SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

        For the transition period from July 1, 1999 to December 31, 1999

                         Commission file number 0-18902

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

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

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

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

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

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

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


Indicate by check mark, whether the Registrant (1) has filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

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

The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 22, 2000 was approximately $28,000,000 based upon the
closing sale price of the Registrant's Common Stock on such date.

Shares of $.01 par value Common Stock outstanding at March 22, 2000:
                               4,661,801 shares.

                       Documents Incorporated by Reference

                                      NONE




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                                     PART I

Item 1.  Business.

(a)  General Development of Business.

     Unless the context otherwise requires, references in this Transition Report
     Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
     to "HRM" and the "Company" refer to Health Risk Management, Inc., and its
     wholly owned domestic subsidiaries, HRM Claim Management, Inc., Institute
     for Healthcare Quality, Inc., Health Benefit Reinsurance, Inc.,
     Pennsylvania HRM, Inc., HRM Health Plans (PA), Inc. and its wholly owned
     subsidiary, Pennsylvania HealthMATE, Inc., and HRM's Canadian subsidiary,
     Health Resource Management LTD. HRM was incorporated in Minnesota in 1977.

     The Company changed its fiscal year end from June 30 to December 31,
     effective December 31, 1999. This report is HRM's Transition Report on Form
     10-K for the period July 1, 1999, through December 31, 1999.

     HRM delivers a variety of evidence-based medical information products and
     health plan management services to the managed care and indemnity markets.
     Service and contracting options range from a single product/service sold on
     a subscription, fee or per member per month basis, to total management of
     the financial risk of a health plan to outright ownership of a health plan.

     Our principal health plan management services and products include care
     management (formerly known as utilization review), provider network
     management, claim administration, partial and total risk management and
     computer-based medical information software and related management
     services.

     During the fiscal ended June 30, 1999, we realigned these products and
     services into three market-focused business units, which focus on the
     specific needs of our three major businesses. This was also done so we can
     manage more efficiently the specific segments within each market that have
     the highest profit potential. During this six month transition period ended
     December 31, 1999, we continued to realign our products and services into
     three market-focused business units. One of the goals of this realignment
     is to facilitate efficient management of the specific segments within each
     market that have the highest profit potential. This report highlights the
     products, services, programs and financials of the three business units.
     The three business units are the Risk Business Unit, the Service Business
     Unit and the QualityFIRST Business Unit.

     Subsequent to the six month transition period ended December 31, 1999, our
     Board of Directors authorized management in each business unit to initiate
     new Internet-based businesses that will take full advantage of cost saving,
     access and other benefits as well as the profit potential of Internet-based
     products and services. These initiatives will be briefly addressed below.
     This was the next step in the fulfillment of the business strategy we
     announced in the fiscal year ended June 30, 1999, Annual Report on Form
     10-K.

     1.   Risk Business Unit. This unit produces larger revenues than any of the
          other units because the revenue reflects the full risk of the benefits
          provided by the health plan, including the cost of services,
          administrative costs and profits. This unit accounted for 0%, 29%, and
          73% of the Company's total revenue for fiscal years 1997, 1998 and
          1999, respectively. This unit accounted for 76% of the Company's total
          revenue for the six month transition period ended December 31, 1999.
          Its revenue is derived primarily from monthly payments received from
          state agencies. Operating expenses from this unit are listed as
          Medical costs, net, the cost of service, and administrative expense
          related to the health plan. Medical costs, net of ceded amounts, refer
          to the cost of providing medical services to health plan members. This
          unit's market is managed care organizations that are underperforming;
          that is, they are operating at a loss, or they are not able to manage
          their medical loss ratio, but provide a premium rate that supports the
          medical costs, cost of service expense, administrative expense and
          profit potential.

          We use our 20 years' experience in health plan management to apply
          virtually all of our services and products to the goal of turning
          around failing health plans. To accomplish this, we assume management
          of all operational functions of the health plan, and we assume either
          a portion or all of the plan's financial risk, or we acquire the plan.
          With each increase in level of risk assumed, HRM increases its access
          to the health plan's premium dollars and assets and increases its
          assumption of financial risk, which may be reinsured via various
          reinsurance vehicles.


<PAGE>

          In February 1998, we signed, through our wholly-owned subsidiary,
          Pennsylvania HRM, Inc., our first full-risk, total health plan
          management contract with Oxford Health Plans (PA), Inc., Philadelphia,
          (Oxford) an approximately 60,000-member Medicaid HMO. Under the terms
          of the agreement, beginning April 16, 1998, we provided health plan
          management services and assumption of the medical cost risk under the
          HealthChoices Physical Health Agreement between the Commonwealth of
          Pennsylvania and Oxford. On January 27, 1999, we purchased the health
          plan, which today operates under the name OakTreeHealth Plan(TM). See
          Note 8 to the Consolidated Financial Statements and Current Report on
          Form 8-K filed February 11, 1999, for further information concerning
          our purchase of the health plan.

          During the six month transition period ended December 31, 1999, the
          risk business unit concentrated its marketing efforts on health
          maintenance organizations (HMOs), especially Medicaid HMOs. In
          December, efforts were initiated by HRM Health Plans (PA), Inc. to
          investigate the acquisition of Pennsylvania HealthMATE, an
          approximately 18,000-voluntary member Integrated Delivery System
          serving the Medicaid population in central Pennsylvania. In January
          2000, HRM Health Plans (PA) finalized the acquisition of Pennsylvania
          HealthMATE.

     2.   Service Business Unit. This unit, known under the brand name HRM(R)
          CarePASS(R) USA, is HRM's second highest revenue generating business
          unit, accounting for 94%, 67% and 24% of the Company's total revenue
          for fiscal years 1997, 1998 and 1999, respectively. The unit accounted
          for 21% of the Company's total revenue for the six month transition
          period ended December 31, 1999. This unit's revenue, in the form of
          management service fees, is usually based on either the number of
          members covered by the particular benefit plan or on a fee per
          transaction basis. Operating expenses for this unit are included in
          cost of services.

          Basic services in this unit include acute care management (review)
          services, coordinated care management for catastrophic or long-term
          illnesses, provider network management, and health care claim and
          related administrative services. This business unit's markets are
          mainly employer self-funded health benefit plans and fully insured
          benefit plans operated by insurance companies. This unit provides
          effective comprehensive health plan management to help clients ensure
          their employees or health plan members have: The right care, At the
          right time, In the right setting, From the right professional, At the
          right price, For the optimal outcomeSM.

          The sales objective is to sell all or as many services to a client as
          possible with the aim of providing total health plan management. When
          we meet this objective, clients can maximize the effectiveness and
          efficiency of their health plan, and HRM is in a position to maximize
          the returns for both the client and itself.

          A brief discussion of recent business developments, including those
          related to the Internet, can be found in the narrative description of
          the business sections below.

     3.   QualityFIRST Business Unit. This unit's revenue is included in
          QualityFIRST revenues, and accounted for 6%, 4% and 2% of the
          Company's revenues for fiscal years 1997, 1998 and 1999, respectively.
          This unit's revenue accounted for 2% of the Company's revenues for the
          six month transition period ended December 31, 1999. Revenues are
          primarily in the form of software license, subscription and related
          fees. During the six month transition period ended December 31, 1999,
          we continued efforts to re-focus what had been mainly a health care
          practice guideline software product into an enterprise-wide financial,
          liability and clinical management system to be used by managed care
          organizations in managing their medical loss ratio. We also
          intensified efforts to re-brand the product series as QualityFIRST(R)
          Evidence-based Solutions for Effective Medical ManagamentSM. . We also
          added separate medical information, continuing medical education and
          medical education core curriculum components. The primary focus during
          the transition period was the Internet. We devoted significant efforts
          to developing comprehensive additional strategies and prototypes for
          Internet applications.


<PAGE>

          Among other services, QualityFIRST(R) delivers scientific,
          evidence-based medical and financial risk management solutions to help
          health plans and providers deliver quality care for members, maintain
          control over medical loss ratios and minimize exposure to liability
          risk.

          A brief discussion of recent business developments, including those
          related to the Internet, can be found in the narrative description of
          business section below.

(b)  Financial Information about Industry Segments.

     The Company is engaged at the present time in three industry segments,
     namely health insurance and medical service plans (Risk Business Unit),
     health care management services (Service Business Unit) and medical
     information software systems and services (QualityFIRST Business Unit).
     Financial information concerning the Company's business units is included
     in Items 6,7,8 and 14.

(c)  Narrative Description of Business.

     (1)  Products.

          HRM's products and services are developed, packaged, managed, sold and
          operated by one of our three main business units, which allows us to
          focus our attention on the high revenue components and the specific
          needs of each of our three primary markets: the at-risk health plan
          market; the self-insured/indemnity service market; and the
          QualityFIRST provider market. Products and services are assigned to a
          business unit based on the specific needs of the market being served.

          Risk Business Unit Marketplace: Health Plans At Risk

          Health plans at risk - primarily HMOs - represent the market for the
          Risk Business Unit. This business unit is described in (a) above. It
          makes use of all of the Company's services and products as it assumes
          partial or full financial risk for a health plan. When accepting
          contracted financial risk, we may obtain reinsurance against losses
          above specific levels. In cases when we share risk, contracts also may
          include the awarding of specified bonus to us or payment by us of a
          penalty for the achievement or non achievement of specified
          performance targets.

          In January 1999, the unit undertook the ownership and management of an
          approximately 60,000- member Medicaid HMO in Philadelphia (formerly
          known as Oxford Health Plans (PA), Inc.) and that today is known as
          OakTree Health Plan(TM) (the Plan). HRM had been managing the Plan
          since April 1998. In January 2000, HRM Health Plans (PA) completed its
          acquisition of Pennsylvania HealthMATE, an approximately 18,000-member
          Medicaid Integrated Delivery System in central Pennsylvania. Our
          objective with these two plans - and others the Company expects to
          manage and/or acquire in the future -- is to improve the delivery of
          medical care services for members and to reduce the plans' medical
          loss ratio through improved operational efficiency and effectiveness.
          To accomplish this, we employ virtually all of HRM's health care
          management, provider contracting and claim administration products and
          services together with management expertise gained during 23years of
          hands on administration. This business unit plans to expand its
          management and/or ownership of similar HMO organizations with various
          financial or reinsurance arrangements.

          In addition, as the other business units establish services and
          products on the Internet, the Risk Business Unit will take full
          advantage of these developments and enjoy significant cost savings and
          enhanced access to a wide array of services and products.

          Service Business Unit Marketplace: Self Insured/Indemnity

          Although the self-insured/indemnity marketplace is the focus of the
          Service Business Unit, the unit also provides care management, claim
          administration and other management services to managed care
          organizations on a selected basis. During the year, the Service
          Business Unit focused sales efforts toward only large employers (more
          than 1,000 employees) and insurance plans, which represented a shift
          in marketing strategy away from smaller organizations. Because this

<PAGE>

          market had been the exclusive focus of HRM for most of its history,
          most of our client base falls within this business unit. The client
          base is nationwide, with clients' employees or members located in
          nearly every state.

          During the six month transition period ended December 31, 1999, this
          unit also continued the process of repackaging and bundling its many
          separate services into essentially one total health plan management
          product. This product includes everything a self-insured employer or
          an insurance company with a health insurance plan needs if it is to
          offer a health plan to employees/members. This product is sold on a
          fixed monthly fee per covered employee based on expected transaction
          volume or on a per transaction or case basis. Components of this
          product include care management for acute and chronic medical,
          surgical and behavioral health cases; complete claim administration
          services, including reinsurance products when requested and pharmacy
          management (provided through subcontractors); and provider network
          management (usually through an affiliated preferred provider network).

          Also during this six month transition period ended December 31, 1999,
          the unit adopted a long-term strategy to enhance patient empowerment
          in matters pertaining to their own health care by increasing their
          access to accredited, evidence-based health care education resources.
          Tied to this strategy are significant efforts to increase customer
          loyalty through the use of long-term pricing incentives and
          risk-sharing incentives. A key development that will facilitate these
          incentives are the large operational cost savings the unit is
          beginning to accrue through the addition of processing technology.

          This technology, a combination of Internet-based data and
          sophisticated phone services, plus the internal integration of service
          expertise, will reduce the number of points of contact for patients
          and providers so that eventually there will be a single point of
          contact for all callers, which will result in improved service at
          lower cost. New call center technology already is using skills-based
          routing for incoming phone calls. This system is aimed at improving
          employee productivity, reducing training costs and serving the
          customer better and more economically.

          On the claim administration side, new scanning and optical character
          recognition technology for entering paper claims into our electronic
          claim adjudication system will contribute significant savings to our
          claim processing service and greatly increase claim accuracy and claim
          turnaround time. All data entry already has been centralized to the
          Minneapolis unit, and we expect to eliminate all external vendors who
          key-in paper claims.

          A significant accomplishment during the six month transition period
          has been the centralization of provider file management into one
          location. Provider data from all of our satellite offices are now
          housed centrally. This greatly simplifies provider data management,
          which is improving service for our customers and reducing data access
          costs.

          During the six month transition period ended December 31, 1999, the
          business unit began developing plans to create a new web-based
          application service provider (ASP) to enhance business to business
          services, provide significant savings and improve the overall business
          practice of health plans and providers alike. Eventually the Service
          and Risk Business Units could carry out all of its operations
          processes through the ASP. Also, the QualityFIRST Business Unit's
          institutional license clients, such as HMOs, could perform their
          utilization management, claim administration and other business
          management operations through the ASP. Initial services could possibly
          include: Provider Programs such as eligibility verification, benefit
          plan coverages, medical decision support, utilization management
          tools, network management, case specific ancillary services, claim
          adjudication; case tracking, practice profiling, provision of
          patient-requested patient education materials on a request and push
          basis; Patient Programs such as web-access to health care information,
          information about ancillary services, chat lines, patient questions
          for their physician, differential diagnoses, provider evaluations,
          appointment scheduling; Health Plan Sponsor Programs such as
          sponsor-specific web page; single point of contact for all patient
          information management; web-based reporting tools including financial,
          operational, case mix trends (plan vs. industry, etc.); pricing
          incentives and risk-sharing opportunities; web-based enrollment,
          eligibility, provider directories, claim status.

               Typical Service Business Unit Case Example
               In a typical case managed by this business unit as of December
               31, 1999, a plan participant or the participant's physician must
               call a toll-free telephone number prior to commencement of

<PAGE>

               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. (The plan
               participant's physician, other medical provider, hospital,
               outpatient center, etc. already will have been determined by
               HRM's Provider Network Services in conjunction with the
               participant's employer or insurer.) From these calls, our nurses
               gather information on the participant's medical condition and the
               attending physician's proposed treatment plan, and then compare
               these with our QualityFIRST(R) guidelines to determine the
               validity of the proposed diagnosis and appropriateness of the
               proposed treatment. In the event of any discrepancies between the
               proposed diagnosis and treatment and our QualityFIRST(R)
               guidelines, or at the request of the attending physician (and in
               all cases involving certain complicated illnesses), these
               determinations are reviewed by one of our consulting physicians
               who is available 24 hours a day, seven days per week, 365 days
               per year, and, in certain instances, by an independent physician
               (second opinion). A second opinion provides the patient with
               additional information to enable him or her to make an informed
               decision before proceeding with a certain treatment. The
               determination of whether the diagnosis, plan of treatment, and
               setting for care are medically necessary and appropriate is
               entered into our computer system to determine health plan
               reimbursement, to begin the claim administration process, 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 we do 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 participant receives the
               appropriate treatment from the appropriate practitioner, in the
               appropriate setting and our claim administration division
               processes the appropriate claims and pays the appropriate charges
               for the services that are covered according to the employer's
               health plan or the participant's health insurance policy. Also,
               any plan participant is encouraged to use our HRM(R) CareCALL(R)
               24-hour health information, assessment, triage and referral phone
               line, which provides personal health management and promotes
               illness and injury prevention by educating and empowering the
               caller to make appropriate decisions about their health, their
               health care, and the health care resources they use.

          QualityFIRST Business Unit Marketplace: General Public/Managed Care
          Organizations/Insurance Companies/Provider Organizations

          Managed care organizations, insurance companies, and various provider
          organizations represent the market for the QualityFIRST Business Unit.
          This unit is described in (a) above. As noted, during the six month
          transition period ended December 31, 1999, this unit re-focused its
          marketing efforts toward offering an integrated, enterprise-wide
          product aimed at improving not only overall health care consistency
          and quality, but also the customer's overall bottom line results. This
          was in contrast to previous marketing efforts aimed at selling the
          product as a tool to assist in clinical decision-making.

          During the six month transition period ended December 31, 1999, the
          unit concentrated on development of plans and prototypes to make this
          product, including its medical content, suitable and attractive for
          Internet applications aimed at the general public, employees of
          clients, health plan members of client provider organizations, medical
          students and physicians. The proposed e-health business could give
          consumers, physicians and health plan administrators access to
          reliable, evidence-based, health care information on the Internet to
          facilitate consistent decision making. Consumers, for example, will
          learn more about treatment options for their specific conditions. And
          they likely would be better prepared to discuss their options and
          choices with their physicians. Users are expected to have access to a
          patented, logic-based Q&A format that will lead them to quality
          decisions that are based on medical best practice research. All other
          aspects of the product, as discussed below, could also be available on
          the Internet.

          QualityFIRST(R) products currently are offered on a license and
          subscription fee basis, which allows, for example, HMOs and other
          managed care organizations, insurance companies, and provider
          organizations to use our software in their health plan management
          system. We also have signed numerous joint venture/partnership
          agreements whereby companies that license operating systems to
          providers and provider organizations will include our decision support
          QualityFIRST(R) guidelines on their systems or, as an option, on their
          systems for a fee.


<PAGE>

          The products of this Business Unit are bundled under a single brand
          name:

          QualityFIRST(R) Evidence-based Solutions for Effective Medical
          ManagementSM.

          These services and products, which include computer-based clinical
          decision support systems based on current clinical research findings
          and published clinical practice evidence, provide solutions for the
          medical risk management challenges being faced by HMOs, various
          managed care organizations, physicians and health plan members
          interested in selecting the right care from the right provider at the
          right time. This series includes the following components:

               QualityFIRST(R) Medical Risk Management System(TM). This system,
               which is used on an enterprise-wide basis, delivers medical and
               financial risk management strategies to help health plans,
               providers and others deliver quality care, maintain maximum
               control over medical loss ratios and minimize liability.

               This integrated system is based on QualityFIRST(R) guidelines,
               which may also be sold as a stand alone product. The Medical Risk
               Management System is a clinical decision support software system
               that uses evidence-based guidelines to evaluate and confirm
               proposed diagnoses, suggest treatment selection options, identify
               resource options, and capture decisions for profiling,
               accountability reporting and outcomes measurement. This
               information is especially valuable for financial risk and
               outcomes management, identification of educational needs and for
               management of the medical loss ratio. The Medical Risk Management
               System integrates medical and financial management to create a
               portfolio of risk management solutions.

               The key component of the Medical Risk Management System is the
               scientific evidence-based QualityFIRST(R) clinical guidelines
               that provide clinical 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. Physicians working with health plans, health plan
               medical directors, health care professionals working with
               physicians, and other providers use these diagnosis-driven
               guidelines to promote consistency in decision making, to
               influence quality of care; to promote clinically appropriate
               decisions concurrently; to promote optimal outcomes; and to allow
               the practitioner flexibility in care decisions on the basis of
               individual patient factors.

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

               QualityFIRST(R) offers Medical/Surgical, Workers'
               Compensation/Disability, Behavioral Health, and Specialist
               Referral guidelines as well as Alternative Setting indicators.
               These modules comprise 500 guidelines and more than 3,630
               treatments/procedures covering approximately 80% of significant
               clinical events. The Workers' Compensation/Disability package
               includes on-line-return-to-work parameters to identify the
               expected length of disability and to expedite return to work as
               well as on-line access to individual state workers' compensation
               treatment guidelines to facilitate compliance with local workers'
               compensation regulations. Alternative Setting indicators are
               designed to help streamline the transfer of care from an acute
               setting to the next appropriate care level based on medical,
               physical, economic and psychosocial issues particular to each
               patient. Specialist Referral guidelines are used to facilitate
               the referral decision process from the primary care physician to
               the specialist. These guidelines are designed to help ensure

<PAGE>

               appropriate referrals and appropriate timing of referrals, to
               support first line treatment by the primary care physician and to
               document referral decisions so the result is optimal,
               cost-effective care. Each of the guidelines is reviewed at least
               yearly and is updated as necessary to reflect the latest clinical
               advances.

               QualityFIRST(R) software is made available to clients on a
               software license basis. Licensees include hospitals, insurance
               companies, HMOs, and others. Fees are based on a license fee at
               inception with a monthly subscription fee during the term of the
               license agreement based on number of plan members or number of
               workstations using the guidelines.

               QualityFIRST Triple WinSM Program. This program was launched
               during the fiscal year ended June 30, 1999, and is a breakthrough
               in offering health plans a method of aligning the interests and
               incentives of all stakeholders in health care: members, providers
               and health plans. It achieves its goals by using a unique
               combination of medical management tools and strategies,
               consulting and education. Success can be measured objectively
               using QualityFIRST(R) Medical Risk Management System(TM) data.
               The Triple WinSM Program provides the health plan CEO with a
               method to assess issues related to managing medical risk,
               including evaluation of current clinical practices and corrective
               plan development, implementation and measurement.

               QualityFIRST Triple WinSM Program components include:

               -    Clinical decision support using the QualityFIRST(R) Medical
                    Risk Management System(TM)
               -    Alignment of physician compensation and incentive strategies
               -    Evidence-based clinical benchmarking using providers'
                    clinical practice results as measured using QualityFIRST(R)
                    data. Comparisons of practice profiles generated using
                    QualityFIRST(R) data help health plan medical directors
                    manage health plan quality and consistency and identify
                    continuing medical education needs.
               -    Physician education. HRM, and its subsidiary, the Institute
                    for Healthcare Quality, in conjunction with major medical
                    schools across the U.S. has been co-sponsoring an
                    evidence-based curriculum to introduce the next generation
                    of physicians to evidence-based QualityFIRST(R)interactive,
                    clinical decision support software. Evidence-based medicine
                    is an approach that promotes the application of scientific
                    evidence and research to clinical decision-making at the
                    point of care. A key objective is to provide physicians with
                    the opportunity for hands-on experience with an advanced
                    tool such as QualityFIRST(R). This program re-enforces the
                    value of guideline use. QualityFIRST is installed in 50
                    medical school programs to provide instruction to medical
                    students and residents on the use of computerized clinical
                    decision support and the use of evidence-based guidelines in
                    medical practice. When used as a component of residency
                    programs, such as the six residencies co-sponsored by HRM
                    and the Minnesota Academy of Family Medicine, and clerkship
                    programs, our guideline curriculum elements prepare students
                    for the use of guidelines when they begin practice. We
                    anticipate that their exposure to our guidelines in school
                    could lead them to select and purchase our guidelines as
                    their system of choice in practice for effective medical
                    management. Currently, we do not directly generate revenue
                    from our CME program, but health plan executives and
                    potential customers recognize the value of this approach,
                    seeing it as a value-added aspect unique to our products and
                    services.


          Internet Strategy Will Change Mode of Product and Service Delivery


          As we noted in summary above, we have announced a significant new
          business strategy for our products and services that is based on
          various Internet applications. As previously announced, we have
          started the process of transforming HRM from a service company
          centered on information to an information company doing some service
          functions.


<PAGE>

          Internet technology will radically change the overall dynamics of
          today's medical care system for payers, providers and patients. To
          expand and prosper, we must take full advantage of these
          opportunities, which are summarized below:

               1.   The Internet has expanded in a quantum leap the member's,
                    provider's and payer's access to information, in many ways
                    placing all three parties on a nearly equal knowledge basis.
                    This will ultimately restructure the health care industry.

               2.   The increasing health care co-pay fees being born by members
                    will give members the right to demand more control of their
                    health care.

               3.   The burdensome administrative processes in the health care
                    industry can be significantly reduced with much cheaper and
                    more efficient Internet technology.

               4.   The Internet will affect HRM's current processes, products
                    and services as follows:


                    (a)  Health care benefit plans will instantly be available
                         in their complete form and open to members, payers and
                         providers equally.

                    (b)  Eligibility files can be maintained in real time and
                         updated daily, which will greatly reduce the
                         administrative burden and costs and result in more
                         accurate files.

                    (c)  Provider network management can be done in real time
                         with significant administrative savings and greater
                         accuracy.

                    (d)  Utilization Management can make use of two-way
                         communication on the Internet and many other features
                         for instant access for all involved parties and data
                         bases at any time.

                    (e)  Claim Adjudication is a process with many Internet
                         applications that will greatly simplify the process,
                         make it more efficient and member friendly and save
                         money.

                    (f)  Member Services will combine state of the art computer
                         telephony and the Internet to streamline access to
                         information and lead to enhanced member satisfaction.

     (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, plan members, medical students, workers' compensation
          and disability insurance programs; refines its QualityFIRST(R) System
          to address an ever enlarging number of provider organizations and
          medical conditions; and will continue expanding its software package
          containing HRM's proprietary QualityFIRST(R) System for license to
          third parties. HRM also expects to continue to develop programs for
          management of health care services, medical education programs and
          costs associated with particular illnesses or conditions. HRM
          anticipates that, as computer hardware, computer software and
          telecommunications equipment become more technologically
          sophisticated, and as Internet applications become feasible, the
          Company will create new or enhanced software and health care
          information products using the Company's medical expertise, database
          systems and technology. HRM will also respond to changes required by
          health care reform in the nation.


     (3)  Source and Availability of Raw Materials.

          Not applicable.

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

          The Company has filed patent applications covering its "Health Care
          Management System" which is an automated, real-time, interactive
          health care management data processing system for use by hospitals,

<PAGE>

          physicians, insurance companies, health maintenance organizations
          (HMOs) and others in the health care field to serve as a diagnostic,
          evaluation and utilization tool for health care providers to
          individuals. The system is implemented on computer hardware and
          software and is used by the Company in providing health care
          management services. Two U. S. patent has been issued on a component
          of the health care management system. Three other applications remain
          pending.

          HRM claims copyrights to software developed by the Company. In
          addition HRM has obtained perpetual licenses to use certain software
          developed by other companies which HRM uses in providing services to
          its clients. HRM has various safeguards in place, including
          authorization codes and encryption, to limit access to the Company's
          databases and operating systems. HRM markets its services and products
          under a number of trade names and trademarks. The following are
          principal trademarks or registered trademarks of HRM or its
          subsidiaries: AutoPILOTTM HRM(R) Evidence-based SolutionsSM, HRM(R)
          CarePASS(R) USA, HRM(R) CarePASS(R) USA-Your Passport to HealthSM,
          HRM(R) CareCALLSM, HRM(R)DisabilityCARESM, HRM(R) MEDIATM,
          HRM(R)QualityBIRTH(R), ReviewPLUS(R), HRM(R) Coordinated Care
          ManagementSM, HRM(R) Rainbow Plan(R), QualityFIRST(R), QualityFIRST
          Health Decision ScienceSM, QualityFIRST(R) Medical Risk Management
          SystemSM, QualityFIRST(R) The Gold Standard for Evidence-based
          BenchmarkingTM, QualityFIRST(R) Evidence-based Solutions for Effective
          Medical ManagementSM, QualityFIRST Index: A Benchmark for Measuring
          Healthcare QualityTM, QualityFIRST Triple WinSM Program, QualityFIRST
          Quick Reference ManualTM, QualityFIRST Clinical Evidence SummaryTM,
          QualityFIRST(R) Clinician Reference GuidelinesTM, CarePLUSSM,
          ReviewPlus(R), Together We Can Make a Healthy Difference(R), Institute
          for Healthcare Quality(R), IHQ(R)and OakTree Health PlanTM. 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, in recent history, not been seasonal. The
          acquisitions of Oxford Health Plans (PA), Inc., now named HRM Health
          Plans (PA), Inc., in January 1999 and Pennsylvania HealthMATE, Inc. in
          January 2000 have not and are not expected to introduce seasonality
          into the Company's revenues.

     (6)  Working Capital.

          HRM's working capital requirements are not generally subject to
          significant fluctuations. In the fiscal year ended June 30, 1999, the
          use of working capital was required for the purchase of Oxford Health
          Plans (PA), Inc., now named HRM Health Plans (PA), Inc. The
          consolidated statements of cash flows indicate the cash flows used in
          and provided by operations, investing activities and financing
          activities.

     (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. HRM Health Plans (PA), Inc. (f/k/a Oxford Health Plan (PA)
          Inc.), became a new client in fiscal 1998 and accounted for
          approximately 29% of total revenues in fiscal 1998 and was acquired in
          January, 1999 and accounted for 73% of total revenue in fiscal year
          ended June 30, 1999 and 76% of revenues in the six month transition
          period ended December 31, 1999 with the majority of the revenue from a
          contract for Medicaid members with the Commonwealth of Pennsylvania.
          Keystone Mercy Health Plan (KMHP) accounted for approximately 16% and
          17% of total revenues in fiscal 1998 and 1997, respectively. The
          contract with KMHP terminated September 30, 1998. Columbia/HCA
          Healthcare Corporation accounted for 16% of total revenues in fiscal
          1997.

     (8)  Backlog.

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

     (9)  Government contracts.

          A material portion of the Company's business is subject to negotiation
          on an annual basis or termination of contract for convenience with one
          hundred twenty days (120) notice or for cause with forty-five days
          notice at the election of a government entity. HRM's subsidiary HMO

<PAGE>

          holds a contract with the Commonwealth of Pennsylvania for
          approximately 60,000 Medicaid members under the Healthy Choices
          Program in a five (5) County Philadelphia area.

     (10) Competition.

          The health care management industry historically has been highly
          fragmented and competitive. HRM's principal competitive strengths are
          its medical and cost databases, QualityFIRST(R) health care 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 improving its quality, but
          also on reducing the cost of health care.

          The Risk Business Unit competes with other HMOs or health plans in the
          geographic region where HRM has management risk contracts or ownership
          in a health plan. This unit competes with HMOs, provider organizations
          and insurance companies who are significantly larger and possess
          greater financial resources than the Company.

          The Service Business Unit competes directly with approximately 100
          independent utilization review firms as well as approximately 120
          insurance carriers, approximately 200 third-party administrators that
          have established their own utilization review procedures, and a
          limited number of software vendors. In addition, the Company's care
          management services compete indirectly with HMOs and several hundred
          PPOs. Some of the Company's competitors are substantially larger and
          possess greater financial resources than the Company. The Company,
          however, believes that the trend toward consolidation of services will
          continue as employers and insurance companies recognize the
          convenience of dealing with a single health care management
          organization.

          The QualityFIRST Business Unit competes with a number of other
          software companies, but believes that the Company offers the most
          comprehensive evidence-based medical guidelines content available in
          the marketplace today.

     (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 $3,146,000 for the six month transition
          period ended December 31, 1999, $8,696,000 in the fiscal year ended
          June 30, 1999, $9,057,000 in fiscal 1998 and $7,396,000 in fiscal
          1997.

     (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 March 2000, the Company employed approximately 900 persons,
          including approximately 250 physicians, nurses, and other health
          professionals. The Company uses approximately 150 independent
          consulting physicians. None of the Company's employees are covered by
          a collective bargaining agreement.

(d)  Foreign Operations and Export Sales.

     In Canada, health care prices and payments are set and administered by the
     provincial governments. HRM has marketed 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. There was no revenue derived from
     Canada in the six month transition period ended December 31, 1999, U.S.
     $46,000 in the fiscal year ended June 30, 1999, U. S. $195,000 in fiscal
     1998 and U.S. $325,000 in fiscal 1997. The Company closed its office in
     Alberta in fiscal 1999.


<PAGE>


Item 2.  Properties.

HRM's principal corporate offices consist currently of approximately 142,500
square feet in a building in Minneapolis, MN with a lease expiring in or by
2009, 31,000 square feet in Kalamazoo, MI with a lease expiring in or by 2001,
28,000 square feet in Philadelphia, PA with a lease expiring in or by 2004 and
4,000 square feet in Sacramento, CA with a lease expiring in or by 2000. 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 expected to
continue to evolve. Although the Company believes that its procedures for making
care management and claims benefit recommendations and decisions result in
reasonable and accurate recommendations, there can be no assurance that the
Company's procedures for limiting liability are effective or that the Company
will not be subject to liability from litigation which might adversely affect
the Company's business. The Company maintains professional liability insurance
and such other coverages as the Company believes are reasonable in light of the
Company's experience to date.

In April 1999, four parties (Banco Panamericano, Inc., Chiplease, Inc., Leon
Greenblatt III and Leslie Jabine) claiming to be shareholders of the Company
brought suit against the Company in the United States District Court for the
Northern District of Illinois. The essence of their complaint is that the four
plaintiffs, as alleged shareholders of the Company, had properly demanded that
the Company call a special meeting of shareholders under Minnesota corporate
law, yet the Company had failed to call one. The complaint seeks an order from
the court declaring that the plaintiffs may call such a meeting directly and
that the Company would be responsible for paying the costs of calling and
conducting the meeting. At the meeting, the plaintiffs want the shareholders to
discuss and vote upon six resolutions that would, inter alia, change the make-up
of the Company's board of directors and terminate the Company's April 4, 1997
Rights Agreement, the Company's shareholder rights plan. The Company does not
believe the plaintiffs are entitled to require the holding of a special meeting
or to take shareholder action on all of the resolutions proposed. The Company
intends to defend this matter vigorously. In response to the lawsuit, the
Company has brought a motion to transfer the case to the United States District
Court for the District of Minnesota and both sides have brought motions for
summary judgment.

In an order dated December 21, 1999, the trial court certified three questions
to the Minnesota Supreme Court on the grounds that the answers to the questions
are dispositive of the case, the relevant statutes are unclear, and there are no
controlling appellate decisions pertaining to the questions. In an Order dated
January 20, 2000, the Minnesota Supreme Court accepted the questions from the
trial court. The parties have submitted briefs to the Minnesota Supreme Court in
support of their respective positions, and oral argument before the Court has
been scheduled for May 9, 2000.

A dispute over amounts which HRM Health Plans (PA), Inc. (the Plan) allegedly
owes a previous provider arose during 1999. The provider, Omnia, Inc., alleges
that the Plan failed to perform, and interfered with the provider's contractual
obligations. The provider demands $4.7 million in damages, plus interest, and it
commenced arbitration proceedings in September, 1999 in Pennsylvania to pursue
its claim. The Company believes that the allegations are without merit and in
November 1999 filed a counterclaim in the arbitration for amounts in excess of
$4.4 million for the provider's failure to perform under terms of the contract.
The contract between the Plan and the provider requires that the dispute be
settled in arbitration for which a hearing is scheduled in May 2000. The outcome
of the arbitration and the impact on the Company's operations is not
determinable. The Company intends to defend its position vigorously in this
matter.


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

None.


<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 year ended June 30, 1998
         First Quarter                                      14.125      11.000
         Second Quarter                                     16.000       9.625
         Third Quarter                                      16.125       8.375
         Fourth Quarter                                     16.375      13.125

         Fiscal year ended June 30, 1999
         First Quarter                                      16.500       8.500
         Second Quarter                                     11.875       5.250
         Third Quarter                                      13.250       6.938
         Fourth Quarter                                     11.250       7.375

         Six month transition period ended December 31, 1999
         First Quarter                                      11.500       6.250
         Second Quarter                                      8.500       5.813

         Fiscal year ending December 31, 2000
         First Quarter                                       8.875       6.000
               Through March 22, 2000

b)   Holders

     As of March 23, 2000, there were approximately 72 holders of record of the
     Company's Common Stock.

c)   Dividends

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



<PAGE>


Item 6.  Selected Financial Data.

                          Health Risk Management, Inc.

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


                                                                                                            Six Months Ended
                                                            Fiscal Year Ended June 30,                         December 31,
                                           --------------------------------------------------------------
                                              1995          1996         1997        1998        1999        1998        1999
                                              ----          ----         ----        ----        ----        ----        ----
                                                       (in thousands, except per share data)              (unaudited)

Revenues:
<S>                                        <C>          <C>           <C>           <C>        <C>          <C>         <C>
Premiums- gross                            $      --    $      --     $      --     $27,457    $144,639     $67,175     $78,659
Ceding allowance                                  --           --            --          --       2,457          --       1,423
Management services fees                      47,873       51,454        59,076      63,395      48,731      24,342      22,622
QualityFIRST revenues                          1,429        3,053         3,647       3,648       4,064       2,033       2,062
Investment income                                128          158           187         337         969         417         478
                                           -----------  ---------     ---------   ---------   ---------   ---------   ---------
     Total revenues                           49,430       54,665        62,910      94,837     200,860      93,967     105,244
Less ceded premiums                               --           --            --          --     (37,821)         --     (38,065)
                                           -----------  ---------     ---------   ---------   ---------   ---------   ---------
     Net revenues                             49,430       54,665        62,910      94,837     163,039      93,967      67,179

Operating expenses:
   Medical costs, net                             --           --            --      23,625      90,572      58,194      34,443
   Cost of services, net                      35,834       38,106        44,640      55,141      55,441      28,456      27,997
   Selling, marketing and
     administration, net                      11,458       12,602        14,081      13,386      14,049       7,662       5,931
   Oxford transition costs                        --           --            --          --       1,350       1,350          --
   Interest expense                              759          708           535         489         974        374          611
                                            --------     --------      --------    --------   ----------  ---------   ---------
     Total operating expenses                 48,051       51,416        59,256      92,641     162,386      96,036      68,982
                                            --------     --------      --------    --------   ----------  ---------   ---------

Income (loss)before income taxes and
   cumulative effect of accounting change      1,379        3,249         3,654       2,196         653      (2,069)     (1,803)

Income tax expense (benefit)                     535         1,253        1,413         868         282        (735)       (583)
                                            --------     --------      --------    --------   ----------  ---------   ---------

Income (loss) before cumulative effect
   of accounting change                          844        1,996         2,241       1,328         371      (1,334)     (1,220)

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

Net income (loss)                          $     844      $ 1,996       $ 2,241    $ (1,043)     $  371    $ (1,334)  $  (1,220)
                                            ========     ========      ========    ========   ==========  =========   =========

Basic earnings per share(2):
Income (loss) before cumulative effect
   of accounting change                    $     .21      $   .49       $   .52    $    .29      $  .08    $   (.29)  $    (.26)
Cumulative effect of accounting change(1)         --           --            --        (.52)         --          --          --
                                            --------     --------      --------    --------   ----------  ---------   ---------
Net income (loss)                          $     .21      $   .49       $   .52    $   (.23)     $  .08    $   (.29)  $    (.26)
                                            ========     ========      ========    ========   ==========  =========   =========

Diluted earnings per share(2):
Income (loss) before cumulative effect
   of accounting change                    $     .21      $   .47       $   .50    $    .29      $  .08    $   (.29)  $    (.26)
Cumulative effect of accounting change(1)         --           --            --        (.51)         --          --          --
                                            --------     --------      --------    --------   ----------  ---------   ---------
                                           $     .21      $   .47       $   .50    $   (.22)     $  .08    $   (.29)  $    (.26)
                                            ========     ========      ========    ========   ==========  =========   =========
Net income (loss)




Weighted average number of shares outstanding:
   Basic                                       3,947        4,081         4,291       4,524       4,615       4,599       4,640
   Diluted                                     3,982        4,219         4,458       4,663       4,675       4,599       4,640
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                                                                 June 30,                            December 31,
                                                        ------------------------------------------------------------
                                                           1995         1996        1997        1998        1999        1999
                                                           ----         ----        ----        ----        ----        ----
Balance Sheet Data:
<S>                                                        <C>          <C>         <C>         <C>        <C>         <C>
Working capital (deficit)                                  $3,763       $5,246      $8,578      $3,474     $(8,511)    $(7,581)
Total assets                                               39,962       44,822      51,723      70,514      88,569      80,837
Current portion of notes payable and capitalized
   equipment Leases                                         1,946        2,427       1,988       5,025       8,117       7,205
Long-term portion of notes payable and capitalized
   Equipment leases                                         5,155        4,550       3,487       3,047       3,628       3,824
Surplus note payable                                           --           --          --          --       2,500       2,500
Shareholders' equity                                       25,101       28,474      34,044      33,785      34,396      33,101
</TABLE>

(1)  As discussed in Note 3 of the consolidated financial statements, the
     Company changed its method of accounting for management service revenue. On
     a pro-forma basis, this change would have decreased 1997 net income by
     $1,382,000, increased 1996 net income by $494,000, and decreased 1995 net
     income by $79,000.

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

(3)  Certain items in the 1995, 1996, 1997 and 1998 selected consolidated
     financial data have been reclassified to conform to the December 31,1999
     presentation.


<PAGE>


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

Overview

The Company's revenues consist primarily of Medicaid premiums for providing
administrative services while assuming all the medical cost risk, management
service fees for health plan management and QualityFIRST revenues for software
licenses and subscription fees.

The Company's operating expenses are comprised of medical costs, net (consisting
primarily of the net medical costs after the ceded portion of medical services
and reinsurance, net of recoveries), its cost of services, net (consisting
primarily of net costs after ceded portions of compensation of personnel,
including nurses and physicians, telephone expenses, depreciation and
amortization, rent, costs related to the Company's computer operations, costs
related to customer service, and costs related to development of new services),
and selling, marketing and administration expenses, net (consisting primarily of
the net costs after ceded portions of sales commissions, advertising, sales
account management personnel, bad debts, administration, professional services,
insurance, compensation and depreciation). The medical costs, cost of services
and selling, marketing and administration expenses are affected to varying
degrees by the 50% quota share agreement related to the Medicaid block of
business which became effective January 1, 1999 (for further discussion of the
50% quota share agreement, see Note 8 of the audited financial statements).

A significant portion of the Company's revenue is from the Risk Business Unit
which owns an HMO serving a Medicaid membership. This business is subject to
regulatory risks such as rate setting, reporting, net worth requirements,
government agendas and the general health of the membership served. Service
utilization for contracted charges payable to providers of care, pharmacies,
vendors, etc. are highly variable and as such estimates are used to estimate
charges incurred but not yet received. The medical loss for the plan continues
to be highly subjective. In the six month transition period ended December 31,
1999, management and the board recorded an additional $2,000,000 medical
services payable because it desired to set more conservative best estimate after
considering the February 2000 claim payment information together with additional
actuarial analysis.

The HMO has estimated receivables from insurance policies for aggregate coverage
of excessive medical costs that may result in adjustments in the future. The
Company's HMO had a 50% quota share agreement whereby 50% of premiums,
investments, medical costs and certain administrative cost are ceded to an
insurance company until a certain policy period has passed or a recapture is
allowed under the policy. Subsequent to year end, the Company's HMO recaptured
the business ceded effective January 2000 for a recapture fee of $300,000 which
was accrued at year end.

Accounts receivable at times, may include performance bonus accruals which when
billed, may result in amounts greater than the accrual or less than the accrual
because considerable time may pass between the accrual of the revenue and the
actual billing of the performance bonus. The affected parties then require time
to prove up the final calculations.

The Company adopted SOP 98-I on July 1, 1999 which resulted in lowering the
amount capitalized for internally developed computer software related to its
Care Management (AutoPILOT) and Claim Administration systems by approximately
$500,000 per quarter based on the year ended June 30, 1999 analysis. This
resulted in additional expense in the periods subsequent to June 30, 1999. Also,
with the decision that the Company's Care Management system will be web-based
versus web-enabled, the Company shortened the estimated useful life on AutoPILOT
from 7 years to 3 years and this resulted in approximately $250,000 additional
expenses in the quarter ended December 31, 1999 and each quarter thereafter for
these years unless it is impaired or replaced before that time. In addition, no
additional software costs will be capitalized related to AutoPILOT.

Results of Operations

The following table sets forth certain consolidated financial data as a
percentage of total revenues for each of the three years in the periods ended
June 30, 1997, 1998 and 1999 and for the six month transition period ended
December 31, 1998, and 1999 and compares the percentage change in the dollar
amounts of these items for the period indicated.

<PAGE>
<TABLE>
<CAPTION>

                                                                               Six Months Ended
                                                                                December 31,
                                                  Year Ended June 30,                           Period to Period Increase (Decrease)
                                                                                                    June 30,   June 30,   December
                                                                                                    1997 vs    1998 vs      31, 1998
                                             1997       1998         1999       1998       1999       1998       1999       vs 1999
                                             ----       ----         ----       ----       ----       ----       ----       -------
                                                                              (unaudited)
<S>                                            <C>       <C>         <C>         <C>        <C>          <C>       <C>         <C>
Total revenues                                 100%      100%        100%        100%       100%         51%       112%        12%
                                               ===       ===         ====        ====       ====

Operating expenses:
   Medical costs, net                            0%       86%(1)      85%(1)      87%(1)     85%(1)     --%        283%       (41%)
   Cost of services, net                        71(2)     58(2)       34(2)       30(2)      42(2)       24          1         (2)
   Selling, marketing and administration, net   22(2)     14(2)        9(2)        8(2)       9(2)       (5)         5        (23)
   Oxford transition costs                       0         0           1(2)        1(2)       0          --         --       (100)
   Interest expense                              1(2)      0           1(2)        *          1(2)       (9)        99         63
                                               ------    ------      ------      ------     ------    ------     ------     ------
         Total operating expenses               94(2)     98(2)      100(2)      102(2)     103(2)       56         75        (28)
                                               ------    ------      ------      ------     ------    ------     ------     ------
Income (loss) before income taxes and
   cumulative effect of accounting change        6         2            *          (2)        (3)       (40)       (70)        13

Income tax expense (benefit)                     2         1            *          (1)        (1)       (39)       (68)        21
                                               ------    ------      ------      ------     ------    ------     ------     ------
Income (loss) before cumulative effect
   of accounting change                          4         1            *          (1)        (2)       (41)       (72)         9
Cumulative effect of accounting change,
   net of income tax                             0        (2)           0           0          0         --         --         --
                                               ------    ------      ------      ------     ------    ------     ------     ------
Net income (loss)                                4%       (1%)         *%          (1%)      (2)%      (147%)      135%         9%
                                               ======    ======      ======      ======     ======    ======     ======     ======
</TABLE>

(1) Computed as a % of HMO premiums, net (gross premiums less ceded premiums).

(2) Computed as a % of net revenues.

*    Less than 1% on a rounded basis

Revenues: Total revenues prior to the reduction for ceded premiums increased
$11,277,000 (12%) for the six month period ended December 31, 1999 compared to
the same period in 1998 (from $93,967,000 to $105,244,000), increased
$106,023,000 (112%) from fiscal 1998 to fiscal 1999 (from $94,837,000 to
$200,860,000) and increased $31,927,000 (51%) from fiscal 1997 to fiscal 1998
(from $62,910,000 to $94,837,000). These increases are primarily attributable to
revenues from HMO operations which began April 16, 1998 (see Note 8 of the
audited financial statements) offset by lower revenues from management service
fees. Management service fees were impacted by a net decrease in the number of
covered participants enrolled in the Company's management services related to an
HMO that terminated services on September 30, 1998. During the six months ended
December 31, 1999, the Service Business Unit's profit was reduced by
approximately $1,000,000 due to reduced covered lives mainly attributable to a
client that was centralizing its own care management department after acquiring
significantly more covered lives. The Company replaced a significant portion of
these lives going forward by extending and expanding its contract with Columbia
HCA, a client of many years, in January 2000.

Following is a breakout of net revenues:

<TABLE>
<CAPTION>
                                           Year Ended June 30,                Six Months Ended December 31,
                           ----------------------------------------------    -----------------------------------
                                 1997            1998           1999             1998              1999
                                 ----            ----           ----             ----              ----
                                                                              (unaudited)
<S>                        <C>              <C>             <C>              <C>             <C>
Premiums - gross           $        --      $  27,457,000   $ 144,639,000    $  67,175,000   $  78,659,000
Ceding allowance                    --               --         2,457,000             --         1,423,000
Management service fees       59,076,000       63,395,000      48,731,000       24,342,000      22,622,000
QualityFIRST revenues          3,647,000        3,648,000       4,064,000        2,033,000       2,062,000
Investment income                187,000          337,000         969,000          417,000         478,000
                           -------------    -------------   -------------    -------------   -------------
       Total revenues         62,910,000       94,837,000     200,860,000       93,967,000     105,244,000
Less ceded premiums                 --               --       (37,821,000)             --      (38,065,000)
                           -------------    -------------   -------------    -------------   -------------
       Net revenues        $  62,910,000    $  94,837,000   $ 163,039,000    $  93,967,000   $  67,179,000
                           =============    =============   =============    =============   =============

</TABLE>
<PAGE>

Premiums - gross are from HMO operations which were the result of obtaining in
the fourth quarter of fiscal 1998 the revenue from a client contract under which
the Company was at risk for the total medical services costs. The Company
received a significant portion of the total premium from this HMO from April
1998 through December 1998 and the Company then acquired this HMO in January
1999. The Company did not have this business in the first three quarters of
fiscal 1998. The premiums-gross increased 17% or $11,484,000, for the six month
period ended December 31, 1999 compared to the same period in 1998 (increasing
from $67,175,000 to $78,659,000) and increased 427% or $117,182,000, from fiscal
1998 to fiscal 1999 (increasing from $27,457,000 to $144,639,000). The increase
was the result of two and one-half months of premium in fiscal 1998 compared to
twelve months of premiums in fiscal 1999, membership category changes and rate
adjustments effective January 1999. Total revenues include the ceding allowance
and net revenues reflect the premiums that are ceded under the reinsurance
agreement that was entered into January 1999.

The management services revenue decreased 7% or $1,720,000, for the six month
period ended December 31, 1999 compared to the same period in 1998 (decreasing
from $24,342,000 to $22,622,000) which was the result of the loss of an
insurance company and bankruptcy of a health plan in the second quarter.
Revenues from management services decreased 23% or $14,664,000, from fiscal 1998
to fiscal 1999 (decreasing from $63,395,000 to $48,731,000) mainly the result of
the decrease in the number of covered participants enrolled in the Company's
management services related to an HMO that terminated services on September 30,
1998 and other clients who terminated services. The management services revenue
increased 7% or $4,319,000, from fiscal 1997 to fiscal 1998 (increasing from
$59,076,000 to $63,395,000) which was the result of the growth of existing
business and new contracts entered into by the Company.

Revenues from QualityFIRST(R) increased 1% or $29,000 for the six month period
ended December 31, 1999 compared to the same period in 1998 (increasing from
$2,033,000 to $2,062,000), increased 11% or $416,000, from fiscal 1998 to fiscal
1999 (increasing from $3,648,000 to $4,064,000) and was largely unchanged
between fiscal 1997 and fiscal 1998. The increases were the result of an
increased number of clients or expansion of systems with existing clients, but
does not include sales announced in the quarter, but implemented in subsequent
quarters.

Investment income increased 15% or $61,000 for the six month period ended
December 31, 1999 compared to the same period in 1998 (increasing from $417,000
to $478,000), increased 188% or $632,000 from fiscal 1998 to fiscal 1999
(increasing from $337,000 to $969,000), and increased 80% or $150,000 from
fiscal 1997 to fiscal 1998 (increasing from $187,000 to $337,000). This increase
is the result of higher levels of short-term investments in the periods
including any increases in interest rates earned.

Medical Costs, Net: Medical costs, net of amounts ceded, for the HMO decreased
41% or $23,754,000 for the six month period ended December 31, 1999 compared to
the same period in 1998 (decreasing from $58,194,000 to $34,443,000) due mainly
because the ceding arrangement began in 1999. Medical costs, net of amounts
ceded, increased 283% or $66,947,000 from fiscal 1998 to fiscal 1999 (from
$23,625,000 to $90,572,000) due to the HMO operations that began in the fourth
quarter of fiscal 1998. As a percentage of net HMO premiums, net medical costs
was 86.6% for the six month period ended December 31, 1998 compared to 84.8% for
the same period in 1999 and 86.0% in fiscal 1998 compared to 84.8% in fiscal
1999. This percentage is the result of higher premium rates for the years versus
the cost of medical expenses, net of insurance recoveries.

Cost of Services, Net: Cost of services, net of amounts ceded, decreased 2% or
$459,0000 for the six month period ending December 31, 1999 compared to the same
period in 1998 (decreasing from $28,456,000 to $27,997,000), increased 1% or
$300,000 from fiscal 1998 to fiscal 1999 (from $55,141,000 to $55,441,000), and
increased 24% or $10,501,000 from fiscal 1997 to fiscal 1998 (from $44,640,000
to $55,141,000). The increases were primarily due to increased payroll and
expenses related to the HMO and implementing management services for additional
covered lives. As a percentage of net revenues, the cost of service, net of
amounts ceded, was 71% in fiscal 1997, 58% in fiscal 1998 and 34% in fiscal 1999
and was 30% for the six months ended December 31, 1998 and 42% for the same
period in 1999. These decreasing percentages were the result of higher premium
revenue in fiscal 1998 and still higher premium revenue in fiscal 1999. The six
month period change from 1998 to 1999 resulted mainly from the reinsurance
agreement entered into in January 1999 and the ceding of a portion of premium
and expense to the insurance company.

Selling, Marketing and Administration, Net: Selling, marketing and
administration, net of amounts ceded, decreased 23% or $1,731,000 for the six
month period ended December 31, 1999 compared to the same period in 1998
(decreasing from $7,662,000 to $5,931,000), increased 5% or $663,000, from
fiscal 1998 to fiscal 1999 (from $13,386,000 to $14,049,000), and decreased 5%
or $695,000 from fiscal 1997 to fiscal 1998 (from $14,081,000 to $13,386,000).
The increases or decreases were due primarily to additions or decreases to
staff, travel, commission, bad debts, insurance, training programs and other
expenses. This expense as a percentage of net revenues (22%, 14%, and 9%) for

<PAGE>

fiscal 1997, fiscal 1998 and fiscal 1999, respectively, decreased because of the
higher premium revenue in fiscal 1998 and still higher premium revenue in fiscal
1999. This expense was 8% for the six months ended December 31, 1998 and 9% for
the same period in 1999. The six month period change from 1998 to 1999 resulted
mainly from the reinsurance agreement entered into in January 1999 and the
ceding of a portion of premium and expense to the insurance company.


Oxford Transition Costs : The Company incurred transition costs related to the
purchase of Oxford Health Plans (PA), Inc., now named HRM Health Plans (PA),
Inc., of approximately $920,000 in the quarter ended December 31, 1998, and
$430,000 in the quarter ended September 30, 1998 , due to increased operational
costs for HMO related activities without a corresponding increase in the
management service fees.

Interest Expense: Interest expense increased 63% or $237,000 for the six month
period ended December 31, 1999 compared to the same period in 1998 (increasing
from $374,000 to $611,000) and increased as a percentage of net revenue from
0.4% to 0.9%. Interest expense increased 99% or $485,000 from fiscal 1998 to
fiscal 1999 (from $489,000 to $974,000), and increased as a percentage of net
revenue from 0.5% to 0.6%. Interest expense decreased 9% or $46,000 from fiscal
1997 to fiscal 1998 (from $535,000 to $489,000) and decreased as a percentage of
net revenue from 0.9% to 0.5%. Interest expense was impacted in fiscal 1998 by
lower interest rates and lower average principal balances outstanding. In fiscal
1999, additional loans were obtained to acquire the HMO.

Income Taxes: Income tax benefit decreased 21% or $152,000 for the six month
period ended December 31, 1999 compared to the same period in 1998 (from an
income tax benefit of $735,000 to $583,000). Income tax expense decreased in
fiscal 1999 from fiscal 1998 by $586,000, or 68% (from $868,000 to $282,000),
and decreased in fiscal 1998 from fiscal 1997 by $545,000, or 39% (from
$1,413,000 to $868,000) primarily due to fluctuations in levels of income (loss)
before income taxes and cumulative effect of accounting change. Net income has
been reported as fully taxed in the periods at the federal tax rate of 34% with
the effective tax rate varying due to state income taxes, expired NOL's and
nondeductible expenses. See Note 10 in the Notes to Consolidated Financial
Statements.

Cumulative effect of accounting change: See Note 3 in the Notes to Consolidated
Financial Statements.

Liquidity and Capital Resources

The Company's cash flow from operations was $4,510,000 and used in operations
was $5,295,000 for the six months ended December 31, 1999 and 1998,
respectively. The Company's cash flow from operations was $6,892,000 and
$23,685,000 for fiscal 1999 and 1998, respectively. Cash flow from operations
have exceeded net income (loss) primarily due to non-cash charges such as
depreciation and amortization, deferred income taxes, cumulative effect of the
accounting change and changes in operating assets and liabilities, particularly
the medical services payable. For the six month period ended December 31, 1998,
cash flow used in operations exceeded the net loss due to an increase in
accounts receivables.

Cash of $7,734,000, net of cash acquired, was used in the third quarter of
fiscal 1999 to purchase Oxford Health Plans (PA), Inc., now named HRM Health
Plans (PA), Inc., on January 27, 1999. Cash has been used to invest in software
and program enhancements ($3,146,000 and $4,864,000 for the six months ended
December 31, 1999 and 1998, respectively and $8,696,000 and $9,057,000 in fiscal
1999 and fiscal 1998, respectively). The Company also used cash to acquire
property and equipment ($603,000 and $4,858,000 for the six months ended
December 31, 1999 and 1998, respectively and $5,602,000 and $2,734,000 for
fiscal 1999 and fiscal 1998, respectively). Approximately $3,000,000 of the
fiscal 1999 property and equipment purchases were related to the corporate
office move in the first quarter of fiscal 1999. Cash of $1,641,000 was
generated in the six month transition period ended December 31, 1999 from the
sale of fixed maturity investments and $234,000 was used in fiscal 1999 from the
purchase of fixed maturity investments. The Company expects to continue to
acquire property and equipment and enhance software and products.

HRM also used approximately $2,070,000 and $1,057,000 for the six months ended
December 31, 1999 and 1998, respectively and $2,327,000 and $2,153,000 in fiscal
1999 and fiscal 1998, respectively, to repay principal on notes payable and
capital leases. The Company borrowed $1,000,000 and $2,000,000 for the six
months ended December 31, 1999 and 1998, respectively and $6,000,000 and
$4,750,000 in fiscal 1999 and fiscal 1998, respectively. The Company received
cash proceeds of $16,000 and $186,000 for the six months ended December 31, 1999
and 1998, respectively and $306,000 and $784,000 in fiscal 1999 and fiscal 1998,
respectively, from stock option exercises for common stock by current or former
employees and directors.


<PAGE>

The Company had a working capital deficit of $7,581,000 and $8,511,000 at
December 31, 1999 and June 30, 1999, respectively and working capital of
$3,474,000 at June 30, 1998. The medical services payables reduced working
capital by $22,506,000, $21,215,000 and $15,452,000 at December 31, 1999, June
30, 1999 and 1998, respectively. The Company has fixed maturity investments of
$6,675,000 and $8,406,000 available at December 31, 1999 and June 30, 1999,
respectively, to be used to pay medical services payables, if the need arises.

The Company has a net operating loss carryforward of approximately $30,000,000
for income tax purposes at December 31, 1999, which can be used to reduce
taxable income and cash flow necessary to pay taxes. The Company changed its tax
accounting treatment to one of capitalizing computer software costs versus
expensing them when incurred. This change should protect carry forward net
operating loss (NOLs) for tax purposes going forward.

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 calendar year 2000. The loss in
the quarter ended December 31, 1999 resulted in the Company not meeting bank
covenants under the bank loan agreements. Subsequent to December 31, 1999, the
Company and the bank amended the loan agreement which will amend the covenants
going forward and waived defaults that existed at December 31, 1999. The two new
web-based business plans will require on-going support from the Company until
external financing is obtained. The quarter ended December 31, 1999 included
approximately $250,000 of expenses related to these business plans and more than
double that amount will be required going forward until they are financed,
estimated by mid-year, and it is expected that they will then create positive
cash flow back to the Company.

The Company has a term loan and revolving loan (principal balance of $7,195,000
and $2,925,000, respectively, as of December 31, 1999.) with its bank and a
revolving credit facility expiring January 30, 2001, under which the Company has
$75,000 and $235,000 additional available under the facility at December 31,
1999 and June 30, 1999, respectively. The revolving credit and term loan are
secured by liens on the assets of the Company.

Subsequent to December 31, 1999, the Company acquired approximately $32,000,000
of annual premium in its risk business unit by assuming approximately $2,500,000
of liabilities in excess of cash and other assets. These excess liabilities will
impact the net worth of our HMO entity, but it is believed that the HMO's net
worth, the earnings of the HMO and a planned quota share insurance arrangement,
will allow the HMO to meet state statutory net worth requirements. The
acquisition should be immediately profitable to the Company, because the Company
can leverage its equipment, systems and employees in the Medicaid business in
the same state.


<PAGE>


YEAR 2000 DISCLOSURE

State of Year 2000 Readiness

The Company began work on its Year 2000 Project in 1997 and established a Year
2000 Project Office and Year 2000 Project Team in early 1998. There were five
phases to the Company's Year 2000 Project: Phase 1: Identify and Analyze; Phase
2: Plan and Schedule; Phase 3: Execute the Plan (Remediate; Upgrade; Replace; or
Eliminate); Phase 4: Test and Integrate; and Phase 5: Maintain Year 2000
Integrity. The primary focus of the Year 2000 Project effort was on the
Company's mission critical systems, which are those that support and interface
with our clients or vendors. The Company's Year 2000 Project is currently in
Phase 5, maintenance of year 2000 integrity of all of our mission critical
components.

The Company completed all year 2000 readiness work according to our Project
plans and experienced no significant problems as a result of the transition to
the year 2000. The Company continues to monitor its systems for any year 2000
issues. Because of the unique nature of the year 2000 issue, including the
existence of critical dates in the year 2000, ongoing maintenance activities
will necessarily continue into the year 2000.

Year 2000 Project Costs

Costs of the Company's Year 2000 Project through June 30, 1999 were
approximately $1.1 million. An additional $.4 million was incurred in the six
month transition period ended December 31, 1999. Costs to be incurred after
December 31, 1999 are not expected to be significant. The costs associated with
the Year 2000 Project have been and will be expensed as incurred.

Year 2000 Contingency Plans

As of October 31, 1999, contingency plans had been completed for the Company's
significant business processes. While at this point we do not anticipate
experiencing any problems which would require the implementation of the
Company's contingency plans, the contingency plans can and will be implemented
if necessary.

Year 2000 Risks

The Company is reliant on technology and outside vendors to deliver its
services. There could be a material adverse effect on the Company if there is a
failure by the Company, or a third party dealing with the Company, to be year
2000 ready on a go forward basis. Possible consequences of such a failure
include temporary disruption of the Company's ability to deliver services to its
clients.

The Company's Year 2000 Project plans are subject to change and are necessarily
dependent upon management business decisions and other factors, both internal
and external. The Company will continue to monitor systems and activities
relating to its Year 2000 Project.

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
marketplace including, but not limited to clients and vendors commonly
experiencing mergers or acquisitions, use of estimates for incurred but not yet
reported claims including medical services payable, use of estimates of bonus
accruals including accounts receivable, reconciliations, volume fluctuations,
provider relations and contracting, participant enrollment fluctuations, changes
in member mix or utilization levels, fixed price contracts, contract disputes,
contract modifications, contract renewals and non-renewals, regulatory issues
and requirements, 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 periodically detailed in
the Company's SEC reports, cannot be predicted exactly, such occurrences can be
expected to have an impact on the Company's anticipated level of revenue growth
or profitability.



<PAGE>

Item 7A  Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, the Company is exposed to market risk from
changes in interest rates. The Company does not enter into any derivative
transactions. The Company's note payable and term loan obligations are subject
to interest rate risk. A 100 basis point increase in interest rates related to
the note payable to bank under revolving credit agreement, assuming the amount
borrowed remains constant, would result in an annual increase in the Company's
then current interest expense of approximately $29,000. A 100 basis point
increase in interest rates related to the Company's term loans payable would
result in an annual increase in the Company's then current interest expense of
approximately $72,000.

Item 8.  Financial Statements and Supplementary Data.

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

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

None.



<PAGE>


                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

Directors

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

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

<S>                          <C>    <C>                       <C>                                            <C>
Gary T. McIlroy, M.D.        59     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            60     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           60     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,         66     Director                  Chief Executive Officer and Medical            1996
M.D. (Class A)                                                Director since 1997 of Toiyabe Dialysis
                                                              Unit. Consultant regarding healthcare
                                                              management consulting (self-employed)
                                                              since 1997.
                                                              Prior to this he was Professor of
                                                              Medicine at the UCLA School of Medicine
                                                              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         73     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.

Robert L. Montgomery         63     Director                  Consultant regarding Health System             1993
(Class C)                                                     Management to Sutter Health since 1999.
                                                              Prior to this he was President-Western
                                                              Division of Sutter Health from 1996
                                                              to 1999. 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 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 B directors expires at
the 2000 annual meeting, the term of the Class C directors expires at the 2001
annual meeting, and the term of the Class A Directors expires at the 2002 annual
meeting.

<PAGE>

Executive Officers

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

Name                      Age                         Position

Gary T. McIlroy, M. D.    59        Chairman of the Board, Chief Executive
                                    Officer and Director

Marlene O. Travis         60        President, Chief Operating Officer,
                                    Secretary and Director

Thomas P. Clark           52        Senior Vice President, Finance and Chief
                                    Financial Officer

Adele M. Kimpell          53        Executive Vice President, Operational
                                    Effectiveness

Russell A. Peterson       58        Chief Information Officer

Pamela N. Hursh           37        President, Indemnity Business Unit

Dianne L. Kuss            52        Vice President, Corporate Marketing

Michael T. McKim          55        Vice President and General Counsel

Luis A. Rosa              46        President, Risk Business Unit

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.

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, Operational
Effectiveness in September 1999, and had previously served as Executive Vice
President, Health Plan Operations since March 1996. Ms. Kimpell also 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.


<PAGE>

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

Pamela N. Hursh R.N., became President, Indemnity Business Unit in December
1999, and had previously served as Acting President, Indemnity Business Unit
since July 1999. Ms. Hursh also served as Vice President, Operational
Effectiveness. Ms. Hursh joined the Company as an Account Manager in March 1991.
Ms. Hursh has served in various capacities within HRM since June 1992, including
Senior Account Manager, National Account Executive, Director of Account
Management and Client Services and VP, Strategic Business Improvement. Ms. Hursh
received her B.S. degree from Northern Illinois University in 1987.

Dianne L. Kuss, became Vice President, Corporate Marketing in June 1999. Ms.
Kuss joined the Company as a Marketing Manager in November 1997. Ms. Kuss has
served since April 1998 as Director of Indemnity Marketing and Vice President,
Marketing. Prior to joining the Company, Ms. Kuss served as a Consultant for
Integrated Healthcare Advisory Group, Inc. in Richmond, VA from 1994 to 1997.
Ms. Kuss received her B.A.S. degree from the University of Minnesota and her
M.S. from Kennedy-Western University in Agoura Hills, CA.

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.

Luis A. Rosa, joined the company as President, Risk Business Unit in January
2000. Prior to joining the Company, Mr. Rosa was Chief Executive Officer for
Network Management Services, subsidiary of Columbia HCA in Brentwood, TN from
1995 to 2000. He served as General Manager for Potomac Medical Services in TN
from 1993 to 1995. Prior to that, he served in various positions at Aetna Health
Plans and MedCenters, Inc. Mr. Rosa received his B.A.
degree from Purdue University in Hammond, Indiana in 1977.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities and Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more that 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 ten days after becoming an
officer, director or greater than ten-percent holder; Form 4, due within ten
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
file.

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, 1999
through December 31, 1999, all Section 16(a) filing requirements applicable to
its current and former officers and directors were complied with.


<PAGE>


Item 11. Executive Compensation.

Summary Compensation Table

The following table sets forth the cash and noncash compensation for the six
month transition period ended December 31, 1999, and for each of the previous
three fiscal years, paid to the Company's Chief Executive Officer and the four
other highest paid executive officers of the Company whose salary and bonus for
fiscal year ended June 30, 1999 exceeded $100,000.

<TABLE>
<CAPTION>
                                                                             Long-Term Compensation
                                       Annual Compensation                     Awards
                             -------------------------------------------   ---------------------
                                                                Other
                                                                Annual               Securities
                                                                Compen-     Stock    Underlying    LTIP      All Other
Name and Position            Year      Salary        Bonus     sation(1)   Awards     Options     Payouts   Compensation
-----------------            ----      ------        -----     ---------   ------     -------     -------   ------------

<S>                         <C>        <C>            <C>      <C>          <C>       <C>          <C>      <C>
Gary T. McIlroy, M.D.       1999*      $139,000       $ 0      $4,930(10)        0         0         $0      $10,332(6)
   Chairman & CEO           1999        278,000         0       9,859(10)        0    10,000(4)       0       23,986(6)
                            1998        278,000         0(2)    9,837(10)        0    40,000(2)       0       23,484(6)
                            1997        278,000         0(2)    9,395(10)        0    15,000(2)       0       23,150(6)
                                                                                      40,000(4)

Marlene Travis              1999*      $125,000       $ 0      $4,930(10)        0         0         $0       $9,211(7)
   President & COO          1999        250,000         0       9,859(10)        0    10,000(4)       0       21,009(7)
                            1998        250,000         0(2)    9,837(10)        0    30,000(2)       0       20,336(7)
                            1997        250,000         0(2)    9,395(10)        0    12,500(2)       0       20,150(7)
                                                                                      33,333(4)

Thomas P. Clark             1999*      $100,000       $ 0      $5,451(10)        0         0                  $5,186(8)
   CFO                      1999        200,000         0      10,902(10)   15,000(11)     0         $0       35,752(8)
                            1998        200,000         0(2)   10,902(10)        0    30,000(2)       0        9,555(8)
                            1997        200,000         0(2)   10,460(10)        0    10,000(2)       0        9,150(8)
                                                                                      26,667(4)

Adele M. Kimpell            1999*       $85,000   $25,000(3)        0            0         0         $0       $2,782(5)
   Executive V.P.           1999        171,600         0           0            0         0          0        4,290(5)
                            1998        156,420         0(2)        0            0     3,600(2)       0        3,361(5)
                            1997        153,542         0(2)        0            0     4,000(2)       0        2,663(5)
                                                                                       9,000(4)

William M. Smith            1999*      $103,129         0           0            0         0         $0      $11,481(9)
   Former Vice President    1999        237,506         0           0            0     1,500(4)       0       61,086(9)
   Managed Care Sales       1998        128,181   $15,000(12)       0            0     6,000(4)       0       11,074(9)
</TABLE>

*    Six month transition period ended December 31, 1999.

(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)  Additional compensation in connection with off-site services provided for
     an extended period of time.

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

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

(6)  The amount reflected includes $3,150, $3,484, $3,986 and $332 as Company
     matching contributions under its 401(k) Salary Savings Plan or other
     retirement payments for fiscal 1997, 1998, 1999 and the six month period
     ended December 31, 1999, respectively, and $20,000 per year ($10,000 per
     half 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 1997, 1998, 1999 and the six months
     ended December 31, 1999, respectively.


<PAGE>

(7)  The amount reflected includes $3,150, $3,336, $4,009 and $711 as Company
     matching contributions under its 401(k) Salary Savings Plan or other
     retirement payments for fiscal 1997, 1998, 1999 and the six months ended
     December 31, 1999, respectively, and $17,000 per year ($8,500 per half
     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 1997, 1998, 1999 and the six months ended December
     31, 1999, respectively.

(8)  The amount reflected includes $3,150, $3,555, $4,435 and $2,186 as Company
     matching contributions under its 401(k) Salary Savings Plan or other
     retirement payments for fiscal 1997, 1998, 1999 and the six month
     transition period ended December 31, 1999, respectively, and $6,000 per
     year ($3,000 per half 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 1997, 1998, 1999 and the six
     months ended December 31, 1999, respectively.

(9)  The amount reflected includes $2,492, $4,800 and $1,801 for fiscal 1998,
     1999 and the six months ended December 31, 1999 as Company matching
     contributions under its 401(k) Salary Savings Plan and a moving allowance
     of $8,582, $56,286, and $9,680 for fiscal 1998, 1999 and the six months
     ended December 31, 1999.

(10) Includes auto allowance and medical coverage.

(11) Issuance of 15,000 common shares as a bonus in connection with certain
     business acquisition activities.

(12) Special bonus related to acceptance of employment.

The following two stock option tables summarize option grants and exercises
during fiscal 1999 for the Chief Executive Officer and other named executive
officers, and the values of options granted during fiscal 1999 and held by such
persons at June 30, 1999. No options were granted or exercised during the six
month transition period ended December 31, 1999.

                       Stock Option Grants in Fiscal 1999
<TABLE>
<CAPTION>
                                                                             Potential Realizable Value at Assumed Annual
                                                                           Rates of Stock Price Appreciation for Option Term
                                                                            ---------------------------------------------
                                     Individual Grants                           5%(2)                   10%(2)
                     --------------------------------------------------     ---------------------    --------------------
                      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.     10,000(1)      12.9%        $10.00        06/30/03       $12.76   $ 27,600       $16.11   $61,100

Marlene Travis         10,000(1)      12.9%        $10.00        06/30/03       $12.76   $ 27,600       $16.11   $61,100

Thomas P. Clark             0          0.0%        $ 0.00              --       $ 0.00   $      0       $ 0.00   $     0

Adele M. Kimpell            0          0.0%        $ 0.00              --       $ 0.00   $      0       $ 0.00   $     0

William M. Smith        1,500(1)       1.9%        $10.00        06/30/03       $12.76    $ 4,140       $16.11   $ 9,165
</TABLE>

(1)  One-third of the stock options granted as a long-term incentive to the
     individuals become exercisable on February 17, 1999, the date of grant, and
     the next two anniversaries of the date of grant. Under the terms of the
     Plan, the Board may provide for the protection of all optionees to whom
     options have been granted in the event of a merger, liquidation,
     reorganization or similar transaction.

(2)  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.

<PAGE>

  Aggregated Option Exercises in Fiscal 1999 and December 31, 1999 Option Value

<TABLE>
<CAPTION>
                                                                 Number of Securities
                                                                Underlying Unexercised       Value of Unexercised
                              Shares Acquired                     Options at December        In-the-Money Options
                                on Exercise          Value       31, 1999 Exercisable/     at December 31, 1999(1)
                                                   Realized          Unexercisable        Exercisable/Unexercisable
                              ---------------      --------     -----------------------   -------------------------
<S>                                  <C>           <C>               <C>                            <C>
Gary T. McIlroy, M.D.                0                --             91,473/96,665                  $0/$0
Marlene Travis                       0                --             71,354/73,277                  $0/$0
Thomas P. Clark                    15,000          $142,035          51,537/32,889                  $0/$0
Adele M. Kimpell                    2,000         $  11,626          15,200/5,400                   $0/$0
William M. Smith                     --                 --            6,500/1,000                   $0/$0
</TABLE>

(1)  Market value of underlying securities at December 31, 1999 ($6.125), the
     closing price of the Common Stock, minus the exercise price. No options
     were exercised during the six months ended December 31, 1999.

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

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

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

<PAGE>

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 1999 and for the
six months ended December 31, 1999 of $278,000 per year (subject to increase
upon annual review by the Compensation Committee of the Board) and is eligible
to receive an annual incentive bonus under the Executive Incentive Plan. The
Employment Agreement is terminable by the Company for cause, in which case the
Company is obligated to pay only Dr. McIlroy's accrued base salary and a portion
of annual incentive bonus for the fiscal year in which his termination occurs.
The Agreement is also terminable by the Company upon thirty (30) days written
notice, without cause, in which case the Company is obligated to (i) pay the
then-current annualized base salary and provide health, dental, life and other
benefits for a twenty-four month period; (ii) pay out-placement services; (iii)
pay a portion of any annual incentive bonus for the fiscal year in which his
termination occurs; and (iv) transfer to Dr. McIlroy all cash value and life
insurance policies owned by the Company. In the event Dr. McIlroy resigns for
"good reason" or within twelve (12) months after a "change of control" of the
Company, the Company is obligated to make all of the payments and provide all of
the benefits described in the preceding sentence, and shall accelerate the
vesting of all stock options which shall then remain exercisable until the
options expire. The Agreement also addresses the benefits payable and the
treatment of the life insurance policies owned by the Company upon termination
for death or disability and, in the event of disability, provides for
supplemental disability payments and health, dental and life benefits for a
twelve (12) month period.

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

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 1999 and for the six months ended December 31, 1999 of $250,000 per
year (subject to increase upon annual review by the Chief Executive Officer) and
is eligible to receive an annual incentive bonus under the Executive Incentive
Plan. The Employment Agreement is terminable by the Company for cause, in which
case the Company is obligated to pay only Ms. Travis' accrued base salary and a
portion of any annual incentive bonus for the fiscal year in which her
termination occurs. The Agreement is also terminable by the Company upon thirty
(30) days written notice, without cause, in which case the Company is obligated
to (i) pay the then-current annualized base salary and provide health, dental,
life and other benefits for a twenty-four (24) month period; (ii) pay
out-placement services; (iii) pay a portion of any annual incentive bonus for
the fiscal year in which her termination occurs; and (iv) transfer to Ms. Travis
all cash value and life insurance policies owned by the Company. In the event
Ms. Travis resigns for "good reason" or within twelve (12) months after a
"change of control" of the Company, the Company is obligated to make all of the
payments and provide all of the benefits described in the preceding sentence and
shall accelerate the vesting of all stock options which shall then remain
exercisable until the options expire. The Agreement also addresses the benefits
payable and the treatment of the life insurance policies owned by the Company
upon termination for death or disability and, in the event of disability,
provides for supplemental disability payments and health, dental and life
benefits for a twelve (12) month period.

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

The Company has an Employment Agreement dated June 21, 1996, with Thomas P.
Clark whereby Mr. Clark will continue to serve as Chief Financial Officer, with
the term continuing indefinitely unless and until terminated under the terms of
the Agreement. As announced, Mr. Clark will be assuming the position of
Executive Vice President, Acquisitions and Business Development and a new Chief
Financial Officer will be hired. Mr. Clark's responsibilities under his

<PAGE>

Employment Agreement will be adjusted accordingly. Mr. Clark received an annual
base salary for fiscal 1999 and for the six months ended December 31, 1999 of
$200,000 per year (subject to increase upon annual review by the Chief Executive
Officer) and is eligible to receive an annual incentive bonus under the
Executive Incentive Plan. The Employment Agreement is terminable by the Company
for cause, in which case the Company is obligated to pay only Mr. Clark's
accrued base salary and a portion of any annual incentive bonus for the fiscal
year in which his termination occurs. The Agreement is also terminable by the
Company upon thirty (30) days written notice, without cause, in which case the
Company is obligated to (i) pay the then-current annualized base salary and
provide health, dental, life and other benefits for a twenty-four (24) month
period; (ii) pay out-placement services; (iii) pay a portion of any annual
incentive bonus for the fiscal year in which his termination occurs; and (iv)
transfer to Mr. Clark all cash value and life insurance policies paid by the
Company. In the event Mr. Clark resigns for "good reason" or within twelve (12)
months after a "change of control" of the Company, the Company is obligated to
make all of the payments and provide all of the benefits described in the
preceding sentence and shall accelerate the vesting of all stock options which
shall then remain exercisable until the options expire. The Agreement also
addresses the benefits payable and the treatment of the life insurance policies
owned by the Company upon termination for death or disability and, in the event
of disability, provides for supplemental disability payments and health, dental
and life benefits for a twelve (12) month period.

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


<PAGE>


Performance Graph

Set forth below are line graphs comparing the Company's cumulative total
shareholder return on the Company's Common Stock, from June 30, 1994 through
December 31, 1999 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.

[Graph Omitted]

<TABLE>
<CAPTION>
                         06/30/94     06/30/95     06/28/96     06/30/97     06/30/98     06/30/99      12/31/99
                         --------     --------     --------     --------     --------     --------      --------
<S>                       <C>          <C>          <C>          <C>          <C>          <C>           <C>
HRM                       100.00       161.54       161.54       207.69       234.62       151.92        94.23
SIC Code Index            100.00       101.41       131.50       171.23       180.82       175.19        141.21
Nasdaq Market             100.00       117.28       147.64       177.85       235.75       330.37        495.88
</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 Inc.; American Medical SEC Inc.; AON Corp.; Citizens Financial Corp.;
Conseco, Inc.; Everest Re Group Ltd.; Foundation Health System; Healthaxis,
Inc.; Humana, Inc.; Lifepoint Hospitals; Maxicare Health Plans; Medical Control,
Inc.; Mid-Atlantic Medical Services; MIIX Group, Inc.; Morrison Management
Specialists; Oxford Health Plans, Inc.; Pacificare Health System B New; Penncorp
Financial Group; Righchoice Managed Care; Sierra Health Services; Torchmark
Corp.; Triad Hospitals, Inc.; Trigon Healthcare Inc.; United Healthcare Corp.;
United Wisconsin Services; Unum Provident Corp.; Wellpoint Health Network.


<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 25), and by all of the Company's current directors and current executive
officers as a group, as of March 22, 2000.

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

Chiplease, Inc.                                      675,500(2)        14.49%
 640 N. LaSalle Street, Suite 300
 Chicago, IL 60610

Summit Capital Management, LLC                       397,250(3)         8.52%
 601 Union Street Suite 3900
 Seattle, WA 98101

Dimensional Fund Advisors, Inc.
 1299 Ocean Avenue, 11th Floor                      288,800( 4)         6.20%
 Santa Monica, CA 90401

Gary T. McIlroy, M.D.                               382,245( 5)         8.01%
 10900 Hampshire Avenue South
 Minneapolis, MN 55438

Marlene Travis                                      380,665( 6)         8.02%
 10900 Hampshire Avenue South
 Minneapolis, MN 55438

Thomas P. Clark                                      124,275(7)         2.63%

Adele M. Kimpell                                     17,400( 8)           *

W. Michael Smith                                      10,275(9)           *

Vance Kenneth Travis                                 11,009(10)           *

Robert L. Montgomery                                 20,380(11)           *

Gary L. Damkoehler                                   16,701(12)           *

Raymond G. Schultze, M.D                              6,701(13)           *

All Current Executive Officers and
  Current Directors as a
   Group (13 persons)                               979,679(14)        19.67%


-----------

 *       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 March 22, 2000, or within 60 days of such
         date are treated as outstanding only when determining the amount and
         percent owned by such person or group named in the table.

(2)      Includes 399,100 (8.56%) shares which Chiplease, Inc. represents are
         owned by it and 276,400 (5.93%) shares which Chiplease, Inc. represents

<PAGE>

         are owned by the secretary of Chiplease, Inc. and for which the
         secretary has sole voting power and which was owned on August 28, 1998,
         the date of the most recent Schedule 13D/A received by the Company from
         such shareholder.

(3)      In its most recent Schedule 13G filing with the Securities and Exchange
         Commission on February 14, 2000, Summit Capital Management, LLC
         represents it has shared voting and investment power over all such
         shares.

(4)      In its most recent Schedule 13G filing with the Securities and Exchange
         Commission on February 11, 2000, Dimensional Fund Advisors, Inc. (DFI),
         represents it has sole voting power and investment power over such
         shares. DFI disclaims beneficial ownership of the shares.

(5)      The number of shares set forth in the above table (i) includes 270,106
         shares held by Gary T. McIlroy Revocable Trust, for which Dr. McIlroy
         is grantor and trustee, (ii) includes 108,139 shares which Dr. McIlroy
         has the right to acquire upon exercise of options, (iii) includes 4,000
         shares held by a foundation controlled by Dr. McIlroy (iv) excludes 75
         shares beneficially owned by Dr. McIlroy's and Ms. Travis' adult
         children and (v) excludes the shares beneficially owned by Ms. Travis.
         Dr. McIlroy disclaims beneficial ownership of such excluded shares.

(6)      The number of shares set forth in the above table (i) includes 291,978
         shares held by the Marlene O. Travis Revocable Trust, for which Ms.
         Travis is grantor and trustee, (ii) includes 84,687 shares which Ms.
         Travis has the right to acquire upon exercise of options, (iii)
         includes 4,000 shares held by a foundation controlled by Ms. Travis,
         (iv) excludes 75 shares beneficially owned by Ms. Travis' and Dr.
         McIlroy's adult children and (v) excludes the shares beneficially owned
         by Dr. McIlroy. Ms. Travis disclaims beneficial ownership of such
         excluded shares.

(7)      Includes 62,738 shares held by Mr. Clark and 61,537 shares which Mr.
         Clark has the right to acquire upon exercise of options.

(8)      Includes 1,000 shares held by Ms. Kimpell and 16,400 shares which Ms.
         Kimpell has the right to acquire upon exercise of options.

(9)      Includes 3,275 shares held by Mr. Smith and 7,000 shares which Mr.
         Smith has the right to acquire upon exercise of options.

(10)     Includes 5,308 shares held by Mr. Travis and 5,701 shares which Mr.
         Travis has the right to acquire upon exercise of options.

(11)     Includes 9,462 shares held by Mr. Montgomery and 10,918 shares which
         Mr. Montgomery has the right to acquire upon exercise of options.

(12)     Includes 11,000 shares held by Mr. Damkoehler and 5,701 shares which
         Mr. Damkoehler has the right to acquire upon exercise of options.

(13)     Includes 1,000 shares held by Dr. Schultze and 5,701 shares which Dr.
         Schultze has the right to acquire upon exercise of options.

(14)     Includes 661,961 shares held by the current officers and directors, and
         317,718 shares that current executive officers and directors as a group
         have the right to acquire as of March 31, 2000, 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 Transition Report Pursuant to Section 13 or 15(d)
              of the Securities and Exchange Act of 1934 on the pages indicated.

                                                                    Page in this
                                                                      Form 10-K

              Report of Independent Auditors...............................  38

              Consolidated Balance Sheets as of December 31, 1999,
              June 30, 1999 and June 30, 1998..............................  39

              Consolidated Statements of Operations for the six
              months ended December 31, 1999 and 1998, and for the years
              ended June 30, 1999, 1998 and 1997...........................  40

              Consolidated Statements of Shareholders' Equity for the
              six months ended December 31, 1999 and 1998 and for the
              years ended June 30, 1999, 1998 and 1997.....................  41

              Consolidated Statements of Cash Flows for the six
              months ended December 31, 1999 and 1998 and for the years
              ended June 30, 1999, 1998 and 1997...........................  42

              Notes to Consolidated Financial Statements...................  43

         (2)  Financial Statement Schedules. The following schedule is included
              in this Transition Report Pursuant to Section 13 or 15(d) of the
              Securities Exchange Act of 1934 on the pages indicated.

                                                                    Page in this
                                                                        Report

              II.  Valuation and Qualifying Accounts.......................  60

              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>



(b)      Exhibits.

2.1      Stock Purchase Agreement dated as of October 14, 1998 between Health
         Risk Management, Inc. and Oxford Health Plans, Inc. - incorporated by
         reference to Exhibit 2.1 to the Company's Form 8-K filed February 11,
         1999 (SEC File No. 0-18902).

2.2      Closing Agreement dated as of January 27, 1999 between Health Risk
         Management, Inc. and Oxford Health Plans, Inc. - incorporated by
         reference to Exhibit 2.2 to the Company's Form 8-K filed February 11,
         1999 (SEC File No. 0-18902).

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 April 21, 1999--incorporated by
         reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
         for the quarter ended March 31, 1999 (SEC File No. 0-18902)

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

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

4.3      Composite Bylaws of the Company, as of April 21, 1999 (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*    Employment Agreement dated as of June 20, 1996 between Health Risk
         Management, Inc. and Dr. Gary T. McIlroy -- incorporated by reference
         to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
         fiscal year ended June 30, 1996 (SEC File No. 0-18902).

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

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

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

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


<PAGE>

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

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

10.8*    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).

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

10.10*   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).

10.11*   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).

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

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

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

10.15*   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).

10.16*   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).

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

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

10.19    Security Agreement dated June 24, 1994 relating to Revolving Credit and
         Term Loan Agreement of same date -- incorporated by reference 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).


<PAGE>

10.20    Management Services Agreement dated February 24, 1998, between
         Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
         Management, Inc) and Oxford Health Plans (PA), Inc. - incorporated by
         reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K
         for the fiscal year ended June 30, 1998 (SEC File No. 0-18902).

10.21    Health Care Excess Risk Insurance Policy dated April 13, 1998, between
         Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
         Management, Inc) and Kentucky Medical Insurance Company -- incorporated
         by reference to Exhibit 10.42 to the Company's Annual Report on Form
         10-K for the fiscal year ended June 30, 1998 (SEC File No. 0-18902).

10.22    Lease agreement dated May 5, 1998, between MEPC O &I, Inc. and Health
         Risk Management, Inc. related to the Company's offices at 10900
         Hampshire Avenue South, Minneapolis, Minnesota and Amendment of Lease
         dated September 16, 1998 -- incorporated by reference to Exhibit 10.43
         to the Company's Annual Report on Form 10-K for the fiscal year ended
         June 30, 1998 (SEC File No. 0-18902).

10.23    Amended and Restated Revolving Credit and Term Loan Agreement between
         Health Risk Management, Inc. and U.S. Bank National Association dated
         May 1, 1998 - incorporated by reference to Exhibit 10.44 to the
         Company's Annual Report on Form 10-K for the fiscal year ended June 30,
         1998 (SEC File No. 0-18902).

10.24    First Amendment to the Credit Agreement between Health Risk Management,
         Inc. and U.S. National Bank Association dated January 27, 1999 --
         incorporated by reference to Exhibit 10.1 to the Company's Quarterly
         Report on Form 10-Q for the quarter ended March 31, 1999 (SEC File No.
         0-18902).

10.25    Second Amendment to the Credit Agreement between Health Risk
         Management, Inc. and U.S. National Bank Association dated June 30, 1999
         - incorporated by reference to Exhibit 10.25 to the Company's Annual
         Report on Form 10-K for the fiscal year ended June 30, 1999 (SEC File
         No. 0-18902).

10.26    Sublease Agreement dated February 10, 1999 between Day & Zimmermann,
         Inc. and Health Risk Management, Inc. as amended by First Amendment to
         Sublease dated April 6, 1999, related to the Company's offices at 1818
         Market Street, Philadelphia, Pennsylvania -- incorporated by reference
         to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the
         fiscal year ended June 30, 1999 (SEC File No. 0-18902).

10.27    Amended and Restated HealthChoices Southeast Agreement between the
         Commonwealth of Pennsylvania (Department of Public Welfare) and Oxford
         Health Plans (PA), Inc. dated January 1, 1999 -- incorporated by
         reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K
         for the fiscal year ended June 30, 1999 (SEC File No. 0-18902).

10.28    Third Amendment to the Credit Agreement between Health Risk Management,
         Inc. and U.S. National Bank dated December 21, 1999.

21.      List of subsidiaries.

23.      Consent of Independent Auditors.

27.1     Financial Data Schedule for the six month transition period ended
         December 31, 1999 (filed in electronic format only).

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


(c)      Reports on Form 8-K.

         During the quarter ended December 31, 1999, the Company filed a report
         on Form 8-K dated November 4, 1999 reporting under Item 8 its change in
         fiscal year end from June 30 to December 31.





<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 December 31, 1999, June 30, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the six months ended December 31, 1999 and for each of the three years
in the period ended June 30, 1999. 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 auditing standards generally accepted
in the United States. 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 December 31, 1999, June 30, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the six month
period ended December 31, 1999 and for each of the three years in the period
ended June 30, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

As described in Notes 3 and 1 of the consolidated financial statements, the
Company changed its method of accounting for management service fees during the
year ended June 30, 1998 and its method of accounting for computer software for
internal use effective July 1, 1999, respectively.


/s/ Ernst & Young LLP

Minneapolis, Minnesota
April 1, 2000


<PAGE>


                          HEALTH RISK MANAGEMENT, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)
                                     ASSETS
<TABLE>
<CAPTION>
                                                                                 December 31,         June 30,
                                                                                  ----------   --------------------
                                                                                     1999        1999        1998
                                                                                  ---------    --------    --------
<S>                                                                                <C>         <C>         <C>
Current assets:
   Cash and cash equivalents                                                       $ 10,577    $  9,229    $ 20,624
   Accounts  receivable-net of allowance for doubtful accounts of $255, $324 and
     $265 at December 31, 1999, June 30, 1999 and 1998, respectively                 19,627      23,774      11,019
   Deferred income taxes                                                                700       1,440         900
   Other                                                                              1,448       2,263         837
                                                                                   --------    --------    --------
     Total current assets                                                            32,352      36,706      33,380

Fixed maturity investments at fair value                                              6,675       8,406        --
Computer software costs, less accumulated amortization of $23,612, $19,910 and
     $17,940 at December 31, 1999, June 30, 1999 and 1998, respectively              26,180      26,736      24,284
Property and equipment, less accumulated depreciation of $16,631, $15,001 and
   $14,299 at December 31, 1999, June 30, 1999 and 1998, respectively                11,078      11,825       8,670
Other assets                                                                          4,552       4,896       4,180
                                                                                   --------    --------    --------
                                                                                   $ 80,837    $ 88,569    $ 70,514
                                                                                   ========    ========    ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                                $  3,084    $  3,954    $  2,125
   Medical services payable                                                          22,506      21,215      15,452
   Due to reinsurer                                                                     138         553        --
   Accrued expenses                                                                   4,226       6,144       3,596
   Unearned revenues                                                                  2,774       5,234       3,708
   Current maturities of notes payable                                                6,825       7,865       4,429
   Current portion of capitalized equipment leases                                      380         252         596
                                                                                   --------    --------    --------
     Total current liabilities                                                       39,933      45,217      29,906

Deferred income taxes                                                                 1,479       2,828       3,776
Long-term portion of notes payable                                                    3,295       3,145       2,313
Long-term portion of capitalized equipment leases                                       529         483         734
Surplus note payable                                                                  2,500       2,500        --
Commitments and contingencies
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 authorized, 4,641,996
     4,639,496 and 4,583,694 issued and outstanding December 31, 1999,
     June 30, 1999 and 1998, respectively                                                46          46          46
  Additional paid-in capital                                                         32,192      32,176      31,728
  Retained earnings                                                                   1,162       2,382       2,011
  Accumulated other comprehensive deficit                                              (299)       (208)       --
                                                                                   --------    --------    --------
     Total shareholders' equity                                                      33,101      34,396      33,785
                                                                                   --------    --------    --------
                                                                                   $ 80,837    $ 88,569    $ 70,514
                                                                                   ========    ========    ========
</TABLE>
See accompanying notes.


<PAGE>

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

<TABLE>
<CAPTION>
                                                    Six Months Ended               Year Ended June 30,
                                                 ----------------------    ----------------------------------
                                                   1999         1998          1999       1998          1997
                                                 ---------    ---------    ---------   ---------    ---------
                                                             (unaudited)
<S>                                              <C>          <C>          <C>         <C>          <C>
Revenues:
  Premiums-gross                                 $  78,659    $  67,175    $ 144,639   $  27,457    $    --
  Ceding allowance                                   1,423         --          2,457        --           --
  Management service fees                           22,622       24,342       48,731      63,395       59,076
  QualityFIRST revenues                              2,062        2,033        4,064       3,648        3,647
  Investment income                                    478          417          969         337          187
                                                 ---------    ---------    ---------   ---------    ---------
     Total revenues                                105,244       93,967      200,860      94,837       62,910
  Less ceded premiums                               38,065         --         37,821        --           --
                                                 ---------    ---------    ---------   ---------    ---------
     Net revenues                                   67,179       93,967      163,039      94,837       62,910

Operating expenses:
   Medical costs, net                               34,443       58,194       90,572      23,625         --
   Cost of services, net                            27,997       28,456       55,441      55,141       44,640
   Selling, marketing and administration, net        5,931        7,662       14,049      13,386       14,081
   Oxford transition costs                            --          1,350        1,350        --           --
   Interest expense                                    611          374          974         489          535
                                                 ---------    ---------    ---------   ---------    ---------
     Total operating expenses                       68,982       96,036      162,386      92,641       59,256
                                                 ---------    ---------    ---------   ---------    ---------

Income (loss) before income taxes and
  cumulative effect of accounting change            (1,803)      (2,069)         653       2,196        3,654
Income tax expense (benefit)                          (583)        (735)         282         868        1,413

                                                 ---------    ---------    ---------   ---------    ---------
Income (loss) before cumulative effect
  of accounting change                              (1,220)      (1,334)         371       1,328        2,241
Cumulative effect
  of accounting change, net of
  income tax benefit of $1,342                        --           --           --        (2,371)        --
                                                 ---------    ---------    ---------   ---------    ---------

Net income (loss)                                $  (1,220)   $  (1,334)   $     371   $  (1,043)   $   2,241
                                                 =========    =========    =========   =========    =========
Basic earnings per share:
  Income (loss) before cumulative effect
     of accounting change                        $    (.26)   $    (.29)   $     .08   $     .29    $     .52
  Cumulative effect of accounting change              --           --           --          (.52)        --
                                                 =========    =========    =========   =========    =========
  Net income (loss)                              $    (.26)   $    (.29)   $     .08   $    (.23)   $     .52
                                                 =========    =========    =========   =========    =========
Diluted earnings per share:
  Income (loss) before cumulative effect
     of accounting change                        $    (.26)   $    (.29)   $     .08   $     .29    $     .50
  Cumulative effect of accounting change              --           --           --          (.51)        --
                                                 =========    =========    =========   =========    =========
  Net income (loss)                              $    (.26)   $    (.29)   $     .08   $    (.22)   $     .50
                                                 =========    =========    =========   =========    =========
Proforma net income and per share amounts
  assuming the new revenue recognition
  accounting policy is applied retroactively:
     Net income                                       --           --           --     $   1,328    $     859
     Basic earnings per share                         --           --           --     $     .29    $     .20
     Diluted earnings per share                       --           --           --     $     .29    $     .19
Weighted average number of shares outstanding:
  Basic                                              4,640        4,599        4,615       4,524        4,291
                                                 =========    =========    =========   =========    =========
  Diluted                                            4,640        4,599        4,675       4,663        4,458
                                                 =========    =========    =========   =========    =========
</TABLE>

  See accompanying notes.
<PAGE>
                          HEALTH RISK MANAGEMENT, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (in thousands, except share data)
<TABLE>
<CAPTION>
                                                     Common Shares
                                                     Outstanding                     Accumulated
                                                -----------------------   Additional    Other
                                                Number of                  Paid-In   Comprehensive   Retained
                                   Total         Shares        Amount       Capital      Deficit     Earnings
                                 ----------     ---------    ----------   ----------   ----------    ----------

<S>                              <C>            <C>          <C>          <C>          <C>           <C>
Balance at June 30, 1996         $   28,474     4,180,476    $       42   $   27,619   $     --      $      813

Common shares issued                  2,464       200,000             2        2,462         --            --
Options exercised, including
   tax benefit of $120                  865        97,769             1          864         --            --
Net income                            2,241          --            --           --           --           2,241
                                 ----------    ----------    ----------   ----------   ----------    ----------
Balance at June 30, 1997             34,044     4,478,245            45       30,945         --           3,054

Options exercised                       784       105,449             1          783         --            --
Net loss                             (1,043)         --            --           --           --          (1,043)
                                 ----------    ----------    ----------   ----------   ----------    ----------
Balance at June 30, 1998             33,785     4,583,694            46       31,728         --           2,011

Options exercised                       306        40,745          --            306         --            --
Common shares issued                    142        15,057          --            142         --            --
Comprehensive income:
   Net income                           371          --            --           --           --             371
   Change in net unrealized
     loss on fixed maturity
     investments                       (208)         --            --           --           (208)         --
                                 ----------
    Total comprehensive income          163          --            --           --           --            --
                                 ----------    ----------    ----------   ----------   ----------    ----------
Balance at June 30, 1999             34,396     4,639,496            46       32,176         (208)        2,382

Common shares issued                     16         2,500          --             16
Comprehensive loss:
   Net loss                          (1,220)                                                             (1,220)
   Change in net unrealized
     loss on fixed maturity
     investments                        (91)                                                  (91)
                                 ----------
    Total comprehensive loss         (1,311)
                                 ----------    ----------    ----------   ----------   ----------    ----------
Balance at December 31, 1999     $   33,101     4,641,996    $       46   $   32,192   $     (299)   $    1,162
                                 ==========    ==========    ==========   ==========   ==========    ==========
</TABLE>

See accompanying notes.


<PAGE>

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

                                                 Six Months Ended December 31,              Year Ended June 30,
                                                      --------------------          --------------------------------
                                                        1999        1998              1999        1998       1997
                                                      --------    --------          --------    --------    --------
                                                                (unaudited)
<S>                                                   <C>         <C>               <C>         <C>         <C>
Cash flows from operating activities:
   Net income (loss)                                  $ (1,220)   $ (1,334)         $    371    $ (1,043)   $  2,241
   Adjustments to reconcile net income
     (loss) to net cash provided by
     operating activities:
       Realized gain on investments                         (1)       --                --          --          --
       Depreciation                                      1,642       1,630             3,480       3,199       2,816
       Amortization                                      4,086       3,311             6,971       5,558       4,830
       Cumulative effect of accounting
         change                                           --          --                --         2,371        --
       Provision for deferred income taxes                (609)       (741)              262        (489)      1,398
       Changes in operating assets and liabilities:
         Accounts receivable                             4,147      (5,686)           (7,366)     (1,023)     (2,557)
         Other assets                                      775      (1,857)           (1,530)     (1,360)          7
         Accounts payable                                 (808)       (143)            1,804         560        (238)
         Medical services payable                        1,291       2,242            (1,938)     15,452        --
         Due to reinsurer                                 (415)       --                 553        --          --
         Accrued expenses                               (1,918)     (1,259)            2,759         578         382
         Unearned revenues                              (2,460)     (1,458)            1,526        (118)      1,248
                                                      --------    --------          --------    --------    --------
Net cash provided by (used in) operating
   activities                                            4,510      (5,295)            6,892      23,685      10,127

Cash flows from investing activities:
   Acquisition of net assets, net of cash acquired        --          --              (7,734)       --          (139)
   Sale of investments                                   1,641        --                --          --          --
   Purchase of investments                                --          --                (234)       --          --
   Computer software costs capitalized                  (3,146)     (4,864)           (8,696)     (9,057)     (7,396)
   Property and equipment purchased                       (603)     (4,858)           (5,602)     (2,734)     (2,827)
                                                      --------    --------          --------    --------    --------
Net cash used in investing activities                   (2,108)     (9,722)          (22,266)    (11,791)    (10,362)

Cash flows from financing activities:
   Proceeds from notes payable                           1,000       2,000             6,000       4,750       1,275
   Principal payments on notes payable                  (1,890)       (736)           (1,732)     (1,308)     (1,278)
   Principal payments on capital leases                   (180)       (321)             (595)       (845)       (999)
   Issuance of common shares                                16         186               306         784       3,239
                                                      --------    --------          --------    --------    --------
Net cash (used in) provided by financing
   activities                                           (1,054)      1,129             3,979       3,381       2,237
                                                      --------    --------          --------    --------    --------

Increase (decrease) in cash                              1,348     (13,888)          (11,395)     15,275       2,002
Cash and cash equivalents at beginning of
   period                                                9,229      20,624            20,624       5,349       3,347
                                                      --------    --------          --------    --------    --------
Cash and cash equivalents at end of period
                                                      $ 10,577    $  6,736          $  9,229    $ 20,624    $  5,349
                                                      ========    ========          ========    ========    ========
</TABLE>
See accompanying notes.


<PAGE>


                          HEALTH RISK MANAGEMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 1999

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     A.  Principles of Consolidation

         The consolidated financial statements include the accounts of Health
         Risk Management, Inc. and its wholly owned subsidiaries (the Company).
         All significant intercompany transactions have been eliminated.

     B.  Nature of Operations

         The Company provides management services, which include administrative
         services and products for integrated health plan management; generates
         QualityFIRST revenues from the sale of evidence-based clinical decision
         support software; and operates a wholly-owned health maintenance
         organization (HMO).
         Each of the three is treated as a business segment.

         The Company provides its management services, including care
         management, price control and claim administration, to self-insured
         employers, unions, government entities, insurance companies, HMO's
         preferred provider organizations and hospitals throughout the United
         States.

         QualityFIRST revenues are principally derived from software license and
         subscription fees for the evidence based clinical decision support
         software.

         On April 16, 1998, the Company's wholly-owned subsidiary, Pennsylvania
         HRM, Inc., entered into a five-year contract with Oxford Health Plans
         (PA), Inc., now named HRM Health Plans (PA), Inc. (the Plan). The Plan
         is a HMO licensed by the Commonwealth of Pennsylvania to offer certain
         insurance products to covered members as defined in the HealthChoices
         Physical Health Agreement (HealthChoices agreement) between the
         Commonwealth of Pennsylvania and the Plan. The Company received a fixed
         amount per enrolled member per month and certain per case fees to
         provide administrative services and assumed all the medical cost risk
         through the date of acquisition of the Plan. On January 27, 1999, the
         Company acquired the Plan (See Note 8). Premium revenues result from
         the Plan's operations from April 16, 1998. The Company continues to
         assume the medical cost risk through the Plan.

         Plan revenues were seventy-six (76%) of total revenues in the six
         months ended December 31, 1999 and seventy-three percent (73%) and
         twenty-nine percent (29%) of total revenues in the years ended June 30,
         1999 and 1998, respectively. In the year ended June 30, 1998, revenues
         from a management services client was sixteen percent (16%) of total
         revenues. In the year ended June 30, 1997, revenues from two management
         services clients were seventeen percent (17%) and sixteen percent (16%)
         of total revenues.

         The markets serviced by the Company are principally domestic.

     C.  Use of Estimates

         The preparation of financial statements in conformity with accounting
         principles generally accepted in the United States requires management
         to make estimates and assumptions that affect the amounts reported in
         the consolidated financial statements and accompanying notes. The most
         significant items include incurred but not yet reported claims included
         in medical services payable, performance bonus accruals included in
         accounts receivable and the deferred tax asset valuation allowance.
         Such estimates and assumptions could change in the future as more
         information becomes known, which could impact the amounts reported and
         disclosed herein.


<PAGE>

     D.  Revenue Recognition

         Premiums and management service fees are generally recognized ratably
         over the contract period. Included in management service fees are
         estimated amounts for performance bonuses and contract adjustments.
         These estimates are recognized when reasonably determinable.
         Adjustments to these estimates are recorded in current operations.

         Contractual relationships with management service clients subject the
         Company to revenue fluctuations resulting from changes in client
         employment levels or covered lives, restructuring of benefit plans and
         price adjustments based on contractual experience and performance
         bonuses. Included in accounts receivable is a significant accrued
         performance bonus that was recognized as revenue in the fiscal years
         ended June 30, 1997 and 1998 that was billed subsequent to December 31,
         1999.

     E.  Unearned Revenues

         Unearned revenues represent amounts billed to clients for contract
         services yet to be performed, QualityFIRST revenues yet to be earned
         and ceding allowance yet to be earned.

     F.  Computer Software Costs

         The Company capitalizes QualityFIRST(R) computer software costs in
         accordance with Statement of Financial Accounting Standards (SFAS) 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.

         Effective July 1, 1999, the Company adopted the American Institute of
         Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1
         "Accounting for Computer Software Developed For or Obtained For
         Internal Use" (the SOP) for its internal-use software related to its
         Care Management software and Claim Administration software. The SOP
         requires the capitalization of certain costs incurred in connection
         with developing or obtaining software for internal use. In connection
         with such adoption, the Company prospectively revised its previous
         capitalization policy for such software to be in conformance with the
         SOP and, as a result, capitalized fewer costs, which increased the net
         loss for the six months ended December 31, 1999 by approximately
         $677,000 ($.15 per share diluted).

     G.  Property and Equipment

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

     H.  Goodwill

         Goodwill is generally being amortized on a straight line basis over 10
         years.

     I.  Income Taxes

         Deferred tax assets and liabilities are determined based on differences
         between the financial reporting basis and the tax basis of the
         Company's assets and liabilities and are measured using the enacted tax
         rates and laws that will be in effect when the differences are expected
         to reverse.

<PAGE>

     J.  Medical Costs

         Medical costs principally include the estimated ultimate net cost of
         all reported and unreported claims incurred during the year. The
         liability for medical services payable is estimated by management
         primarily by the use of cost per contract data and completion factors
         developed from historical lag patterns. Subsequent to the Company's
         purchase of the Plan, several issues with respect to claims processing
         were identified that limited the usefulness of historical claims data
         to estimate future claim payments. These issues included large claims
         backlogs, overpayments, and duplicate payments. Through December 31,
         1999, the claim processing issues identified by management continue to
         affect their ability to estimate the ultimate cost of settling medical
         claims.

         Management believes that the liability for medical services is adequate
         and that it has identified the operational changes that will improve
         its ability to estimate the liability for medical claims. However, the
         assumptions made about improvements in historical trends, the related
         operational changes and the collection of claim overpayments of
         $1,321,000 during the year ending December 31, 2000 may not be realized
         which will adversely affect the ultimate cost of medical claims. The
         estimates for settled claims and incurred but not reported or paid
         claims are made and adjusted in future periods as required. The
         estimates are continually reviewed and adjusted as experience develops
         or new information becomes known. Such adjustments are included in
         current operations. The six months ended December 31, 1999 included an
         additional $2,925,000 of medical claim expense in excess of the medical
         claims liability at June 30, 1999, net of reinsurance.

     K.  Net Income (Loss) Per Share

         The following table sets forth the computation of basic and diluted
         earnings per share (in thousands, except per share data):

<TABLE>
<CAPTION>
                                            Six Months Ended December 31,   Year Ended June 30,
                                                1999          1998         1999    1998        1997
                                              ---------    ---------    ------   ---------    ------
                                                           (unaudited)
<S>                                           <C>          <C>          <C>      <C>          <C>
   Numerator:
     Income (loss) before cumulative effect
        of accounting change                  $  (1,220)   $  (1,334)   $  371   $   1,328    $2,241
     Cumulative effect of accounting change        --           --        --        (2,371)     --
                                              ---------    ---------    ------   ---------    ------
     Net income (loss)                        $  (1,220)   $  (1,334)   $  371   $  (1,043)   $2,241
                                              =========    =========    ======   =========    ======

   Denominator:
     Weighted-average shares-basic                4,640        4,599     4,615       4,524     4,291
     Effect of dilutive stock options              --           --          60         139       167
                                              ---------    ---------    ------   ---------    ------
     Weighted-average shares-diluted              4,640        4,599     4,675       4,663     4,458
                                              =========    =========    ======   =========    ======
   Basic earnings per share:
     Income (loss) before cumulative effect
        of accounting change                  $    (.26)   $   (.29)    $  .08   $     .29    $  .52
     Cumulative effect of accounting change        --           --        --          (.52)      --
                                              ---------    ---------    ------   ---------    ------
     Net income (loss)                        $    (.26)   $   (.29)    $  .08   $    (.23)   $  .52
                                              =========    =========    ======   =========    ======

   Diluted earnings per share:
     Income (loss) before cumulative effect
        of accounting change                  $    (.26)   $   (.29)    $  .08   $     .29    $  .50
     Cumulative effect of accounting change        --           --        --          (.51)     --
                                              ---------    ---------    ------   ---------    ------
     Net income (loss)                        $    (.26)   $   (.29    )$  .08   $    (.22)   $  .50
                                              =========    =========    ======   =========    ======
</TABLE>


         The effect of stock options were not included in the calculation of
         diluted earnings per share for six month transition period ended
         December 31, 1999 and 1998 because they are antidilutive.

<PAGE>


     L.  Shareholder Rights Plan

         On April 4, 1997, the Company's 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 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 one one-hundredth of
         a share of Series A Preferred Stock 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 common
         stock or announces a tender offer for 15% or more of common stock,
         subject to certain exceptions. After the Rights become exercisable,
         each Right entitles the holder (other than the 15% holder) to purchase
         the Company'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, the Company 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, subject to certain exceptions. Each Right is redeemable at $.001
         at any time up to ten days after a person acquires 15% of the Company's
         common stock. The Rights expire on April 4, 2007 unless earlier
         redeemed by the Company.

     M.  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.


     N.  Investments

         The Company has determined that its fixed maturity investments might be
         sold prior to maturity to support its liquidity needs. Accordingly,
         such investments have been classified as available-for-sale and carried
         at fair value, with net unrealized losses reported as a component of
         accumulated other comprehensive loss in shareholders' equity. The fair
         value of fixed maturity investments is based on quotations obtained
         from brokers for those or similar investments. Gains and losses on
         sales of investments are recorded as a component of investment income
         using the specific identification method.

     O.  Reinsurance

         Reinsurance premiums and benefits are accounted for on the basis
         consistent with that used in accounting for the reinsured policy and
         the terms of the reinsurance contract.

     P.  Risks and Uncertainties

         Management is considering and is in the process of developing a
         business plan for an internet-based business model for the Management
         Services Unit. The development of a business plan began in 1999 in
         recognition of the significant impact that the internet is having and
         will continue to have on business to business services to health
         insurance plans and health providers. As a result of this consideration
         and planning effort, the Company is evaluating and will continue to
         evaluate the impact that internet technology will have on its existing
         technology and software and the remaining estimated lives of its
         software assets. As described in Note 5, management reduced the
         estimated life of its care management software from seven years to
         three years. The Company's other software systems, claims
         administration and QualityFIRST, are also being evaluated for the
         impact that technology may have on their estimated useful lives;
         however, management does not believe that a change in their estimated
         useful life is warranted at this time. As the internet-based business
         plan evolves and as internet technology emerges, the Company may
         further reduce the estimated useful lives of the existing software or

<PAGE>

         abandon those assets. Management believes that it is reasonably
         possible that a decision to move to a internet-based business model
         could occur during the next 12 months.

         The Company has accrued $6,910,000 as a reinsurance recoverable from a
         single reinsurer relating to medical claims incurred during the period
         of April 16, 1998 through December 31, 1998. While the reinsurer is
         currently conducting a claims audit to assess the appropriateness of
         the Company's assertion, management believes that the entire receivable
         is collectible either from the reinsurer or the health care providers
         during the year ending December 31, 2000.

     Q.  Merger Termination

         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 and that HPS had purchased
         200,000 unregistered shares of common stock from the Company 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 in
         selling, marketing and administration expense ($0.05 per share diluted,
         net of tax benefit) for the write-off of costs related to the
         terminated merger agreement with HPS.

2.   CHANGE IN FISCAL YEAR

     On November 4, 1999, the Company's Board of Directors decided to change the
     Company's fiscal year end from June 30 to December 31 in order to
     facilitate activities of the Plan and the Company.

3.   ACCOUNTING CHANGE

     Effective July 1, 1997, the Company changed its method of accounting for
     management service fees from a policy of revenue being generally recognized
     based on an estimate of the services to be provided over the service period
     to a policy under which revenue is recognized ratably over the contract
     period. The change was made because management believes that the new method
     will provide for consistent accounting methods between its management
     services and the full risk health plan premiums, is more prevalent in the
     health management industry, and will reduce the administrative burden.

     The cumulative effect of the change in accounting principles as July 1,
     1997 resulted in a pre-tax, non-cash charge of $3,713,000 ($2,371,000 after
     tax benefit of $.52 per share for basic and $.51 per share for diluted).
     Income before cumulative effect of accounting change and basic and diluted
     earnings per share for the year ended June 30, 1998 would have been
     $1,826,000, $.40 and $.39, respectively, without the accounting change
     compared to $1,328,000, $.29 and $.29, respectively, with the accounting
     change.

4.   INVESTMENTS

     The amortized cost and fair value of available-for-sale fixed maturity
     investments consists of the following (in thousands):

                                          December 31, 1999
                              -------------------------------------------
                                           Gross       Gross
                             Amortized   Unrealized  Unrealized    Fair
                               Cost        Gains       Losses      Value
                              ------      -------      ------      ------

U.S. Treasury securities      $4,941      $  --        $  264      $4,677
Corporate bonds                2,033         --            35       1,998
                              ------      -------      ------      ------
                              $6,974      $  --        $  299      $6,675
                              ======      =======      ======      ======


<PAGE>

                                           June 30, 1999
                              -------------------------------------------
                                           Gross       Gross
                             Amortized   Unrealized  Unrealized   Fair
                               Cost        Gains      Losses      Value
                              ------      ------      ------      ------

U.S. Treasury securities      $5,581      $   11      $  198      $5,394
Corporate bonds                3,033        --            21       3,012
                              ------      ------      ------      ------
                              $8,614      $   11      $  219      $8,406
                              ======      ======      ======      ======

The Company held no investments at June 30, 1998.

All fixed maturity investments are due within five years as of December 31,
1999. Actual maturities may differ from contractual maturities because the
borrowers may have the right to prepay such obligations without prepayment
penalties.

Gross realized gains of $8,356 and gross realized losses of $6,829 were
recognized on the sale of available-for-sale fixed maturity securities in the
six months ended December 31, 1999 and are included in investment income. There
were no sales of fixed maturity investments during the year ended June 30, 1999.

U.S. Treasury Securities with a book value of $100,000 were on deposit with the
Commonwealth of Pennsylvania Insurance Department to satisfy regulatory
requirements at December 31, 1999 and June 30, 1999.

The net unrealized loss on fixed maturity investments included in shareholder's
equity consists of the following (in thousands):

                                                     December 31,  June 30,
                                                         1999        1999
                                                        -----       -----
Gross unrealized loss on fixed
   maturity investments                                 $(299)      $(208)
Adjustment for net deferred
   tax benefit, net of valuation allowance               --          --
                                                        -----       -----
Net unrealized loss on fixed
   maturity investments                                 $(299)      $(208)
                                                        =====       =====


<PAGE>



5.   COMPUTER SOFTWARE COSTS

     Computer software costs consist of the following (in thousands):


                                            December 31,         June 30,
                                            ------------   ---------------------
                                                1999        1999         1998

      Care Management Software
            Cost                               $20,201      $18,936      $17,268
            Less accumulated amortization        9,161        7,483        7,391
                                               -------      -------      -------
            Net book value                      11,040       11,453        9,877
      Claim Administration Software
            Cost                                 9,987        9,709        8,852
            Less accumulated amortization        4,803        4,302        3,708
                                               -------      -------      -------
            Net book value                       5,184        5,407        5,144
      QualityFIRST(R) Software
            Cost                                19,604       18,001       16,104
            Less accumulated amortization        9,648        8,125        6,841
                                               -------      -------      -------
            Net book value                       9,956        9,876        9,263
                                               -------      -------      -------

      Computer Software Costs                  $26,180      $26,736      $24,284
                                               =======      =======      =======



     Amortization of these costs was as follows (in thousands):

<TABLE>
<CAPTION>
                                      Six Months Ended
                                         December 31,              Year Ended June 30,
                                      ------------------      ------------------------------
                                        1999       1998        1999        1998        1997
                                               (unaudited)

<S>                                   <C>         <C>         <C>         <C>         <C>
Care Management Software              $1,678      $1,249      $2,603      $2,214      $1,791
Claim Administration Software            501         445         919         795         735
QualityFIRST Software                  1,523       1,279       2,722       2,149       1,617
                                      ------      ------      ------      ------      ------

Amortization Expense                  $3,702      $2,973      $6,244      $5,158      $4,143
                                      ======      ======      ======      ======      ======
</TABLE>


     Fully amortized software of $4,274,000 was written off in the year ended
     June 30, 1999.

     Effective October 1, 1999, the estimated remaining useful life of the care
     management software was reduced from seven years to three years. The
     reduction resulted in an additional amortization expense of approximately
     $250,000 during the six months ended December 31, 1999 and increased the
     net loss by approximately $167,000 ($.04 per share diluted).


<PAGE>


6.   PROPERTY AND EQUIPMENT

     Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>

                                                          December 31,                  June 30,
                                                        -----------------    -------------------------------
                                                              1999               1999              1998
                                                        -----------------    -------------     -------------

         Owned

<S>                                                     <C>                  <C>               <C>
         Office equipment, furniture and fixtures       $     7,796          $     7,811       $     5,788
         Leasehold improvements                               2,270                2,248             1,719
         Data processing equipment                           15,623               15,101            10,348
                                                        -----------------    -------------     -------------
                                                             25,689               25,160            17,855
         Less accumulated depreciation                       15,250               13,763            10,676
                                                        -----------------    -------------     -------------

         Net property and equipment owned                    10,439               11,397             7,179
                                                        -----------------    -------------     -------------

         Capitalized leases

         Office equipment and furniture                          --                   --             1,271
         Data processing equipment                            2,020                1,666             3,843
                                                        -----------------    -------------     -------------
                                                              2,020                1,666             5,114
         Less accumulated depreciation                        1,381                1,238             3,623
                                                        -----------------    -------------     -------------

         Net capitalized leases                                 639                  428             1,491
                                                        -----------------    -------------     -------------

         Property and equipment                         $    11,078          $     11,825      $     8,670
                                                        =================    =============     =============
</TABLE>


7.   NOTES PAYABLE

     Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                                               December 31,         June 30,
                                                                                 -------      --------------------
                                                                                  1999         1999         1998
                                                                                 -------      -------      -------
                                                                                                 (in thousands)
<S>                                                                              <C>          <C>          <C>
Term loans payable to bank in monthly installments of $325,000 plus interest
at the bank's reference rate (8.50% at December 31, 1999), with the last
payment equal to all remaining principal due
January, 2002                                                                    $ 7,195      $ 5,245      $ 3,742

Note payable to bank under revolving credit agreement with interest payable
monthly at the bank's reference rate (8.50% at
December 31, 1999), due January 30, 2001                                           2,925        5,765        3,000
                                                                                 -------      -------      -------
                                                                                  10,120       11,010        6,742
Less:  Current maturities                                                          6,825        7,865        4,429
                                                                                 -------      -------      -------
Long-term portion                                                                $ 3,295      $ 3,145      $ 2,313
                                                                                 =======      =======      =======
</TABLE>


     The above notes payable are collateralized by accounts receivable,
     equipment, fixtures, and general intangibles. The notes payable are subject
     to debt covenants that are to be met on a quarterly basis. The Company's
     revolving credit agreement includes a $3,000,000 revolving credit facility.
     The revolving credit agreement terminates on January 30, 2001. The Company
     had available $75,000 under the revolving credit facility at December 31,
     1999.
<PAGE>

     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
     $6,825,000 in 2000 and $3,295,000 in 2001.

     Total interest paid on notes payable was $468,000 for the six months ended
     December 31, 1999 and $797,000, $335,000 and $299,000 for the years ended
     June 30, 1999, 1998 and 1997, respectively.

8.   ACQUISITION/REINSURANCE AGREEMENT

     On January 27, 1999, the Company completed the acquisition of Oxford Health
     Plans (PA), Inc. (the Plan), a wholly-owned subsidiary of Oxford Health
     Plans, Inc. In the nine months prior to the acquisition, the Company
     managed the medical assistance component of the Plan under terms of a
     contract with Oxford Health Plans, Inc. The Company provided health plan
     management services and assumed the medical cost risk of the medical
     assistance recipients in and around Philadelphia, Pennsylvania.

     As a result of the acquisition, the Company retained a $2,500,000 surplus
     note, which has an interest rate of 8.5% annum. The note is classified as
     long-term due to the fact that the principle and interest on the note is
     payable only upon the Plan's receipt of prior approval from the Insurance
     Commissioner of the Commonwealth of Pennsylvania. Interest of $197,104 and
     $89,980 was accrued as of December 31, 1999 and June 30, 1999,
     respectively. The Plan is also restricted from paying dividends in excess
     of prior year net income or 10% of net worth without prior approval from
     the Insurance Commissioner. No dividends were paid in 1999.

     After the acquisition, the Company continued to assume the medical cost
     risk through the Plan for these Medical Assistance recipients. The
     acquisition also included a small block of commercial HMO products. As of
     December 31, 1999, substantially all of the commercial block had
     discontinued their insurance coverage with the Plan.

     For the period April 16, 1998 to December 31, 1998 the Company maintained a
     reinsurance contract to control exposure to potential medical losses
     arising from large risks. To the extent that the reinsurer does not meet
     its obligations assumed under the reinsurance contract, the Company remains
     primarily liable. Reinsurance premiums under terms of this reinsurance
     contract were $1,088,000 and $445,000 in the years ended June 30, 1999 and
     1998, respectively, and are included in medical costs, net. Amounts
     recoverable under terms of this reinsurance contract as of December 31,
     1999 and June 30, 1999 were $6,910,000 and $3,990,000, respectively, and
     are included in accounts receivable on the consolidated balance sheet.
     There were no amounts recoverable under terms of the reinsurance contract
     as of June 30, 1998.

     Effective January 1, 1999, the Company entered in to a 50% quota-share
     reinsurance agreement under which the reinsurer has assumed 50% of the
     Medicaid medical cost risk and certain non-medical expenses in exchange for
     50% of the related Medicaid premium. Under this agreement, the Company
     received a $5,000,000 ceding allowance from the reinsurer. The ceding
     allowance is being realized in relation to profits ceded to the reinsurer.
     The Company realized $1,423,000 in the six month period ended December 31,
     1999 and $2,457,000 in the year ended June 30, 1999, of the ceding
     allowance as a component of net revenue. Amounts ceded under the contract
     for premiums, medical costs and expenses for the six month period ended
     December 31, 1999 were $38,065,000, $32,998,000 and $3,153,000,
     respectively. The amounts ceded for the year ended June 30, 1999 were
     $37,821,000, $31,464,000 and $3,569,000, respectively.

     Under terms of the agreement, the Company could recapture the business
     ceded, subject to provisions of the agreement. On February 21, 2000, the
     Company elected to recapture the business ceded and accrued the recapture
     fee of $300,000 at December 31, 1999. There were no amounts recoverable
     under terms of this reinsurance contract as of December 31, 1999.



<PAGE>

9.   OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN

     At December 31, 1999, the Company's 1992 Long-Term Incentive Plan and the
     1990 Stock Option Plan ("the Option Plans") permitted the granting of
     1,200,000 options to officers, directors and employees. These can be either
     incentive stock options or non-qualified stock 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 $5.250 to $15.50. A total of 73,390 common shares are
     available for future issuance under the Option Plans at December 31, 1999.

     Transactions related to outstanding options are as follows:

<TABLE>
<CAPTION>
                                                                Weighted
                                                                Average
                                    Total       Exercisable     Exercise Price
                                  --------       --------       -------------
<S>                                <C>            <C>           <C>
Balance at June 30, 1996           533,814        364,865       $    8.72
    Granted                        260,550           --             12.32
    Became exercisable                --           99,324            7.41
    Exercised                      (97,769)       (97,769)           9.06
    Expired                        (24,536)       (24,536)           8.85
                                  --------       --------
 Balance at June 30, 1997          672,059        341,884           10.06
    Granted                        237,600           --             12.61
    Became exercisable                --          161,523           10.36
    Exercised                     (105,449)      (105,449)           8.89
    Expired                        (77,341)       (71,041)          11.23
                                  --------       --------
Balance at June 30, 1998           726,869        326,917           10.72
    Granted                         77,250           --              9.92
    Became exercisable                --          184,606           11.57
    Exercised                      (40,745)       (40,745)           7.80
    Expired                        (54,228)       (31,895)          11.34
                                  --------       --------
Balance at June 30, 1999           709,146        438,883           10.63
    Granted                         15,000           --              8.47
    Became exercisable                --           61,317           12.10
    Expired                        (20,450)       (13,600)          12.39
                                  --------       --------
Balance at December 31, 1999       703,696        486,600           10.66
                                  ========       ========

</TABLE>

     The following table summarizes information about the stock options at
December 31, 1999:

<TABLE>
<CAPTION>
                                           Options Outstanding                        Options Exercisable
                                -------------------------------------------        --------------------------
                                                Weighted
                                                Average
                                                Remaining        Weighted                           Weighted
     Range of Exercise                         Contractual       Average                            Average
           Prices                 Number      Life in Years    Exercise Price       Number       Exercise Price
<S>                             <C>              <C>                <C>            <C>                 <C>
     $5.250 - $7.875             111,368          0.24               $7.03          110,035             $7.04
     $8.00                        74,695          0.91                8.00           74,695              8.00
     $9.125 - $9.875              24,500          4.38                9.23            6,000              8.88
     $10.00                       59,000          3.50               10.00           23,997             10.00
     $10.125                      53,200          2.50               10.13           44,150             10.13
     $10.375 - $11.00             64,533          2.24               10.90           60,702             10.90
     $11.25 - $11.75              21,850          1.49               11.45           21,350             11.45
     $12.625                     162,600          2.50               12.63           56,534             12.63
     $12.875 -$15.50             131,950          2.58               13.33           89,137             13.27
                                 -------                                            -------
     $5.250 - $15.50             703,696          2.08               10.66          486,600             10.10
                                 =======                                            =======
</TABLE>

<PAGE>

     The number of options scheduled to expire by year are 185,702 in 2000,
     33,244 in 2001, 386,250 in 2002, 74,000 in 2003 and 24,500 in 2004. As
     permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the
     Company has elected to follow Accounting Principles Board Opinion (APB) No.
     25, "Accounting for Stock Issued to Employees," to measure compensation
     cost for employee stock options. Under APB No. 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.

<TABLE>
<CAPTION>
                                          Six Months Ended
                                            December 31,                        Year Ended June 30,
                                         -------------------    --------------------------------------------------------
                                                1999                 1999                 1998                1997
                                         -------------------    ---------------     ----------------    ----------------
<S>                                        <C>                   <C>                 <C>                 <C>
     Risk Free Interest Rate Change        5.54% to 6.36%        3.95 to 5.93%       5.25 to 5.625%      5.85 to 6.73%
     Dividend Yield                              0%                   0%                   0%                  0%
     Volatility factor of the expected
       market price of the Company's
       common stock                             .626                 .622                 .577                .513
</TABLE>


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

     For purposes of pro forma disclosures, the estimated fair value of the
     options is amortized over the option's vesting period. Had the compensation
     cost been determined consistent with SFAS No. 123, the pro-forma impact
     would be as follows (in thousands):


<TABLE>
<CAPTION>
                                               Six Months
                                            Ended December 31,                    Year Ended June 30,
                                            ----------------    --------------------------------------------------------
                                                  1999               1999                 1998                1997
                                            ----------------    ---------------     ----------------    ----------------
<S>                                         <C>                 <C>                 <C>                 <C>
     Reported net income (loss)             $  (1,220)          $       371         $   (1,043)         $    2,241
     SFAS No. 123 Compensation Cost              (366)                 (540)              (282)               (324)
                                            ----------------    ---------------     ----------------    ----------------
     Proforma net income (loss)             $  (1,586)          $      (169)        $   (1,325)         $    1,917
                                            ----------------    ---------------     ----------------    ----------------

     Proforma net income (loss) per share:
          Basic                             $    (.34)          $      (.04)        $     (.29)         $      .45
          Diluted                           $    (.34)          $      (.04)        $     (.29)         $      .43
</TABLE>


     On May 14, 1999, the shareholders approved the Company's 1999 Employee
     Stock Purchase Plan. The Plan permits employees to purchase stock of the
     Company at a lower of 85% of the closing price of the Company's common
     stock as of the commencement date of a plan year or 85% of the closing
     price of the Company's common stock as of the last date of a plan year. The
     first plan year began November 1, 1999 and $49,389 had been contributed at
     December 31, 1999. Initially, 60,000 shares of the Company's common stock
     have been reserved for issuance. Beginning November 1, 2000, and each year
     thereafter, the shares available for issuance will be increased so that up
     to 60,000 shares will be available for each plan year. The Plan will
     terminate on October 31, 2009, unless the Board of Directors extends the
     term of the plan.

<PAGE>

10.  INCOME TAXES
     The components of income tax expense (benefit) were as follows (in
thousands):
<TABLE>
<CAPTION>

                               Six Months
                             Ended December 31,                    Year Ended June 30,
                            ----------------    --------------------------------------------------------
                                  1999               1999                 1998                1997
                            ----------------    ---------------     ----------------    ----------------
<S>                         <C>                 <C>                 <C>                 <C>
         Current:
             Federal        $         --        $         --        $          --       $        5
             State                    26                  20                   15               10
         Deferred                   (609)                262                  853            1,398
                            ----------------    ---------------     ----------------    ----------------
                            $       (583)       $        282        $         868       $    1,413
                            ================    ===============     ================    ================
</TABLE>

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

<TABLE>
<CAPTION>
                                               Six Months
                                             Ended December 31,                   Year Ended June 30,
                                            ----------------    --------------------------------------------------------
                                                  1999               1999                 1998                1997
                                            ----------------    ---------------     ----------------    ----------------
<S>                                               <C>                  <C>                <C>                 <C>
           Statutory rate                         (34.0%)              34.0%              34.0%               34.0%
           State income taxes                      (2.5)                3.6                2.8                 2.7
           Non-deductible meals
            and entertainment expenses               .6                 4.0                1.4                  .8%
           NOL expiration                           5.0                  --                 --                  --
           Other                                   (1.4)               (1.6)               1.6                 1.2
                                            ================    ===============     ================    ================
                                                  (32.3%)              43.2%              39.5%               38.7%
                                            ================    ===============     ================    ================
</TABLE>

      The components of the deferred income tax liabilities and assets were as
follows (in thousands):

<TABLE>
<CAPTION>
                                         Six Months
                                           Ended
                                         December 31,      Year Ended June 30,
                                          --------       -----------------------
                                            1999           1999           1998
                                          --------       --------       --------
<S>                                       <C>            <C>            <C>
Deferred tax liabilities
  Prepaid expenses                        $     27       $     72       $     58
  Other assets                                 255            330            172
  Computer software costs                    8,004          9,483          8,519
  Tax over book depreciation                 1,182          1,188          1,016
                                          --------       --------       --------
      Total deferred tax liabilities         9,468         11,073          9,765
Deferred tax assets
  Receivables                                   88            135          1,747
  Accrued expenses                             605            558            428
  Ceding allowance                             388            890           --
  Net operating loss carryforwards          10,463         12,704          5,487
                                          --------       --------       --------
      Total deferred tax assets             11,544         14,287          7,662
      Less valuation allowance              (2,855)        (4,675)          (773)
                                          --------       --------       --------
      Total net deferred tax assets          8,689          9,685          6,889
                                          --------       --------       --------

Net deferred tax liabilities              $    779       $  1,388       $  2,876
                                          ========       ========       ========
</TABLE>

     At December 31, 1999, the Company had net operating loss (NOL)
     carryforwards of $30,000,000 for income tax purposes that expire in years
     2001 through 2018. Included in this NOL is $6,000,000 and $2,270,000
     related to the estimated net operating carryforward of the Plan and stock
     options, respectively, and each has a full valuation allowance. The amount
     of NOL that will expire by year for which a deferred tax asset has been
     recognized is $3,801,000 in 2000, $1,664,000 in 2001, $299,000 in 2002,

<PAGE>

     $1,334,000 in 2003, $66,000 in 2004 and $14,797,000 thereafter. The amount
     of the net operating loss carryforward related to the Plan is subject to
     the filing of the 2000 consolidated tax return of the former Parent of the
     Plan and the application of the consolidated tax return rules. The amount
     of the Plan's NOL that the Company will have available each year is further
     limited by Section 382 of the Internal Revenue Code and is estimated to be
     $333,000 per year. The Plan's NOL will expire in the years 2011 through
     2016. The stock options when realized for financial statement purposes will
     be recorded as additional paid-in capital and not as a reduction of income
     tax expense. In addition, any Plan NOLs eventually realized would first be
     used to reduce net goodwill of $1,218,000 at December 31, 1999, and then to
     reduce income tax expense.

     Total income tax paid for the six months ended December 31, 1999 and for
     the years ended June 30, 1999, 1998 and 1997 was $38,000, $23,000, $14,786
     and $15,090, respectively.

11.  COMMITMENTS AND CONTINGENCIES

     The Company leases its office facilities and various equipment under
     operating and capital leases. Rental expense was approximately $2,467,000,
     $4,507,000, $4,276,000 and $3,564,000 for the six months ended December 31,
     1999 and for the years ended June 30, 1999, 1998 and 1997, respectively.
     The following is a schedule of future minimum rental payments required
     under operating leases (in thousands):

     Year ending December 31:

         2000                                $ 3,562
         2001                                  3,156
         2002                                  2,416
         2003                                  2,184
         2004                                  1,904
         Thereafter                            8,368
                                             -------
     Total minimum rental payments           $21,590
                                             =======

     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 (in thousands):

     Year ending December 31:

         2000                                $   463
         2001                                    410
         2002                                    143
                                             -------
     Total minimum lease payments              1,016
     Less amount representing interest           107
                                             -------
     Net minimum lease payments                  909
     Less current maturities                     380
                                             -------
     Long-term portion                       $   529
                                             =======

     The Company entered into capital lease agreements totaling $354,000 for
     data processing equipment and software for the six months ended December
     31, 1999. The Company entered into no capital leases in the years ended
     June 30, 1999 and 1998.

     A dispute over amounts the Plan allegedly owes a previous provider arose
     during 1999. The provider alleges that the Plan failed to perform, and
     interfered with the provider's contractual obligations. The provider
     demands $4.7 million in damages, plus interest. The Company believes that
     the allegations are without merit and has filed a counterclaim for amounts
     in excess of $4.4 million for the provider's failure to perform under terms
     of the contract. The contract between the Plan and the provider requires
     that the dispute be settled in arbitration for which a hearing is scheduled
     in May 2000. The outcome of arbitration and the impact on the Company's
     operations is not determinable. The Company intends to defend its position
     vigorously in this matter.


     At times the Company is or may be involved in legal actions concerning
     benefit plan coverage, decisions by the Company or alleged medical
     malpractice by participating providers. If found liable in such actions,
     the Company may bear financial responsibility. Also, the Company is or may
     be involved in certain other claims and legal actions arising in the
     ordinary course of business. In the opinion of management, the claims and
     legal actions will not have a material adverse effect on the Company's
     consolidated financial position, results of operations or cash flows.


<PAGE>

     As a risk contractor for Medicaid programs, the Company is subject to
     regulations covering operating procedures. The laws and regulations
     governing risk contractors are complex and subject to interpretation. The
     state of Pennsylvania and various regulatory bodies within the state,
     monitor the Company's operations to ensure compliance with the applicable
     laws and regulations. There can be no assurance that administrative or
     systems issues or the Company's current or future provider arrangements
     will not result in adverse action by regulatory authorities.

12.  SAVINGS PLAN

     The Company has a tax deferred savings plan in accordance with the
     provisions of Section 401(k) of the Internal Revenue Code covering
     substantially all employees. Under the plan, the Company matches a minimum
     of 10% of eligible employees' contributions up to 6% of the employee's
     salary. Employee and employer matching contributions to the plan are
     remitted to a trustee on a biweekly basis. Company contribution expenses
     were $271,000, $567,000, $442,000, and $350,000 for the six months ended
     December 31, 1999 and for the years ended June 30, 1999, 1998, and 1997,
     respectively.

13.  SUBSEQUENT EVENT

     In January 2000, the Company through its subsidiary, HRM Health Plans (PA),
     Inc. (HRMPA) acquired from Hamilton HealthCenter, Inc. all of the
     outstanding stock of Pennsylvania HealthMATE, Inc., an 18,000 voluntary
     member health plan serving the Medicaid population in a six (6) county
     area. HRMPA assumed ownership of HealthMATE by assuming liabilities in
     excess of assets of approximately $2,500,000. The revenue from HealthMATE
     is expected to exceed $32,000,000 annually.


<PAGE>



14.  SEGMENT REPORTING

Reportable segment information is as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                Risk
                                              Management     QualityFIRST       (HMO)
Six months ended December 31,1999:            Services Unit     Unit            Unit           Total
                                               ---------      ---------       ---------       ---------
<S>                                            <C>            <C>             <C>             <C>
Revenues from external clients                 $  22,622      $   2,062       $  42,017       $  66,701
Intersegment revenues(1)                          11,443            547            --            11,990
Investment income(2)                                  53           --               425             478
Interest expense(3)                                  407             97             107             611
Depreciation expense                               1,480             67              95           1,642
Amortization expense                               2,554          1,532            --             4,086
Segment pretax profit (loss)(4)                    1,009           (667)         (2,145)         (1,803)
Segment assets                                    39,002         10,716          31,119          80,837
Purchases of property and equipment and
computer software                                  2,131          1,630            --             3,761

<CAPTION>
                                                                                Risk
                                              Management     QualityFIRST       (HMO)
Year ended June 30, 1999:                     Services Unit     Unit            Unit           Total
                                               ---------      ---------       ---------       ---------
<S>                                            <C>            <C>             <C>             <C>
Revenues from external customers               $  48,731      $   4,064       $ 109,275       $ 162,070
Intersegment revenues(1)                          20,787          1,330            --            22,117
Investment income(2)                                 196           --               773             969
Interest expense(3)                                  714            170              90             974
Depreciation expense                               3,230            149             101           3,480
Amortization expense                               4,230          2,741            --             6,971
Segment pretax profit (loss)(4)                    1,608         (1,515)            560             653
Segment assets                                    46,291         11,033          31,245          88,569
Purchases of property and equipment and
computer software                                 10,793          3,586            --            14,379

</TABLE>

(1)  Intersegment Management Services Unit revenues represent the amounts
     charged to the Risk (HMO) unit under terms of an administrative services
     agreement. The revenue is eliminated in consolidation.

     Intersegment QualityFIRST Unit revenues represents amounts charged by the
     QualityFIRST Unit to the Management Services Unit ($188,000 and $456,000
     for the six month period ended December 31, 1999 and the year ended June
     30, 1999, respectively) and the Risk (HMO) unit $359,000 and $874,000 for
     the six month period ended December 31, 1999 and the year ended June 30,
     1999, respectively) for use of the QualityFIRST(R) software. The revenue is
     based upon covered members or employees and is eliminated in consolidation.

(2)  Investment income earned on fixed maturity investments is recorded in the
     Risk (HMO) Unit. All other investment income is recorded in the Management
     Services Unit.

(3)  Interest expense on the surplus note payable is recorded in the Risk (HMO)
     Unit. The remaining interest expense has been allocated between the
     Management Services Unit and the QualityFIRST unit based upon segment
     assets.

(4)  Corporate amounts have been allocated back to the respective business units
     based upon estimated resource usage. Oxford transition costs of $1,350,000
     have been charged to the Risk (HMO) unit for the year ended June 30, 1999.


<PAGE>

15.  QUARTERLY FINANCIAL DATA (Unaudited)

The following table presents certain unaudited quarterly results for the six
months ended December 31, 1999 and for the years ended June 30, 1999 and 1998
(in thousands, except per share data).

<TABLE>
<CAPTION>
                                 Six Month Period Ended December 31, 1999
                                 ----------------------------------------
                                      First          Second                                             Six
                                     Quarter         Quarter                                           Months
                                    ----------       ---------                                       -----------

<S>                                 <C>              <C>                                             <C>
     Net revenues                   $   35,703       $  31,476                                       $    67,179
                                    ==========       =========                                       ===========

     Net income (loss)              $      913       $  (2,133)                                      $    (1,220)
                                    ==========       =========                                       ===========

     Earnings (loss) per share:

       Basic                        $      .20       $    (.46)                                      $      (.26)
                                    ==========       =========                                       ===========


       Diluted                      $      .20       $    (.46)                                      $      (.26)
                                    ==========       =========                                       ===========


<CAPTION>

                                                           Year Ended June 30, 1999
                                    ----------------------------------------------------------------------------
                                     First            Second          Third           Fourth
                                     Quarter          Quarter         Quarter         Quarter         Year
                                    ----------       ---------       ----------      ----------      -----------

<S>                                 <C>              <C>             <C>             <C>             <C>
     Net revenues                   $   48,949       $  45,018       $   33,914      $   35,158      $   163,039
                                    ==========       =========       ==========      ==========      ===========

     Net income (loss)              $      (23)      $  (1,311)      $    1,069      $      636      $       371
                                    ==========       =========       ==========      ==========      ===========

     Earnings (loss) per share:

       Basic                        $     (.01)      $    (.28)      $      .23      $      .14      $       .08
                                    ==========       =========       ==========      ==========      ===========


       Diluted                      $     (.01)      $    (.28)      $      .23      $      .14      $       .08
                                    ==========       =========       ==========      ==========      ===========

</TABLE>



<PAGE>

<TABLE>
<CAPTION>

                                                                Year Ended June 30, 1998
                                     ----------------------------------------------------------------------------
                                        First            Second         Third          Fourth
                                       Quarter           Quarter       Quarter         Quarter          Year
                                     ----------       ----------      ----------      ----------       ----------

    <S>                                <C>              <C>             <C>             <C>              <C>
    Net revenues                       $   17,046       $   17,989      $   16,972      $   42,830       $   94,837
                                       ==========       ==========      ==========      ==========       ==========

    Income (loss) before cumulative
    effect of accounting change        $      751       $      787      $       31      $     (241)      $    1,328

    Cumulative effect of
    accounting change                      (2,371)            --              --              --             (2,371)
                                       ----------       ----------      ----------      ----------       ----------

    Net income (loss)                  $   (1,620)      $      787      $       31      $     (241)      $   (1,043)
                                       ==========       ==========      ==========      ==========       ==========

    Basic earnings per share:

    Income (loss) before cumulative
    effect of accounting change        $      .17       $      .18      $      .01      $     (.05)      $      .29

    Cumulative effect of
    accounting change                        (.53)         --              --              --                  (.52)
                                       ----------       ----------      ----------      ----------       ----------

    Net income (loss)                  $     (.36)      $      .18      $      .01      $     (.05)      $     (.23)
                                       ==========       ==========      ==========      ==========       ==========

    Diluted earnings per share:

    Income (loss) before cumulative
    effect of accounting change        $      .16       $      .17      $      .01      $     (.05)      $      .29

    Cumulative effect of
    accounting change                        (.51)         --              --              --                  (.51)
                                       ----------       ----------      ----------      ----------       ----------

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

</TABLE>


<PAGE>


                                                                    Schedule II

                          HEALTH RISK MANAGEMENT, INC.
                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

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

<S>                                               <C>              <C>         <C>          <C>             <C>
Six month transition period ended December 31, 1999:
   Allowance for uncollectible accounts           $323,500         $6,332       --           $74,832(1)      $255,000

Year ended June 30, 1999:
   Allowance for uncollectible accounts           $265,000       $113,159       --           $54,659(1)      $323,500

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

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

April 13, 2000                By: /s/  Gary McIlroy
                                  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.

April 13, 2000               By:  /s/ Gary McIlroy
                                  Gary T. McIlroy, M.D.
                                  Chairman of the Board, Chief Executive Officer
                                  and Director (principal executive officer)

April 13, 2000               By:  /s/ Marlene Travis
                                  Marlene Travis
                                  President, Secretary, Chief Operating Officer
                                  and Director

April 13, 2000               By:  /s/ Thomas P. Clark
                                  Thomas P. Clark
                                  Senior Vice President, Finance and Chief
                                  Financial Officer (principal financial
                                  officer and principal accounting officer)

April 13, 2000               By:  /s/ Vance Kenneth Travis
                                  Vance Kenneth Travis, Director

April 13, 2000               By:  /s/ Gary L. Damkoehler
                                  Gary L. Damkoehler, Director

April 13, 2000               By:  /s/ Raymond G. Schultze, M.D.
                                  Raymond G. Schultze, M.D., Director

April 13, 2000               By:  /s/ Robert L. Montgomery
                                  Robert L. Montgomery, Director

<PAGE>


                                  EXHIBIT INDEX

No.      Description

2.1      Stock Purchase Agreement dated as of October 14, 1998 between Health
         Risk Management, Inc. and Oxford Health Plans, Inc. - incorporated by
         reference to Exhibit 2.1 to the Company's Form 8-K filed February 11,
         1999 (SEC File No. 0-18902).

2.2      Closing Agreement dated as of January 27, 1999 between Health Risk
         Management, Inc. and Oxford Health Plans, Inc. - incorporated by
         reference to Exhibit 2.2 to the Company's Form 8-K filed February 11,
         1999 (SEC File No. 0-18902).

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 April 21, 1999--incorporated by
         reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q
         for the quarter ended March 31, 1999 (SEC File No. 0-18902)

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

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

4.3      Composite Bylaws of the Company, as of April 21, 1999 (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*    Employment Agreement dated as of June 20, 1996 between Health Risk
         Management, Inc. and Dr. Gary T. McIlroy -- incorporated by reference
         to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
         fiscal year ended June 30, 1996 (SEC File No. 0-18902).

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

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

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


<PAGE>

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

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

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

10.8*    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).

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

10.10*   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).

10.11*   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).

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

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

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

10.15*   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).

10.16*   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).

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

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

10.19    Security Agreement dated June 24, 1994 relating to Revolving Credit and
         Term Loan Agreement of same date -- incorporated by reference 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).


<PAGE>

10.20    Management Services Agreement dated February 24, 1998, between
         Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
         Management, Inc) and Oxford Health Plans (PA), Inc. - incorporated by
         reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K
         for the fiscal year ended June 30, 1998 (SEC File No. 0-18902).

10.21    Health Care Excess Risk Insurance Policy dated April 13, 1998, between
         Pennsylvania HRM, Inc. (a wholly owned subsidiary of Health Risk
         Management, Inc) and Kentucky Medical Insurance Company -- incorporated
         by reference to Exhibit 10.42 to the Company's Annual Report on Form
         10-K for the fiscal year ended June 30, 1998 (SEC File No. 0-18902).

10.22    Lease agreement dated May 5, 1998, between MEPC O &I, Inc. and Health
         Risk Management, Inc. related to the Company's offices at 10900
         Hampshire Avenue South, Minneapolis, Minnesota and Amendment of Lease
         dated September 16, 1998 -- incorporated by reference to Exhibit 10.43
         to the Company's Annual Report on Form 10-K for the fiscal year ended
         June 30, 1998 (SEC File No. 0-18902).

10.23    Amended and Restated Revolving Credit and Term Loan Agreement between
         Health Risk Management, Inc. and U.S. Bank National Association dated
         May 1, 1998 - incorporated by reference to Exhibit 10.44 to the
         Company's Annual Report on Form 10-K for the fiscal year ended June 30,
         1998 (SEC File No. 0-18902).

10.24    First Amendment to the Credit Agreement between Health Risk Management,
         Inc. and U.S. National Bank Association dated January 27, 1999 --
         incorporated by reference to Exhibit 10.1 to the Company's Quarterly
         Report on Form 10-Q for the quarter ended March 31, 1999 (SEC File No.
         0-18902).

10.25    Second Amendment to the Credit Agreement between Health Risk
         Management, Inc. and U.S. National Bank Association dated June 30, 1999
         -- incorporated by reference to Exhibit 10.25 to the Company's Annual
         Report on Form 10-K for the fiscal year ended June 30, 1999 (SEC File
         No. 0-18902).

10.26    Sublease Agreement dated February 10, 1999 between Day & Zimmermann,
         Inc. and Health Risk Management, Inc. as amended by First Amendment to
         Sublease dated April 6, 1999, related to the Company's offices at 1818
         Market Street, Philadelphia, Pennsylvania -- incorporated by reference
         to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the
         fiscal year ended June 30, 1999 (SEC File No. 0-18902).

10.27    Amended and Restated HealthChoices Southeast Agreement between the
         Commonwealth of Pennsylvania (Department of Public Welfare) and Oxford
         Health Plans (PA), Inc. dated January 1, 1999 -- incorporated by
         reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K
         for the fiscal year ended June 30, 1999 (SEC File No. 0-18902).

10.28    Third Amendment to the Credit Agreement between Health Risk Management.
         Inc. and U.S. National Bank dated December 21, 1999.

21.      List of subsidiaries.

23.      Consent of Independent Auditors.

27.1     Financial Data Schedule for the six month transition period ended
         December 31, 1999 (filed in electronic format only).

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