

Cash and cash equivalents at end of year                              $     5,349      $     3,347             3,348
                                                                      ===========      ===========       ===========
</TABLE>
<PAGE>

                          HEALTH RISK MANAGEMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 1997

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  is engaged in a single  business  consisting  of managed
          health care services providing  comprehensive,  integrated health plan
          management and related information  services.  The Company's principal
          health plan management  services include care review, case management,
          price control, and claims  administration.  The Company's  information
          services  revenues are derived  principally  from software license and
          subscription  fees related to its  QualityFIRST(R)  clinical  practice
          guidelines (the Guidelines). A significant percentage of the Company's
          revenues  are  derived  from the care  review  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
          its clients  subjects  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.  In addition,  the Company services a small
          number of large clients.  In 1997, sales to two clients were seventeen
          percent (17%) and sixteen percent (16%) of revenues, and in 1996 sales
          to two clients were seventeen  percent (17%), and eleven percent (11%)
          of  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.  Actual results could
          differ from those estimates.

     D.   Revenue Recognition

          The Company's revenues for health plan management services are derived
          from services provided under contracts obligating clients to generally
          pay: a  capitated  monthly  charge for each  covered  member  based on
          anticipated  case  volume  experience,  a  percentage  of  savings,  a
          transaction  or case fee,  or an hourly  fee.  In  addition,  each new
          client is typically charged a one-time set-up fee to cover the related
          set-up  costs  incurred  by  the  Company.  Revenue  for  health  plan
          management  services is recognized as services are rendered under each
          contract. Revenue from license fees is recognized upon delivery of the
          Guidelines  while  subscription  fees are recognized as revenue in the
          month the Guidelines are utilized by the clients.

     E.   Unbilled Receivables

          Unbilled  receivables  represent costs and related profit incurred for
          contract services which have not been billed.

<PAGE>
     F.   Unearned Revenues

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

     G.   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.

     H.   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.

     I.   Contract Rights

          The fair  value of  purchased  customer  lists  and  relationships  is
          amortized  over their  respective  estimated  useful lives of three to
          twelve years. Amortization expense was $166,000, $144,000 and $161,000
          for the years ended June 30, 1997, 1996 and 1995, respectively.

     J.   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.

     K.   Net Income Per Common and Common Equivalent Share

          Earnings per share is computed  using the weighted  average  number of
          Common  Shares and Common  Share  equivalents  outstanding  during the
          period.  Common Share equivalents include dilutive stock options using
          the treasury stock method.

          In February  1997,  the Financial  Accounting  Standards  Board issued
          Statement No. 128,  "Earnings Per Share." This  statement  establishes
          standards for computing and presenting  basic and diluted earnings per
          share  for  financial  statements  issued  for  periods  ending  after
          December  15,  1997.  Basic  and  diluted  earnings  per  share  under
          Statement No. 128 as compared to current  accounting  standards  would
          have been as follows:
<TABLE>
<CAPTION>
                                                  Current Standards
                                                  -----------------                       FAS 128
                                                                Fully                     -------
                                                  Primary      Diluted        Basic       Diluted
                                                  -------      -------        -----       -------
              <S>                                    <C>        <C>            <C>          <C>

              Year ended June 30, 1997               $.50       $.50           $.52         $.50
              Year ended June 30, 1996               $.47       $.47           $.49         $.47
</TABLE>
<PAGE>

     L.   Series A Preferred Stock

          On April 4,  1997,  the HRM  Board of  Directors  created  a series of
          preferred stock with a par value of $.01 per share for the shareholder
          rights plan.  The shares of such series were  designated  as "Series A
          Preferred  Stock".  The  number  of  shares  authorized  and  unissued
          constituting the Series A Preferred Stock is 300,000 shares.

     M.   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) 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.

     N.   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.

     O.   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,  net of tax benefit) for the  write-off of costs related to the
          terminated merger agreement with HPS.
<PAGE>

2.   COMPUTER SOFTWARE COSTS

     Computer software costs consist of the following at June 30:
<TABLE>
<CAPTION>
                                                                         1997              1996
                                                                         ----              ----
                                                                              (in thousands)
         <S>                                                         <C>               <C> 

         Computer Software (AutoPILOT(TM))
              Cost.................................................. $  12,932         $  10,347
              Less accumulated amortization.........................     5,177             4,307
                                                                       -------           -------
              Net book value........................................     7,755             6,040
         Claim Administration Software
              Cost..................................................     7,601             6,705
              Less accumulated amortization.........................     2,913             2,178
                                                                       -------           -------
              Net book value........................................     4,688             4,527
         Guidelines, Protocols and Medical Analysis Software
              Cost..................................................    12,634             9,896
              Less accumulated amortization.........................     4,692             3,331
                                                                       -------           -------
              Net book value........................................     7,942             6,565
                                                                       -------           -------

         Computer Software and Database Development Costs........... $  20,385         $  17,132
                                                                        ======            ======
</TABLE>
     Amortization of these costs was as follows for the years ended June 30:
<TABLE>
<CAPTION>
                                                                        1997             1996              1995
                                                                   -------------   --------------     ---------
                                                                                   (in thousands)
         <S>                                                            <C>              <C>               <C>


         Computer Software (AutoPILOT(TM))....................          $  1,791         $  1,485          $  1,255
         Claim Administration Software........................               735              645               552
         Guidelines, Protocols and Medical Analysis Software..             1,617            1,279               982
                                                                           -----            -----             -----

         Amortization Expense.................................          $  4,143         $  3,409          $  2,789
                                                                           =====            =====             =====
</TABLE>
<PAGE>
3.   PROPERTY AND EQUIPMENT

     Property and equipment consists of the following at June 30:

                                                       1997              1996
                                                       ----              ----
                                                           (in thousands)
     Owned

     Office equipment, furniture and fixtures........$  5,435          $  5,037
     Leasehold improvements..........................   1,594             1,387
     Data processing equipment.......................   8,175             5,951
                                                      -------           -------
                                                       15,204            12,375
     Less accumulated depreciation...................   8,374             6,431
                                                      -------           -------

     Net property and equipment owned................   6,830             5,944
                                                      -------           -------

     Capitalized leases

     Office equipment and furniture..................   1,271             1,372
     Data processing equipment.......................   3,843             5,313
                                                      -------           -------
                                                        5,114             6,685
     Less accumulated depreciation...................   2,729             2,841
                                                      -------           -------

     Net capitalized leases..........................   2,385             3,844
                                                      -------           -------

     Property and equipment..........................$  9,215          $  9,788
                                                        =====             =====

4.   NOTES PAYABLE

     Notes payable consist of the following at June 30:
<TABLE>
<CAPTION>
                                                                                         1997              1996
                                                                                         ----              ----
                                                                                             (in thousands)
     <S>                                                                                 <C>               <C>


     Term loan payable to bank in monthly  installments of $43,667 plus interest
     at bank's  reference rate plus 0.375%  (8.875% at June 30, 1997),  with the
     last payment due June 30, 1999. Secured by accounts receivable, equipment,
     fixtures and general intangibles...............................................     $  1,048          $  1,572

     Notes  payable  to  bank  under  revolving   credit  agreement  in  monthly
     installments  of $46,250 plus  interest at the bank's  reference  rate plus
     0.375% (8.875% at June 30, 1997), with the last payment due December 31, 2001
     Secured by accounts receivable, equipment, fixtures and general intangibles....        2,198             1,350

     Note payable to bank in monthly  installments of $22,325 including interest
     at the bank's base rate (8.50% at June 30, 1997) until  September  30, 1997
     when the remaining principal balance is due. Secured by accounts receivable
     and equipment..................................................................           54               306
                                                                                         --------          --------
                                                                                            3,300             3,228
     Less Current Maturities........................................................        1,134             1,076
                                                                                            -----             -----
     Long-Term Portion..............................................................     $  2,166          $  2,152
                                                                                            =====             =====
</TABLE>
<PAGE>

     The Company  has entered  into a  revolving  credit  agreement  with a bank
     whereby it may borrow up to $3,750,000  under a revolving loan. The loan is
     secured  by   accounts   receivable,   equipment,   fixtures   and  general
     intangibles. The revolving credit agreement terminates on January 31, 1998.
     The Company had available $1,552,000 under the revolving credit facility at
     June 30, 1997.

     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
     $1,134,000 in 1998, $1,078,000 in 1999, $555,000 in 2000, $405,000 in 2001,
     and $128,000 in 2002.

     Total interest paid on notes payable was $299,000,  $281,000,  and $298,000
     for the years ended June 30, 1997, 1996 and 1995, respectively.

5.   OPTIONS

     At June 30, 1997, the Company's 1992 Long-Term  Incentive Plan and the 1990
     Stock Option Plan ("the Plans")  permitted the granting of 800,000  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
     $15.25.  No common shares are available for future issuance under the Plans
     at June 30, 1997. On August 28, 1997, the Company registered 400,000 shares
     of common stock for issuance under the 1992 long-term Incentive Plan.

     At June 30, 1997, the Company had outstanding 250  unregistered  options to
     purchase common shares, not granted under the Plans, at $6.50 per share.

     Transactions related to outstanding options during the last three years are
     summarized as follows:
<TABLE>
<CAPTION>
                                                                                        Weighted
                                                                                         Average
                                                         Total       Exercisable     Exercise Price
                                                         -----       -----------     --------------        
     <S>                                                 <C>            <C>            <C>   

     Balance at June 30, 1994                            689,352        485,906        $  9.81
         Granted                                         178,657             --           7.02
         Became exercisable                                   --        125,320           9.09
         Exercised                                       (85,500)       (85,500)          6.49
         Expired                                         (93,482)       (90,482)         12.92
                                                        --------       --------          -----
     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
                                                         =======        =======          =====
</TABLE>
<PAGE>

     The following table summarizes  information about the stock options at June
     30, 1997
<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 - $5.50          21,951          2.01                $  4.90           21,951          $  4.90
     $6.375 - $6.75          12,904          1.94                   6.55           12,904             6.55
     $7.00                  110,500          2.59                   7.00           97,166             7.00
     $7.25-$9.00            113,154          2.98                   8.07           70,447             8.13
     $9.75                   62,750          1.06                   9.75           58,750             9.75
     $10.00-$10.75           33,200          1.97                  10.26           26,232            10.20
     $11.00                 100,500          5.00                  11.00                0             0.00
     $11.25-$13.00           51,750          2.83                  11.87           43,434            11.93
     $13.25-$13.50          154,600          4.99                  13.25              250            13.50
     $15.25                  10,750          0.57                  15.25           10,750            15.25
                             ------          ----                  -----           ------            -----
     $4.875-$15.25          672,059          3.35                 $10.06          341,884          $  8.69
                            =======          ====                  =====          =======           ======
</TABLE>

     The number of options scheduled to expire by fiscal year is 51,700 in 1998,
     103,619 in 1998, 131,407 in 2000, 130,483 in 2000, and 254,850 in 2002.

     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, 1997 and 1996:
     risk-free interest rates ranging from 5.85% to 6.73%; dividend yield of 0%;
     volatility  factor of the  expected  market price of the  Company's  common
     stock of .513;  and a weighted  average  expected life of the option of 3.5
     years.

     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.  The Company's pro
     forma information follows:

                                                Year ended June 30
                                               1997             1996
                                               ----             ----
     Pro forma net income                   $1,917,000        $1,763,000
     Pro forma net income per share               $.44              $.42
<PAGE>
6.   INCOME TAXES

     The  components of the provision for income taxes for the three years ended
     June 30 were as follows:
                                     1997              1996             1995
                               --------------   --------------    ----------

     Current:
          Federal............   $   5,000       $    8,000        $        0
          State..............      10,000           14,000            12,000
     Deferred................   1,398,000        1,231,000           523,000
                                ---------        ---------         ---------
                               $1,413,000       $1,253,000        $  535,000
                                =========        =========         =========

<PAGE>

     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:
<TABLE>
<CAPTION>
                                                                  1997              1996
                                                            --------------     -------------
         <S>                                                  <C>              <C> 

         Deferred tax liabilities:
              Prepaid expenses..........................      $     24,000     $     130,000
              Other assets..............................           253,000           196,000
              Computer software costs...................         7,437,000         6,251,000
              Tax over book depreciation................           758,000           917,000
                                                               -----------       -----------
                  Total deferred tax liabilities........         8,472,000         7,494,000

         Deferred tax assets:
              Allowance for doubtful accounts...........            94,000            75,000
              Accrued expenses..........................           280,000           290,000
              Net operating loss carryforwards..........         5,248,000         5,496,000
                                                                 ---------         ---------
                  Total deferred tax assets.............         5,622,000         5,861,000
              Less valuation allowance..................         (515,000)         (424,000)
                                                                 --------          --------
                  Total net deferred tax assets.........         5,107,000         5,437,000
                                                                 ---------         ---------

         Net deferred tax liabilities...................      $  3,365,000      $  2,057,000
                                                                 =========         =========
</TABLE>

     A reconciliation  of the statutory federal income tax rate to the effective
     tax rate is as follows:
<TABLE>
<CAPTION>
                                                   1997             1996            1995
                                              ------------      ------------     -------
       <S>                                        <C>               <C>              <C> 

       Statutory rate................             34.0%             34.0%            34.0%
       State income taxes............              2.7%              2.7%             2.8%
       Non-deductible meals and entertainment
         expenses....................               .8%               .7%             1.1%
       Other.........................              1.2%              1.2%              .9%
                                                 -----             -----            -----
                                                  38.7%             38.6%            38.8%
                                                  ====              ====             ====
</TABLE>

     At June 30, 1997, the Company had net operating loss (NOL) carryforwards of
     $14,100,000  for income tax purposes only that expire in years 1999 through
     2012.  Included  in  the  NOL is  approximately  $1,426,000  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, 1997,  1996 and 1995 was
     $15,090, $20,600 and $4,600, respectively.
<PAGE>

7.   COMMITMENTS

     The  Company  leases its office  facilities  and  various  equipment  under
     operating and capital leases. Rental expense was approximately  $3,564,000,
     $2,881,000  and  $2,754,000,  for the years ended June 30, 1997,  1996, and
     1995, respectively.  The following is a schedule by years of future minimum
     rental  payments  required under  operating  leases as of June 30, 1997 (in
     thousands):

     Year ending June 30:

         1998                                          $  3,487
         1999                                             1,954
         2000                                             1,217
         2001                                               921
         2002   `                                            90
                                                       --------
     Total minimum rental payments                     $  7,669
                                                       ========

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

     The following is a schedule of future  minimum lease payments under capital
     leases as of June 30, 1997 (in thousands):

     Years ending June 30:

         1998                                          $  999
         1999                                             682
         2000                                             303
         2001                                             295
         2002                                             223
                                                       ------
     Total minimum lease payments                       2,502
     Less amount representing interest                    327

     Net minimum lease payments                         2,175
     Less current maturities                              854
                                                        -----
     Long-Term portion                               $  1,321
                                                        =====

     The Company  entered into capital lease  agreements  aggregating  $460,000,
     $432,000,  and $1,271,000 for the years ended June 30, 1997, 1996 and 1995,
     respectively,   in  connection  with  the  purchase  of  office  equipment,
     furniture and fixtures, and data processing equipment.

8.   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  will match a
     minimum  of  10%  of  eligible  employees'  contributions  up to 6% of  the
     employee's  salary for the plan year ending June 30, 1997 and 1996 compared
     to 5% of the  employee's  salary for the plan year  ending  June 30,  1995.
     Employee and employer matching  contributions to the plan are remitted to a
     trustee on a biweekly basis. Company  contribution  expenses were $350,000,
     $240,000 and $200,000  for the years ended June 30, 1997,  1996,  and 1995,
     respectively.
<PAGE>

9.   QUARTERLY FINANCIAL DATA (Unauditied)

     The following table presents certain unaudited quarterly results for fiscal
     1997 and 1996.
<TABLE>
<CAPTION>
                                                                           Fiscal 1997
                                           ---------------------------------------------------------------------
                                            First           Second         Third          Fourth
                                          Quarter           Quarter       Quarter         Quarter          Year
                                          -------           -------       -------         -------          ----
     <S>                                  <C>              <C>             <C>            <C>            <C>    

     Revenues                             $14,395          $15,597         $16,058        $16,673        $62,723
                                           ======           ======          ======         ======         ======

     Gross Profit(1)                     $  5,747         $  6,438        $  6,162        $ 6,719        $25,066
                                           ======           ======          ======         ======         ======

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

     Net Income per share                $    .10         $    .16        $    .10(2)     $   .15        $   .50
                                           ======           ======          ======         ======         ======

     Weighted average number of shares      4,356            4,431           4,466          4,581          4,458
                                           ======           ======          ======         ======         ======

                                                                           Fiscal 1996
                                          ----------------------------------------------------------------------
                                            First          Second          Third          Fourth
                                          Quarter          Quarter        Quarter        Quarter          Year
                                          -------          -------        -------        -------          ----
     Revenues                             $13,371          $13,689         $14,045        $13,402        $54,507
                                           ======           ======          ======         ======         ======

     Gross Profit(1)                      $ 5,491          $ 5,838         $ 6,034        $ 5,382        $22,745
                                           ======           ======          ======         ======         ======

     Net Income                           $   529          $   612         $   784        $    71        $ 1,996
                                           ======           ======          ======         ======         ======

     Net Income per share                 $   .13          $   .15         $   .18        $   .02        $   .47
                                           ======           ======          ======         ======         ======

     Weighted average number of shares      4,140            4,107           4,277          4,353          4,219
                                           ======           ======          ======         ======         ======
</TABLE>
(1)  Represents revenues less cost of services.

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

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

Year ended June 30, 1995:
   Allowance for uncollectible accounts          $150,000       $333,000                  $183,000(1)       $300,000
</TABLE>

----------------
(1)  Uncollectible accounts written off.

<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.

October 13, 1997                       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.

October 13, 1997                      By: /s/ Gary T. McIlroy, M.D.         
                                           Gary T. McIlroy, M.D.
                                           Chairman of the Board, Chief 
                                           Executive Officer and Director 
                                           (principal executive officer)

October 13, 1997                      By: /s/ Marlene Travis
                                           Marlene Travis
                                           President, Secretary, Chief Operating
                                           Officer and Director

October 13, 1997                      By: /s/ Thomas P. Clark
                                           Thomas P. Clark
                                           Senior Vice President, Finance and
                                           Chief Financial Officer (principal
                                           financial officer and  principal
                                           accounting officer)

October 13, 1997                      By: /s/ Vance Kenneth Travis
                                           Vance Kenneth Travis, Director

October 13, 1997                      By: /s/ Gary L. Damkoehler
                                           Gary L. Damkoehler, Director

October 13, 1997                      By: /s/ Raymond G. Schultze, M.D.
                                           Raymond G. Schultze, M.D., Director

October 13, 1997                      By: /s/ Ronald R. Hahn
                                           Ronald R. Hahn, Director

October 13, 1997                      By: /s/ Robert L. Montgomery
                                           Robert L. Montgomery, Director
<PAGE>
                                 EXHIBIT INDEX
                                 -------------

     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, 1997 (SEC File No.
          0-18902).

     3.2  Composite Bylaws of the Company, as of May 17, 1997.

     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).

     10.3fEmployment  Agreement  dated as of June 20, 1996  between  Health Risk
          Management,  Inc. and Dr. Gary T. McIlroy --  incorporated by refernce
          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).

     10.4fSplit 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 refernce 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).

     10.5fEmployment  Agreement  dated as of June 21, 1996  between  Health Risk
          Management,  Inc. and Marlene O. Travis -- incorporated by refernce 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). 

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

     10.6fSplit 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 refernce 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).

     10.7fEmployment   Agreement   dated  June  21,  1996  between  Health  Risk
          Management,  Inc. and Thomas P. Clark --  incorporated  by refernce 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).

     10.8fSplit Dollar  Agreement  dated as of September 1, 1991 between  Health
          Risk Management,  Inc. and Thomas P. Clark -- incorporated by refernce
          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).

     10.9fHealth 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).

     10.10f 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).

     10.11Second  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).

     10.12Third  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).

     10.13f Amended and Restated 1992 Long-Term Incentive Plan.

     10.14f 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).

     10.15f 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).

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

     10.17f  Form  of  Non-Qualified  Stock  Option  Agreement  under  the  1992
          Long-Term Incentive Plan -- incorporated by reference to Exhibit 10.33
          to  theCompany's  Annual Report on Form 10-K for the fiscal year ended
          June 30, 1992 (SEC File No. 0-18902).
--------------
f    Indicates  a  management  contract  or  compensatory  plan  or  arrangement
     required to be filed as an exhibit to Form 10-K.
<PAGE>
     10.18f Form of Performance  Unit Award under the 1992  Long-Term  Incentive
          Plan --  incorporated  by reference to Exhibit  10.34 to  theCompany's
          Annual  Report on Form 10-K for the fiscal  year  ended June 30,  1992
          (SEC File No. 0-18902).

     10.19f  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).

     10.20f  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).

     10.21Lease  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).

     10.22Second  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.

     10.23Fourth  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).

     10.24Fifth  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).

     10.25Sixth  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.

     10.26Third  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).

     10.27Fourth  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.
--------------
f    Indicates  a  management  contract  or  compensatory  plan  or  arrangement
     required to be filed as an exhibit to Form 10-K.
<PAGE>
     10.28Revolving  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).

     10.29First  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).

     10.30Second  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).

     10.31Third  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.

     10.32Security  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).

     10.33Managed  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).

     10.34Second  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).

     10.35Claim  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, 1995 (SEC File No. 0-18903).

     10.36Second 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).
--------------
f    Indicates  a  management  contract  or  compensatory  plan  or  arrangement
     required to be filed as an exhibit to Form 10-K.
<PAGE>
     10.37Lease 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).

     10.38Managed Care Service  Agreement  dated October 29, 1996 between Health
          Risk Management, Inc. and Keystone Mercy Health Plan.

     10.39QualityFIRST(R)License  Agreement  dated July 11, 1996 between  Health
          Risk Management, Inc. and Keystone Mercy Health Plan.

     10.40Amendment No. 1 to the Managed Care Service  Agreeement between Health
          Risk Management, Inc. and Keystone Mercy Health Plan effective October
          1, 1997.

     11.  Statement of computation of earnings per share.

     21.  List of subsidiaries.

     23.  Consent of Independent Auditors.

     27.  Financial Data Schedule (filed in electronic format only).