##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|   |  |                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934                          
|  
|   |  | For The Fiscal Year Ended April 30,
    2002                                                                          
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE
    REQUIRED]
|  
|   |  | For The Transition Period
    From           to                                                                       

Commission File No. 0-20488



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PMR Corporation

(Exact name of registrant as specified in its
charter)




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|                                                                                                               |  |                                         
|-------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                                       |  | 23-2491707                              
|(State or Other Jurisdiction of
    Incorporation or Organization)                                             |  | (I.R.S. Employer
    Identification No.)
|                                                                                                              
|1565 Hotel Circle South, 2nd Floor
    San Diego, California 10101(Address of principal executive
    offices) |  | 92108(Zip Code)                         

(Registrants telephone number, including
area code)

(619) 610-4001




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

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

Common Stock, Par Value $0.01 Per
Share

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 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 þ          No o

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 10K or any amendment to this
Form 10K o .

As of July 26, 2002, the approximate
aggregate market value of the Common Stock held by
non-affiliates of the registrant was $7,549,134, based upon the
closing price of the Common Stock reported on the Nasdaq
National Stock Market of $1.85 per share. See footnote
(1) below.

The number of shares of Common Stock outstanding
as of July 26, 2002 was 7,262,907.

DOCUMENTS INCORPORATED BY REFERENCE

This form does not incorporate any documents by
reference.



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|    |                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The information provided shall in no way be
    construed as an admission that any person whose holdings are
    excluded from the figure is not an affiliate or that any person
    whose holdings are included is an affiliate and any such
    admission is hereby disclaimed. The information provided is
    included solely for record keeping purposes of the Securities
    and Exchange Commission.



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TABLE OF CONTENTS



|                             |                                                                                               |  |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                      
|                             | Item 1. Business                                                                             
|                             | Item 2. Properties                                                                           
|                             | Item 3. Legal Proceedings                                                                    
|                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                     
|                             | Item 5. Market for PMRs Common Equity and Related Stockholder Matters                       
|                             | Item 6. Selected Financial Data                                                              
|                             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                             | Item 8. Financial Statements and Supplementary Data                                          
|                             | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III                    
|                             | Item 10. Directors and Executive Officers                                                    
|                             | Item 11. Executive Compensation                                                              
|                             | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                             | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                     
|                             | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                  
|LIST OF SUBSIDIARIES        
|CONSENT OF ERNST & YOUNG LLP



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##### Table of Contents



PMR CORPORATION

FORM 10-K for the Fiscal Year Ended
April 30, 2002

TABLE OF CONTENTS

|           |  |                                                                                           |    |      |    | 
|---------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                           |    | Page
|           |  |                                                                                           |    |     
|PART I    
|Item 1.    |  | Business                                                                                  |    |      | 1  | 
|Item 2.    |  | Properties                                                                                |    |      | 10 | 
|Item 3.    |  | Legal Proceedings                                                                         |    |      | 10 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 10 | 
|PART II   
|Item 5.    |  | Market for PMRs Common Equity and Related
    Stockholder Matters                        |    |      | 11 | 
|Item 6.    |  | Selected Financial Data                                                                   |    |      | 12 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 13 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 20 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                               |    |      | 20 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |    |      | 20 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers                                                          |    |      | 21 | 
|Item 11.   |  | Executive Compensation                                                                    |    |      | 23 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 29 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                            |    |      | 32 | 
|PART IV   
|Item 14.   |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |    |      | 36 | 
|Signatures |  |                                                                                           | 40 |     



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PART I

Except for the historical information
contained herein, the following discussion contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those contained
in or implied by the forward-looking statements. Factors that
could cause or contribute to such differences include those
discussed in the description of our business below and in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Forward-Looking Statements.




Item 1.     Business

Over the past fourteen years PMR (and its
subsidiaries) has been a leader in the development and
management of specialized mental health care programs and
disease management services designed to treat individuals
diagnosed with a serious mental illness (SMI),
primarily schizophrenia and bipolar disorder
(i.e., manic-depressive illness). PMR currently manages,
administers or provides consulting services for outpatient and
community-based psychiatric services for SMI patients,
consisting of two outpatient programs (the Outpatient
Programs) and case management programs for a case
management agency in and around the Nashville, Tennessee area
(the Case Management Programs). We refer to these
programs in this document as Health Services
Programs.

During the fiscal year ended April 30, 2002,
PMR continued to focus on maximizing cash flow in the Health
Services Programs.

In July 2001, after exploring numerous strategic
alternatives, PMR terminated the operations of its Infoscriber
subsidiary and licensed the Infoscriber application to Conundrum
Communications, Inc. (Conundrum) on an exclusive and
perpetual basis in the behavioral and social services areas.

InfoScriber Corporation had a business plan to
become a leading provider of strategic health information for
pharmaceutical companies, medical device companies, managed care
organizations and health care providers. PMR made significant
progress in the completion of the software program, the signing
and implementation of a group of select physicians as well as
significant discussions with purchasers of the associated data.
As anticipated, InfoScriber was using cash and PMR had hoped to
seek additional third-party financing to fund the growth of the
subsidiary. However, given the state of the capital markets and
the need for significant additional investment to bring the
InfoScriber subsidiary to profitability, it was determined in
July 2001 that it would be in the stockholders best
interest to terminate the operations of InfoScriber. In
addition, on July 30, 2001, PMR agreed to license the
InfoScriber application to Conundrum. Conundrum will have the
opportunity to grow the InfoScriber application in the
behavioral health and social services areas while PMRs
InfoScriber subsidiary will be eligible to receive royalties for
a period of five years.

PMR was incorporated in the State of Delaware in
1988. The operations of PMR include the operations of its
wholly-owned subsidiaries, Psychiatric Management Resources,
Inc., Collaborative Care Corporation, InfoScriber, and PMR
Acquisition Corporation. The principal executive offices of PMR
are located at 1565 Hotel Circle South, 2nd Floor, San
Diego, California 92108. PMRs telephone number is
(619) 610-4001.

Health Services Programs



| |                                           
| | ------------------------------------------
| | Outpatient Program Management
    Services

One aspect of PMRs historical business is
the provision of management, administrative and consulting
services to acute care hospitals, psychiatric hospitals and
community mental health centers (CMHCs) with respect
to their outpatient programs, specifically Outpatient Programs
for patients diagnosed with SMI (Outpatient Program
Management Services). PMR does not render any medical or
clinical services in connection with its Outpatient Program
Management Services; all of these services are provided by the
hospitals, CMHCs, and their personnel.

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The Outpatient Programs that PMR currently
manages or administers consist primarily of psychiatric partial
hospitalization programs. In these programs, the patient is
ambulatory, but requires intensive, coordinated clinical
services for SMI. In general, these programs are an alternative
to inpatient care. They involve patients in crisis or recovering
from crisis who, thus, require more intensive clinical services
than those generally available in a traditional outpatient
setting.

As of July 26, 2002, PMR manages or provides
consulting services to two Outpatient Programs. These services
are provided under a contract, which has a remaining term of
approximately two years, with an acute care hospital. This
contract governs the method by which PMR provides consulting or
management services, the responsibility of the hospital provider
for licensure, billing, staff, insurance and the provision of
health care services and the manner in which PMR will be
compensated. At each program location, PMR provides a program
administrator, proprietary software and data systems, policies
and procedures, clinical protocols and curricula and other
technical and administrative information that enhance the
quality of care and the efficiency of administration of the
program.

Effective March 8, 2002, this contract
provides for payment of a fixed monthly fee by the hospital.
Previously, the fees payable to PMR were based on the services
that PMR provided. The hospital maintains responsibility for
substantially all direct program costs under the contract.

Historically, the costs incurred by the providers
(hospitals or CMHCs) for PMRs Outpatient Program
Management Services have been recovered by the provider through
reimbursement by third party payors, typically Medicare and
Medicaid. In that regard, the providers submitted invoices to
the third party payors or requests for reimbursement in
accordance with the regulations applicable to the governmental
programs. The changing regulatory environment in recent years
has resulted in the denial by Medicare or its fiscal
intermediaries of claims for patient services rendered by the
provider with respect to PMRs services and/or disallowance
of reimbursement to the providers for portions of PMRs
fees. Under the terms of some of PMRs terminated or
expired contracts, PMR is required to indemnify the providers
for some or all of PMRs fees if the fees were disallowed
by Medicare or its fiscal intermediaries, or if the claims
associated with PMRs fees for services rendered to
patients were denied. In some instances, PMR is required to
indemnify the hospital for certain of the hospitals direct
costs if the claims associated with PMRs fees for services
rendered to patients were denied. For further information
regarding this matter, see Item 7. PMR Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.

The Outpatient Programs, after accounting for a
$1.7 million reduction in contract settlement reserves,
contributed revenues of $3.1 million for the fiscal year
ended April 30, 2002, versus $3.3 million for fiscal
year 2001. None of the Outpatient Programs that PMR administered
during fiscal years 2002 and 2001 contributed more than 10% of
PMRs consolidated revenues from continuing operations for
the respective years.



| |                         
| | ------------------------
| | Case Management Programs

PMR acquired the model for its Case Management
Programs in 1993. That model, as refined by PMR since then,
constitutes a proprietary system for managing, in a managed care
environment, treatment, rehabilitation and support for a limited
population of individuals diagnosed with SMI.

Specifically, PMRs Case Management Programs
provide SMI patients with personalized, one-on-one services
designed to stabilize their daily lives and to provide early
intervention in crisis situations. In this fashion, PMRs
programs limit the incurrence of the costs related to
catastrophic events leading to inpatient hospitalization. Each
program utilizes a case manager whose responsibilities include
consumer education, crisis plan development, crisis event
response, patient needs assessment, review of patient treatment
plans, linking patients to emergency services and reviewing and
authorizing services. Depending upon the needs of the specific
case management population and the varying markets, these
services may include 24-hour case management, crisis
intervention, respite services, housing assistance, medication
management and routine health screening. In providing case
management services, PMR does not provide

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medical or clinical services; such services are
performed by the case management agency with whom PMR contracts.


PMRs Case Management Programs are located
in and around Nashville, Tennessee. Prior to May 31, 2002,
PMR also managed a Case Management Program in Memphis,
Tennessee. In Tennessee, mental health care services for the
Medicaid and qualified indigent population are provided under
the Tennessee TennCare Partners State Medicaid Managed Care
Program (TennCare). TennCare contracts with two
behavioral health organizations (BHOs) that are
subsidiaries of Magellan Health Services, Inc. and that are at
risk for the required services throughout the State of
Tennessee. The BHOs in turn contract with various providers,
including a wholly-owned subsidiary of PMR, for the provision of
services to TennCare enrollees. As of July 31, 2002, it is
anticipated that all of the covered patients will be transferred
to one of the BHOs. However, this should not have a material
impact on PMR. The contracts between TennCare and the BHOs
expire on or about December 31, 2003 and it is unknown
whether the contracts will be extended or whether and how
TennCare might initiate a bidding process for contracts after
December 31, 2003, all of which creates uncertainty as to
the future of the current arrangement. In general, PMR fulfills
its contractual obligations to the BHOs pursuant to an exclusive
agreement with the Nashville case management agency.

The Nashville Case Management Program is
administered pursuant to a management and affiliation agreement
with the contracting case management agency. PMR is responsible
for clinical systems, financial analysis, support services,
contract development and other management and administrative
services. Pursuant to the terms of the management and
affiliation agreement, PMR manages and operates the delivery of
case management and other covered psychiatric services. The case
management agency is, however, responsible for staff personnel
and program facilities, and retains final discretionary
authority to approve the related policy manual, staffing issues
and overall program operations. The term of the Nashville
management and affiliation agreement has been extended to
April 30, 2007 and may only be terminated upon the
occurrence of events such as (i) a loss of accreditation or
other required licensing or regulatory qualifications,
(ii) material breach by either party, and
(iii) certain legislative or administrative changes that
may adversely affect the continued operation of the program.
Through the Nashville Case Management Program, PMR currently
provides case management services in and around Nashville to
approximately 4,300 individuals residing primarily in the
Nashville area.

PMR had a second Case Management Program in
Memphis, Tennessee, and the agreement with that case management
agency expired on May 31, 2002.

Case management contracts in Tennessee accounted
for 92% and 82% of PMRs consolidated revenues from
continuing operations for fiscal year 2002 and fiscal year 2001,
respectively.



| |            
| | -----------
| | Competition

In general, the operation of psychiatric programs
is characterized by intense competition. General, community and
specialty providers, including national companies and their
subsidiaries, provide many different health care programs and
services. Many other companies engaged in the management of
outpatient psychiatric programs compete with PMR for the
establishment of affiliations with acute care providers. Many of
these present and future competitors are substantially more
established and have greater financial and other resources than
PMR does. In addition, PMRs current and potential
providers may choose to manage mental health programs themselves
rather than contract with PMR.

There can be no assurance that PMR will be able
to compete effectively with its present or future competitors,
and any such inability could have a material adverse effect on
PMRs business, financial condition and results of
operations.

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Regulatory Matters



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Compliance With Medicare Guidelines;
    Reimbursement for Partial Hospitalization Programs

With respect to PMRs revenues derived from
payments made by providers to PMR for Outpatient Program
Management Services, PMR bills its fees to the provider as a
purchased management, administrative and consultative support
service. Substantially all of the patients admitted to these
programs are eligible for Medicare coverage and thus, the
providers rely upon payment from Medicare for the services. Many
of the patients are also eligible for Medicaid payments.

As discussed below, there are at least three
factors that will affect the revenue received by hospitals for
Outpatient Programs managed by PMR: (i) coverage of
services by third party payors, principally Medicare,
i.e., payors will not pay any amount unless the services
are covered; (ii) the amounts paid by third party payors,
principally Medicare, for covered services; and (iii) the
amounts paid by patients or their secondary payors for
coinsurance. To the extent that a hospital deems
revenue for a program PMR managed to be inadequate, it may seek
to terminate its contract with PMR or not renew the contract.
Similarly, PMR will not obtain new contracts for Outpatient
Program Management Services if prospective customers do not
believe that such programs will generate sufficient revenue.



| |                  
| | -----------------
| | Medicare Coverage

Medicare has published criteria limiting its
coverage for partial hospitalization services to patients whose
conditions are quite severe. The proper interpretation of
Medicares coverage criteria is often not clear. In
addition, intermediaries, or private contractors,
who administer the Medicare program as contractors to the
government, often interpret the Medicare coverage criteria in a
very restrictive manner. Even when a patient should be found to
meet the Medicare coverage, Medicare may deny coverage because
the patients condition was not documented adequately in
the patients medical record.

Some adverse coverage determinations are made at
the time the claim is presented. In such cases, Medicare does
not pay for the services it deems not to be covered. In other
instances, Medicare conducts coverage audits after claims have
been paid. Often such audits are based on a sample of claims
from a period, and the results of the sample are extrapolated to
the universe of claims submitted for the entire period. In such
instances, Medicare may demand repayment from the provider of
several hundreds of thousands of dollars or more. Because the
Office of the Inspector General of the Department of Health and
Human Services (OIG) as well as the Centers for
Medicine and Medicinal Services (CMS), formerly the
Health Care Financing Administration of the Department of Health
and Human Services, have both identified partial hospitalization
services as having often been billed to and paid by Medicare
even though the services did not meet Medicares coverage
criteria, PMR expects the frequency and intensity of coverage
reviews and audits of partial hospitalization services to
continue or even to increase in the future.

Coverage denials can have a direct adverse impact
on PMR because some of its terminated contracts obligate PMR to
refund to the provider fees paid to PMR, and in some instances
certain of the hospitals direct costs, with respect to
services for which coverage is denied. See Item 7. PMR
Managements Discussion and Analysis of Financial Condition
and Results of Operations  Liquidity and Capital
Resources.

Depending on the basis for the denial of
coverage, the provider may be able to appeal the coverage
denial. PMR has assisted providers in appealing coverage denials
and have, to date, prevailed in many of the cases PMR has
pursued, resulting in restoration of PMRs fees previously
not paid because of the denial. There can be no assurance that
coverage denials for services managed by PMR will be overturned
at that rate in the future. In addition, PMR does not undertake
to appeal all services and may decide in the future not to
pursue any such appeals. The appeal process can often extend for
more than a year.



| |                                                
| | -----------------------------------------------
| | Medicare Payment Rates for Covered
    Services

On or about August 1, 2000, under a new
Medicare payment formula called the outpatient prospective
payment system, Medicare began paying a pre-established rate to
providers for outpatient

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services. Under the new formula, Medicare pays
$206.82 per day (adjusted up or down for differences in wages
from area to area) of partial hospitalization service, assuming
that the services meet Medicares coverage criteria (see
 Medicare Coverage). Medicare pays this
amount regardless of whether it is more or less than a
hospitals actual costs, although there is a three-year
transition period during which hospitals whose aggregate costs
for Medicare outpatients exceed the Medicare rates will receive
some additional Medicare payments, but not up to the level of
full costs. The Medicare rates for outpatient services should be
updated annually, but in the past when Medicare has adjusted
other rates similar to its new rates for hospital outpatient
services, the updates have often been increases in amounts that
were less than the increase in the hospital market
basket, i.e., the increase in costs of items and
services purchased by hospitals. In some instances, Medicare has
reduced rates in the updating process.




| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Patient Coinsurance, Medicaid Coverage of
    Medicare Coinsurance Amounts, and Medicare Allowable Bad
    Debts

Although Medicare has established a rate for
partial hospitalization services of $206.82 per day, Medicare
will not pay that full amount to a hospital. It will deduct from
that rate an amount for patient coinsurance, or the
amount that the patient is expected to pay.

Most of the patients receiving services in
partial hospitalization programs managed by PMR are unable to
pay the coinsurance amount. If such patients are also covered by
Medicaid, the Medicaid program usually will not pay the Medicare
coinsurance amount in states where PMR furnishes Outpatient
Program Management Services such as where PMRs two
existing programs are located. Thus, the Medicare coinsurance
amount will go uncollected by the provider except to the extent
that the provider is partially reimbursed that amount as a
Medicare bad debt as described in the following
paragraph.

To the extent that neither a Medicare patient nor
any secondary payor for that patient pays the Medicare
coinsurance amount after a documented reasonable collection
effort or the patients indigence is documented, the
provider is entitled to be paid 70 percent of this
bad debt by Medicare. However, there are many
instances when Medicare denies reimbursement for all or part of
claimed bad debts for coinsurance on Medicare patients on
grounds that the provider did not engage in a reasonable
collection effort or that the provider failed to maintain
adequate documentation of its collection effort or of the
patients indigence.



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Medicare Cost Reimbursement for Partial
    Hospitalization for Services Furnished Prior to Medicares
    Outpatient Prospective Payment System

Prior to the implementation of Medicares
outpatient prospective payment system, Medicare paid for partial
hospitalization services on the basis of reasonable
cost, subject to coinsurance of 20 percent of the
providers charges. Medicare made interim payments to a
provider based on an estimate of the providers cost, and
then made a final settlement based on an annual cost report
filed by the provider. Providers claimed fees paid to PMR as
part of their allowable costs for serving Medicare covered
patients. Under the applicable Medicare principles of
reimbursement, PMRs fees should be allowed if they are
reasonable and relate to covered services.
Medicares policy directs that generally the reasonableness
of PMRs fees should be evaluated by the market value of
the services furnished by PMR. PMR believes that its fees are
and have been fair market value for the services furnished.
Nevertheless, there have been occasions when Medicare has
disallowed a portion of PMRs fees, and that may occur in
the future as Medicare conducts audits of cost reports for
periods through July 31, 2000 (or such time as cost
reimbursement ends for hospital outpatient services). In some
instances, PMR has a contractual obligation to repay a provider
the amount of PMRs fees, which are disallowed.



| |                                                 
| | ------------------------------------------------
| | Medicare Criteria for
    Provider-Based Sites

In order for Medicare to cover partial
hospitalization services, the services must be furnished by a
hospital or a CMHC. In many instances, PMR has managed
Outpatient Programs for a hospital or CMHC in which the program
has been conducted away from the main campus of the provider.
Such

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services have been covered by Medicare as the
providers services on the basis that the site where the
services were furnished was a provider-based site.
In 1996, Medicare published a policy that defined more narrowly
than prior practice what was a provider-based site.
In April 2000, Medicare published a final regulation that
further defined what is a provider-based site. As a
result of the Benefits Improvement and Protection Act of 2000,
facilities treated as provider-based as of October 1, 2000
shall continue to be treated as provider-based until
October 1, 2002, the effective date of the April 2000 final
regulation. In addition, the April 2000 final regulation
specifies instances when there may be retrospective recoveries
of amounts previously paid by Medicare if a determination is
made that a site was not provider-based. On
May 9, 2002, CMS published a rule that proposes to further
extend the grandfathering of provider-based
entities. Under the proposed rule, a facility will continue to
be treated as provider based until the start of the
hospitals first cost reporting period beginning on or
after July 1, 2003. The proposed rule also specifies that
in addition to possible recoupment of amounts previously paid,
future payments may be adjusted to approximate the amounts that
would be paid for the same services furnished by a freestanding
facility. PMR is unable to predict when or if the provisions of
this proposed rule will be adopted in final form.


PMR believes that the sites it presently manages
are provider-based within the meaning of the April 2000 final
regulation, and PMR expects that its provider customers will
obtain, or have obtained, determinations of such provider-based
status from Medicare. However, it is possible that such sites
will not obtain approval as provider-based sites or will lose
such approval in the future. In such instances, there may be a
loss of Medicare coverage for services furnished at that site
and there may be a retrospective recovery by Medicare.

There also is a risk that Medicare will determine
that sites where PMR furnished Outpatient Program Management
Services in the past were not provider-based. Such a
determination would not necessarily trigger a demand for
repayment from the provider because there is a good
faith exception to demanding recoupment of amounts paid if
the site: (i) was held out to the public as part of the
provider; (ii) was part of the providers licensed
premises (if licensure was required); (iii) the provider
billed Medicare a facility charge; and (iv) the physicians
practicing at the site properly indicated the site of service on
their bills to Medicare for professional services. PMR believes,
but cannot assure, that the sites PMR managed met the good faith
exception for retrospective recoveries. If a site managed by PMR
in the past were found not to have been provider-based and the
good faith exception not met, Medicare would demand
repayment in full for the amounts it had paid for partial
hospitalization services for all periods, which are subject to
reopening at the time of the determination (generally the 5
preceding years, but it could be more in individual
circumstances). If such demands were made upon providers that
had contracted with PMR, it is possible that the providers would
seek indemnity or damages from PMR. In some instances, it is
possible that a court would interpret PMRs contract with a
provider as requiring PMR to indemnify the provider asserting
such a claim.



| |                                                               
| | --------------------------------------------------------------
| | Compliance With Medicaid Regulations and
    Potential Changes

PMR cannot predict the extent or scope of changes
which may occur in the ways in which state Medicaid programs
contract for and deliver services to Medicaid recipients. All
Medicaid funding is generally conditioned upon financial
appropriations to state Medicaid agencies by the state
legislatures and there are political pressures on such
legislatures in terms of controlling and reducing such
appropriations. With respect to PMRs Case Management
Programs reimbursed by behavioral health organizations, the
overall trend is generally to impose lower reimbursement rates
including incentives to assume risk not only by licensed managed
care organizations with whom state Medicaid agencies contract,
but by subcontracted providers, such as PMR. Consequently, any
significant reduction in funding for Medicaid programs could
have a material adverse effect on PMRs business, financial
condition and results of operations.

Some states may adopt substantial health care
reform measures which could modify the manner in which all
health services are delivered and reimbursed, especially with
respect to Medicaid recipients and with respect to other
individuals funded by public resources. The reduction in other
public resources could have an impact upon the delivery of
services to Medicaid recipients.

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| |                                   
| | ----------------------------------
| | Specific Licensing of
    Programs

PMRs Outpatient Programs are operated as
outpatient departments of providers, thus subjecting such
programs to regulation by federal, state and local agencies.
These regulations govern licensure and conduct of operations at
the facilities, review of construction plans, addition of
services and facilities and audit of cost allocations, cost
reporting and capital expenditures. The facilities occupied by
the programs must comply with the requirements of municipal
building, health and fire codes. Inclusion of hospital space
where the Outpatient Programs are furnished within the
providers license, when required under applicable state
laws, is a prerequisite to participation in the Medicare
programs. Additionally, the providers premises and
programs are subject to periodic inspection and recertification.



| |                                                                          
| | -------------------------------------------------------------------------
| | False Claims Investigations and Enforcement
    of Health Care Fraud Laws

The OIG, as well as other federal, state, and
private organizations, are aggressively enforcing their
interpretation of Medicare and Medicaid laws and policies, and
other applicable standards. Often in such enforcement efforts,
the government has relied on the Federal Civil False Claims Act
(False Claims Act). Under that law, if the
government prevails in a case, it is entitled to treble damages
plus not less than $5,000 nor more than $11,000 per claim, plus
reasonable attorney fees and costs. In addition, a person found
to have submitted false claims, or who caused the submission of
false claims, can be excluded from governmental health care
programs including Medicare and Medicaid. If a provider
contracting with PMR were excluded from governmental health
programs, no services furnished by that provider would be
covered by any governmental health program. PMR could also be
excluded from government health care programs if there were a
finding that PMR had violated its obligations to those programs.
If PMR were excluded, providers would as a practical matter,
cease contracting for PMRs Outpatient Program Management
Services. If PMR were excluded from governmental health
programs, providers contracting with PMR could not be reimbursed
for amounts paid to PMR.

To prevail in a False Claims Act case, the
government need show only that a person submitted, or
caused to be submitted, incorrect claims with
reckless disregard or in deliberate
ignorance of the applicable Medicare law. The government
does not have to prove that the claims were submitted with the
intent to defraud a governmental or private health care payor.
The qui tam provisions of the False Claims Act permit
individuals also to bring suits under the False Claims Act. The
incentive for an individual to do so is that he or she will
usually be entitled to approximately 15% to 30% of any ultimate
recovery. Under the False Claims Act, the Department of Justice
has successfully made demands on thousands of providers to
settle alleged improper billing disputes at double alleged
damages or more. Although PMR does not bill governmental
programs directly, PMR could possibly be liable under the False
Claims Act to the extent that PMR is found to have
caused false claims to have been presented.

There are many other civil and criminal statutes
at the federal and state levels that may penalize conduct
related to submitting false claims for health care services. The
penalties under many of those statutes are severe, and the
government often need not prove intent to defraud in order to
prevail. Management believes that PMR is in material compliance
with applicable regulatory and industry standards. However, in
light of the complexity of the policies governing governmental
health care programs together with changing and uncertain
interpretations of those policies, it is impossible to be
absolutely assured that the government (or a qui tam relator in
the name of the government) will not assert that some of
PMRs conduct, or conduct by one of PMRs customers,
has given rise to a potentially large liability.

In the past, there have been occasions when
Medicare fiscal intermediaries have denied coverage for all or
substantially all of the claims submitted by the providers where
PMR had a management or administrative services contract. Such
denials have occurred even though a physician has certified that
the Outpatient Program services were medically necessary.
Notwithstanding PMRs ongoing efforts to assure that the
Outpatient Program services furnished under contract are
consistent with PMRs understanding of the Medicare
coverage criteria, it is possible that there will be future
occasions when a substantial number of services furnished at a
site managed by PMR will be denied coverage. The Health
Insurance Portability

7



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##### Table of Contents



and Accountability Act of 1996
(HIPAA) grants the U.S. Department of Health
and Human Services broad authority to impose civil monetary
penalties on providers for certain activities. Among those
activities are the repeated submission of claims for services
which are not medically necessary. If there were again to be
occasions when a Medicare fiscal intermediary denied a large
number of claims for a site managed by us, it is possible that
the government would seek sanctions from the provider and
possibly from PMR. While PMR believes that it would be
inappropriate for the government to seek such sanctions for
services for which the coverage criteria are interpreted
differently at different times and which have been ordered by a
physician, it is not clear at this time how the government will
apply this new authority.




| |                       
| | ----------------------
| | Anti-Remuneration Laws

Medicare and Medicaid law prohibits an entity
from paying or receiving, subject to certain exceptions and
safe harbors, any remuneration to induce the
referral of Medicare or Medicaid beneficiaries, or the purchase
or arranging for or recommending of the purchase of items or
services that may receive payment under Medicare, Medicaid, or
other federally-funded health care programs. Several states have
similar laws, which are not limited to services for which
Medicare or Medicaid payments are made. Sanctions for violating
these federal and state anti-remuneration laws may include
imprisonment, criminal and civil fines, and exclusion from
participation in Medicare, Medicaid or other applicable programs.

The courts, OIG and administrative agencies
interpret the federal anti-remuneration law broadly. Because of
the federal statutes broad scope, the regulations
establish certain safe harbors from liability. Some of
PMRs practices do not satisfy all of the requirements
necessary to fall under the applicable safe harbor. A practice
that does not fall under a safe harbor, although not necessarily
unlawful, may be subject to scrutiny and challenge. PMR believes
that it is in substantial compliance with the legal requirements
imposed by these laws and regulations, but there can be no
assurance that PMR will not be subject to scrutiny or challenge
under such laws or regulations. Such scrutiny or challenge may
have a material adverse effect on PMRs business, financial
condition and results of operations.



| |                                            
| | -------------------------------------------
| | Privacy and Confidentiality
    Legislation

Most of PMRs activities require PMR to
receive or use confidential medical information about individual
patients. In addition, PMR has used aggregated unidentified
patient data for research and analysis purposes and with respect
to PMRs InfoScriber business. Federal and some state
legislation restrict the use and disclosure of confidential
medical information and the fact of treatment. There are
specific requirements permitting disclosure, but inadequate or
incorrect disclosure, even if inadvertent or negligent, can
trigger substantial criminal and other penalties. To date, no
such legislation has been enacted that adversely impacts
PMRs ability to provide its services.

HIPAA requires the Department of Health and Human
Services (HHS) to promulgate standards for health
information privacy and security, as well as develop standards
for electronic health transactions. These HIPAA rules, referred
to collectively as Administrative Simplification, apply only to
those entities defined as covered entities (health plans,
clearinghouses, and those providers who transmit any
health information in electronic form in connection with a
standard transaction). HHS has published final regulations to
protect the privacy of individually identifiable health
information, setting forth the rights of individuals who are the
subject of protected health information, and establishing the
permitted uses and disclosures of personally identifiable health
information. The effective date of the privacy regulations for
compliance purposes is April 14, 2003. HHS has also
published standards for electronic transactions which are
effective for compliance purposes on October 16, 2002. This
compliance date may be extended by one year to October 16,
2003, if the provider files a compliance extension form with the
Centers for Medicare and Medicaid Services (CMS) by
October 15, 2002. Additionally, HHS has issued a Notice of
Proposed Rulemaking titled Security and Electronic
Signature Standards to protect the security of health
information when it is electronically maintained or transmitted.
It is unknown at this time when these security regulations will
be finalized.

8



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##### Table of Contents



In connection with case management services PMR
may electronically conduct activities, such as transmitting
health care claims or equivalent encounter data, that may be
classified as standard transactions under HIPAA. Therefore, PMR
may need to convert its systems to adapt to the required HIPAA
format to accommodate any covered entity clients that are
directly subject to HIPAA rules and regulations. Under HIPAA,
covered entities are obligated to enter into contractual
agreements with any other entity to which they disclose
protected health information and obligate such entities to
protect the privacy and security of health information.
Accessing the protected health information of its covered entity
clients may make PMR the business associates of covered
entities, or it is feasible that in certain circumstances PMR
and/or its wholly-owned subsidiaries may be considered covered
entities themselves. In either case, these HIPAA agreements may
obligate PMR to install certain technical security protections
and to establish new policies and procedures to insure the
confidentiality and integrity of health information.

The HHS Office of Civil Rights is the enforcement
agency for HIPAA Administrative Simplification and may assess
civil penalties which range from $100 to $25,000 per year for
each violation of an identical requirement or prohibition of the
standards, to civil and criminal penalties of up to $250,000 and
10 years of prison for wrongful disclosure of health
information for commercial advantage, personal gain, or
malicious harm. Additionally, there are various state laws
governing the protection of medical information, including
certain statutes which may provide enhanced protections for
sensitive health information, such as mental health records.
HIPAAs civil and criminal sanctions apply only to covered
entities. To the extent that PMR is not considered a covered
entity itself, PMRs HIPAA liability under Administrative
Simplification would be limited to any contractual agreements
PMR makes.

The costs of conforming PMRs systems to
provide the privacy, security, and transaction standard
conformance required by HIPAA Administrative Simplification and
PMRs covered entity customers may require substantial cost
investment in PMRs software, computers, policies and
procedures, employee training, and other goods and services.



| |                                    
| | -----------------------------------
| | Unlicensed Practice of
    Medicine

Many states prohibit physicians from splitting
fees with non-physicians and prohibit non-physician entities
from practicing medicine. These laws vary from state to state
and are interpreted by courts and regulatory agencies with broad
discretion. PMR believes that its contractual arrangements do
not violate these laws. PMRs contractual arrangement and
services, like InfoScriber, with some providers could possibly
be challenged on the basis of being an alleged unlicensed
practice of medicine, or the enforceability of provisions in
that arrangement may be limited. In the event a regulatory
authority limits or prohibits PMR or an affiliate from
conducting PMRs business, PMRs contractual
arrangements may require organizational modification or
restructuring.

Insurance

Mental health care and information services are
always subject to the risk of liability. In recent years,
participants in the mental health care industry have become
subject to an increasing number of lawsuits that allege
malpractice or other related legal theories. These lawsuits
often involve large claims and incur significant defense costs.
PMR maintains liability insurance intended to cover such claims,
which is renewable annually. PMR believes that its insurance
coverage conforms to industry standards. There are no
assurances, however, that PMRs insurance will cover all
claims (e.g., claims for punitive damages), or that claims
in excess of PMRs insurance coverage will not arise. A
successful lawsuit against PMR that is not covered by, or is in
excess of, PMRs insurance coverage may have a material
adverse effect on PMRs business, financial condition and
results of operations. There are no assurances that PMR will be
able to obtain liability insurance coverage on commercially
reasonable terms in the future or that such insurance will
provide adequate coverage against potential claims.

9



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##### Table of Contents



Recent Developments

On May 6, 2002, PMR, PMR Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary
of PMR, and Psychiatric Solutions, Inc., a Delaware corporation,
executed an Agreement and Plan of Merger, which was subsequently
amended by Amendment No. 1 to Agreement and Plan of Merger
dated as of June 10, 2002 and Amendment No. 2 to
Agreement and Plan of Merger dated as of July 9, 2002 (the
Merger Agreement). The Merger Agreement is on file
with the Securities and Exchange Commission as an exhibit to
Amendment No. 1 to PMRs Registration Statement on
Form S-4 filed by PMR on July 11, 2002.

At the effective time of the merger, PMR
Acquisition Corporation, a newly-formed, wholly-owned subsidiary
of PMR, will merge with and into Psychiatric Solutions.
Psychiatric Solutions will be the surviving corporation in the
merger, and will become a wholly-owned subsidiary of PMR. In
exchange for their outstanding shares of common stock or
preferred stock in Psychiatric Solutions, stockholders of
Psychiatric Solutions will receive newly-issued shares of PMR
common stock. Options to acquire Psychiatric Solutions common
stock will be converted into options to purchase shares of PMR
common stock based on the common stock exchange ratio used in
the merger. Warrants of Psychiatric Solutions will enable the
holders to exercise these securities into shares of PMR common
stock. After giving effect to the exercise of all outstanding
options and warrants of Psychiatric Solutions following the
merger, Psychiatric Solutions stockholders and PMR stockholders
will own approximately 72% and 28% of the common stock of PMR,
respectively, upon completion of the merger.

The closing of the merger will occur as soon as
practical after all conditions to the merger, other than those
conditions that by their nature are to be satisfied at the
closing, have been satisfied or waived, unless we agree on
another time. As early as practicable on the closing date of the
merger, we will file a certificate of merger with the Secretary
of State of Delaware. The merger will become effective at or
about the time we file the certificate of merger. We currently
anticipate that we will complete the merger shortly after the
PMR and Psychiatric Solutions special stockholder meetings,
assuming our respective stockholders approve the merger and the
other matters contemplated by the merger agreement, and that all
other conditions to the merger have been satisfied or waived.
The merger is conditioned upon approval by PMRs
stockholders of an amendment to PMRs charter to
(i) increase the number of authorized shares of PMR common
stock, (ii) effect a 1-for-3 reverse stock split, and
(iii) change the name of PMR to Psychiatric
Solutions, Inc. We will file the certificate of amendment
to PMRs charter immediately before we file the certificate
of merger.




Item 2.     Properties

PMR owns no real property. PMR currently
subleases approximately 3,500 square feet comprised of a
lease for its corporate headquarters at 1565 Hotel Circle South,
2nd Floor, San Diego, California expiring on September 30,
2002, with an option to renew for six months. PMR carries
property and liability insurance as required by its sublessors.
PMR believes that its facilities are adequate for its short-term
needs.




Item 3.     Legal
Proceedings

From time to time, PMR has been involved in
routine litigation incidental to the conduct of its business.
There are currently no material pending litigation proceedings
to which PMR is a party.




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

There were no matters submitted to a vote of
security holders during the fourth quarter of the fiscal year
ended April 30, 2002.

10



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##### Table of Contents






PART II




Item 5.     Market
for PMRs Common Equity and Related Stockholder
Matters

PMRs common stock is listed on the Nasdaq
National Market under the symbol PMRP.

The following table sets forth, for fiscal
quarters indicated, the high and low sales prices for a share of
PMR common stock as reported on the Nasdaq National Market.

|                                                      |                |      |   |      |  |  |   |      | 
|----------------------------------------------------- | -------------- | ---- | - | ---- |  |  | - | ---- | 
|                                                      |                | High |   | Low 
|                                                      |                |      |   |     
|Quarters for the fiscal year ended April 30,
    2002 |                |      |   |      |  |  |   |     
|                                                      | First Quarter  |      | $ | 1.75 |  |  | $ | 1.21 | 
|                                                      | Second Quarter |      | $ | 2.03 |  |  | $ | 1.23 | 
|                                                      | Third Quarter  |      | $ | 2.14 |  |  | $ | 1.46 | 
|                                                      | Fourth Quarter |      | $ | 2.56 |  |  | $ | 1.83 | 
|Quarters for the fiscal year ended April 30,
    2001 |                |      |   |      |  |  |   |     
|                                                      | First Quarter  |      | $ | 4.00 |  |  | $ | 2.56 | 
|                                                      | Second Quarter |      | $ | 2.84 |  |  | $ | 2.00 | 
|                                                      | Third Quarter  |      | $ | 3.00 |  |  | $ | 1.13 | 
|                                                      | Fourth Quarter |      | $ | 1.97 |  |  | $ | 1.31 | 

As of July 26, 2002, there were
102 holders of record of PMRs common stock.

In the third quarter of fiscal year 2000,
PMRs board of directors declared a special dividend of
$1.50 per share of common stock payable to stockholders of
record on January 26, 2000. The total amount of the
dividend was approximately $10.6 million. In the third
quarter of fiscal year 2001, PMRs board of directors
declared a special cash dividend of $1.00 per share of common
stock payable on December 29, 2000 to stockholders of
record on December 21, 2000. The total amount of the
dividend was approximately $7.3 million. On May 6,
2002, PMRs board of directors declared a special cash
dividend of $1.70 per share of common stock payable on
May 24, 2002 to the stockholders of record as of the close
of business on May 17, 2002. The total amount of the
dividend was approximately $12.3 million.

PMRs board may declare an additional
dividend prior to the closing of the merger with Psychiatric
Solutions, subject to the closing condition in the merger
agreement requiring PMR to have on hand a minimum of
$5.05 million in cash and cash equivalents at the effective
time.

11



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##### Table of Contents






Item 6.     Selected
Financial Data

The following table sets forth selected
historical consolidated financial data of PMR as of the dates
and for the periods indicated. The historical consolidated
financial data for each of the years ended April 30, 2002,
2001, 2000, 1999 and 1998 are derived from the audited
consolidated financial statements of PMR and its predecessors.
The following data should be read in conjunction with
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, the
historical financial statements of PMR, and the related notes
thereto contained elsewhere in this document.

|                                                         |                                                                            |                                          |   |        |      |      |   |         |       |      |   |         |       |   |   |        |       |   |   |        |      | 
|-------------------------------------------------------- | -------------------------------------------------------------------------- | ---------------------------------------- | - | ------ | ---- | ---- | - | ------- | ----- | ---- | - | ------- | ----- | - | - | ------ | ----- | - | - | ------ | ---- | 
|                                                         |                                                                            |                                         
|                                                         |                                                                            | Fiscal Year Ended April 30,             
|                                                         |                                                                            |                                         
|                                                         |                                                                            | 2002                                     |   | 2001   |      | 2000 |   | 1999    |       | 1998
|                                                         |                                                                            |                                          |   |        |      |      |   |         |       |     
|                                                         |                                                                            |                                         
|                                                         |                                                                            | (In thousands, except per share amounts)
|Historical Consolidated Statements of Earnings
    Data: |                                                                            |                                          |   |        |      |      |   |         |       |      |   |         |       |   |   |        |       |   |   |       
|                                                         | Revenues from continuing operations(1)                                     |                                          | $ | 20,747 |      |      | $ | 17,682  |       |      | $ | 42,510  |       |   | $ | 55,823 |       |   | $ | 67,524 |     
|                                                         | Net income (loss) from continuing
    operations(3)(4)(5)                  |                                          |   | 5,821  |      |      |   | (10,770 | )     |      |   | (11,667 | )     |   |   | (46    | )     |   |   | 1,788  |     
|                                                         | Net income (loss) from discontinued
    operations, net of gain on sale(2) |                                          |   |       |      |      |   |        |       |      |   | 664     |       |   |   | (401   | )     |   |   |       |     
|                                                         | Net income (loss)(6)                                                       |                                          |   | 5,821  |      |      |   | (10,770 | )     |      |   | (11,003 | )     |   |   | (447   | )     |   |   | 1,788  |     
|                                                         | Net income (loss) per share from continuing
    operations:(7)             |                                          |   |        |      |      |   |         |       |      |   |         |       |   |   |        |       |   |   |        |     
|                                                         |                                                                            | Basic                                    |   |        | 0.81 |      |   |         | (1.52 | )    |   |         | (1.77 | ) |   |        | (0.01 | ) |   |        | 0.30 | 
|                                                         |                                                                            | Diluted                                  |   |        | 0.81 |      |   |         | (1.52 | )    |   |         | (1.77 | ) |   |        | (0.01 | ) |   |        | 0.27 | 
|Historical Consolidated Balance Sheets Data:             |                                                                            |                                          |   |        |      |      |   |         |       |      |   |         |       |   |   |        |       |   |   |       
|                                                         | Working capital(8)                                                         |                                          | $ | 20,824 |      |      | $ | 15,430  |       |      | $ | 29,926  |       |   | $ | 52,233 |       |   | $ | 52,150 |     
|                                                         | Total assets                                                               |                                          |   | 24,802 |      |      |   | 21,359  |       |      |   | 40,736  |       |   |   | 67,052 |       |   |   | 70,449 |     
|                                                         | Long-term debt                                                             |                                          |   |       |      |      |   | 81      |       |      |   | 196     |       |   |   | 294    |       |   |   | 392    |     
|                                                         | Total liabilities                                                          |                                          |   | 5,427  |      |      |   | 7,892   |       |      |   | 9,734   |       |   |   | 14,401 |       |   |   | 16,573 |     
|                                                         | Stockholders equity(8)(9)                                                 |                                          |   | 19,375 |      |      |   | 13,467  |       |      |   | 31,002  |       |   |   | 52,651 |       |   |   | 53,876 |     



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During fiscal year 2002, PMR recognized a
    reduction of approximately $1.7 million in contract
    settlement reserves due to estimated final settlement in
    provider cost reports. This reduction in contract settlement
    reserve was recorded as an increase in net revenues for the
    period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(2) | During fiscal year 2000, PMR sold substantially
    all of its interest in Stadt Solutions LLC (Stadt
    Solutions, a majority owned subsidiary partially-owned by
    Stadt Holdings (formerly Stadtlander Drug Distribution Co.,
    Inc.). For fiscal years 2000 and 1999, PMRs revenues
    related to this discontinued business segment, which commenced
    in July 1998, were approximately $27 million and
    $30 million, respectively.                                                                                                                                                                                                                                                                                                                             
|   
|(3) | In fiscal year 1999, PMR wrote-off costs after
    income taxes of approximately $951,000 relating to a terminated
    acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(4) | In fiscal years 2002 and 2001, PMR incurred
    non-cash stock compensation expense of approximately $155,000
    and $95,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(5) | In fiscal year 2002, PMR recovered
    $3.4 million in provision for doubtful accounts, which was
    primarily due to the collection of approximately
    $1.9 million of previously reserved accounts receivable
    relating to closed outpatient programs and a change in estimate
    on the collectability of certain other related receivables.                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(6) | In fiscal year 2002, PMR recognized
    $3.2 million in tax benefit resulting primarily from the
    economic recovery stimulus package approved by the 107th
    Congress of the United States of America, which allowed PMR to
    carryback the losses for a five-year period versus a two-year
    period, and various state tax refunds. In fiscal year 2001, PMR
    recognized an income tax benefit of approximately $929,000
    resulting from federal and various state tax refunds for the
    fiscal year ended April 30, 2000. In the fourth quarter of
    fiscal year 2000, PMR established a tax asset valuation
    allowance of $5.9 million and reversed a current year net
    tax benefit of approximately $1.5 million to reserve fully
    for its deferred

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | tax assets in conformity with SFAS No. 109,
    Accounting for Income Taxes. The reserve resulted in a total
    non-cash income tax of $7.4 million for the fiscal year
    ended April 30, 2000.                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(7) | Does not give effect to the proposed 1-for-3
    reverse stock split.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(8) | In the third quarter of fiscal year 2001,
    PMRs Board of Directors declared a special cash dividend
    of $1.00 per share of common stock payable on December 29,
    2000 to stockholders of record on December 21, 2000. The
    total amount of the dividend was approximately
    $7.3 million. In the third quarter of fiscal year 2000,
    PMRs Board of Directors declared a special cash dividend
    of $1.50 per share of common stock payable on January 31,
    2000 to stockholders of record on January 26, 2000. The
    total amount of the dividend was approximately
    $10.6 million.
|   
|(9) | PMRs Stockholders Equity includes
    notes receivable from employees and officers of approximately
    $373,000 at April 30, 2002 and $539,000 at April 30,
    2001. Also included are unrealized gains (losses) on
    investments of approximately $32,000 at April 30, 2002 and
    $50,000 at April 30, 2001 and treasury shares of
    approximately $196,000 at April 30, 2002 and $28,000 at
    April 30, 2001.                                                                                                                                                                                     






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


The following discussion should be read in
conjunction with the more detailed information and consolidated
financial statements and accompanying notes, as well as the
other financial information appearing elsewhere in this
document. Except for historical information, the following
discussion contains forward-looking statements that involve
risks and uncertainties. PMRs actual results could differ
materially from those discussed herein. Factors that could cause
or contribute to such differences include, but are not limited
to, those discussed in  Liquidity and Capital
Resources, as well as those discussed elsewhere in this
document.

Overview

Management of PMR has undertaken significant
changes to its business and operations during fiscal year 2002
including terminating its InfoScriber operations and reducing
corporate overhead. As a direct result of these changes plus
$3.4 million in recoveries of certain accounts receivable
previously provided as doubtful accounts and $3.2 million
in tax benefit resulting primarily from the economic recovery
stimulus package approved by the 107th Congress of the United
States of America, which allowed PMR to carryback the losses for
a five-year period versus a two-year period, PMR significantly
improved results from operations and its financial position for
the fiscal year ended April 30, 2002 versus 2001. The
recovery of provision for doubtful accounts was primarily due to
the collection of approximately $1.9 million of previously
reserved accounts receivable relating to closed outpatient
programs and a change in estimate on the collectability of
certain other related receivables. PMR had approximately
$5.8 million in net income during the fiscal year ended
April 30, 2002 versus a loss of approximately
$10.8 million for the same period in the prior year.

During fiscal year 2002, PMR continued to focus
on maximizing cash flow. At April 30, 2002, PMRs cash
and short-term investments totaled $22.6 million, as compared to
$17.8 million at April 30, 2001. The increase in cash
and short-term investments resulted primarily from the
approximately $1.9 million collection of receivables from
previously closed Outpatient Programs, a $2.6 million
income tax refund, plus cash flow from operations.

On July 30, 2001, PMR agreed to license the
InfoScriber application to Conundrum. Conundrum will have the
opportunity to grow the InfoScriber application in the
behavioral health and social service areas while PMRs
InfoScriber subsidiary will be eligible to receive royalties for
a period of five years. As of April 30, 2002, no royalties
have been earned by PMR. Other than some transition services
that were already reimbursed by Conundrum, and certain
termination costs already accounted for as part of PMRs
special charges for the fiscal year ended April 30, 2002,
PMR does not anticipate incurring any further costs associated
with the InfoScriber subsidiary.

On February 15, 2001, PMR announced its
intention to explore strategic alternatives to maximize
stockholder value and currently retains Raymond James and
Associates, Inc. to assist PMR in this process.

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PMR also engaged the firm of McGettigan, Wick
& Co. to assist in an advisory role. A principal of
McGettigan, Wick & Co. serves on PMRs Board of
Directors. On May 6, 2002, PMR announced the execution of a
definitive merger agreement dated May 6, 2002, providing
for the merger of a wholly-owned subsidiary of PMR with and into
Psychiatric Solutions, with Psychiatric Solutions being the
surviving corporation and becoming a wholly-owned subsidiary of
PMR. In connection with the merger, the stockholders of
Psychiatric Solutions will exchange all preferred stock and
common stock of Psychiatric Solutions for shares of PMR common
stock, and outstanding options and warrants to acquire the
common stock of Psychiatric Solutions will convert into the
right to acquire the common stock of PMR. After giving effect to
the exercise of all outstanding options and warrants of
Psychiatric Solutions following the merger, stockholders of
Psychiatric Solutions will own approximately 72% of the combined
company and PMR stockholders will own approximately 28% of the
common stock of PMR upon completion of the merger. The
transaction will be subject to PMR stockholder approval,
regulatory approval, and other customary closing conditions. In
connection with and as a condition of closing, PMR has also
proposed an amendment to its charter in order to effect a
proposed 1-for-3 reverse stock split. The reverse stock split
will be subject to PMR stockholder approval.


Sources of Revenue

Outpatient
Programs

PMR continues to manage or administer two
outpatient programs with one acute care hospital. PMR does not
intend to continue to devote resources to develop additional
outpatient programs. Prior to March 8, 2002, some of
PMRs contracts with the acute care hospital provided for
payment of fees by the hospital based on the services rendered
by PMR. Effective March 8, 2002, the payment of fees was
converted to a fixed amount per month. The hospital maintains
responsibility for substantially all direct program costs under
this contract.

Under the terms of PMRs terminated or
expired contracts, PMR is required to indemnify the providers
for some or all of PMRs fees if the fees were disallowed
by Medicare or its fiscal intermediaries, or if the claims
associated with PMRs fees for services rendered to
patients were denied. In some instances, PMR is required to
indemnify the hospital for certain of the hospitals direct
costs if the claims associated with PMRs fees for services
rendered to patients were denied. As of April 30, 2002, PMR
had recorded $2.0 million in contract settlement reserves to
provide for an estimate of possible amounts ultimately owed to
its provider customers resulting from disallowance of costs by
Medicare and Medicare cost report settlement adjustments. Such
reserves are classified as long-term liabilities because
ultimate determination of substantially all of the potential
contract disallowances, if any, is not anticipated to occur
during the current fiscal year. The $2.0 million in
contract settlement reserves at April 30, 2002, is net of a
$1.7 million reduction in contract settlement reserves
during fiscal year 2002 due to estimated final settlement in
Provider cost reports. This reduction in contract settlement
reserve was recorded as an increase to net revenues for the
period.

Case
Management Programs

For its case management programs in Tennessee,
PMR receives a monthly case rate fee from the managed care
consortium responsible for managing the Tennessee TennCare
Partners State Medicaid Managed Care Program
(TennCare). Revenue under the TennCare program is
recognized in the period in which the related service is to be
provided and may fluctuate based on rates set by the managed
care consortium as well as level of patient enrollment.

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Results of Continuing Operations

The following table sets forth, for the periods
indicated, the percentage of revenue represented by the
respective financial items:

|                                                                 |  |                       |       |      |  |      |       |    |  |  |       |   
|---------------------------------------------------------------- |  | --------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                                 |  |                      
|                                                                 |  | Years Ended April 30,
|                                                                 |  |                      
|                                                                 |  | 2002                  |       | 2001 |  | 2000
|                                                                 |  |                       |       |      |  |     
|Revenue from continuing operations                               |  |                       | 100.0 | %    |  |      | 100.0 | %  |  |  | 100.0 | % 
|                                                                 |  |                       |       |      |  |      |       |    |  |  |       |   
|Direct operating expenses                                        |  |                       | 78.2  | %    |  |      | 86.5  | %  |  |  | 81.5  | % 
|Research and development                                         |  |                       | 1.0   | %    |  |      | 5.6   | %  |  |  | 0.0   | % 
|Marketing, general and administrative                            |  |                       | 18.8  | %    |  |      | 46.9  | %  |  |  | 20.1  | % 
|Provision for (recovery of) doubtful accounts                    |  |                       | (15.4 | )%   |  |      | 4.1   | %  |  |  | 12.1  | % 
|Depreciation and amortization                                    |  |                       | 2.6   | %    |  |      | 7.7   | %  |  |  | 2.4   | % 
|Software development amortization                                |  |                       | 0.0   | %    |  |      | 15.6  | %  |  |  | 0.0   | % 
|Special charge                                                   |  |                       | 5.2   | %    |  |      | 7.0   | %  |  |  | 3.4   | % 
|                                                                 |  |                       |       |      |  |      |       |    |  |  |       |   
|Total expenses                                                   |  |                       | 90.4  | %    |  |      | 173.4 | %  |  |  | 119.5 | % 
|                                                                 |  |                       |       |      |  |      |       |    |  |  |       |   
|Interest expense                                                 |  |                       | (0.1  | )%   |  |      | (0.1  | )% |  |  | (0.1  | )%
|Interest income                                                  |  |                       | 3.0   | %    |  |      | 7.4   | %  |  |  | 3.5   | % 
|Income (loss) from continuing operations
    before income taxes |  |                       | 12.5  | %    |  |      | (66.1 | )% |  |  | (16.1 | )%
|Income tax (benefit) expense                                     |  |                       | (15.6 | )%   |  |      | (5.3  | )% |  |  | 11.5  | % 
|                                                                 |  |                       |       |      |  |      |       |    |  |  |       |   
|Net income (loss) from continuing operations                     |  |                       | 28.1  | %    |  |      | (60.8 | )% |  |  | (27.6 | )%
|                                                                 |  |                       |       |      |  |      |       |    |  |  |       |   

Fiscal Year Ended April 30, 2002 Compared
to Fiscal Year Ended April 30, 2001

Revenues.Revenue
from continuing operations increased from $17.7 million for
the fiscal year ended April 30, 2001 to $20.7 million
for the fiscal year ended April 30, 2002, an increase of
$3.0 million, or 16.9%. The increase was primarily due to a
$3.2 million increase in Case Management Program revenues
and a $1.7 million reduction in contract settlement
reserves during fiscal year 2002 due to estimated final
settlement in Provider cost reports, offset by a
$1.9 million decrease in Outpatient Program revenues due to
the termination of numerous programs in fiscal year 2001.

Direct Operating
Expenses.Direct operating expenses
from continuing operations consist of costs incurred at program
sites and costs associated with field management responsible for
administering the programs. Direct operating expenses increased
from $15.3 million for the fiscal year ended April 30,
2001 to $16.2 million for the fiscal year ended
April 30, 2002, an increase of $900,000 or 5.9%. As a
percentage of revenues, however, direct operating expenses were
78.2%, down from 86.5% for the fiscal year ended April 30,
2001 as a result of better operating margins during fiscal year
2002.

Research and
Development.PMR stopped incurring
research and development costs with the termination of the
InfoScriber operations in July 2001.

Marketing, General and
Administrative.Marketing, general and
administrative expenses decreased from $8.3 million for the
fiscal year ended April 30, 2001 to $3.9 million for
the fiscal year ended April 30, 2002, a decrease of
$4.4 million or (53%). The decrease was primarily due to
the reduction in corporate overhead costs resulting from the
termination of the InfoScriber operations.

Recovery of Provision for Doubtful
Accounts.During the fiscal year ended
April 30, 2002, PMR recovered $3.4 million in
provision for doubtful accounts. The recovery was primarily due
to the collection of approximately $1.9 million of
previously reserved accounts receivable relating to closed
outpatient programs and a change in estimate on the
collectability of certain other related receivables.

Depreciation and
Amortization.Depreciation and
amortization expense decreased from $1.4 million for the
fiscal year ended April 30, 2001 to approximately $500,000
for the fiscal year ended April 30, 2002,

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a decrease of $900,000 or (64.3%). The decrease
was primarily due to the disposal and write-off of assets in
2001 resulting from contract terminations or expirations.


Special Charge.Special charges of approximately $1.1 million were recorded
in fiscal year 2002 for lease termination costs, severance
costs, and write-off of various assets primarily resulting from
the termination of the InfoScriber operations and the associated
corporate overhead reductions. The accruals for special charges
included in the liabilities sections in the consolidated balance
sheets at April 30, 2002 and 2001 were $203,000 and
$265,000, respectively.

Net Interest Income.Interest income, net of interest expense, decreased from
$1.3 million for the fiscal year ended April 30, 2001
to $600,000 for the fiscal year ended April 30, 2002, a
decrease of $700,000 or (53.8%). The decrease was primarily due
to the lower interest rates and lower average balances in
interest-bearing assets during fiscal year 2002 versus 2001. PMR
paid cash dividends of approximately $7.3 million in
December 2000.

Income Tax (Benefit)
Expense.For the fiscal year ended
April 30, 2002, PMR recognized total income tax benefit of
$3.2 million primarily resulting from the economic recovery
stimulus package approved by the 107th Congress of the United
States of America, which allowed PMR to carryback the losses for
a five-year period versus a two-year period, and refunds from
various State tax authorities. PMR has treated the entire
$3.2 million as income tax benefit because PMR had
previously recognized a valuation allowance against all of its
deferred tax assets. The valuation allowance was originally
established because realization of the deferred tax assets was
uncertain in light of recurring net losses, changes in
PMRs core business and associated business risks.

Fiscal Year Ended April 30, 2001 Compared
to Fiscal Year Ended April 30, 2000

Revenues.Revenue
from continuing operations decreased from $42.5 million for
the fiscal year ended April 30, 2000 to $17.7 million
for the fiscal year ended April 30, 2001, a decrease of
$24.8 million, or (58.4%). The decrease was primarily due
to the termination of numerous Outpatient Program contracts
during fiscal year 2001. The Outpatient Programs recorded
revenues of $3.3 million for the fiscal year ended
April 30, 2001, a decrease of $23.6 million or (87.7%)
as compared to fiscal year 2000. Case Management Program
revenues remained relatively unchanged between fiscal years 2000
and 2001.

Direct Operating
Expenses.Direct operating expenses
from continuing operations consist of costs incurred at program
sites and costs associated with field management responsible for
administering the programs. Direct operating expenses decreased
from $34.6 million for the fiscal year ended April 30,
2000 to $15.3 million for the fiscal year ended
April 30, 2001, a decrease of $19.3 million, or (55.8%). As
a percentage of revenues, direct operating expenses were 86.5%,
slightly up from 81.5% for the fiscal year ended April 30,
2000 as a result of lower revenues in fiscal year 2001.

Research and
Development.PMR incurred, in fiscal
year 2001, approximately $1.0 million in research and
development costs related to the development of Version 2 of its
InfoScriber medication management system. PMR did not incur
thereafter significant additional research and development costs
for InfoScriber due to the termination of the operations of
InfoScriber in July 2001.

Marketing, General and
Administrative.Marketing, general and
administrative expenses for the fiscal year ended April 30,
2001 was relatively unchanged from that for the fiscal year
ended April 30, 2000.

Provision for Doubtful
Accounts.Provision for doubtful
accounts from continuing operations decreased from
$5.1 million for the fiscal year ended April 30, 2000
to $700,000 for the fiscal year ended April 30, 2001, a
decrease of approximately $4.4 million or (86.3%). As a
percentage of revenues, the provision for doubtful accounts
decreased to 4.1% in the fiscal year ended April 30, 2001
from 12.1% in fiscal year 2000. The decrease was due to lower
revenues in fiscal year 2001 and the additional reserves taken
in fiscal year 2000 due to anticipated difficulties in the
collection of receivables related to Outpatient Program
locations closed throughout fiscal year 2000. PMR expects the
allowance for non-collectible accounts to fluctuate based on the
amount of claims from our Outpatient Programs under review and
the number of Health Services Programs that it manages.

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Depreciation and
Amortization.Depreciation and
amortization expense increased from $1.0 million for the
fiscal year ended April 30, 2000 to $1.4 million for the
fiscal year ended April 30, 2001, an increase of $400,000
or 40.0%. This increase was primarily due to the addition of
computer equipment for InfoScriber and the change in estimates
of useful life of certain assets related to the Case Management
Program.

Software Development
Amortization.Amortization of the
InfoScriber medication management software commenced upon its
completion and commercial release in August 2000. Research for
and development of Version 2 of the software started
immediately thereafter. Version 2 was expected to
completely replace Version 1 and was anticipated to be
technically feasible shortly after April 30, 2001.
Accordingly, PMR amortized the total capitalized cost of
Version 1 of approximately $2.8 million through
April 30, 2001. In July 2001, PMR terminated the operations
of InfoScriber.

Special Charge.Special charges of approximately $1.2 million were recorded
in fiscal year 2001 for lease termination costs, severance
costs, and write-off of various assets related to closures of
numerous Outpatient Program locations and the impairment charge
incurred on InfoScribers furniture, equipment, and certain
other current assets under the provisions of SFAS No. 121.
The accruals for special charges included in the liabilities
sections in the consolidated balance sheets at April 30,
2001 and 2000 were $265,000 and $376,000, respectively.

Net Interest Income.Interest income, net of interest expense, decreased from
$1.5 million for the fiscal year ended April 30, 2000
to $1.3 million for the fiscal year ended April 30,
2001, a decrease of $200,000 or (13.3%). This decrease resulted
from lower interest bearing cash, cash equivalent, and
short-term investment balances primarily due to the negative
cash flow from InfoScriber and a $7.3 million cash dividend
payment at the end of the third quarter of fiscal year 2001.

Income Tax (Benefit)
Expense.The income tax benefit of
$929,000 in fiscal year 2001 is related to the federal and
various state tax refunds recognized for the fiscal year ended
April 30, 2000. Income tax expense for fiscal year 2000 was
$4.9 million as a result of establishing a non-cash
valuation allowance to fully reserve for deferred tax assets in
conformity with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. The valuation
allowance was recognized in fiscal year 2000 because realization
of the deferred tax assets was uncertain in light of the changes
in PMRs core business and associated business risks,
including an unproven history of earnings in InfoScriber. PMR
continued to fully reserve for its tax assets in fiscal year
2001.

Results from Discontinued
Operation.In the third quarter of
fiscal year 2000, PMR sold substantially all of its interest in
Stadt Solutions. The transaction, which eliminated PMRs
ownership interest, resulted in cash proceeds of
$3.3 million and a gain of $664,000, net of operating
losses related to Stadt Solutions during fiscal year 2000. There
were no discontinued operations in fiscal year 2001.

Liquidity and Capital Resources

For the fiscal year ended April 30, 2002,
net cash provided by operating activities was $5.2 million
as compared to net cash used in operating activities of
$1.5 million in fiscal year 2001. The increase in cash
flows from operating activities was primarily due to the
decrease in operating expenses resulting from the termination of
the InfoScriber operations, $1.9 million in collection of
previously reserved accounts receivable, and $2.6 million in
income tax refunds, net of payments.

Cash and cash equivalents and short-term
investments at April 30, 2002 were $22.6 million, an
increase of $4.8 million, or 27.0%, as compared to $17.8
million at April 30, 2001. Working capital at
April 30, 2002 was $20.8 million, an increase of
$5.4 million, or 35.1%, as compared to working capital of
$15.4 million at April 30, 2001. The increase in
working capital was primarily due to the increase in cash
provided by operating activities discussed in the preceding
paragraph and a change in estimate on the collectability of
certain other related receivables.

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Actual cash usage during fiscal year 2003 may
fluctuate and vary depending upon PMRs cash flow from its
existing operations, success in continued collection on accounts
receivable balances from closed programs, and completion of the
merger agreement with PSI.

Working capital may also be used, from time to
time, to pay dividends to PMRs stockholders. In connection
with the execution of the merger agreement, on May 6, 2002,
the Board of Directors of PMR declared a special cash dividend
in the amount of $1.70 per share, payable on May 24, 2002,
to the stockholders of record as of the close of business on
May 17, 2002. The total amount of the dividend that was
paid on May 24, 2002 was approximately $12.3 million.

Additionally, the PMR board of directors has
authorized the repurchase of up to 15% of PMRs outstanding
common stock. Purchased shares will be used for corporate
purposes including issuance under PMRs stock compensation
plans. The purchases will be made from time to time in open
market transactions. During fiscal year 2001, PMR repurchased
10,000 shares of its common stock at an average price of $2.75
per share or $27,500 in open market transactions. During the
fiscal year ended April 30, 2002, PMR repurchased 99,575
shares of its common stock at an average price of $1.69 per
share, or $168,007 in open market transactions. All shares
repurchased are held in treasury.

In connection with its outpatient programs, PMR
maintains reserves to cover the potential impact of two
significant uncertainties: (i) PMR may have an obligation
to indemnify certain providers for some portions of its
management fee which may be subject to disallowance upon audit
of a providers cost report by fiscal intermediaries; and
(ii) PMR may not receive full payment of the management
fees owed by a provider during the periodic review of the
providers claims by the fiscal intermediaries.

From time to time, PMR recognizes charges to
operations as a result of particular uncertainties associated
with the healthcare reimbursement rules as they apply to the
outpatient programs. During the fiscal years 2000, 2001, and
2002, a portion of PMRs revenue was derived from the
management of the outpatient programs. Because substantially all
of the patients of the outpatient programs are eligible for
Medicare, collection of a significant component of PMRs
management fees is dependent upon reimbursement of claims
submitted to fiscal intermediaries by the hospitals or community
mental health centers on whose behalf these programs are
managed. Certain of PMRs contracts with providers contain
warranty obligations that require PMR to indemnify such
providers for the portion of PMRs management fees
disallowed for reimbursement by Medicares fiscal
intermediaries. As of April 30, 2001 and 2002, PMR had
recorded $4.2 million and $2.0 million, respectively,
in contract settlement reserves to provide for such indemnity
obligations. These reserves have been classified as non-current
because the ultimate determination of substantially all
potential contract disallowances, if any, is not anticipated to
occur during the current fiscal year. Although PMR believes that
its potential liability to satisfy such requirements has been
adequately reserved in the financial statements, there can be no
assurance that the amount of fees disallowed will not be greater
than the amount of such reserves. Also, the obligation to pay
such amounts, if and when they become due, could have a material
adverse effect on PMRs short-term liquidity. Certain
factors are, in managements view, likely to lessen the
impact of any such effect, including the expectations that
(i) if claims arise, they will arise on a periodic basis
over several years and (ii) any disallowance may be offset
against obligations already owed by the provider to PMR.

In addition, PMR has been advised by the Centers
for Medicare & Medicaid Services, formerly Health Care
Financing Administration, that certain program-related costs are
not allowable for reimbursement. Thus, PMR may be responsible
for reimbursement of the amounts previously paid to PMR that are
disallowed pursuant to obligations that exist with certain
providers. Although PMR believes that the potential liability to
satisfy such requirements has been adequately reserved in the
financial statements, there can be no assurance that such
reserves will be adequate. The obligation to pay the amounts so
reserved, if and when they become due, could have a material
adverse effect upon PMRs cash flows and liquidity and, if
greater amounts became due, on PMRs business, financial
condition, and results of operations.

Management believes that PMR has the financial
resources needed to meet its business requirements throughout
fiscal year 2003. PMR will continue to evaluate the allocation
of its financial resources

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including, but not limited to, the merger with
PSI, dividend distributions, and funding of on-going working
capital requirements. PMR may also, from time to time, use
working capital, issue debt or equity securities, or a
combination thereof, to finance other selective acquisitions of
assets or businesses or for general corporate purposes.
PMRs ability to effect any such issuance will be dependent
on its results of operations, its financial condition, current
market conditions and other factors beyond its control.


Impact of Inflation

A substantial portion of PMRs revenue is
subject to reimbursement rates that are regulated by the federal
and state governments and that do not automatically adjust for
inflation. As a result, increased operating costs due to
inflation, such as labor and supply costs, without a
corresponding increase in reimbursement rates, may adversely
affect PMRs earnings in the future.

Forward-Looking Statements

In this document, we make forward-looking
statements that include assumptions as to how PMR may perform in
the future. You will find many of these statements in the
following sections:



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | Business beginning on page 1; and                                                                                  
|
| |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations beginning
    on page 13.

Also, when we use words like may,
may not, believes, does not
believe, expects, does not expect,
anticipates, does not anticipate and
similar expressions, we are making forward-looking statements.
Forward-looking statements should be viewed with caution.

As provided by the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, we caution
that forward-looking statements involve risks and uncertainties
that may affect our actual results of operations. Statements in
this document that are forward-looking and that provide other
than historical information involve those risks and
uncertainties. Our forward-looking information reflects our best
judgment based on current information. Forward-looking
information involves, however, a number of risks and
uncertainties and there can be no assurance that other factors
will not affect the accuracy of our forward-looking information.
While it is not possible to identify all these factors, we
continue to face many risks and uncertainties that could cause
actual results to differ from those forward-looking statements,
including our ability to:



| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | generate acceptance and use of our services;                                                                                                                                                                                                           
|
| |  | protect our intellectual property rights;                                                                                                                                                                                                              
|
| |  | respond to competition in our industry;                                                                                                                                                                                                                
|
| |  | ensure confidential information is not
    inappropriately disclosed and that we are in compliance with
    federal and state health information privacy standards;                                                                                    
|
| |  | comply with federal and state governmental
    regulation covering healthcare-related products and services
    on-line, including the regulation of medical devices and the
    practice of medicine and pharmacology;                                
|
| |  | assist providers in meeting the Health Care
    Financing Administrations requirements to ensure
    reimbursement for services performed;                                                                                                            
|
| |  | comply with federal and state anti-remuneration
    laws prohibiting the granting or receiving of remuneration in
    connection with services that are reimbursable under federal
    Medicare and Medicaid programs and other reimbursement programs;
|
| |  | respond to changes in Medicare, Medicaid, and
    other governmental regulations regarding alternative health care
    delivery systems and payment methodologies;                                                                                     

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| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | maintain significant existing reserves to cover
    reimbursement risks posed by the indemnification of certain
    providers and the reduction of outstanding fee amounts;
|
| |  | successfully integrate operations and
    technologies from any acquisitions, joint ventures or other
    business combinations or investments;                            
|
| |  | maintain liability insurance coverage on
    commercially reasonable terms to ensure adequate coverage
    against potential claims; and                                   
|
| |  | attract, retain and motivate qualified personnel.                                                                                                                          

In addition, future trends for pricing, margins,
revenues and profitability remain difficult to predict in the
industries that we serve.

Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements.
We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking
statement to reflect any change in our expectations or any
change in events, conditions or circumstances on which any
forward-looking statement is based.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

PMRs financial instruments include an
equipment note payable and investments in debt securities,
including U.S. Treasury securities, commercial paper and
certificates of deposit. The equipment note payable, due in
November 2002, has an effective interest rate of 8.36%. There
was approximately $72,000 outstanding under this note at
April 30, 2002 and approximately $188,000 outstanding under
this note at April 30, 2001.

At April 30, 2001, the fair market value of
PMRs investment in debt securities was approximately
$4.1 million, which includes an unrealized holding gain of
approximately $50,000. These securities bear interest rates
ranging from 4.57 percent to 7.55 percent and are
generally short-term and readily marketable. At April 30,
2002, the fair market value of the investment in debt securities
was approximately $7.8 million, which includes an
unrealized gain of approximately $32,000. These securities bear
interest rates ranging from 1.10% to 7.88% and are generally
short-term and readily marketable.

PMR does not and has not used derivative
financial instruments for any purpose, including hedging or
mitigating interest rate risk, and PMR believes the increase in
the fair value of its investments in debt securities due to
interest rate sensitivity is temporary in nature. This
determination was based on the marketability of the instruments,
PMRs ability to retain its investment in the instruments,
past market movements and reasonably possible, near-term market
movements. Therefore, PMR does not believe that potential,
near-term gains or losses in future earnings, fair values, or
cash flows from changes in interest rates are likely to be
material.

Exchange Rate Sensitivity

PMR does not currently have financial instruments
that are sensitive to foreign currency exchange rates.




Item 8.     Financial
Statements and Supplementary Data

Financial Statements and supplementary data of
PMR are provided at the pages indicated in Item 14(a).




Item 9.     Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure

There has not been any change of accountants or
any disagreements with PMRs accountants on any matter of
accounting practice or financial disclosure during the reporting
periods.

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PART III




Item 10.     Directors
and Executive Officers

Meetings of the Board

During the fiscal year ended April 30, 2002,
PMRs Board of Directors met eight times.

Directors of PMR

The following individuals currently serve on
PMRs Board of Directors: Allen Tepper, Mark P. Clein,
Charles C. McGettigan, Susan D. Erskine, Richard A. Niglio,
Eugene D. Hill, III, and Satish Tyagi. Each of the current
directors of PMR other than Charles C. McGettigan and Mark P.
Clein will continue in office until the closing of the merger
with Psychiatric Solutions. Messrs. McGettigan and Clein
will become directors of the combined company.

Allen
Tepper

Mr. Tepper, 54, was a co-founder of PMR
in May 1988 and has served as Chairman of the Board of PMR since
October 31, 1989. Mr. Tepper also currently serves as
the Chief Executive Officer of PMR having been elected to such
office on June 10, 2002. Previously, Mr. Tepper served
as Chief Executive Officer of PMR from October 1989 to May 1999,
and as President from October 1989 to April 1997.
Mr. Tepper was a co-founder of Consolidated Medical Corp.
in 1979, which was engaged in outpatient clinic management for
acute care hospitals in the Philadelphia area. The company was
sold to the Berwind Corporation in 1984 and Mr. Tepper
remained with the company until December 1986 as Senior Vice
President. Mr. Tepper serves as Chairman of the Board of
Paidos Health Management Services, Inc., a privately-held
neo-natal managed care company. Mr. Tepper holds a Masters of
Business Administration degree from Northwestern University and
a Bachelors degree from Temple University.

Mark P.
Clein

Mark P. Clein, 42, has been a director of
PMR since 1999. Mr. Clein presently serves as Executive
Vice President and Chief Financial Officer of US Bioservices
Corporation. Prior to joining US Bioservices Corporation, Mr.
Clein served as Chief Executive Officer of PMR from May 14,
1999 to May 10, 2002, and previously served as Executive
Vice President and Chief Financial Officer of PMR from May 1996
to May 1999. Prior to joining PMR, Mr. Clein was a Managing
Director of Health Care Investment Banking for Jefferies &
Co., an investment banking firm, from August 1995 to May 1996.
Previously, Mr. Clein was a Managing Director of the
investment banking firms of Rodman & Renshaw, Inc. (March
1995 to August 1995) and Mabon Securities Corp. (March 1993 to
March 1995) and served as a Vice President with Sprout Group, an
affiliate of Donaldson, Lufkin and Jenrette, Inc. (May 1991 to
March 1993), and a Vice President and partner with Merrill Lynch
Venture Capital, Inc. (1982 to February 1990 and August 1990 to
February 1991). Mr. Clein holds a Masters of Business
Administration degree from Columbia University and a Bachelors
degree from the University of North Carolina.



| |                      
| | ---------------------
| | Charles C. McGettigan

Mr. McGettigan, 57, has been a director
of PMR since 1992. Mr. McGettigan was a co-founder in
November 1988 and remains a Managing Director of McGettigan,
Wick & Co., Inc., an investment banking firm. He is a
general partner of Proactive Investment Managers, L.P., a
limited partnership which, through its holdings, is a principal
stockholder of PMR. See Security Ownership of Certain
Beneficial Owners and Management. Mr. McGettigan has
previously served as an investment banker with Blyth Eastman
Dillon & Co. (1970-1980); Dillon, Read & Co.
(1980-1982); Woodman, Kirkpatrick & Gilbreath (1983-1984);
and Hambrecht & Quist (1984-1988). Mr. McGettigan
serves on the Boards of Directors of Cuisine Solutions, Modtech,
Onsite Energy, Sonex Research, and Tanknology.

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##### Table of Contents





| |                 
| | ----------------
| | Susan D. Erskine

Ms. Erskine, 50, was a co-founder of
PMR in May 1988 and has been Executive Vice President, Secretary
and a director of PMR since October 31, 1989.
Ms. Erskine previously served in several operational and
marketing management positions with acute care hospitals and
health care management organizations. She holds a Masters
degree in Health Science and completed post graduate work at
Stanford University in Education and Psychology. She has
extensive experience in program development, marketing and
management of psychiatric programs, both inpatient and
outpatient.



| |                  
| | -----------------
| | Richard A. Niglio

Mr. Niglio, 59, has been a director of
PMR since 1992. In June 2000, Mr. Niglio was appointed as
President, Chief Executive Officer and a Director of Chumbo
Holdings, Inc., which has since been renamed Microgistix, Inc.
From June 1998 until August 1999, he was Chairman and Chief
Executive Officer of Equities Enterprises, Inc. From 1987 until
May 1998, he was Chairman and Chief Executive Officer of
Childrens Discovery Centers of America, Inc. From 1982
until March 1987, he was President, Chief Executive Officer and
a director of Victoria Station Incorporated. Prior to that time
he held various executive positions with several major publicly
held companies such as International Multifoods and Kentucky
Fried Chicken Corporation. Mr. Niglio currently serves on
the Boards of Directors of ShipExact.com, Inc., a private
company providing fulfillment and other outsourcing services to
the e-commerce industry, and VCExperts.com, Inc., a venture
capital infoportal and services company.



| |                    
| | -------------------
| | Eugene D. Hill, III

Mr. Hill, 50, has served as a director
of PMR since 1995. Mr. Hill is a Partner with Schroder
Ventures Life Sciences, a venture capital firm, since April
1999. Previously, Mr. Hill was with Accel Partners, a
venture capital firm, since 1994 and a General Partner of the
firm since 1995, where he focused on healthcare service
investments. Prior to that time, he was President of Behavioral
Health at United HealthCare Corporation from 1992 to 1994. From
1988 to 1992, he served as President and CEO of U.S. Behavioral
Health, a managed behavioral healthcare company he built from a
start-up to a national enterprise. Previously Mr. Hill was
the President and Chairman of Sierra Health and Life Insurance
Company. Prior to Sierra, he served as the Administrator of the
Southern Nevada Memorial Hospital and the Boston City Hospital.
He has been a managed healthcare consultant and venture capital
advisor, and serves on the Boards of Directors of Interplan,
Navix Radiology Systems, Phase Forward, Physicians
Dialysis, MD Everywhere, EMED Technologies, and Cadent. He
is a graduate of Middlebury College, received his M.B.A. in
health care administration from Boston University and has
completed Harvard Universitys Executive Program in Health
Systems Management.



| |                
| | ---------------
| | Satish K. Tyagi

Mr. Tyagi, 46, has served as a director
of PMR since 2000. Mr. Tyagi is currently Principal of
Delta Capital & Research, a financial advisory and strategic
consulting firm focused on healthcare IT, services, and medical
technology. He is also currently engaged with Schroder Ventures
Life Sciences, a venture capital firm, as Venture Partner.
Previously, Mr. Tyagi was with investment banks SG Cowen
Securities Corp., where he was Managing Director, Institutional
Research since 1997, and Jefferies & Co., where he was
Managing Director, Equity Research, since 1995. Mr. Tyagi
serves on the Board of Directors of Superior Consultant Holdings
Corp. Mr. Tyagi received his M.B.A. in Finance from New
York University and a Bachelors degree in Economics from
University of Delhi, New Delhi.

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##### Table of Contents



Executive Officers of PMR

The following individuals currently serve as
executive officers of PMR.

|                 |  |                            
|---------------- |  | ---------------------------
|Name             |  | Office(s)                  
|                 |  |                            
|Allen Tepper     |  | Chief Executive Officer    
|Fred D. Furman   |  | President & General Counsel
|Susan D. Erskine |  | Secretary                  
|Reggie A. Roman  |  | Chief Financial Officer    

Each of the current executive officers will
continue in office until the closing of the merger.



| |               
| | --------------
| | Fred D. Furman

Fred D. Furman has served as President and
General Counsel of PMR since April 1997. Previously, he held the
position of Executive Vice President  Administration
and General Counsel from March 1995 to April 1997. Prior to
joining PMR, Mr. Furman was a partner at Kleinbard, Bell
and Brecker, a Philadelphia law firm from 1980 to March 1995.
Mr. Furman is a member of the American Health Lawyers
Association. He holds a Juris Doctor degree and a Bachelors
degree from Temple University.



| |                
| | ---------------
| | Reggie A. Roman

Reggie Roman has served as Chief Financial
Officer of PMR since October 2001. Previously, he held the
position of Vice President of Finance, Strategic Planning and
Reimbursement from May 1999 to October 2001. Mr. Roman
started with PMR in February 1993 and served as the Manager and
Director of the budget and reimbursement departments of PMR
until April 1999. Prior to joining PMR, Mr. Roman has
served in several finance, accounting and auditing positions
with healthcare organizations. He holds dual degrees in
Accountancy and Finance from the University of the Philippines.

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Exchange Act
requires PMRs directors and executive officers, and
persons who beneficially own more than ten percent of a
registered class of PMR equity securities, to file with the
Securities and Exchange Commission (the SEC) initial
reports of ownership and reports of changes in ownership of PMR
common stock and other equity securities of PMR. PMR officers,
directors and greater than ten percent beneficial owners are
required by SEC regulation to furnish PMR with copies of all
Section 16(a) reports they file.

To PMRs knowledge, based solely on a review
of the copies of such reports furnished to PMR and written
representations that no other reports were required,
(i) Jon D. Gruber and J. Patterson McBaine, beneficial
owners of more than ten percent of PMR common stock, failed to
file a required Form concerning the sale of 5,750 shares of PMR
common stock during fiscal year ended April 30, 2002, and
(ii) Reggie A. Roman failed to file a required Form when he
became Chief Financial Officer of PMR in October 2001 but has
since made an amended filing on the required Form.




Item 11.     Executive
Compensation

Compensation of Directors

The employee-directors of PMR receive no fees or
other compensation in connection with their services as
directors. PMR has adopted an informal policy to pay a fee of
$500 to each non-employee director who attends a regularly
scheduled or special meeting of the Board of Directors and to
pay expenses for attendance at any such meeting. For the fiscal
year ended April 2002, Messrs. Hill and McGettigan, each
received such payments in an aggregate amount of $2,000,
Messrs. Tyagi and Niglio each received payments in an
aggregate amount of $1,500, and PMR paid their expenses in
connection with attendance at meetings.

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##### Table of Contents



Outside Directors Non-Qualified Stock
Option Plan of 1992

Each non-employee director of PMR receives stock
option grants under the Outside Directors Non-Qualified
Stock Option Plan of 1992 (the Outside Directors
Plan). Only non-employee directors of PMR are eligible to
receive options under the Outside Directors Plan. Options
granted under the Outside Directors Plan are intended by
PMR not to qualify as incentive stock options under the Internal
Revenue Code of 1986, as amended (the Code).

Option grants under the Outside Directors
Plan are non-discretionary. As of the date of the regular
meeting of PMRs Board of Directors closest to August 3rd
of each year, each member of PMRs Board who is not an
employee of PMR is automatically granted under the Outside
Directors Plan, without further action by PMR, the Board
or the stockholders of PMR, an option to purchase 15,000 shares
of common stock of PMR. The Board may also grant options at any
other time under the Outside Directors Plan. The exercise
price of options granted under the Outside Directors Plan
must be at least 100% of the fair market value of the PMR common
stock subject to the option on the date of the option grant.
Options granted under the Outside Directors Plan are
immediately exercisable as to 30% of the option shares and the
remaining 70% of the option shares become exercisable in equal
installments on each of the first, second and third anniversary
of the option grant date in accordance with the terms of the
Outside Directors Plan. In the event of certain mergers of
PMR with or into another corporation or certain other
consolidation, acquisition of assets or other change-in-control
transactions involving PMR, the vesting period of each option
will accelerate.

On August 8, 2001, the Board granted options
covering 15,000 shares of common stock of PMR to each of
Messrs. McGettigan, Niglio, Hill, and Tyagi at the exercise
price per share of $1.50 (the fair market value based on the
closing sales price reported on the Nasdaq National Market on
that date).

1997 Equity Incentive Plan

Option grants under the 1997 Equity Incentive
Plan (the Incentive Plan) are discretionary by
PMRs Board of Directors. The exercise price of options
granted under the Incentive Plan must be at least 100% of the
fair market value of the common stock subject to the option on
the grant date for incentive stock options and at least 85% of
the fair market value of the common stock subject to the option
on the grant date for nonstatutory stock options and restricted
stock purchases. Options granted under the Incentive Plan are
exercisable as determined by PMRs Board of Directors.
Options granted to an employee who is a director of PMR become
immediately exercisable upon certain change in control
transactions. Options granted to an employee who is not a
director become immediately exercisable following certain change
in control transactions if, within one year of the change in
control of PMR, (i) the optionees employment is
terminated other than for cause or (ii) the optionees
employment is constructively terminated.

During the last fiscal year, PMR granted stock
options to Named Executive Officers (as defined below) and
employee-directors of PMR. See  Stock Option
Grants and Exercises and Item 13. Certain
Relationships and Related Transactions  Grant of
Options to Certain Directors and Executive Officers for a
description of the terms of such stock options.

Compensation Pursuant to Plans

PMR maintains a tax-deferred retirement plan
under Section 401(k) of the Code for the benefit of all
employees meeting minimum eligibility requirements (the
401(k) Plan). Under the 401(k) Plan, each employee
may defer up to fifteen percent (15%) of pre-tax earnings,
subject to certain limitations. PMR will match fifty percent
(50%) of an employees deferral to a maximum of three
percent (3%) of an employees gross salary. PMRs
matching contribution vests over a five (5) year period.
For the years ended April 30, 2002, 2001, and 2000, PMR
contributed $39,000, $116,000, and $236,000, respectively, to
match employee deferrals. Of these amounts, $24,700, $20,890,
and $23,987, respectively, were contributed to match deferrals
of the Named Executive Officers (as defined below) of PMR.

24



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##### Table of Contents



Summary of Compensation

The following table shows for the fiscal years
ended April 30, 2002, 2001, and 2000, compensation awarded
or paid to, or earned by, PMRs Chief Executive Officer and
its other four most highly compensated executive officers at
April 30, 2002 (the Named Executive Officers):

Summary Compensation Table

|                            |                               |                     |      |               |  |              |         |              |  |        |         |         |  |  |         |         |  |  |       |       | 
|--------------------------- | ----------------------------- | ------------------- | ---- | ------------- |  | ------------ | ------- | ------------ |  | ------ | ------- | ------- |  |  | ------- | ------- |  |  | ----- | ----- | 
|                            |                               |                     |      |               |  |              |         | Long Term    |  |       
|                            |                               |                     |      |               |  |              |         | Compensation |  |       
|                            |                               |                     |      |               |  |             
|                            |                               | Annual Compensation |      | Securities    |  | All Other   
|                            |                               |                     |      | Underlying    |  | Compensation
|Name and Principal Position |                               | Year                |      | Salary ($)(1) |  | Bonus($)     |         | Options(#)   |  | ($)(2)
|                            |                               |                     |      |               |  |              |         |              |  |       
|Allen Tepper                |                               |                     | 2002 |               |  |              | 175,000 |              |  |        |        |         |  |  |        |         |  |  | 5,100 |      
|                            | Chairman of the Board         |                     |      | 2001          |  |              |         | 175,000      |  |        |         |        |  |  |         |        |  |  |       | 5,100 | 
|                            |                               |                     | 2000 |               |  |              | 175,000 |              |  |        |        |         |  |  |        |         |  |  | 4,800 |      
|Mark P. Clein               |                               |                     | 2002 |               |  |              | 200,000 |              |  |        |        |         |  |  |        |         |  |  | 5,100 |      
|                            | Chief Executive Officer(3)    |                     |      | 2001          |  |              |         | 200,000      |  |        |         |        |  |  |         |        |  |  |       | 5,350 | 
|                            |                               |                     | 2000 |               |  |              | 200,000 |              |  |        | 200,000 |         |  |  | 425,000 |         |  |  | 5,113 |      
|Fred D. Furman              |                               |                     | 2002 |               |  |              | 192,000 |              |  |        |        |         |  |  |        |         |  |  | 4,809 |      
|                            | President and General Counsel |                     |      | 2001          |  |              |         | 192,000      |  |        |         |        |  |  |         |        |  |  |       | 5,340 | 
|                            |                               |                     |      | 2000          |  |              |         | 192,000      |  |        |         | 192,000 |  |  |         | 200,000 |  |  |       | 4,914 | 
|Susan D. Erskine            |                               |                     | 2002 |               |  |              | 180,000 |              |  |        |        |         |  |  |        |         |  |  | 4,875 |      
|                            | Executive Vice President     |                     |      | 2001          |  |              |         | 180,000      |  |        |         |        |  |  |         | 100,000 |  |  |       | 5,100 | 
|                            | Development and Secretary     |                     |      | 2000          |  |              |         | 180,000      |  |        |         |        |  |  |         | 40,000  |  |  |       | 5,263 | 
|Reggie A. Roman(4)          |                               |                     | 2002 |               |  |              | 102,673 |              |  |        | 57,500  |         |  |  |        |         |  |  | 3,080 |      
|                            | Chief Financial Officer       |                     |      |               |  |              |         |              |  |        |         |         |  |  |         |         |  |  |       |       | 



---



|    |                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In accordance with the rules of the SEC, the
    compensation described in this table does not include
    perquisites and other personal benefits received by the Named
    Executive Officers which do not exceed the lesser of $50,000 or
    10% of any such officers salary and bonus shown in the
    table.
|   
|(2) | Represents matching contributions by PMR under
    the 401(k) Plan.                                                                                                                                                                                                                                                
|   
|(3) | Mr. Clein resigned as Chief Executive
    Officer effective as of May 10, 2002. On June 10, 2002
    the Board of Directors of PMR appointed Mr. Tepper as the
    Chief Executive Officer.                                                                                                                        
|   
|(4) | Reggie A. Roman was appointed Chief
    Financial Officer in October 2001.                                                                                                                                                                                                                                         

Stock Option Grants and Exercises

PMR grants options to its executive officers
under the Incentive Plan. As of April 30, 2002, options to
purchase 850,730 shares were outstanding under the Incentive
Plan and 2,084,019 shares remained available for grant under the
Incentive Plan.

There were no options granted to the Named
Executive Officers.

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The following table shows for the fiscal year
ended April 30, 2002, certain information regarding options
granted to, exercised by, and held at year end by, the Named
Executive Officers.

Aggregated Option Exercises In Last Fiscal
Year,

and Fiscal Year-End Option Values


|            |  |                    |   |                |  |                           |   |                           |  |  |                 |  |  |  |          | 
|----------- |  | ------------------ | - | -------------- |  | ------------------------- | - | ------------------------- |  |  | --------------- |  |  |  | -------- | 
|            |  |                    |   |                |  | Number of Securities      |   |                          
|            |  |                    |   |                |  | Underlying Unexercised    |   | Value of Unexercised     
|            |  |                    |   |                |  | Options at Fiscal         |   | In-the-Money Options     
|            |  | Shares Acquired on |   | Value Realized |  | Year-End (#)              |   | at Fiscal Year-End ($)(2)
|Name        |  | Exercise (#)       |   | ($)(1)         |  | Exercisable/Unexercisable |   | Exercisable/Unexercisable
|            |  |                    |   |                |  |                           |   |                          
|Mr. Tepper  |  |                    | 0 |                |  |                           | 0 |                           |  |  | 25,000/0        |  |  |  | 0/0      | 
|Ms. Erskine |  |                    | 0 |                |  |                           | 0 |                           |  |  | 54,450/200,000  |  |  |  | 0/63,500 | 
|Mr. Furman  |  |                    | 0 |                |  |                           | 0 |                           |  |  | 61,760/100,000  |  |  |  | 0/0      | 
|Mr. Clein   |  |                    | 0 |                |  |                           | 0 |                           |  |  | 287,720/190,000 |  |  |  | 0/0      | 
|Mr. Roman   |  |                    | 0 |                |  |                           | 0 |                           |  |  | 17,588/4,039    |  |  |  | 0/0      | 



---



|    |                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on the fair market value per share of PMR
    common stock (the closing sales price reported by the Nasdaq
    National Market) at the date of exercise, less the exercise
    price.
|   
|(2) | Based on the fair market value per share of PMR
    common stock ($2.26) at April 30, 2002, less the exercise
    price, multiplied by the number of shares underlying the option.         

Employment Contracts

PMR and each of Messrs. Clein and Furman and
Ms. Erskine entered into agreements dated August 25,
1999 (the Employment Agreements), providing for,
among other things, the employment of such Named Executive
Officer until August 30, 2000. On August 30, 2000 and
each year thereafter, the term of the Employment Agreements will
automatically be extended by one year unless notice has been
otherwise provided. The Employment Agreements provide for an
annual salary, subject to such increases as the Board of
Directors of PMR may from time to time determine, and permit
PMRs Board of Directors, in its sole discretion, to
provide a bonus to such Named Executive Officers. The Employment
Agreements provide that during the term of such Named Executive
Officers employment thereunder and for a period of one
year immediately following termination of such employment, such
Named Executive Officer will not solicit or attempt to solicit
any employee, consultant or independent contractor of PMR to
terminate his or her relationship with PMR. The Employment
Agreements provide that if such Named Executive Officers
employment is terminated (i) by PMR without Cause (as
defined in the Employment Agreement), (ii) by such Named
Executive Officer for Good Reason (as defined in the Employment
Agreement) or (iii) by PMRs notification of
non-renewal prior to the date of automatic renewal, such Named
Executive Officer is entitled to additional compensation upon
termination in the form of a lump sum payment and, if eligible,
periodic payments for a specified period of time or until such
Named Executive Officer begins employment with another company
or business.

Pursuant to the terms of a Consulting Agreement
dated May 10, 2002, Mr. Clein resigned as the Chief
Executive Officer of PMR, terminated his employment with PMR and
PMRs subsidiaries, as applicable, and waived any rights to
benefits and severance under his employment agreement. In
addition, pursuant to such Consulting Agreement, Mr. Clein
has agreed to render consulting services to PMR until the
earlier of (i) May 10, 2003 or (ii) the closing
of the merger transaction with Psychiatric Solutions. Under the
terms of the Consulting Agreement, Mr. Clein will be
considered an independent contractor and will not be eligible
for benefits as an employee of PMR (other than any rights under
COBRA and continuation of health insurance through June 30,
2002). In consideration for Mr. Cleins consulting
services, PMR has agreed to pay Mr. Clein a fee in the
total amount of $240,000 in two installments 
$120,000 on May 10, 2002 and $120,000 upon the closing of
the merger transaction with Psychiatric Solutions or
May 10, 2003, whichever occurs first. The Consulting
Agreement also provides for the amendment of certain option
agreements, pursuant to which PMR granted to Mr. Clein
options to

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##### Table of Contents



purchase 477,720 of PMRs common stock, such
that the exercise periods with respect to those options will be
extended.


Compensation Committee

The Compensation Committee of PMRs Board of
Directors is responsible for developing and making
recommendations to PMRs Board of Directors with respect to
PMRs executive compensation policies. PMRs
Compensation Committee consists of outside directors
Messrs. Niglio and Hill each of whom is a non-employee
director. During the fiscal year ended April 30, 2002, the
Compensation Committee met four times.

Compensation Committee Interlocks and Insider
Participation

There were no Compensation Committee interlock
relationships during the fiscal year ended April 30, 2002.
All directors of PMR, including Messrs. Niglio and Hill, have
options to purchase shares of PMRs common stock. See
 Outside Directors Non-Qualified Stock
Option Plan of 1992 and  1997 Equity
Incentive Plan.

Compensation Committee Report on Executive
Compensation(1)

Executive
Officer Compensation Program

PMRs executive compensation program is
based on the following four objectives: (i) to link the
interests of management with those of stockholders by
encouraging stock ownership in PMR; (ii) to attract and
retain superior executives by providing them with the
opportunity to earn total compensation packages that are
competitive with the industry; (iii) to reward individual
results by recognizing performance through salary, annual cash
incentives and long-term stock based incentives; and
(iv) to manage compensation based on the level of skill,
knowledge, effort and responsibility needed to perform the job
successfully.

The components of PMRs compensation program
for its executive officers include (i) base salary,
(ii) performance-based cash bonuses, (iii) incentive
compensation in the form of stock options, and
(iv) participation in PMRs 401(k) Plan. An
explanation of the 401(k) Plan appears at
 Compensation Pursuant to Plans.

Base Salary.Base
salary levels for the PMRs executive officers are
determined, in part, through comparisons with companies in the
outpatient service industry, other companies with which PMR
competes for personnel, and general geographic market
conditions. Additionally, PMRs Compensation Committee
evaluates individual experience and performance and the overall
performance of PMR. PMRs Compensation Committee reviews
each executives salary on an annual basis and may increase
each executives salary based on (i) the
individuals increased contribution to PMR over the
preceding year; (ii) the individuals increased
responsibilities over the preceding year; and (iii) any
increase in median competitive pay levels.

Annual Cash Bonuses.PMRs Compensation Committee recommends the payment of
bonuses from time-to-time to PMRs employees, including its
executive officers, to provide an incentive to these persons to
be productive over the course of each fiscal year. These bonuses
are awarded only if PMR achieves or exceeds certain corporate
performance objectives relating to net income and/or cash flow.
Accrued monthly, depending on the earnings of PMR, is a cash
bonus pool to be paid out after fiscal year end. The



---

1 The material in this report is not
soliciting material, is not deemed filed
with the SEC, and is not to be incorporated by reference into
any filing of PMR under the Securities Act or the Exchange Act,
whether made before or after the date hereof and irrespective of
any general incorporation language contained in such filing.


27



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##### Table of Contents



size of the cash bonus to each executive officer
is based on the individual executives performance during
the preceding year.


Stock Options.PMR
believes that a key component to the compensation of its
executive officers should be through stock options. Stock
options utilized by PMR for this purpose have been designed to
provide an incentive to these employees by allowing them to
directly participate in any increase in the long-term value of
PMR. This incentive is intended to reward, motivate and retain
the services of executive employees. PMR has historically
rewarded its executive employees through the grant of Incentive
Stock Options and Nonstatutory Stock Options.

Incentive Stock Options are allocated to both
executive and non-executive employees on an annual basis by
either the Committee or the Board. PMRs 1997 Equity
Incentive Plan (the Incentive Plan) provides for the
grant of up to an aggregate 4,000,000 Options, of which
1,915,981 had been granted as of April 30, 2002. Incentive Stock
Options are granted with exercise prices equal to the prevailing
market value of PMRs common stock on the date of grant,
have 10-year terms and are subject to vesting periods
established from time to time by the Committee. Incentive Stock
Options granted to holders of 10% or more of PMRs stock
are granted with exercise prices equal to 110% of the prevailing
market value of PMRs common stock on the date of grant and
have terms of 5 years.

PMR has also granted Nonstatutory Stock Options
on occasion, generally, in circumstances where the grant of the
option may not satisfy certain of the technical criteria for an
Incentive Stock Option. Through April 30, 2002, PMR had
granted 506,250 Nonstatutory Stock Options to executive
personnel under the Incentive Plan. See  1997
Equity Incentive Plan.

PMRs Compensation Committee employs no
particular set of mechanical criteria in awarding stock options.
Rather, it evaluates a series of factors including: (i) the
overall performance of PMR for the fiscal year in question;
(ii) the performance of the individual in question;
(iii) the anticipated contribution by the individual to PMR
on an overall basis; (iv) the historical level of
compensation of the individual; (v) the level of
compensation of similarly situated executives in PMRs
industry; and (vi) that level of combination of cash
compensation and stock options that would be required from a
competitive point of view to retain the services of a valued
executive officer.

CEO Compensation

The base salary of PMRs Chief Executive
Officer has been and will continue to be adjusted from
time-to-time in accordance with the criteria for the
determination of executive officer compensation as described
above in the section captioned Base Salary. In
setting the compensation for Mr. Clein for fiscal year
2002, PMR sought to retain a key executive officer while
continuing to tie a significant percentage of his compensation
to company performance.



| |                              
| | -----------------------------
| | By the Compensation Committee
|
| | Richard A. Niglio            
| | Eugene D. Hill, III          

28



---



##### Table of Contents



Performance Measurement Comparison

The following graph and table show the total
stockholder return of an investment of $100 in cash on
April 30, 1997 for PMRs Common Stock and the Nasdaq
Stock Market (U.S.) Index. All values assume reinvestment of the
full amount of all dividends and are calculated as of
April 30, of each year:

(PERFORMANCE GRAPH)

|                           |  |      |        |      |  |      |        |      |  |        |        |        |  |   |        |  |  |   |        |  |  |   |        | 
|-------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ------ | ------ | ------ |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                          
|                          
|Fiscal Year                |  | 4/97 |        | 4/98 |  | 4/99 |        | 4/00 |  | 4/2001 |        | 4/2002
|                          
|                          
|PMR Corporation            |  | $    | 100.00 |      |  | $    | 75.47  |      |  | $      | 21.70  |        |  | $ | 25.16  |  |  | $ | 16.25  |  |  | $ | 24.48  | 
|Nasdaq Stock Market (U.S.) |  |      | 100.00 |      |  |      | 148.20 |      |  |        | 201.69 |        |  |   | 306.22 |  |  |   | 167.85 |  |  |   | 133.91 | 




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

Equity Compensation Plan Information

The following table summarizes share and exercise
price information with respect to PMRs equity compensation
plans (including individual compensation arrangements) under
which equity securities of PMR are authorized for issuance as of
April 30, 2002:

|                                                               |       |                      |           |                      |  |                           |      |      |  |  |           |           | 
|-------------------------------------------------------------- | ----- | -------------------- | --------- | -------------------- |  | ------------------------- | ---- | ---- |  |  | --------- | --------- | 
|                                                               |       |                      |           |                      |  | Number of Securities     
|                                                               |       | Number of Securities |           |                      |  | Remaining Available for  
|                                                               |       | to be Issued         |           | Weighted-Average     |  | Future Issuance Under    
|                                                               |       | Upon Exercise of     |           | Exercise Price of    |  | Equity Compensation Plans
|                                                               |       | Outstanding Options, |           | Outstanding Options, |  | (Excluding Securities    
|Plan Category                                                  |       | Warrants and Rights  |           | Warrants and Rights  |  | Reflected in Column (a)) 
|                                                               |       |                      |           |                      |  |                          
|                                                               |       | (a)                  |           | (b)                  |  | (c)                      
|Equity compensation plans approved by security
    holders     |       |                      | 1,384,651 |                      |  | $                         | 5.58 |      |  |  | 2,626,769 |          
|Equity compensation plans not approved by
    security holders |       |                      | 26,000    | (1)                  |  | $                         | 8.75 |      |  |  |          |          
|                                                               |       |                      |           |                      |  |                           |      |      |  |  |           |          
|                                                               | Total |                      |           | 1,410,651            |  |                           | $    | 5.64 |  |  |           | 2,626,769 | 
|                                                               |       |                      |           |                      |  |                           |      |      |  |  |           |          






|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(1) | See Note 9 to the audited financial statements on
    page F-14 of this document.

29



---



##### Table of Contents



Beneficial Ownership

The following table presents information
regarding beneficial ownership of PMRs common stock as of
May 31, 2002 by:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | each person whom PMR knows beneficially owns more
    than 5 percent of PMRs common stock;                 
|
| |  | each of PMRs directors;                                                                                    
|
| |  | PMRs chief executive officer and each of
    our four other most highly compensated executive officers; and
|
| |  | all of PMRs executive officers and
    directors as a group.                                               

This table is based upon information supplied by
officers, directors and principal stockholders and Schedules 13D
and 13G (if any) filed with the Securities and Exchange
Commission. Unless otherwise indicated in the footnotes to this
table and subject to community property laws where applicable,
PMR believes that each of the stockholders named in this table
has sole voting and investment power with respect to the shares
indicated as beneficially owned. Except as otherwise indicated,
the address of each holder identified below is in care of PMR,
1565 Hotel Circle South, 2nd Floor, San Diego, California 92108.

|                                                                                          |                               |                         |           |                  |  |  |       |  | 
|----------------------------------------------------------------------------------------- | ----------------------------- | ----------------------- | --------- | ---------------- |  |  | ----- |  | 
|                                                                                          |                               |                        
|                                                                                          |                               | Beneficial Ownership(1)
|                                                                                          |                               |                        
|                                                                                          |                               | Number of               |           |                 
|Beneficial Owner                                                                          |                               | Shares                  |           | Percent of Total
|                                                                                          |                               |                         |           |                 
|Persons and entities affiliated with Proactive
    Investment
    Managers, L.P.(2)(3)(4) |                               |                         | 1,386,702 |                  |  |  | 19.09 | 
|                                                                                          | 50 Osgood Place, Penthouse    |                         |           |                  |  |  |       |  | 
|                                                                                          | San Francisco, CA 94133       |                         |           |                  |  |  |       |  | 
|Jon D. Gruber(2)(3)                                                                       |                               |                         | 1,249,952 |                  |  |  | 17.21 | 
|                                                                                          | 50 Osgood Place, Penthouse    |                         |           |                  |  |  |       |  | 
|                                                                                          | San Francisco, CA 94133       |                         |           |                  |  |  |       |  | 
|J. Patterson McBaine(2)(4)                                                                |                               |                         | 1,238,452 |                  |  |  | 17.05 | 
|                                                                                          | 50 Osgood Place, Penthouse    |                         |           |                  |  |  |       |  | 
|                                                                                          | San Francisco, CA 94133       |                         |           |                  |  |  |       |  | 
|J. P. Morgan Chase & Co.(5)                                                               |                               |                         | 656,460   |                  |  |  | 9.04  | 
|                                                                                          | 270 Park Avenue               |                         |           |                  |  |  |       |  | 
|                                                                                          | New York, NY 10017            |                         |           |                  |  |  |       |  | 
|Myron A. Wick III(2)                                                                      |                               |                         | 529,905   |                  |  |  | 7.30  | 
|                                                                                          | 50 Osgood Place, Penthouse    |                         |           |                  |  |  |       |  | 
|                                                                                          | San Francisco, CA 94133       |                         |           |                  |  |  |       |  | 
|Dimensional Fund Advisors Inc.(6)                                                         |                               |                         | 481,800   |                  |  |  | 6.63  | 
|                                                                                          | 1299 Ocean Avenue, 11th Floor |                         |           |                  |  |  |       |  | 
|                                                                                          | Santa Monica, CA 90401        |                         |           |                  |  |  |       |  | 
|Allen Tepper(7)                                                                           |                               |                         | 905,242   |                  |  |  | 12.46 | 
|Charles C. McGettigan(2)                                                                  |                               |                         | 599,580   |                  |  |  | 8.26  | 
|                                                                                          | 50 Osgood Place, Penthouse    |                         |           |                  |  |  |       |  | 
|                                                                                          | San Francisco, CA 94133       |                         |           |                  |  |  |       |  | 
|Mark P. Clein                                                                             |                               |                         | 595,720   |                  |  |  | 8.20  | 
|Fred D. Furman                                                                            |                               |                         | 362,522   |                  |  |  | 4.99  | 
|Susan D. Erskine(8)                                                                       |                               |                         | 181,919   |                  |  |  | 2.50  | 
|Richard A. Niglio                                                                         |                               |                         | 123,953   |                  |  |  | 1.71  | 
|Reggie Roman                                                                              |                               |                         | 42,588    |                  |  |  | *     | 

30



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##### Table of Contents



|                                                |  |                         |           |                  |  |  |       | 
|----------------------------------------------- |  | ----------------------- | --------- | ---------------- |  |  | ----- | 
|                                                |  |                        
|                                                |  | Beneficial Ownership(1)
|                                                |  |                        
|                                                |  | Number of               |           |                 
|Beneficial Owner                                |  | Shares                  |           | Percent of Total
|                                                |  |                         |           |                 
|Eugene D. Hill, III                             |  |                         | 66,000    |                  |  |  | *     | 
|Satish Tyagi                                    |  |                         | 12,500    |                  |  |  | *     | 
|All executive officers and directors as a group |  |                         | 2,890,024 |                  |  |  | 39.79 | 



---



| |   |                       
| | - | ----------------------
| | * | Less than one percent.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Applicable percentages of ownership are based on
    7,262,907 shares of PMR Common Stock outstanding on May 31,
    2002 and adjusted as required by rules promulgated by the SEC.
    Under the rules, shares are deemed to be beneficially
    owned by a person if he or she directly or indirectly has
    or shares the power to vote or dispose of such shares, whether
    or not he or she has any pecuniary interest in such shares, or
    if he or she has the right to acquire the power to vote or
    dispose of such shares within 60 days, including any right to
    acquire such power through the exercise of any option, warrant
    or right. The shares beneficially owned by Ms. Erskine and
    Messrs. Tepper, McGettigan, Clein, Furman, Niglio, Roman,
    and Hill include 54,450, 25,000, 52,000, 262,054, 61,760,
    37,000, 17,588, and 37,000 shares, respectively, that may be
    acquired by such persons within 60 days through the
    exercise of stock options. The shares owned by the executive
    officers and directors as a group include 546,852 shares that
    may be acquired by such persons within 60 days through the
    exercise of stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(2) | Charles C. McGettigan, a director of PMR since
    1992, Jon D. Gruber, J. Patterson McBaine, and
    Myron A. Wick III are general partners of Proactive
    Investment Managers, L.P. Proactive Investment Managers, L.P. is
    the general partner of Proactive Partners, L.P. and Fremont
    Proactive Partners, L.P. Shares beneficially owned include
    (i) 506,830 shares held by Proactive Partners, L.P.,
    (ii) with respect to Mr. McGettigan, 40,750 shares
    held by Mr. McGettigan, (iii) with respect to
    Messrs. Gruber and McBaine, 658,697 shares held by entities
    controlled by Messrs. Gruber and McBaine (which include
    (A) 433,747 shares held by Lagunitas Partners L.P., a
    limited partnership of which an entity controlled by
    Messrs. Gruber and McBaine is the controlling general
    partner and (B) 224,950 shares held by entities controlled
    by Messrs. Gruber and McBaine and in various accounts
    managed by an investment advisor controlled by
    Messrs. Gruber and McBaine), (iv) with respect to
    Mr. Gruber, 84,425 shares held by Mr. Gruber,
    (v) with respect to Mr. McBaine, 72,925 shares
    held by Mr. McBaine, and (vi) with respect to
    Mr. Wick, 23,075 shares held by Mr. Wick.
    Proactive Investment Managers, L.P. and its general partners,
    Messrs. McGettigan, Gruber, McBaine and Wick, share voting
    and investment power of the shares and may be deemed to be
    beneficial owners of the shares held by Proactive Partners, L.P.
    Messrs. McGettigan, Gruber, McBaine and Wick disclaim beneficial
    ownership of any shares held by Proactive Investment Managers,
    L.P., Proactive Partners, L.P., or other entities they control
    or for which they exercise voting and investment power as
    described above, except to the extent of their respective
    interests in such shares arising from their pecuniary interest
    in such partnerships.
|   
|(3) | Includes 64,625 shares over which Mr. Gruber
    shares ownership with his wife, 6,200 shares over which
    Mr. Gruber has sole voting and investment power as a
    trustee for a foundation, 4,000 shares over which
    Mr. Gruber has sole voting and investment power as a
    trustee of accounts for the benefit of his children and
    2,000 shares held by Mr. Grubers wife.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(4) | Includes 5,500 shares over which Mr. McBaine
    has shared ownership with his wife, 4,000 shares over which
    Mr. McBaine and his wife share voting and investment power
    as trustees for a foundation, 2,000 shares held by
    Mr. McBaines child who lives with Mr. McBaine
    and 4,000 shares held by Mr. McBaines child, over
    which shares Mr. McBaine has voting and investment power.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(5) | Based solely on the Schedule 13G/ A filed
    with the SEC on February 13, 2002, J.P. Morgan Chase &
    Co. is the beneficial owner of 656,460 shares. J.P. Morgan Chase
    & Co. has sole dispositive power over, and sole power to
    vote or to direct voting of, such shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

31



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Based solely on the Schedule 13G filed with
    the SEC on February 12, 2002, Dimensional Fund Advisors
    Inc. is the beneficial owner of 481,800 shares as a result
    of acting as an investment advisor to certain investment
    companies, commingled group trusts and separate accounts
    (together, the Funds). Dimensional Fund Advisors
    Inc. possesses voting and/or investment power over the shares,
    all of which are owned by the Funds. Dimensional Fund Advisors
    Inc. disclaims beneficial ownership of such shares.
|   
|(7) | Includes 9,076 shares held by Mr. Tepper,
    856,166 shares held by Mr. Tepper as Trustee FBO Tepper Family
    Trust and 16,000 shares held by Mr. Tepper and
    Ms. Tepper as Trustees FBO The Tepper 1996 Charitable
    Remainder Trust UA DTD 11/19/96.                                                                                                                                                                                                                                                                                       
|   
|(8) | Includes 120,469 shares held by the Erskine
    Family Trust and 7,000 shares held by Ms. Erskines
    spouse, William N. Erskine, who has sole voting and
    dispositive power over such shares and as to which
    Ms. Erskine disclaims beneficial ownership.                                                                                                                                                                                                                                                                                   




Item 13.     Certain
Relationships and Related Transactions

Certain Relationships and Related
Transactions



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Grant of Options and Stock Award to Certain
    Directors and Executive Officers

Directors and members of PMRs management
have been granted options to purchase PMR common stock. See
Item 11. Executive Compensation  Outside
Directors Non-Qualified Stock Option Plan of 1992,
Item 11. Executive Compensation  1997 Equity
Incentive Plan and Item 11. Executive
Compensation  Stock Option Grants and Exercises.

In April 2002 PMRs Board of Directors
granted Reggie Roman 25,000 shares of PMR common stock.



| |                                               
| | ----------------------------------------------
| | Indebtedness of Certain Executive
    Officers

In January 2000, PMR loaned Messrs. Clein
and Furman $467,500 and $684,750, respectively, pursuant to
promissory notes for the purchase of stock from the exercise of
stock options (the Stock Notes). The Stock Notes,
due December 31, 2004, bear interest at the rate of 6.21%
per annum and are with recourse in addition to being secured by
stock under respective pledge agreements. PMR also received
promissory notes from Messrs. Clein and Furman for up to
$257,208 and $193,311, respectively, for tax liabilities related
to the purchase of such stock (the Tax Notes). The
Tax Notes, due December 31, 2004, bear interest at the rate
of 6.21% and are secured by respective stock pledges, but are
otherwise without recourse. In May 2002, the Stock Notes and Tax
Notes for Mr. Clein were amended to include a provision
that allows the principal and interest on the notes to be paid,
at anytime prior to December 31, 2003, through the delivery to
PMR of PMR common stock valued at the higher of (i) $2.64
or (ii) the average closing sales prices of PMR common
stock for the five trading days prior to the delivery of such
stock. Also in May 2002, the Stock Notes and Tax Notes for
Mr. Furman were amended to included a provision that allows
the principal and interest on the notes to be paid, at anytime
prior to December 31, 2003, through the delivery to PMR of
PMR common stock valued at the higher of (i) $2.94 or
(ii) the average closing sales prices of PMR common stock
for the five trading days prior to the delivery of such stock.
As of April 30, 2002, Messrs. Clein and Furman owed
$59,554 and $256,624, respectively, under the Stock Notes and
$278,505 and $209,317, respectively, under the Tax Notes.

Director and
Officer Positions with Combined Company

PMR has designated two individuals who were
directors of PMR on the date of the merger agreement with
Psychiatric Solutions to become directors of the combined
company. These individuals are Mark P. Clein and
Charles C. McGettigan.

32



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##### Table of Contents





| |                            
| | ---------------------------
| | Acceleration of PMR Options

Pursuant to the provisions of the PMR 1997 Equity
Incentive Plan, as amended, in the event of a change in control
of PMR, all of the options granted pursuant to such plan will
become fully vested and immediately exercisable unless otherwise
provided in the option agreement related to such options. For
purposes of the PMR 1997 Equity Incentive Plan, the merger with
Psychiatric Solutions will constitute a change in control. As of
May 31, 2002, Mark P. Clein, Susan D. Erskine,
Fred D. Furman and Reggie Roman, each an officer or
director of PMR, held 190,000, 200,000, 100,000 and 4,039
unvested options to purchase shares of PMR common stock,
respectively, subject to the PMR 1997 Equity Incentive Plan.

Pursuant to the provisions of the PMR Outside
Directors Non-Qualified Stock Option Plan of 1992, in the
event of a change in control, all of the options granted
pursuant to such plan will become fully vested and immediately
exercisable. For purposes of the PMR Outside Directors
Non-Qualified Stock Option Plan of 1992, the merger with
Psychiatric Solutions will constitute a change in control. As of
May 31, 2002, Charles C. McGettigan, Eugene Hill,
Richard Niglio and Satish Tyagi, each a director of PMR, held
21,000, 21,000, 21,000 and 17,500 unvested options to purchase
shares of PMR common stock, respectively, subject to the PMR
Outside Directors Non-Qualified Stock Option Plan of 1992.



| |                                                                  
| | -----------------------------------------------------------------
| | Extension of Option Exercise Periods for
    Certain PMR Officers

In connection with the closing of the merger with
Psychiatric Solutions, PMRs board of directors has
extended or will extend the option exercise period for all
options to purchase PMR common stock held by each of
Mark P. Clein, Fred D. Furman, Susan D. Erskine,
Reggie Roman, and Allen Tepper to a period that is three years
from the date of such individuals termination of
employment with PMR.



| |                                                    
| | ---------------------------------------------------
| | Severance Arrangements for Certain PMR
    Officers

Mark P.
Clein.In connection with the
merger with Psychiatric Solutions, Mark P. Clein, the Chief
Executive Officer and member of the board of directors of PMR,
entered into a consulting agreement with PMR to be effective as
of May 10, 2002. Pursuant to the consulting agreement,
Mr. Clein terminated his employment with PMR effective
May 10, 2002 and waived any and all rights to cash
severance payments pursuant to his employment agreement.
Pursuant to the consulting agreement Mr. Clein also will
provide management and strategic consulting to PMR until the
closing of the merger for two lump-sum cash payments of $120,000
each, one of which was paid upon the execution of the consulting
agreement and the other of which is payable upon the earlier of
the closing of the merger or May 10, 2003. Finally, the
consulting agreement provides for the extension of the exercise
period of all PMR stock options held by Mr. Clein to a date
that is 90 days following the earlier of the closing of the
merger with Psychiatric Solutions or May 10, 2003.

Fred D.
Furman.In connection with the
merger with Psychiatric Solutions, PMR and Fred D. Furman,
PMRs President and General Counsel, entered into an
amendment to his employment agreement effective as of
May 1, 2002. Pursuant to the amendment, if
Mr. Furmans employment with PMR is terminated by PMR
or Mr. Furman in contemplation of, upon or within
180 days following the merger, then Mr. Furman is
entitled to a lump-sum cash severance payment by PMR on the date
of such termination equal to three times Mr. Furmans
annual base salary plus three times his average annual bonus.

Susan D.
Erskine.In connection with the
merger with Psychiatric Solutions, PMR and Susan D. Erskine,
PMRs Executive Vice President  Development and
Secretary, entered into an amendment to her employment agreement
effective as of May 1, 2002. Pursuant to the amendment, if
Ms. Erskines employment with PMR is terminated by PMR
or Ms. Erskine in contemplation of, upon or within
180 days following the merger, then Ms. Erskine is
entitled to a lump-sum cash severance payment by PMR on the date
of such termination equal to three times Ms. Erskines
annual base salary plus three times her average annual bonus.

33



---



##### Table of Contents





| |                                                                         
| | ------------------------------------------------------------------------
| | Amendments to Promissory Notes of Certain
    PMR Officers and Directors

The outstanding promissory notes of each of Mark
P. Clein, a director of PMR, Fred D. Furman, the President
and General Counsel of PMR, and Susan D. Erskine, the Executive
Vice President  Development, Secretary and a director
of PMR, payable to PMR were amended and restated on May 1,
2002, to:



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | permit the payment of all outstanding principal
    and interest thereon to be paid through the delivery of shares
    of PMR common stock and provide that each share delivered for
    such purpose would be valued at the higher of:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | $2.64 in the case of Mr. Clein, $2.94 in the
    case of Mr. Furman and $2.00 in the case of
    Ms. Erskine, and
|
| |  | the average closing price of PMR common stock for
    the five trading days prior to any such delivery; and      



| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | eliminate the provision in each note which
    required any dividends received with respect to shares being
    purchased with the proceeds of such note to be immediately
    applied toward the payment of amounts outstanding under such
    note.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Certain Fees to be Paid to an Entity Owned
    and Controlled by PMR Director

PMR entered into an agreement with McGettigan,
Wick & Co., Inc. on February 8, 2001 to provide
financial services to the management and board of directors of
PMR in connection with potential strategic alternatives for PMR.
PMR paid McGettigan, Wick & Co., Inc. a $30,000
retainer fee and has agreed to reimburse all reasonable
out-of-pocket expenses incurred by McGettigan, Wick &
Co. In addition, upon the closing of the merger with Psychiatric
Solutions, PMR has agreed to pay McGettigan, Wick &
Co., Inc. an advisory fee equal to $270,000 in cash.
Charles C. McGettigan, a director and significant
stockholder of PMR, and Myron A. Wick III, a significant
stockholder of PMR, are each a founder, owner and managing
director of McGettigan, Wick & Co., Inc.

Indemnification of Certain Persons

In connection with the merger with Psychiatric
Solutions, PMR has agreed to indemnify Psychiatric
Solutions current officers and directors pursuant to terms
no less favorable than those contained in Psychiatric
Solutions certificate of incorporation and bylaws. PMR has
agreed not to amend, repeal or otherwise modify these provisions
for a period of six years from the effective time of the merger
in any manner that would adversely affect the rights of
Psychiatric Solutions present directors and officers.

PMR has agreed that, for six years after
completion of the merger, it will maintain directors and
officers liability insurance for PMRs current directors
and officers comparable to the insurance provided to such
persons immediately prior to the effective time of the merger,
subject to certain limitations.

PMR has also agreed that, for six years after
completion of the merger, it will maintain directors and
officers liability insurance for Psychiatric Solutions
current directors and officers comparable to the insurance
provided to such persons immediately prior to the effective time
of the merger, subject to certain limitations.

Allen Tepper
Employment/Consulting Agreement

In connection with the merger with Psychiatric
Solutions, Allen Tepper, currently the Chairman of the Board of
Directors and Chief Executive Officer of PMR, will enter into an
employment or consulting agreement with the combined company
pursuant to which he will receive monthly compensation of $5,000
and may be eligible for health benefits. The employment
agreement would be for an initial term of 12 months and
would include a non-competition provision restricting
Mr. Teppers ability to compete with the Tennessee
Mental Health Cooperative for a period of one year following the
effective time of the merger.

34



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##### Table of Contents



Contingent
Value Rights Representative

The merger agreement with Psychiatric Solutions
permits PMR to issue Contingent Value Rights (CVRs)
prior to the effective time of the merger to each holder of
outstanding PMR common stock pursuant to a CVR agreement to be
entered into among PMR, Fred D. Furman, as representative of the
CVR holders, and StockTrans, Inc., as trustee. In the event that
PMR issues the CVRs, CVR holders would be entitled to receive:



| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a cash distribution within 90 days of the
    effective time of the merger equal to the amount of PMRs
    cash and cash equivalents in excess of $5.05 million as of
    the effective time of the merger; and
|
| |  | quarterly cash payments equal to the cash and
    cash equivalents collected on certain PMR accounts receivable
    during the two-year period following the effective time of the
    merger.                  

Although PMR presently intends to issue the CVRs,
it may determine not to issue the CVRs if the cash amount
distributable in respect of the CVRs is not likely to be
sufficient to justify the costs and expenses associated with the
CVRs, due to (i) collection by PMR of the designated
accounts receivable prior to the effective time of the merger,
(ii) a determination by PMR that a significant amount of
these accounts receivable are not likely to be collected, or
(iii) a combination of these factors.

The CVR agreement appoints a representative,
initially Fred D. Furman, the current President and General
Counsel of PMR, to act as an agent for PMR to assist in the
collection of legacy receivables. PMR will provide the
representative with accounting, legal and administrative support
during the term of the CVR agreement. The representative will
have the power and authority, subject to the prior written
consent of PMR, to bring any action, suit or other legal
proceeding with respect to any legacy receivable.

PMR will compensate the representative as follows:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $5,000 monthly following the execution of
    the CVR agreement for a 12-month period;                                                                                                                      
|
| |  | $3,500 monthly thereafter until the CVRs
    have expired by their terms; and                                                                                                                               
|
| |  | 10% of actual collections of the legacy
    receivables related to the management contracts of PMR with
    either Centennial Medical Center or Skyline Hospital (formerly
    Nashville Memorial Hospital).

PMR also agrees to:



| |   |                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | advance all reasonable expenses and disbursements
    incurred or to be incurred by the representative; and                                                                                                                                                                
|
| |  | indemnify the representative for any loss,
    liability or expense incurred without willful misconduct or bad
    faith on the part of the representative, arising out of or in
    connection with the exercise or performance of his duties under
    the CVR agreement.

35



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##### Table of Contents






PART IV




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

(a) The following documents are filed as
part of this Annual Report on Form 10-K:



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | 1. Financial Statements: The
    financial statements of PMR are included as follows:

|                                                    |  |      |     | 
|--------------------------------------------------- |  | ---- | --- | 
|                                                    |  | Page
|                                                    |  |     
|Report of Independent Auditors                      |  |      | F-2 | 
|Consolidated Balance Sheets                         |  |      | F-3 | 
|Consolidated Statements of Operations               |  |      | F-4 | 
|Consolidated Statements of Stockholders
    Equity |  |      | F-5 | 
|Consolidated Statements of Cash Flows               |  |      | F-6 | 
|Notes to Consolidated Financial Statements          |  |      | F-7 | 



| |                                  
| | ---------------------------------
| | 2. Financial Statement Schedules.

|                                                    |  |      |     | 
|--------------------------------------------------- |  | ---- | --- | 
|                                                    |  | Page
|                                                    |  |     
|Schedule II  Valuation and
    Qualifying Accounts |  |      | S-1 | 



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. The exhibits which are filed with this
    report or which are incorporated herein by reference are set
    forth in the Exhibit Index on pages 36 through 39.

(b) Reports on Form 8-K:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On May 6, 2002 PMR filed a Report on
    Form 8-K, which reported under Item 2, (1) the
    issuance of a press release announcing the execution of a
    definitive merger agreement among PMR, PMR Acquisition
    Corporation, and Psychiatric Solutions, Inc., and (2) the
    declaration by PMRs board of directors of a cash dividend
    of $1.70 per share of common stock, payable on May 24, 2002
    to the stockholders of record as of the close of business on
    May 17, 2002.

(c) Exhibits:

|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                              
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 2.1   |             |  | Agreement and Plan of Merger by and between PMR
    Corporation, PMR Acquisition Corporation and Psychiatric
    Solutions, Inc. dated May 6, 2002, as amended by Amendment
    No. 1 dated as of June 10, 2002 and Amendment
    No. 2 dated as of July 9, 2002 (incorporated by
    reference to Annex A to PMRs Registration Statement on
    Form S-4 (Reg. No. 333-90372) (the S-2)).
|        | 3.1   |             |  | PMRs Restated Certificate of Incorporation,
    filed with the Delaware Secretary of State on March 9, 1998
    (incorporated by reference to Exhibit 3.1 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended April 30, 1998 (the 1998 10-K)).                                                                                                                  
|        | 3.2   |             |  | PMRs Amended and Restated Bylaws
    (incorporated by reference to Exhibit 3.2 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended April 30, 1997 (the 1997 10-K)).                                                                                                                                                                                             
|        | 4.1   |             |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                                                                                                                   
|        | 4.2   |             |  | Common Stock Specimen Certificate (incorporated
    by reference to Exhibit 4.1 to PMRs Registration
    Statement on Form S-18 (Reg. No. 23-20095-A)).                                                                                                                                                                                                                                     
|        | 10.1 |             |  | PMRs 1997 Equity Incentive Plan
    (incorporated by reference to Exhibit 10.1 to the 1997
    10-K).                                                                                                                                                                                                                                                                                       
|        | 10.2 |             |  | Form of Incentive Stock Option Agreement under
    the 1997 Plan (incorporated by reference to Exhibit 10.2 to
    the 1997 10-K).                                                                                                                                                                                                                                                           

36



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##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                              
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.3  |             |  | Form of Nonstatutory Stock Option Agreement under
    the 1997 Plan (incorporated by reference to Exhibit 10 to
    the 1997 10-K).                                                                                                                                                                                                                          
|        | 10.4  |             |  | Outside Directors Non-Qualified Stock
    Option Plan of 1992 (the 1992 Plan) (incorporated by
    reference to Exhibit 10.4 to the 1997 10-K).                                                                                                                                                                                                           
|        | 10.5  |             |  | Form of Outside Directors Non-Qualified
    Stock Option Agreement (incorporated by reference to
    Exhibit 10.5 to the 1997 10-K).                                                                                                                                                                                                                        
|        | 10.6  |             |  | Amended and Restated Stock Option Agreement dated
    April 30, 1996, evidencing award to Allen Tepper
    (incorporated by reference to Exhibit 10.6 to the 1997
    10-K).                                                                                                                                                                                 
|        | 10.7  |             |  | Amended and Restated Stock Option Agreement dated
    April 30, 1996, evidencing award to Susan Erskine
    (incorporated by reference to Exhibit 10.7 to the 1997
    10-K).                                                                                                                                                                                
|        | 10.8  |             |  | Amended and Restated Stock Option Agreement dated
    February 1, 1996, evidencing award to Mark Clein
    (incorporated by reference to Exhibit 10.8 to the 1997
    10-K).                                                                                                                                                                                 
|        | 10.9  |             |  | Amended and Restated Stock Option Agreement dated
    February 1, 1996, evidencing award to Mark Clein
    (incorporated by reference to Exhibit 10.9 to the 1997
    10-K).                                                                                                                                                                                 
|        | 10.10 |             |  | Amended and Restated Warrant dated July 9,
    1997, evidencing award to Fred Furman (incorporated by reference
    to Exhibit 10.11 to the 1997 10-K).                                                                                                                                                                                                      
|        | 10.11  |             |  | Restated Management Agreement dated
    April 11, 1997 with Scripps Health (incorporated by
    reference to Exhibit 10.12 to the 1997 10-K).                                                                                                                                                                                                                
|        | 10.12  |             |  | Amendment to Restated Management Agreement dated
    July 15, 1998 with Scripps Health (incorporated by
    reference to Exhibit 10.12 to the 1998 10-K).                                                                                                                                                                                                    
|        | 10.13  |             |  | Sublease dated April 1, 1997 with CMS
    Development and Management Company, Inc. (incorporated by
    reference to Exhibit 10.13 to the 1997 10-K).                                                                                                                                                                                                        
|        | 10.14  |             |  | Management and Affiliation Agreement dated
    April 13, 1995, between Mental Health Cooperative, Inc. and
    Tennessee Mental Health Cooperative, Inc. with Addendum
    (incorporated by reference to Exhibit 10.14 to the 1997
    10-K) (Tennessee Mental Health Cooperative, Inc. subsequently
    changed its name to Collaborative Care Corporation).
|        | 10.15  |             |  | Second Addendum to Management and Affiliation
    Agreement dated November 1, 1996 between Mental Health
    Cooperative, Inc. and Collaborative Care Corporation
    (incorporated by reference to Exhibit 10.15 to the
    Companys Registration Statement on Form S-2 (Reg.
    No. 333-36313)(the S-2)).                                              
|        | 10.16  |             |  | Provider Services Agreement dated April 13,
    1995, between Tennessee Mental Health Cooperative, Inc. and
    Mental Health Cooperative, Inc. (incorporated by reference to
    Exhibit 10.15 to the 1997 10-K) (Tennessee Mental Health
    Cooperative, Inc. subsequently changed its name to Collaborative
    Care Corporation).                       
|        | 10.17  |             |  | Provider Agreement dated December 4, 1995,
    between Tennessee Behavioral Health, Inc. and Tennessee Mental
    Health Corporations, Inc. (incorporated by reference to
    Exhibit 10.19 to the 1998 10-K).                                                                                                                                               
|        | 10.18  |             |  | Addendum No. 1 to Provider Agreement dated
    December 4, 1995, between Tennessee Behavioral Health, Inc.
    and Tennessee Mental Health Cooperative, Inc. (incorporated by
    reference to Exhibit 10.20 to the 1998 10-K).                                                                                                                              
|        | 10.19  |             |  | Addendum No. 2 to Provider Agreement dated
    February 4, 1996, between Tennessee Behavioral Health, Inc.
    and Tennessee Mental Health Cooperative, Inc. (incorporated by
    reference to Exhibit 10.21 to the 1998 10-K).                                                                                                                              
|        | 10.20  |             |  | Provider Participation Agreement dated
    December 1, 1995, among Green Spring Health Services, Inc.,
    AdvoCare, Inc. and Tennessee Mental Health Cooperative, Inc.
    (incorporated by reference to Exhibit 10.22 to the 1998
    10-K).                                                                                                               
|        | 10.21  |             |  | Amendment to Provider Participation Agreement
    dated February 13, 1996, among Green Spring Health
    Services, Inc., AdvoCare of Tennessee, Inc. and Tennessee Mental
    Health Cooperative, Inc. (incorporated by reference to
    Exhibit 10.23 to the 1998 10-K).                                                                                    

37



---



##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                                                      
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.22  |             |  | Subscription Agreement dated June 8, 1998,
    between the Company and Stadtlander Drug Distribution Co., Inc.
    (incorporated by reference to Exhibit 10.24 to the 1998
    10-K).                                                                                                
|        | 10.23  |             |  | Sanwa Bank California Credit Agreement dated
    February 2, 1996, as amended on October 31, 1996
    (incorporated by reference to Exhibit 10.19 to the S-2).                                                                                                                       
|        | 10.24 |             |  | Form of Stock Option granted to Mark P. Clein,
    Fred D. Furman and Susan Erskine dated December 3, 1998
    (incorporated by reference to Exhibit 10.30 to the
    Companys Annual Report on Form 10-K for the year
    ended April 30, 1999 (the 1999 10-K)).                 
|        | 10.25 |             |  | Promissory Note between Mark Clein and PMR
    Corporation in the amount of $467,500, dated January 19,
    2000 (incorporated by reference to Exhibit 10.31 to the
    Companys Quarterly Report on Form 10-Q for the period
    ended January 31, 2000 (the January 2000 10-Q)).
|        | 10.26 |             |  | Promissory Note between Mark Clein and PMR
    Corporation in the amount of $257,208, dated January 19,
    2000 (incorporated by reference to Exhibit 10.32 to the
    January 2000 10-Q).                                                                                          
|        | 10.27 |             |  | Stock Pledge Agreement between Mark Clein and PMR
    Corporation dated January 19, 2000 (incorporated by
    reference to Exhibit 10.33 to the January 2000 10-Q).                                                                                                                  
|        | 10.28 |             |  | Promissory Note between Fred Furman and PMR
    Corporation in the amount of $684,750, dated January 19,
    2000 (incorporated by reference to Exhibit 10.34 to the
    January 2000 10-Q).                                                                                         
|        | 10.29 |             |  | Promissory Note between Fred Furman and PMR
    Corporation in the amount of $193,311, dated January 19,
    2000 (incorporated by reference to Exhibit 10.35 to the
    January 2000 10-Q).                                                                                         
|        | 10.30 |             |  | Stock Pledge Agreement between Fred Furman and
    PMR Corporation dated January 19, 2000 (incorporated by
    reference to Exhibit 10.36 to the January 2000 10-Q).                                                                                                                 
|        | 10.31 |             |  | Promissory Note between Susan Erskine and PMR
    Corporation in the amount of $80,000, dated January 19,
    2000 (incorporated by reference to Exhibit 10.37 to the
    January 2000 10-Q).                                                                                        
|        | 10.32 |             |  | Stock Pledge Agreement between Susan Erskine and
    PMR Corporation dated January 19, 2000 (incorporated by
    reference to Exhibit 10.38 to the January 2000 10-Q).                                                                                                               
|        | 10.33 |             |  | Amended and Restated Promissory Note between Mark
    P. Clein and PMR Corporation in the amount of $59,554, dated as
    of May 1, 2002 (incorporated by Reference to
    Exhibit 10.1 to the S-4).                                                                                 
|        | 10.34 |             |  | Amended and Restated Promissory Note between
    Mark P. Clein and PMR Corporation in the amount of
    $278,504.82, dated as of May 1, 2002 (incorporated by
    Reference to Exhibit 10.2 to the S-4).                                                                             
|        | 10.35 |             |  | Amended and Restated Promissory Note between Fred
    D. Furman and PMR Corporation in the amount of $256,623.60,
    dated as of May 1, 2002 (incorporated by Reference to
    Exhibit 10.3 to the S-4).                                                                            
|        | 10.36 |             |  | Amended and Restated Promissory Note between
    Fred D. Furman and PMR Corporation in the amount of
    $209,317.15, dated as of May 1, 2002 (incorporated by
    Reference to Exhibit 10.4 to the S-4).                                                                            
|        | 10.37 |             |  | Amended and Restated Promissory Note between
    Susan Erskine and PMR Corporation in the amount of $20,414,
    dated as of May 1, 2002 (incorporated by Reference to
    Exhibit 10.5 to the S-4).                                                                                 
|        | 10.38 |             |  | Consulting Agreement between Mark P. Clein and
    PMR Corporation dated as of May 10, 2002 (incorporated by
    Reference to Exhibit 10.6 to the S-4).                                                                                                                              
|        | 10.39 |             |  | Employment Agreement between Fred D. Furman
    and PMR Corporation dated as of August 25, 1999
    (incorporated by Reference to Exhibit 10.7 to the S-4).                                                                                                                          
|        | 10.40 |             |  | Employment Agreement between Susan D.
    Erskine and PMR Corporation dated as of August 25, 1999
    (incorporated by Reference to Exhibit 10.8 to the S-4).                                                                                                                        
|        | 10.41 |             |  | Amendment to Employment Agreement between
    Fred D. Furman and PMR Corporation dated as of May 1,
    2002 (incorporated by Reference to Exhibit 10.9 to the S-4).                                                                                                                 

38



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##### Table of Contents



|        |        |             |  |                                                                                                                                                                     
|------- | ------ | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.42 |             |  | Amendment to Employment Agreement between Susan
    Erskine and PMR Corporation dated as of May 1, 2002
    (incorporated by Reference to Exhibit 10.10 to the S-4).
|        | 21.1*  |             |  | List of Subsidiaries.                                                                                                                                               
|        | 23.1*  |             |  | Consent of Ernst & Young LLP, Independent
    Auditors.                                                                                                             



---



| |   |                
| | - | ---------------
| | * | Filed herewith.



| |   |                                                             
| | - | ------------------------------------------------------------
| |  | Management contract or compensatory plan or
    arrangement.

39



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, PMR has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on July 29, 2002.



| |                
| | ---------------
| | PMR CORPORATION



| |     |                   
| | --- | ------------------
| | By: | /s/ FRED D. FURMAN

| |                              
| | -----------------------------
| |                              
| | Fred D. Furman               
| | President and General Counsel

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Fred D. Furman and Reggie A. Roman, and each or any one of
them, his true and lawful attorney-in-fact and agent, with full
power of substitution and re-substitution, for him and in his
name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this
Form 10-K, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do
or cause to be done by virtue hereof.

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

|                                               |  |                                                                                                      |  |               |  | 
|---------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | ------------- |  | 
|                                               |  |                                                                                                      |  |              
|Signature                                      |  | Title                                                                                                |  | Date         
|                                               |  |                                                                                                      |  |              
|                                              
|/s/ ALLEN TEPPERAllen Tepper                   |  | Chairman of the Board of Directors
    and Chief Executive Officer
    (Principal Executive Officer) |  | July 29, 2002
|                                              
|/s/ MARK P. CLEINMark P. Clein                 |  | Director                                                                                             |  | July 29, 2002
|                                              
|/s/ FRED D. FURMANFred D. Furman               |  | President and General Counsel                                                                        |  | July 29, 2002
|                                              
|/s/ SUSAN D. ERSKINESusan D. Erskine           |  | Executive Vice President, Secretary,
    and Director                                                |  | July 29, 2002
|                                              
|/s/ SATISH TYAGISatish Tyagi                   |  | Director                                                                                             |  | July 29, 2002
|                                              
|/s/ CHARLES C. MCGETTIGANCharles C. McGettigan |  | Director                                                                                             |  | July 29, 2002
|                                              
|/s/ EUGENE D. HILLEugene D. Hill               |  | Director                                                                                             |  | July 29, 2002

40



---



##### Table of Contents



|                                   |  |                                                           |  |               |  | 
|---------------------------------- |  | --------------------------------------------------------- |  | ------------- |  | 
|                                   |  |                                                           |  |              
|Signature                          |  | Title                                                     |  | Date         
|                                   |  |                                                           |  |              
|                                  
|/s/ RICHARD NIGLIORichard Niglio   |  | Director                                                  |  | July 29, 2002
|                                  
|/s/ REGGIE A. ROMANReggie A. Roman |  | Chief Financial Officer
    (Principal Financial Officer) |  | July 29, 2002

41



---



##### Table of Contents



INDEX TO PMR CONSOLIDATED FINANCIAL
STATEMENTS

|                |                                                                                                       |  |  |     | 
|--------------- | ----------------------------------------------------------------------------------------------------- |  |  | --- | 
|PMR CORPORATION |                                                                                                       |  |  |    
|                | Report of Independent Auditors                                                                        |  |  | F-2 | 
|                | Consolidated Balance Sheets as of April 30,
    2002 and 2001                                         |  |  | F-3 | 
|                | Consolidated Statements of Operations for the
    years ended April 30, 2002, 2001 and 2000           |  |  | F-4 | 
|                | Consolidated Statements of Stockholders
    Equity for the years ended April 30, 2002, 2001 and 2000 |  |  | F-5 | 
|                | Consolidated Statements of Cash Flows for the
    years ended April 30, 2002, 2001 and 2000           |  |  | F-6 | 
|                | Notes to Consolidated Financial Statements                                                            |  |  | F-7 | 
|                | Valuation and Qualifying Accounts                                                                     |  |  | S-1 | 

F-1



---



##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Stockholders

PMR Corporation


We have audited the accompanying consolidated
balance sheets of PMR Corporation as of April 30, 2002 and
2001, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended April 30, 2002. Our audits also
included the financial statement schedule listed in the index at
item 14(a). These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
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 financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of PMR Corporation at
April 30, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended April 30, 2002, 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.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

San Diego, California

June 21, 2002


F-2



---



##### Table of Contents



PMR Corporation

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                |                                                                                                                                               |           |            |             |   |   |            |             |  
|------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | --------- | ---------- | ----------- | - | - | ---------- | ----------- | -
|                                                                                                                                |                                                                                                                                               |          
|                                                                                                                                |                                                                                                                                               | April 30,
|                                                                                                                                |                                                                                                                                               |          
|                                                                                                                                |                                                                                                                                               | 2002      |            | 2001       
|                                                                                                                                |                                                                                                                                               |           |            |            
|ASSETS                                                                                                                         
|Current assets:                                                                                                                 |                                                                                                                                               |           |            |             |   |   |            |            
|                                                                                                                                | Cash and cash equivalents                                                                                                                     |           | $          | 14,847,153  |   |   | $          | 13,636,122  |  
|                                                                                                                                | Short-term investments, available-for-sale                                                                                                    |           |            | 7,767,116   |   |   |            | 4,129,364   |  
|                                                                                                                                | Accounts receivable, net of allowance for
    doubtful accounts of $2,060,000 in 2002 and $4,992,000 in 2001                                  |           |            | 909,605     |   |   |            | 794,549     |  
|                                                                                                                                | Prepaid expenses and other current assets                                                                                                     |           |            | 679,295     |   |   |            | 453,768     |  
|                                                                                                                                |                                                                                                                                               |           |            |             |   |   |            |            
|Total current assets                                                                                                            |                                                                                                                                               |           | 24,203,169 |             |   |   | 19,013,803 |            
|Furniture and office equipment, net of
    accumulated depreciation of $1,617,000 in 2002 and $2,400,000 in
    2001            |                                                                                                                                               |           | 163,842    |             |   |   | 742,754    |            
|Long-term accounts and notes receivable, net of
    allowance for doubtful accounts of $91,000 in 2002 and $520,000
    in 2001 |                                                                                                                                               |           | 407,028    |             |   |   | 1,514,482  |            
|Other long-term assets                                                                                                          |                                                                                                                                               |           | 28,166     |             |   |   | 88,035     |            
|                                                                                                                                |                                                                                                                                               |           |            |             |   |   |            |            
|                                                                                                                                | Total assets                                                                                                                                  |           | $          | 24,802,205  |   |   | $          | 21,359,074  |  
|                                                                                                                                |                                                                                                                                               |           |            |             |   |   |            |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                           
|Current liabilities:                                                                                                            |                                                                                                                                               |           |            |             |   |   |            |            
|                                                                                                                                | Accounts payable                                                                                                                              |           | $          | 194,038     |   |   | $          | 466,564     |  
|                                                                                                                                | Accrued expenses                                                                                                                              |           |            | 928,438     |   |   |            | 1,274,788   |  
|                                                                                                                                | Accrued compensation and employee benefits                                                                                                    |           |            | 311,851     |   |   |            | 530,646     |  
|                                                                                                                                | Advances from case management agencies                                                                                                        |           |            | 1,944,472   |   |   |            | 1,312,187   |  
|                                                                                                                                |                                                                                                                                               |           |            |             |   |   |            |            
|Total current liabilities                                                                                                       |                                                                                                                                               |           | 3,378,799  |             |   |   | 3,584,185  |            
|Contract settlement reserve                                                                                                     |                                                                                                                                               |           | 2,048,597  |             |   |   | 4,199,146  |            
|Note payable, long-term portion                                                                                                 |                                                                                                                                               |           |           |             |   |   | 81,284     |            
|Other long-term liabilities                                                                                                     |                                                                                                                                               |           |           |             |   |   | 27,360     |            
|Stockholders equity:                                                                                                           |                                                                                                                                               |           |            |             |   |   |            |            
|                                                                                                                                | Convertible preferred stock, $.01 par value,
    authorized shares  1,000,000; issued &
    outstanding shares  none in 2002 and 2001       |           |            |            |   |   |            |            |  
|                                                                                                                                | Common stock, $.01 par value, authorized
    shares  19,000,000; issued and outstanding
    shares  7,290,017 in 2002 and 7,255,017 in 2001 |           |            | 72,650      |   |   |            | 72,550      |  
|                                                                                                                                | Additional paid-in capital                                                                                                                    |           |            | 31,365,808  |   |   |            | 31,259,688  |  
|                                                                                                                                | Notes receivable from employees and officers, net                                                                                             |           |            | (373,017    | ) |   |            | (539,260    | )
|                                                                                                                                | Accumulated other comprehensive income                                                                                                        |           |            | 31,829      |   |   |            | 49,747      |  
|                                                                                                                                | Accumulated deficit                                                                                                                           |           |            | (11,526,954 | ) |   |            | (17,348,126 | )
|                                                                                                                                | Treasury stock, at cost                                                                                                                       |           |            | (195,507    | ) |   |            | (27,500     | )
|                                                                                                                                |                                                                                                                                               |           |            |             |   |   |            |            
|Total stockholders equity                                                                                                      |                                                                                                                                               |           | 19,374,809 |             |   |   | 13,467,099 |            
|                                                                                                                                |                                                                                                                                               |           |            |             |   |   |            |            
|Total liabilities and stockholders equity                                                                                      |                                                                                                                                               | $         | 24,802,205 |             |   | $ | 21,359,074 |            
|                                                                                                                                |                                                                                                                                               |           |            |             |   |   |            |            

See accompanying notes.

F-3



---



##### Table of Contents



PMR Corporation

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |            |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | --------------------- | ---------- | ---------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                                                                                                                  |                                               |                      
|                                                                                                                                                  |                                               | Years Ended April 30,
|                                                                                                                                                  |                                               |                      
|                                                                                                                                                  |                                               | 2002                  |            | 2001       |            | 2000
|                                                                                                                                                  |                                               |                       |            |            |            |     
|Revenues                                                                                                                                          |                                               | $                     | 20,746,624 |            |            | $    | 17,682,291  |            |            | $ | 42,510,179  |           
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|Expenses:                                                                                                                                         |                                               |                       |            |            |            |      |             |            |            |   |             |           
|                                                                                                                                                  | Direct operating expenses                     |                       |            | 16,231,237 |            |      |             | 15,287,649 |            |   |             | 34,626,858 |           
|                                                                                                                                                  | Research and development                      |                       |            | 210,851    |            |      |             | 997,117    |            |   |             |           |           
|                                                                                                                                                  | Marketing, general and administrative         |                       |            | 3,902,745  |            |      |             | 8,292,006  |            |   |             | 8,561,708  |           
|                                                                                                                                                  | Provision for (recovery of) doubtful accounts |                       |            | (3,195,115 | )          |      |             | 723,376    |            |   |             | 5,128,847  |           
|                                                                                                                                                  | Depreciation and amortization                 |                       |            | 542,993    |            |      |             | 1,361,740  |            |   |             | 1,010,415  |           
|                                                                                                                                                  | Software development amortization             |                       |            |           |            |      |             | 2,759,942  |            |   |             |           |           
|                                                                                                                                                  | Special charge                                |                       |            | 1,070,046  |            |      |             | 1,246,425  |            |   |             | 1,432,823  |           
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|                                                                                                                                                  |                                               | Total expenses        |            |            | 18,762,757 |      |             |            | 30,668,255 |   |             |            | 50,760,651 | 
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|Interest expense                                                                                                                                  |                                               |                       | (11,326    | )          |            |      | (20,625     | )          |            |   | (26,908     | )         
|Interest income                                                                                                                                   |                                               |                       | 616,337    |            |            |      | 1,307,743   |            |            |   | 1,491,977   |           
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|Income (loss) from continuing operations
    before income taxes                                                                                  |                                               |                       | 2,588,878  |            |            |      | (11,698,846 | )          |            |   | (6,785,403  | )         
|Income tax (benefit) expense                                                                                                                      |                                               |                       | (3,232,294 | )          |            |      | (929,305    | )          |            |   | 4,881,927   |           
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|Net income (loss) from continuing operations                                                                                                      |                                               |                       | 5,821,172  |            |            |      | (10,769,541 | )          |            |   | (11,667,330 | )         
|Results from discontinued operation 
    Stadt Solutions LLC                                                                                     |                                               |                       |           |            |            |      |            |            |            |   | 664,011     |           
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|Net income (loss)                                                                                                                                 |                                               | $                     | 5,821,172  |            |            | $    | (10,769,541 | )          |            | $ | (11,003,319 | )         
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|Earnings (loss) per common share from
    continuing operations:                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|                                                                                                                                                  | Basic                                         |                       | $          | 0.81       |            |      | $           | (1.52      | )          |   | $           | (1.77      | )         
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|                                                                                                                                                  | Diluted                                       |                       | $          | 0.81       |            |      | $           | (1.52      | )          |   | $           | (1.77      | )         
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|Earnings per common share from discontinued
    operation:                                                                                        |                                               |                       |            |            |            |      |             |            |            |   |             |           
|                                                                                                                                                  | Basic                                         |                       | $          |           |            |      | $           |           |            |   | $           | 0.10       |           
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|                                                                                                                                                  | Diluted                                       |                       | $          |           |            |      | $           |           |            |   | $           | 0.10       |           
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|Earnings (loss) per common share:                                                                                                                 |                                               |                       |            |            |            |      |             |            |            |   |             |           
|                                                                                                                                                  | Basic                                         |                       | $          | 0.81       |            |      | $           | (1.52      | )          |   | $           | (1.67      | )         
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|                                                                                                                                                  | Diluted                                       |                       | $          | 0.81       |            |      | $           | (1.52      | )          |   | $           | (1.67      | )         
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|Dividend declared per share of common stock
    outstanding of 7,255,017 shares on December 29, 2000 and
    7,053,689 shares on January 26, 2000 |                                               | $                     |           |            |            | $    | 1.00        |            |            | $ | 1.50        |           
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|Shares used in computing per share amounts:                                                                                                       |                                               |                       |            |            |            |      |             |            |            |   |             |           
|                                                                                                                                                  | Basic                                         |                       |            | 7,202,236  |            |      |             | 7,098,000  |            |   |             | 6,606,322  |           
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           
|                                                                                                                                                  | Diluted                                       |                       |            | 7,211,888  |            |      |             | 7,098,000  |            |   |             | 6,606,322  |           
|                                                                                                                                                  |                                               |                       |            |            |            |      |             |            |            |   |             |           

See accompanying notes.

F-4



---



##### Table of Contents



PMR CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                          |                                                                            |                 |   |              |  |            |   |           |  |            |           |          |  |               |        |               |  |      |            |             |   |   |          |            |   |   |             |             |   |   |          |            |   |   |          |          |   |   |            |             |  
|------------------------- | -------------------------------------------------------------------------- | --------------- | - | ------------ |  | ---------- | - | --------- |  | ---------- | --------- | -------- |  | ------------- | ------ | ------------- |  | ---- | ---------- | ----------- | - | - | -------- | ---------- | - | - | ----------- | ----------- | - | - | -------- | ---------- | - | - | -------- | -------- | - | - | ---------- | ----------- | -
|                          |                                                                            |                 |   |              |  |            |   |           |  |            |           | Notes    |  |               |        |               |  |      |            |            
|                          |                                                                            |                 |   |              |  |            |   |           |  | Receivable |           |          |  |               |        | Accumulated   |  |     
|                          |                                                                            | Convertible     |   |              |  |            |   | from      |  |            |           |          |  | Other         |        |              
|                          |                                                                            | Preferred Stock |   | Common Stock |  | Additional |   | Employees |  | Retained   |           |          |  | Comprehensive |        | Total        
|                          |                                                                            |                 |   |              |  | Paid-in    |   | and       |  | Earnings   |           | Treasury |  | Income        |        | Stockholders
|                          |                                                                            | Shares          |   | Amount       |  | Shares     |   | Amount    |  | Capital    |           | Officers |  | (Deficit)     |        | Stock         |  | Loss |            | Equity     
|                          |                                                                            |                 |   |              |  |            |   |           |  |            |           |          |  |               |        |               |  |      |            |            
|Balance at April 30, 1999 |                                                                            |                 |  |              |  |            |  |           |  |            | 6,988,878 |          |  | $             | 69,889 |               |  | $    | 48,123,385 |             |   | $ |         |            |   | $ | 5,400,242   |             |   | $ | (942,500 | )          |   | $ |         |          |   | $ | 52,651,016 |            
|                          | Acquisition of treasury stock at cost                                      |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             |            |   |   |          | (1,786,406 | ) |   |          |         |   |   |            | (1,786,406  | )
|                          | Issuance of common stock under stock option plan                           |                 |   |             |  |            |   |          |  |            |           | 69,139   |  |               |        | 691           |  |      |            | 250,342     |   |   |          |           |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | 251,033     |  
|                          | Reissued treasury stock under stock option plan                            |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             | 13,326      |   |   |          | 427,822    |   |   |          |         |   |   |            | 441,148     |  
|                          | Reissued treasury stock in exchange of notes
    receivable                |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          | (1,312,250 | ) |   |             | (988,834    | ) |   |          | 2,301,084  |   |   |          |         |   |   |            |            |  
|                          | Proceeds from payment of employees and officers                            |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          | 980,250    |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | 980,250     |  
|                          | Stock compensation expense                                                 |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            | 202,790     |   |   |          |           |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | 202,790     |  
|                          | Dividend paid on common stock                                              |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            | (10,580,534 | ) |   |          |           |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | (10,580,534 | )
|                          | Net loss                                                                   |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             | (11,003,319 | ) |   |          |           |   |   |          |         |   |   |            | (11,003,319 | )
|                          | Unrealized loss on short-term investments                                  |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             |            |   |   |          |           |   |   |          | (154,274 | ) |   |            | (154,274    | )
|                          |                                                                            |                 |   |              |  |            |   |           |  |            |           |          |  |               |        |               |  |      |            |             |   |   |          |            |   |   |             |             |   |   |          |            |   |   |          |          |   |   |            |            
|                          | Comprehensive loss                                                         |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | (11,157,593 | )
|                          |                                                                            |                 |   |              |  |            |   |           |  |            |           |          |  |               |        |               |  |      |            |             |   |   |          |            |   |   |             |             |   |   |          |            |   |   |          |          |   |   |            |            
|Balance at April 30, 2000 |                                                                            |                 |  |              |  |            |  |           |  |            | 7,058,017 |          |  |               | 70,580 |               |  |      | 37,995,983 |             |   |   | (332,000 | )          |   |   | (6,578,585  | )           |   |   |         |            |   |   | (154,274 | )        |   |   | 31,001,704 |            
|                          | Acquisition of treasury stock at cost                                      |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             |            |   |   |          | (27,500    | ) |   |          |         |   |   |            | (27,500     | )
|                          | Issuance of common stock under stock option plan                           |                 |   |             |  |            |   |          |  |            |           | 197,000  |  |               |        | 1,970         |  |      |            | 423,353     |   |   |          | (423,260   | ) |   |             |            |   |   |          |           |   |   |          |         |   |   |            | 2,063       |  
|                          | Proceeds from payments on notes receivable from
    employees and officers |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          | 216,000    |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | 216,000     |  
|                          | Stock compensation expense                                                 |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            | 95,368      |   |   |          |           |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | 95,368      |  
|                          | Dividend paid on common stock                                              |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            | (7,255,016  | ) |   |          |           |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | (7,255,016  | )
|                          | Net loss                                                                   |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             | (10,769,541 | ) |   |          |           |   |   |          |         |   |   |            | (10,769,541 | )
|                          | Unrealized gain on short-term investments                                  |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             |            |   |   |          |           |   |   |          | 204,021  |   |   |            | 204,021     |  
|                          |                                                                            |                 |   |              |  |            |   |           |  |            |           |          |  |               |        |               |  |      |            |             |   |   |          |            |   |   |             |             |   |   |          |            |   |   |          |          |   |   |            |            
|                          | Comprehensive loss                                                         |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | (10,565,520 | )
|                          |                                                                            |                 |   |              |  |            |   |           |  |            |           |          |  |               |        |               |  |      |            |             |   |   |          |            |   |   |             |             |   |   |          |            |   |   |          |          |   |   |            |            
|Balance at April 30, 2001 |                                                                            |                 |  |              |  |            |  |           |  |            | 7,255,017 |          |  |               | 72,550 |               |  |      | 31,259,688 |             |   |   | (539,260 | )          |   |   | (17,348,126 | )           |   |   | (27,500  | )          |   |   | 49,747   |          |   |   | 13,467,099 |            
|                          | Acquisition of treasury stock at cost                                      |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             |            |   |   |          | (168,007   | ) |   |          |         |   |   |            | (168,007    | )
|                          | Issuance of common stock                                                   |                 |   |             |  |            |   |          |  |            |           | 35,000   |  |               |        | 100           |  |      |            | 71,150      |   |   |          |           |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | 71,250      |  
|                          | Proceeds from payments on notes receivable from
    employees and officers |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          | 103,510    |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | 103,510     |  
|                          | Stock compensation expense                                                 |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            | 34,970      |   |   |          |           |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | 34,970      |  
|                          | Allowance on notes receivable                                              |                 |   |              |  |            |   |           |  |            |           |          |  |               |        |               |  |      |            |             |   |   |          | 62,733     |   |   |             |             |   |   |          |            |   |   |          |          |   |   |            | 62,733      |  
|                          | Net income                                                                 |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             | 5,821,172   |   |   |          |           |   |   |          |         |   |   |            | 5,821,172   |  
|                          | Unrealized gain on short-term investments                                  |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             |            |   |   |          |           |   |   |          | (17,918  | ) |   |            | (17,918     | )
|                          |                                                                            |                 |   |              |  |            |   |           |  |            |           |          |  |               |        |               |  |      |            |             |   |   |          |            |   |   |             |             |   |   |          |            |   |   |          |          |   |   |            |            
|                          | Comprehensive income                                                       |                 |   |             |  |            |   |          |  |            |           |         |  |               |        |              |  |      |            |            |   |   |          |           |   |   |             |            |   |   |          |           |   |   |          |         |   |   |            | 5,803,254   |  
|                          |                                                                            |                 |   |              |  |            |   |           |  |            |           |          |  |               |        |               |  |      |            |             |   |   |          |            |   |   |             |             |   |   |          |            |   |   |          |          |   |   |            |            
|Balance at April 30, 2002 |                                                                            |                 |  |              |  |            |  |           |  |            | 7,290,017 |          |  | $             | 72,650 |               |  | $    | 31,365,808 |             |   | $ | (373,017 | )          |   | $ | (11,526,954 | )           |   | $ | (195,507 | )          |   | $ | 31,829   |          |   | $ | 19,374,809 |            
|                          |                                                                            |                 |   |              |  |            |   |           |  |            |           |          |  |               |        |               |  |      |            |             |   |   |          |            |   |   |             |             |   |   |          |            |   |   |          |          |   |   |            |            

See accompanying notes.

F-5



---



##### Table of Contents



PMR CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                           |                                                   |                                            |             |            |            |      |             |           |            |   |             |           |            |  
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------ | ----------- | ---------- | ---------- | ---- | ----------- | --------- | ---------- | - | ----------- | --------- | ---------- | -
|                                                                                                           |                                                   |                                           
|                                                                                                           |                                                   | Years Ended April 30,                     
|                                                                                                           |                                                   |                                           
|                                                                                                           |                                                   | 2002                                       |             | 2001       |            | 2000
|                                                                                                           |                                                   |                                            |             |            |            |     
|Operating activities                                                                                       |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Net income (loss)                                                                                          |                                                   | $                                          | 5,821,172   |            |            | $    | (10,769,541 | )         |            | $ | (11,003,319 | )        
|Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|                                                                                                           | Depreciation and amortization                     |                                            |             | 542,993    |            |      |             | 4,121,682 |            |   |             | 1,010,415 |           
|                                                                                                           | Special charge                                    |                                            |             | 1,070,046  |            |      |             | 1,246,425 |            |   |             | 1,432,823 |           
|                                                                                                           | Provision for (recovery of) doubtful accounts     |                                            |             | (3,285,820 | )          |      |             | 723,376   |            |   |             | 5,128,847 |           
|                                                                                                           | Stock compensation expense                        |                                            |             | 155,203    |            |      |             | 95,368    |            |   |             | 202,790   |           
|                                                                                                           | Deferred income taxes, net of valuation allowance |                                            |             |           |            |      |             |          |            |   |             | 8,071,815 |           
|                                                                                                           | Changes in operating assets and liabilities:      |                                            |             |            |            |      |             |           |            |   |             |           |           
|                                                                                                           |                                                   | Accounts and notes receivable              |             |            | 4,278,218  |      |             |           | 4,633,483  |   |             |           | 11,950,486 |  
|                                                                                                           |                                                   | Prepaid expenses and other assets          |             |            | (176,598   | )    |             |           | 758,395    |   |             |           | 668,018    |  
|                                                                                                           |                                                   | Accounts payable and accrued expenses      |             |            | (1,418,216 | )    |             |           | (1,051,777 | ) |             |           | (2,565,844 | )
|                                                                                                           |                                                   | Accrued compensation and employee benefits |             |            | (218,795   | )    |             |           | (305,220   | ) |             |           | (1,247,216 | )
|                                                                                                           |                                                   | Advances from case management agencies     |             |            | 632,285    |      |             |           | 227,991    |   |             |           | 237,843    |  
|                                                                                                           |                                                   | Payable to related party                   |             |            |           |      |             |           |           |   |             |           | (3,052,610 | )
|                                                                                                           |                                                   | Contract settlement reserve                |             |            | (2,150,549 | )    |             |           | (1,113,909 | ) |             |           | (1,359,672 | )
|                                                                                                           |                                                   | Minority interest                          |             |            |           |      |             |           |           |   |             |           | (1,921,057 | )
|                                                                                                           |                                                   | Other long-term liabilities                |             |            | (27,360    | )    |             |           | (18,613    | ) |             |           | (7,466     | )
|                                                                                                           |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Net cash provided by (used in) operating
    activities                                                    |                                                   |                                            | 5,222,579   |            |            |      | (1,452,340  | )         |            |   | 7,545,853   |          
|                                                                                                           |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Investing activities                                                                                       |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Proceeds from the sale and maturity of short-term
    investments                                          |                                                   |                                            | 6,520,601   |            |            |      | 16,980,209  |           |            |   | 15,576,782  |          
|Purchases of short-term investments                                                                        |                                                   |                                            | (10,176,271 | )          |            |      | (2,325,798  | )         |            |   | (6,801,256  | )        
|Software development costs                                                                                 |                                                   |                                            |            |            |            |      | (1,187,654  | )         |            |   | (1,572,288  | )        
|Purchases of furniture and office equipment, net
    of disposals                                          |                                                   |                                            | (223,847    | )          |            |      | (391,253    | )         |            |   | (205,393    | )        
|                                                                                                           |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Net cash (used in) provided by investing
    activities                                                    |                                                   |                                            | (3,879,517  | )          |            |      | 13,075,504  |           |            |   | 6,997,845   |          
|                                                                                                           |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Financing activities                                                                                       |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Cash dividend paid                                                                                         |                                                   |                                            |            |            |            |      | (7,255,016  | )         |            |   | (10,580,534 | )        
|Acquisition of treasury stock                                                                              |                                                   |                                            | (86,757     | )          |            |      | (27,500     | )         |            |   | (1,786,406  | )        
|Issuance of common stock                                                                                   |                                                   |                                            | 13,750      |            |            |      | 2,063       |           |            |   | 251,033     |          
|Issuance of treasury stock                                                                                 |                                                   |                                            |            |            |            |      |            |           |            |   | 441,148     |          
|Proceeds from payments of notes receivable from
    employees and officers                                 |                                                   |                                            | 22,260      |            |            |      | 216,000     |           |            |   | 980,250     |          
|Payments on note payable to bank                                                                           |                                                   |                                            | (81,284     | )          |            |      | (114,843    | )         |            |   | (97,947     | )        
|                                                                                                           |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Net cash used in financing activities                                                                      |                                                   |                                            | (132,031    | )          |            |      | (7,179,296  | )         |            |   | (10,792,456 | )        
|                                                                                                           |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Net increase in cash and cash equivalents                                                                  |                                                   |                                            | 1,211,031   |            |            |      | 4,443,868   |           |            |   | 3,751,242   |          
|Cash and cash equivalents of discontinued
    operation                                                    |                                                   |                                            |            |            |            |      |            |           |            |   | 192,166     |          
|Cash and cash equivalents at beginning of period                                                           |                                                   |                                            | 13,636,122  |            |            |      | 9,192,254   |           |            |   | 5,248,846   |          
|                                                                                                           |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Cash and cash equivalents at end of period                                                                 |                                                   | $                                          | 14,847,153  |            |            | $    | 13,636,122  |           |            | $ | 9,192,254   |          
|                                                                                                           |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Supplemental information:                                                                                  |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Tax refund, net                                                                                            |                                                   | $                                          | (2,570,803  | )          |            | $    | (938,706    | )         |            | $ | (3,624,370  | )        
|Interest paid                                                                                              |                                                   | $                                          | 11,326      |            |            | $    | 20,625      |           |            | $ | 28,521      |          
|Supplemental disclosure of non-cash financing
    activities:                                              |                                                   |                                            |             |            |            |      |             |           |            |   |             |          
|Cancellation of note receivable from officer for
    treasury shares                                       |                                                   | $                                          | 81,250      |            |            | $    |            |           |            | $ |            |          

See accompanying notes.

F-6



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##### Table of Contents



PMR CORPORATION

NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS

1.     Organization
and Significant Accounting Policies

Organization,
Business and Principles of Consolidation

PMR Corporation and its subsidiaries
(PMR or the Company) develops and
manages specialized mental health care programs and disease
management services designed to treat individuals diagnosed with
a serious mental illness (SMI), primarily
schizophrenia and bipolar disorder (i.e., manic-depressive
illness). The Company currently manages, administers or provides
consulting services for outpatient and community-based
psychiatric services for SMI patients, consisting of two
outpatient programs (the Outpatient Programs) and
case management programs for a case management agency in and
around the Nashville, Tennessee area (the Case Management
Programs). During the fiscal year ended April 30,
2002, the Company continued to focus on maximizing cash flow in
the Health Services Programs as it evaluated its strategic
alternatives.

In fiscal year 2000, the Company launched a
health information business through InfoScriber Corporation
(InfoScriber), its wholly-owned subsidiary, whose
mission was to become a strategic health information company
that would provide critical disease-specific information to
pharmaceutical companies, providers, managed care organizations,
and other health care organizations. The Company made
significant progress in the completion of the software program,
the signing and implementation of a group of select physicians
as well as significant discussions with purchasers of the
associated data. As anticipated, InfoScriber was using cash and
the Company had hoped to seek additional third-party financing
to fund the growth of the subsidiary. However, given the state
of the capital markets and the need for significant additional
investment to bring the InfoScriber subsidiary to profitability,
it was determined in July 2001 that it would be in the
stockholders best interest to terminate the operations of
InfoScriber. In addition, on July 31, 2001, the Company
agreed to license the InfoScriber application to Conundrum
Communications, Inc. (Conundrum) on an exclusive and
perpetual basis in the behavioral and social services areas.
Conundrum will have the opportunity to grow the InfoScriber
application in the behavioral health and social services areas
while the InfoScriber subsidiary will be eligible to receive
royalties for a period of five years.

The Company was incorporated in the State of
Delaware in 1988. The consolidated financial statements include
the accounts of PMR Corporation and its wholly-owned
subsidiaries, Psychiatric Management Resources, Inc.,
Collaborative Care Corporation and InfoScriber Corporation. The
Company accounted for its consolidation in accordance with
Statement of Financial Accounting Standards No. 94,
Consolidation of All Majority-Owned Subsidiaries. All
inter-company balances have been eliminated in consolidation.
The Company does not consolidate any of the organizations it
manages as it does not have operating control as defined in
Emerging Issues Task Force Statement No. 97-2,
Application of FASB Statement No. 94 and APB Opinion
No. 16 to Physician Practice Management Entities and
Certain Other Entities with Contractual Management Arrangements
(EITF 97-2).

Recent
Operating Results and Liquidity

The Company experienced significant losses in
fiscal years 2001 and 2000. Those losses reduced the
Companys equity position at April 30, 2001.
Management of the Company has undertaken significant changes to
its business and operations including reducing the number of
Outpatient Programs managed and exiting the InfoScriber
business. As a direct result of these changes plus
$3.4 million in recoveries of certain accounts receivable
previously provided as doubtful accounts and $3.2 million
in tax benefit resulting primarily from the economic recovery
stimulus package approved by the 107th Congress of the United
States of America, which allowed the Company to carryback the
losses for a five-year period versus a two-year period, the
Company significantly improved results from operations and its
financial position during fiscal year 2002.

In May 2002, the Company announced the execution
of a definitive merger agreement dated May 6, 2002,
providing for the merger of a wholly-owned subsidiary of PMR
with and into Psychiatric Solutions,

F-7



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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

Inc., a privately-held Delaware corporation
(PSI), with PSI being the surviving corporation and
becoming a wholly-owned subsidiary of PMR, which will be
subsequently renamed PSI. In connection with the merger, PSI
stockholders will exchange all warrants, preferred stock, and
common stock of PSI for shares of PMR common stock. Upon
completion of the merger, PSI stockholders will own
approximately 72% of the combined company and PMR shareholders
will own approximately 28%. The transaction will be subject to
PMR stockholder approval, regulatory approval, and other
customary closing conditions.

In connection with the execution of the merger
agreement, on May 6, 2002, the Board of Directors of PMR
declared a special cash dividend in the amount of $1.70 per
share, payable on May 24, 2002, to the stockholders of
record as of the close of business on May 17, 2002. The
total amount of the dividend that was paid on May 24, 2002
was approximately $12.3 million on approximately 7,263,000
shares outstanding on that date.

Although there can be no assurances, management
believes that the Company has the financial resources needed to
meet its liquidity needs throughout fiscal year 2003.

Legislation,
Regulations and Market Conditions

The Company is subject to federal, state and
local government regulation relating to licensure, conduct of
operations, ownership of facilities, expansion of facilities and
services, and reimbursement for services. As such, in the
ordinary course of business, the Companys operations are
continuously subject to state and federal regulatory scrutiny,
supervision and control. Such regulatory scrutiny often includes
inquiries, investigations, examinations, audits, site visits,
and surveys, some of which may be non-routine. The Company
believes that it is in substantial compliance with the
applicable laws and regulations. However, if the Company is ever
found to have engaged in improper practices, it could be
subjected to civil, administrative or criminal fines, penalties,
or restitutionary relief.

Concentration
of Credit Risk

The Company grants credit to contracting
providers in various states without collateral. At
April 30, 2002, the Company has net current and long term
receivables aggregating approximately $1,063,000 from two
providers, each of which comprise more than 10% of total net
consolidated receivables. The Company monitors the credit
worthiness of these customers and believes the balances
outstanding, net of allowances at April 30, 2002, are fully
collectible.

Substantially all of the Companys cash and
cash equivalents are held at five financial institutions. The
Company monitors the financial status of these banks and does
not believe the deposits are subject to a significant degree of
risk.

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 reported amounts of assets and
liabilities and related disclosures at the date of the financial
statements and the amounts of revenues and expenses reported
during the period. Actual results could differ from those
estimates. The Companys significant accounting estimates
are the allowance for doubtful accounts and the contract
settlement reserve.

Cash and Cash
Equivalents

Cash and cash equivalents consist of highly
liquid investments with maturities, when acquired, of three
months or less. Investments with original maturities of three
months or less that were classified as cash equivalents totaled
approximately $3.9 million and $4.2 million as of
April 30, 2002 and 2001, respectively.

F-8



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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | Short-Term Investments

Marketable equity securities and debt securities
are classified as available-for-sale because management has the
intent and ability to sell the securities prior to maturity for
use in current operations. Available-for-sale securities are
carried at fair value, which approximates cost, with unrealized
gains and losses reported as a separate component of
stockholders equity. The cost of debt securities in this
category is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization along with realized
gains and losses, interest and dividends are included in
interest income. The cost of securities sold is based on the
specific identification method.



| |                              
| | -----------------------------
| | Dividend Paid on Common Stock

No dividends were paid in fiscal year 2002. In
the third quarter of fiscal year 2001, the Board of Directors
declared a dividend of $7,255,016, or $1.00 per share of common
stock, payable to stockholders of record on December 21,
2000. In fiscal year 2000, the Board of Directors declared a
dividend of $10,580,534, or $1.50 per share of common stock,
payable to stockholders of record on January 26, 2000.

In connection with the execution of the merger
agreement, on May 6, 2002, the Board of Directors of PMR
declared a special cash dividend in the amount of $1.70 per
share, payable on May 24, 2002, to the stockholders of
record as of the close of business on May 17, 2002. The
total amount of the dividend that was paid on May 24, 2002
was approximately $12.3 million.



| |                   
| | ------------------
| | Earnings per Share

Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings per Share,requires dual presentation of basic and diluted earnings per
share by entities with complex capital structures. Basic EPS
includes no dilution and is computed by dividing net income by
the weighted-average number of common shares outstanding for the
period.

Diluted EPS reflects the potential dilution of
securities that could share in the earnings of the entity. The
Company has calculated its earnings per share in accordance with
SFAS No. 128 for all periods presented.

The following table sets forth the computation of
basic and diluted earnings per share:

|                                          |                                                                      |                       |      |           |  |      |       |             |   |   |       |             |  
|----------------------------------------- | -------------------------------------------------------------------- | --------------------- | ---- | --------- |  | ---- | ----- | ----------- | - | - | ----- | ----------- | -
|                                          |                                                                      |                      
|                                          |                                                                      | Years Ended April 30,
|                                          |                                                                      |                      
|                                          |                                                                      | 2002                  |      | 2001      |  | 2000
|                                          |                                                                      |                       |      |           |  |     
|Numerator:                                |                                                                      |                       |      |           |  |      |       |             |   |   |       |            
|                                          | Net income (loss) available to common
    stockholders               |                       | $    | 5,821,172 |  |      | $     | (10,769,541 | ) |   | $     | (11,003,319 | )
|                                          |                                                                      |                       |      |           |  |      |       |             |   |   |       |            
|Denominator:                              |                                                                      |                       |      |           |  |      |       |             |   |   |       |            
|                                          | Weighted average shares outstanding for basic
    earnings per share |                       |      | 7,202,236 |  |      |       | 7,098,000   |   |   |       | 6,606,322   |  
|                                          | Effects of dilutive stock options and warrants
    outstanding       |                       |      | 9,652     |  |      |       |            |   |   |       |            |  
|                                          |                                                                      |                       |      |           |  |      |       |             |   |   |       |            
|                                          | Shares used in computing diluted earnings per
    common share       |                       |      | 7,211,888 |  |      |       | 7,098,000   |   |   |       | 6,606,322   |  
|                                          |                                                                      |                       |      |           |  |      |       |             |   |   |       |            
|Earnings (loss) per common share, basic   |                                                                      | $                     | 0.81 |           |  | $    | (1.52 | )           |   | $ | (1.67 | )          
|                                          |                                                                      |                       |      |           |  |      |       |             |   |   |       |            
|Earnings (loss) per common share, diluted |                                                                      | $                     | 0.81 |           |  | $    | (1.52 | )           |   | $ | (1.67 | )          
|                                          |                                                                      |                       |      |           |  |      |       |             |   |   |       |            

No dilutive stock options and warrants were
included in the computation of diluted earnings per share for
the fiscal years ended April 30, 2001 and 2000 because the
inclusion thereof would have had an antidilutive effect.

F-9



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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)



| |                                                        
| | -------------------------------------------------------
| | Revenue Recognition and Contract Settlement
    Reserve

The Outpatient Programs that the Company
currently manages or administers consist primarily of
psychiatric partial hospitalization programs. In these programs,
the patient is ambulatory, but requires intensive, coordinated
clinical services for SMI. In general, these programs are an
alternative to inpatient care. They involve patients in crisis
or recovering from crisis who, thus, require more intensive
clinical services than those generally available in a
traditional outpatient setting. Presently, the Companys
Outpatient Program Management Services are provided under a
contract, which has a remaining term of two years, with an acute
care hospital. This contract governs the method by which the
Company provides consulting or management services, the
responsibility of the hospital provider for licensure, billing,
staff, insurance and the provision of health care services and
the manner in which the Company will be compensated. The Company
provides a program administrator or consultant, proprietary
software and data systems, policies and procedures, clinical
protocols and curricula and other technical and administrative
information that enhance the quality of care and the efficiency
of administration of the program. Prior to March 8, 2002,
this contract provided for payment of fees by the hospital based
on the services that the Company provides. Effective
March 8, 2002, the payment of fees was converted to a fixed
monthly management fee. The hospital maintains responsibility
for substantially all direct program costs under this contract.

The Company has been retained to manage and
provide the outpatient psychiatric portion of a managed health
care program funded by the State of Tennessee
(TennCare). Under the terms of its agreements, the
Company receives a monthly case rate payment from the managed
care consortium responsible for managing the TennCare program,
and is responsible for planning, coordinating and managing
psychiatric case management to residents of Tennessee who are
eligible to participate in the TennCare program using the
proprietary treatment programs developed by the Company. The
Company offers its case management services through long-term
exclusive management agreements with leading independent
providers for case management services. Pursuant to those
agreements, the Company contributes its proprietary protocols
and management expertise and, when necessary, negotiates case
management rates and contracts on behalf of the Providers. The
Company may also provide training, management information
systems support, and accounting and fiscal services. Presently,
the Company manages programs for a case management agency in and
around the Nashville, Tennessee area. Revenues under these
programs were approximately $17,201,000, $14,019,000, and
$13,663,000 for the years ended April 30, 2002, 2001, and
2000, respectively.

The Company does not employ or bill for any
services rendered by psychiatrists or other professionals whose
patients are enrolled in the programs managed by the Company.

Revenue under the acute outpatient psychiatric
programs is recognized when services are rendered based upon
contractual arrangements with providers at the estimated net
realizable amounts. Under certain management contracts, the
Company is obligated under warranty provisions to indemnify the
Providers for all or some portions of the Companys
management fees that may be disallowed as reimbursable to the
Providers by Medicares fiscal intermediaries. The Company
has recorded contract settlement reserves to provide for
possible amounts owed to its Providers resulting from
disallowance of costs by Medicare and Medicare cost report
settlement adjustments. Such reserve is classified as a
non-current liability in the accompanying balance sheets as
payment of these reserves is not expected to occur during fiscal
year 2003. Disallowance of costs by Medicare are pertinent only
for services rendered through September 30, 2000 inasmuch
as the Medicare program converted to the prospective payment
methodology for the reimbursement of outpatient services
effective October 1, 2000. Under provisions of the
indemnification clause of the Companys management
contracts, the Company indemnified providers approximately
$1,240,000 and $2,874,000 for the years ended April 30,
2001 and 2000, respectively. The Company was not required to
indemnify any provider during fiscal year 2002. In addition,
during the fourth quarter of fiscal year 2002, the Company
recognized a reduction of approximately $1.7 million in
contract settlement

F-10



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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

reserves due to estimated final settlement in
Provider cost reports. This reduction in contract settlement
reserve was recorded as an increase to net revenues for the
period.

During the fiscal year ended April 30, 2002,
the Company recorded $3.4 million in recoveries of certain
accounts receivable previously provided as doubtful accounts.
The recoveries were primarily due to the collection of
approximately $1.9 of previously reserved accounts receivable
relating to closed outpatient programs and a change in estimate
on the collectability of certain other related receivables.

Stadt Solutions LLC (Stadt Solutions)
recorded pharmaceutical revenue when the product was sold to
customers at pharmacies, net of any estimated contractual
allowances. A substantial portion of the net revenue for Stadt
Solutions was derived directly from customers insured under
Medicaid or other government-sponsored health care programs. The
Company sold substantially all of its interest in Stadt
Solutions in fiscal year 2000. Activity related to Stadt
Solutions is presented in the Companys financial
statements and footnotes as a discontinued operation for all
fiscal years (see Note 2).

Insurance

The Company carries occurrence basis
insurance to cover general liability, property damage and
workers compensation risks. Medical professional liability
risk is covered by a claims made insurance policy
that provides for guaranteed tail coverage. Loss reserves for
incurred by not reported medical professional liability claims
are not material.

Stock
Options

SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), establishes the use of the
fair value based method of accounting for stock-based
compensation arrangements, under which compensation cost is
determined using the fair value of stock-based compensation
determined as of the grant date, and is recognized over the
periods in which the related services are rendered. In
accordance with the provisions of SFAS No. 123, the Company
has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees(APB 25) and related Interpretations in accounting for its
employee stock options. Under APB 25, when the purchase price of
restricted stock or the exercise price of the Companys
employee stock options equals or exceeds the fair value of the
underlying stock on the date of issuance or grant, no
compensation expense is recognized. In accordance with SFAS
No. 123, the Company has presented pro forma disclosures of
net income and earnings per share as if SFAS No. 123 had
been applied.

Comprehensive
Income (Loss)

The Company follows SFAS No. 130,
Reporting Comprehensive Income,which requires that all
components of comprehensive income, including net income, be
reported in the financial statements in the period in which they
are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and
circumstances from non-owner sources. Net income (loss) and
other comprehensive income (loss), including foreign currency
translation adjustments and unrealized gains and losses on
investments, shall be reported, net of their related tax effect,
to arrive at comprehensive income (loss). The Company reports
comprehensive income (loss) as a separate component of
Stockholders Equity.

Recent
Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141,
Business Combinationsand SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS
No. 142, goodwill and intangible assets with indefinite
lives are no longer amortized but are viewed annually for
impairment, or more frequently if impairment indicators arise.
Separable intangible assets that are not deemed to have
indefinite lives will

F-11



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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

continue to be amortized over their useful lives.
The Company had no acquired goodwill or intangible assets at
April 30, 2002 or 2001 and, thus, the adoption of these new
standards had no impact.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which establishes one accounting model to
be used for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations to include
more disposal transactions. SFAS No. 144 supercedes SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30.
SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company does not believe the
adoption of SFAS No. 144 will have a significant effect on
its financial statements.

2.     Discontinued
Operation

During fiscal year 2000, the Company sold
substantially all of its interest in Stadt Solutions, a majority
owned subsidiary owned partially by Stadt Holdings (formerly
Stadtlander Drug Distribution Co., Inc.). Stadt Solutions
comprised the Companys entire pharmaceutical segment. The
transaction, which effected the sale of the Companys
ownership interest in Stadt Solutions, resulted in cash proceeds
of approximately $3.3 million and a gain of approximately
$664,000, net of fiscal year 2000 operating losses. The
operating results of the discontinued operation are summarized
as follows:

|                                                         |  |                |            |  
|-------------------------------------------------------- |  | -------------- | ---------- | -
|                                                         |  | Year Ended    
|                                                         |  | April 30, 2000
|                                                         |  |               
|Net revenue                                              |  | $              | 26,878,254 |  
|                                                         |  |                |            |  
|Loss before minority interest and income tax
    benefit |  |                | (2,773,570 | )
|Minority interest                                        |  |                | 1,384,011  |  
|                                                         |  |                |            |  
|Net loss                                                 |  | $              | (1,389,559 | )
|                                                         |  |                |            |  

Net current assets and net long-term liabilities
of the discontinued operation have been reported as a separate
component of the consolidated balance sheets for all years
presented. Net results of operation for the discontinued
operation have been reported as a separate component of the
consolidated statements of operations for all years presented.
There were no discontinued operations during fiscal years 2002
and 2001.

3.     Investments

The following is a summary of available-for-sale
securities, stated at fair value:

|                           |  |           |           |      |  |   |           | 
|-------------------------- |  | --------- | --------- | ---- |  | - | --------- | 
|                           |  |          
|                           |  | April 30,
|                           |  |          
|                           |  | 2002      |           | 2001
|                           |  |           |           |     
|U.S. government securities |  | $         | 5,558,178 |      |  | $ | 3,876,999 | 
|Commercial paper           |  |           | 2,208,938 |      |  |   | 252,365   | 
|                           |  |           |           |      |  |   |           | 
|Total debt securities      |  | $         | 7,767,116 |      |  | $ | 4,129,364 | 
|                           |  |           |           |      |  |   |           | 

At April 30, 2002 all investments contain
contractual maturities of two years or less. The balance sheet
classification as short-term available-for-sale securities is
based on managements intentions rather than actual
maturity dates. Therefore, classification of these securities
may differ from stated maturities. As management has the ability
and intent to sell these available-for-sale securities prior to
maturity and views the portfolio as available for use in current
operations, the investments are classified as current at
April 30, 2002. Unrealized holding gains, reported as other
comprehensive income in accordance with SFAS No. 130 (see
Note 1), totaled approximately $32,000 and $50,000 at
April 30, 2002 and 2001, respectively.

F-12



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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

4.     Capitalized
Software Development

During the years ended April 30, 2001 and
2000, the Company recorded capitalized software development
costs in accordance with FASB Statement No. 86,
Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed, and related interpretations.
Capitalized software development costs consist primarily of
consulting fees and salaries and benefits for in-house
programmers incurred by the newly established InfoScriber
subsidiary. Amortization commenced upon completion and
commercial release of the software in August 2000. Research for
and development of Version 2 of the InfoScriber medication
management software started immediately after completion of
Version 1. Version 2 was expected to completely replace Version
1 and was anticipated to be technically feasible shortly after
April 30, 2001. Accordingly, the Company amortized the total
capitalized cost of Version 1 of approximately $2.8 million
through April 30, 2001. In July 2001, after exploring
numerous strategic alternatives, the Company terminated the
operations of its InfoScriber subsidiary and licensed the
InfoScriber application to Conundrum on an exclusive and
perpetual basis in the behavioral and social services areas.

5.     Long Term
Receivables

Long-term receivables consist of amounts due from
certain officers for related tax liabilities (see Note 10).

6.     Furniture and
Office Equipment

Furniture and office equipment consist of the
following at April 30:

|                         |  |      |            |      |  |   |            |  
|------------------------ |  | ---- | ---------- | ---- |  | - | ---------- | -
|                         |  | 2002 |            | 2001
|                         |  |      |            |     
|Furniture and equipment  |  | $    | 1,573,680  |      |  | $ | 2,857,193  |  
|Leasehold improvements   |  |      | 206,849    |      |  |   | 285,448    |  
|                         |  |      |            |      |  |   |            |  
|                         |  |      | 1,780,529  |      |  |   | 3,142,641  |  
|Accumulated depreciation |  |      | (1,616,687 | )    |  |   | (2,399,887 | )
|                         |  |      |            |      |  |   |            |  
|                         |  | $    | 163,842    |      |  | $ | 742,754    |  
|                         |  |      |            |      |  |   |            |  

Furniture and office equipment are stated at cost
and are depreciated over their estimated useful lives using the
straight-line method over terms of three to five years.
Depreciation expense from continuing operations was
approximately $532,000, $1,173,000, and $898,000 for the years
ended April 30, 2002, 2001, and 2000, respectively.

7.     Other
Long-term Assets

Other long-term assets consist of the following
at April 30:

|                                                         |  |      |          |      |  |   |          |  
|-------------------------------------------------------- |  | ---- | -------- | ---- |  | - | -------- | -
|                                                         |  | 2002 |          | 2001
|                                                         |  |      |          |     
|Proprietary information and covenants not to
    compete |  | $    | 225,000  |      |  | $ | 225,000  |  
|Other                                                    |  |      | 178,268  |      |  |   | 227,197  |  
|                                                         |  |      |          |      |  |   |          |  
|                                                         |  |      | 403,268  |      |  |   | 452,197  |  
|Amortization                                             |  |      | (375,102 | )    |  |   | (364,162 | )
|                                                         |  |      |          |      |  |   |          |  
|                                                         |  | $    | 28,166   |      |  | $ | 88,035   |  
|                                                         |  |      |          |      |  |   |          |  

Other assets are amortized using the
straight-line method over their estimated useful lives. The
estimated useful life of proprietary information and covenants
not to compete is five to ten years. Amortization expense from
continuing operations was approximately $11,000, $189,000, and
$112,000 for the fiscal years ended April 30, 2002, 2001,
and 2000, respectively.

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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

8.     Borrowings

Equipment
Note Payable

The Company has a promissory note for the
purchase of office furniture, fixtures, and equipment. The note
is collateralized by all assets acquired with proceeds from the
loan. The note matures in November 2002 and requires principal
and interest payments due monthly with interest accruing at
8.36%. The balance outstanding under this note was approximately
$72,000 and $188,000 at April 30, 2002 and 2001,
respectively for which the current portion is included in
accrued expenses and the long-term portion is included in other
long-term liabilities.

9.     Stock Options
and Warrants

The Companys 1997 Equity Incentive Plan, as
amended (the 1997 Plan) provides for the granting of
options to purchase up to 4,000,000 shares of common stock to
eligible employees. Under the 1997 Plan, options may be granted
for terms of up to ten years and are generally exercisable in
cumulative annual increments of 20% each year, commencing one
year after the date of grant. The 1997 Plan also provides for
the full vesting of all outstanding options under certain change
of control events. Option prices must equal or exceed the fair
market value of the common shares on the date of grant. The
termination date of the 1997 Plan is October 6, 2008.

The Company has a non-qualified stock option plan
for its outside directors (the 1992 Plan). The 1992
Plan provides for the Company to grant each outside director
options to purchase 15,000 shares of the Companys common
stock annually at the fair market value at the date of grant. As
amended, options for a maximum of 1,025,000 shares may be
granted under this plan. The options vest 30% immediately and in
ratable annual increments over the three-year period following
the date of grant. In 1997, the Board of Directors amended the
1992 Plan to provide for full vesting of all outstanding options
under certain change of control events.

During fiscal year 2000, the Company recognized
$142,500 compensation expense related to stock options issued to
certain officers with exercise prices below fair market value.

Warrants

In September 1995, the Company granted rights to
earn up to 50,000 warrants to a case management agency in
connection with a Management and Affiliation Agreement. The
warrants may be earned in each of the five years beginning May
1997 only if certain financial performance criteria are met. The
exercise price is equal to the average closing price of the
Companys common stock for the ten day period prior to
April 30 for the year in which the warrants are earned. As
of April 30, 2002, no warrants were earned under the
agreement. Rights to earn 40,000 of the warrants were expired at
April 30, 2001.

In November 1996, the Company granted warrants to
purchase a total of 30,000 shares of common stock to the case
management agency discussed above. The warrants are exercisable
in increments of 5,000 shares per year for six years beginning
May 1997. The exercise price is equal to the average closing
price of the Companys common stock for the ten day period
prior to April 30 for the covered year. As of
April 30, 2002, warrants to purchase 25,000 shares of the
Companys stock were outstanding at prices ranging from
$1.40 to $19.19. The warrants expire in September 2002.

In March 2000, warrants to purchase 1,000 shares
of the Companys common stock were issued to an outside
party at an exercise price of $4.50. The warrants are
immediately exercisable and expire in March 2005. None of the
warrants were exercised as of April 30, 2002.

In March 2000, the Company granted rights to an
outside party to earn up to 10,000 warrants to purchase the
Companys common stock. The exercise price of the warrants
is $4.938. The warrants are earned only if certain criteria are
met by the outside party. Upon being earned, the warrants are
exercisable at a rate of 33.3% on the first day of the calendar
quarter following each of the first, second

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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

and third anniversary of their respective
effective dates. The warrants expire the earlier of five years
from the date of grant or on the date the Membership Agreement
with the outside party is terminated. Warrants to purchase 500
shares of the Companys common stock expired during fiscal
year 2002.

A summary of the Companys stock option and
warrant activity and related information is as follows:

|                           |           |        |           |                  |   |   |      |      | 
|-------------------------- | --------- | ------ | --------- | ---------------- | - | - | ---- | ---- | 
|                           |           |        |           | Weighted-Average
|                           |           | Shares |           | Exercise Price  
|                           |           |        |           |                 
|Outstanding April 30, 1999 |           |        | 2,677,410 |                  |   | $ | 6.68 |     
|                           | Granted   |        |           | 1,063,000        |   |   |      | 2.51 | 
|                           | Exercised |        |           | (844,139         | ) |   |      | 2.38 | 
|                           | Forfeited |        |           | (912,476         | ) |   |      | 6.27 | 
|                           |           |        |           |                  |   |   |      |     
|Outstanding April 30, 2000 |           |        | 1,983,795 |                  |   |   | 6.38 |     
|                           | Granted   |        |           | 561,100          |   |   |      | 2.19 | 
|                           | Exercised |        |           | (197,000         | ) |   |      | 2.16 | 
|                           | Forfeited |        |           | (401,335         | ) |   |      | 5.26 | 
|                           |           |        |           |                  |   |   |      |     
|Outstanding April 30, 2001 |           |        | 1,946,560 |                  |   |   | 5.83 |     
|                           | Granted   |        |           | 65,000           |   |   |      | 1.49 | 
|                           | Exercised |        |           | (10,000          | ) |   |      | 1.38 | 
|                           | Forfeited |        |           | (590,909         | ) |   |      | 5.88 | 
|                           |           |        |           |                  |   |   |      |     
|Outstanding April 30, 2002 |           |        | 1,410,651 |                  |   |   | 5.64 |     
|                           |           |        |           |                  |   |   |      |     

At April 30, 2002, options and warrants to
purchase 779,360 and 26,000 shares of common stock,
respectively, were exercisable. Shares available for future
grant under the 1997 and 1992 Plans totaled 2,626,769 at
April 30, 2002. The weighted-average fair value of options
and warrants granted was $0.97, $1.53, and $1.70 for the fiscal
years ended April 30, 2002, 2001, and 2000, respectively.

A summary of options and warrants outstanding and
exercisable at April 30, 2002 follows:

|            |           |                |  |           |                |             |  |             |       |           |  |  |     |  |  |  |         |  |  |   |       | 
|----------- | --------- | -------------- |  | --------- | -------------- | ----------- |  | ----------- | ----- | --------- |  |  | --- |  |  |  | ------- |  |  | - | ----- | 
|            |           |                |  |           |                | Weighted-   |  |             |       |          
|Options     |           |                |  | Weighted- |                | Average     |  | Options     |       | Weighted-
|and         |           |                |  | Average   |                | Remaining   |  | and         |       | Average  
|Warrants    |           | Exercise Price |  | Exercise  |                | Contractual |  | Warrants    |       | Exercise 
|Outstanding |           | Range          |  | Price     |                | Life        |  | Exercisable |       | Price    
|            |           |                |  |           |                |             |  |             |       |          
|            | 180,000   |                |  | $         | 1.40  $ 2.0   |             |  | 0 $         | 1.60  |           |  |  | 8.2 |  |  |  | 31,000  |  |  | $ | 1.61  | 
|            | 269,750   |                |  |           | 2.44    3.50  |             |  |             | 3.08  |           |  |  | 6.4 |  |  |  | 135,800 |  |  |   | 3.06  | 
|            | 224,613   |                |  |           | 3.75    4.75  |             |  |             | 4.68  |           |  |  | 3.6 |  |  |  | 222,513 |  |  |   | 4.68  | 
|            | 591,209   |                |  |           | 6.00    8.00  |             |  |             | 7.21  |           |  |  | 5.4 |  |  |  | 270,968 |  |  |   | 7.35  | 
|            | 135,079   |                |  |           | 9.75   10.00  |             |  |             | 10.00 |           |  |  | 3.7 |  |  |  | 135,079 |  |  |   | 10.00 | 
|            | 10,000    |                |  |           | 15.46   19.19 |             |  |             | 17.33 |           |  |  | 0.3 |  |  |  | 10,000  |  |  |   | 17.33 | 
|            |           |                |  |           |                |             |  |             |       |           |  |  |     |  |  |  |         |  |  |   |       | 
|            | 1,410,651 |                |  |           |                |             |  |             | 5.64  |           |  |  | 5.5 |  |  |  | 805,360 |  |  |   | 6.24  | 
|            |           |                |  |           |                |             |  |             |       |           |  |  |     |  |  |  |         |  |  |   |       | 

Adjusted pro forma information regarding net
income and net income per share is required by SFAS 123, and has
been determined as if the Company had accounted for its employee
stock options and stock purchase plan under the fair value
method of SFAS 123. The fair value for these options was
estimated at

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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

the date of grant using the
Black-Scholes method for option pricing with the
following weighted-average assumptions for fiscal years 2002,
2001, and 2000:

|                        |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  | 2002 |      | 2001 |  | 2000
|                        |  |      |      |      |  |     
|Expected life (years)   |  |      | 5.0  |      |  |      | 5.0  |   |  |  | 5.0  |  
|Risk-free interest rate |  |      | 4.61 | %    |  |      | 5.75 | % |  |  | 6.12 | %
|Annual dividend yield   |  |      |     |      |  |      |     |   |  |  |     |  
|Volatility              |  |      | 70.0 | %    |  |      | 82.6 | % |  |  | 70.0 | %

For purposes of pro forma disclosures, the
estimated fair value of the options granted is amortized to
expense over the options vesting period. The
Companys pro forma information for the years ended
April 30, 2002, 2001, and 2000 follows:

|                                                     |  |      |           |      |  |      |             |   |  |   |             |  
|---------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                     |  | 2002 |           | 2001 |  | 2000
|                                                     |  |      |           |      |  |     
|Pro forma net income (loss)                          |  | $    | 4,934,200 |      |  | $    | (12,162,678 | ) |  | $ | (11,712,350 | )
|Pro forma net earnings (loss) per share,
    basic   |  |      | 0.69      |      |  |      | (1.71       | ) |  |   | (1.77       | )
|Pro forma net earnings (loss) per share,
    diluted |  |      | 0.68      |      |  |      | (1.71       | ) |  |   | (1.77       | )

10.     Notes
Receivable from Employees and Officers

In fiscal year 2001 and 2000, the Company loaned
approximately $423,000 and $1.3 million, respectively, to
certain employees and officers of the Company for the purchase
of stock pursuant to the exercise of stock options (Stock
Notes). The notes receivable are recorded as a separate
component of stockholders equity in the accompanying
balance sheets and totaled approximately $373,000 and $539,000
at April 30, 2002 and 2001, respectively. The notes for
purchase of stock are with recourse in addition to being
collateralized by stock under the respective pledge agreements.

The Company also made available loans of
approximately $451,000 to certain officers for related tax
liabilities (Tax Notes). The notes receivable plus
accrued interest are included in long-term accounts and notes
receivable in the accompanying balance sheets and totaled
approximately $407,000 and $451,000 at April 30, 2002 and
2001, respectively. The notes for related tax liabilities are
without recourse. The notes are collateralized by stock under
their respective pledge agreements.

Effective May 1, 2002, the notes were
amended to include a provision that allows the principal and
interest on the notes to be paid, at anytime prior to
December 31, 2003, through the delivery to the Company of
PMR common stock valued at the higher of (i) a fixed amount
or (ii) the average closing sales prices of PMR common
stock for the five trading days prior to the delivery of such
stock. As of April 30, 2002, the Companys stock price
was below the fixed amount stated above. As such, the Company
recorded allowances on the Stock Notes and Tax Notes of
approximately $63,000 and $91,000, respectively, as of
April 30, 2002.

F-16



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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

11.     Income
Taxes

Income tax (benefit) expense consists of the
following:

|         |          |      |            |            |   |      |          |          |   |   |           |            |  
|-------- | -------- | ---- | ---------- | ---------- | - | ---- | -------- | -------- | - | - | --------- | ---------- | -
|         |          | 2002 |            | 2001       |   | 2000
|         |          |      |            |            |   |     
|Federal: |          |      |            |            |   |      |          |          |   |   |           |           
|         | Current  |      | $          | (87,000    | ) |      | $        | (741,000 | ) |   | $         | (1,000,000 | )
|         | Deferred |      |            | (3,379,000 | ) |      |          |         |   |   |           | 4,653,000  |  
|         |          |      |            |            |   |      |          |          |   |   |           |           
|         |          |      | (3,466,000 | )          |   |      | (741,000 | )        |   |   | 3,653,000 |           
|         |          |      |            |            |   |      |          |          |   |   |           |           
|State:   |          |      |            |            |   |      |          |          |   |   |           |           
|         | Current  |      |            |           |   |      |          | (188,000 | ) |   |           |           |  
|         | Deferred |      |            | 234,000    |   |      |          |         |   |   |           | 1,229,000  |  
|         |          |      |            |            |   |      |          |          |   |   |           |           
|         |          |      | 234,000    |            |   |      | (188,000 | )        |   |   | 1,229,000 |           
|         |          |      |            |            |   |      |          |          |   |   |           |           
|         |          | $    | (3,232,000 | )          |   | $    | (929,000 | )        |   | $ | 4,882,000 |           
|         |          |      |            |            |   |      |          |          |   |   |           |           

At April 30, 2002, the Company had federal
and state tax net operating loss carryforwards of approximately
$6,822,000 and $10,567,000, respectively. The federal and state
tax loss carryforwards will begin to expire in 2020 and 2003,
respectively, unless previously utilized.

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. A valuation allowance has been
recognized in fiscal years 2002 and 2001 as realization of such
assets is uncertain due primarily to changes in the
Companys core business and associated business risks.

Significant components of the Companys
deferred tax assets and liabilities at April 30 are as
follows:

|                                                  |                                  |      |            |           |  |   |             |           | 
|------------------------------------------------- | -------------------------------- | ---- | ---------- | --------- |  | - | ----------- | --------- | 
|                                                  |                                  | 2002 |            | 2001     
|                                                  |                                  |      |            |          
|Deferred tax assets:                              |                                  |      |            |           |  |   |             |          
|                                                  | Allowance for bad debts          |      | $          | 1,761,000 |  |   | $           | 2,388,000 | 
|                                                  | Contract settlement reserve      |      |            | 835,000   |  |   |             | 1,711,000 | 
|                                                  | Other                            |      |            | 90,000    |  |   |             | 445,000   | 
|                                                  | Depreciation and amortization    |      |            | 907,000   |  |   |             | 692,000   | 
|                                                  | Net operating loss carryforwards |      |            | 2,996,000 |  |   |             | 7,899,000 | 
|                                                  | Special charge                   |      |            | 83,000    |  |   |             | 130,000   | 
|                                                  |                                  |      |            |           |  |   |             |          
|Total deferred tax assets                         |                                  |      | 6,672,000  |           |  |   | 13,265,000  |          
|                                                  |                                  |      |            |           |  |   |             |          
|Deferred tax liabilities:                         |                                  |      |            |           |  |   |             |          
|                                                  | Right to bill                    |      |            |          |  |   |             | 633,000   | 
|                                                  | Non-accrual experience method    |      |            | 163,000   |  |   |             | 2,335,000 | 
|                                                  |                                  |      |            |           |  |   |             |          
|Total deferred tax liabilities                    |                                  |      | 163,000    |           |  |   | 2,968,000   |          
|                                                  |                                  |      |            |           |  |   |             |          
|Net deferred tax asset before valuation allowance |                                  |      | 6,509,000  |           |  |   | 10,297,000  |          
|Valuation allowance for deferred tax assets       |                                  |      | (6,509,000 | )         |  |   | (10,297,000 | )        
|                                                  |                                  |      |            |           |  |   |             |          
|Net deferred tax asset                            |                                  | $    |           |           |  | $ |            |          
|                                                  |                                  |      |            |           |  |   |             |          

F-17



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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

A reconciliation between the federal income tax
rate and the effective income tax rate is as follows:

|                                               |  |                      |      |      |  |      |     |    |  |  |     |   
|---------------------------------------------- |  | -------------------- | ---- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                               |  |                     
|                                               |  | Year Ended April 30,
|                                               |  |                     
|                                               |  | 2002                 |      | 2001 |  | 2000
|                                               |  |                      |      |      |  |     
|Statutory federal income tax rate              |  |                      | 34   | %    |  |      | (41 | )% |  |  | (35 | )%
|State income taxes, net of federal tax benefit |  |                      | 0    | %    |  |      | (2  | )% |  |  | (6  | )%
|Permanent differences                          |  |                      | 4    | %    |  |      | 0   | %  |  |  | 0   | % 
|Net operating loss carryback                   |  |                      | (125 | )%   |  |      | 0   | %  |  |  | 0   | % 
|Change in valuation allowance                  |  |                      | (38  | )%   |  |      | 35  | %  |  |  | 0   | % 
|Net effect of valuation of deferred tax assets |  |                      | 0    | %    |  |      | 0   | %  |  |  | 121 | % 
|                                               |  |                      |      |      |  |      |     |    |  |  |     |   
|                                               |  |                      | (125 | )%   |  |      | (8  | )% |  |  | 80  | % 
|                                               |  |                      |      |      |  |      |     |    |  |  |     |   

12.     Customers

The Companys consolidated revenues, net of
the effect of a $1.7 million reduction in contract
settlement reserve (see Note 1), was approximately $19.0 million
for the fiscal year ended April 30, 2002. Approximately 90%
of such revenues relate to programs for a case management agency
in and around the Nashville, Tennessee area.

Approximately 2% of this $19.0 million in
consolidated revenues was for a case management contract in
Memphis, Tennessee that terminated on June 1, 2002.
Revenues from the two continuing outpatient psychiatric programs
accounted for the balance of the Companys consolidated
revenues. There were no outpatient psychiatric care providers
responsible for 10% or more of the Companys consolidated
revenues from continuing operations in fiscal years 2002 and
2001. Individual providers responsible for ten percent or more
of the Companys consolidated revenues from continuing
operations totaled 32% in fiscal year 2000.

13.     Employee
Benefits

The Company maintains a tax deferred retirement
plan under Section 401(k) of the Internal Revenue Code for
the benefit of all employees meeting minimum eligibility
requirements. Under the plan, each employee may defer up to 15%
of pre-tax earnings, subject to certain limitations. The Company
will match 50% of an employees deferral to a maximum of 3%
of the employees gross salary. The Companys matching
contributions vest over a five-year period. For the years ended
April 30, 2002, 2001, and 2000, the Company contributed
approximately $39,000, $116,000, and $236,000, respectively, to
match employee deferrals.

14.     Commitments
and Contingencies



| |       
| | ------
| | Leases

The Company leases its corporate headquarters in
San Diego under a non-cancelable leasing arrangement for $6,000
per month, which expires on September 30, 2002. The Company
also leases certain equipment under operating lease agreements.
At April 30, 2002, future minimum lease payments for all
operating leases with initial terms of one year or more are
approximately $30,000 for the fiscal year ended April 2003.

Rent expense from continuing operations totaled
approximately $283,000, $427,000, and $2,052,000 for the years
ended April 30, 2002, 2001, and 2000, respectively.



| |           
| | ----------
| | Litigation

The Company is a party to various potential
litigation claims and legal proceedings arising in the normal
course of business. In managements opinion, the outcome of
these proceedings is not expected to

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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

have a material adverse effect on the
Companys consolidated financial position, results of
operations, or cash flows.

15.     Special
Charge (Credit)

A summary of the special charge for the year
ended April 30, 2002 is as follows:

|                                    |  |   |           | 
|----------------------------------- |  | - | --------- | 
|Severance                           |  | $ | 736,722   | 
|Write-off of property and equipment |  |   | 39,722    | 
|Other costs                         |  |   | 293,602   | 
|                                    |  |   |           | 
|Total special charge                |  | $ | 1,070,046 | 
|                                    |  |   |           | 

The special charge in fiscal year 2002 resulted
primarily from the termination of the InfoScriber operations and
the related reduction in administrative overhead costs. The
components of the special charge in fiscal year 2002 consist of
severance for terminated employees, costs for non-cancelable
facility lease commitments, write-offs of additional office
furniture and equipment, and other miscellaneous charges.

A summary of the special charge for the year
ended April 30, 2001 is as follows:

|                                    |  |   |           | 
|----------------------------------- |  | - | --------- | 
|Severance                           |  | $ | 600,164   | 
|Write-off of property and equipment |  |   | 561,647   | 
|Other costs                         |  |   | 84,614    | 
|                                    |  |   |           | 
|Total special charge                |  | $ | 1,246,425 | 
|                                    |  |   |           | 

The special charge in fiscal year 2001 resulted
primarily from managements decision to close 14 programs,
reduce administrative overhead during the fiscal year, and the
impairment charge recognized on InfoScribers furniture,
equipment, and certain other current assets under the provisions
of SFAS No. 121. The components of the exit costs resulting from
closing Outpatient Program locations and reducing operations and
administrative overhead consist of severance for terminated
employees, costs for non-cancelable facility lease commitments,
write-offs of office furniture and equipment, and other
miscellaneous charges.

A summary of the special charge for the year
ended April 30, 2000 is as follows:

|                                    |  |   |           | 
|----------------------------------- |  | - | --------- | 
|Severance                           |  | $ | 800,349   | 
|Lease costs                         |  |   | 371,166   | 
|Write-off of property and equipment |  |   | 177,826   | 
|Other costs                         |  |   | 83,482    | 
|                                    |  |   |           | 
|Total special charge                |  | $ | 1,432,823 | 
|                                    |  |   |           | 

The special charge in fiscal year 2000 resulted
primarily from managements decision to close 26 programs
and reduce administrative overhead during the year. The
components of the exit costs resulting from closing program
locations and reducing administrative overhead consist of
severance for terminated employees, costs for non-cancelable
facility lease commitments, write-offs of office furniture and
equipment, and other miscellaneous charges.

Components of the accrued special charge at
April 30, 2002 are as follows:

|                                        |  |   |         | 
|--------------------------------------- |  | - | ------- | 
|Non-cancelable lease costs              |  | $ | 117,000 | 
|Severance                               |  |   | 38,000  | 
|Other costs                             |  |   | 48,000  | 
|                                        |  |   |         | 
|Accrued special charges, April 30, 2002 |  | $ | 203,000 | 
|                                        |  |   |         | 

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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

Components of the accrued special charge at
April 30, 2001 are as follows:

|                                        |  |   |         | 
|--------------------------------------- |  | - | ------- | 
|Non-cancelable lease costs              |  | $ | 95,000  | 
|Severance                               |  |   | 148,000 | 
|Other costs                             |  |   | 22,000  | 
|                                        |  |   |         | 
|Accrued special charges, April 30, 2001 |  | $ | 265,000 | 
|                                        |  |   |         | 

Accruals for special charges are included in the
accompanying balance sheets as a component of accrued expenses.

An analysis of the accrual activity during fiscal
year 2002 is as follows:

|                                        |                  |  |  |          |   |   |         |         |  
|--------------------------------------- | ---------------- |  |  | -------- | - | - | ------- | ------- | -
|Accrued special charges, April 30, 2001 |                  |  |  |          |   | $ | 265,000 |        
|                                        | Lease costs, net |  |  | 22,000   |   |   |         |         |  
|                                        | Severance, net   |  |  | (110,000 | ) |   |         |         |  
|                                        | Other, net       |  |  | 26,000   |   |   |         | (62,000 | )
|                                        |                  |  |  |          |   |   |         |        
|Accrued special charges, April 30, 2002 |                  |  |  |          |   | $ | 203,000 |        
|                                        |                  |  |  |          |   |   |         |        

An analysis of the accrual activity during fiscal
year 2001 is as follows:

|                                        |                                |  |  |         |   |   |         |          |  
|--------------------------------------- | ------------------------------ |  |  | ------- | - | - | ------- | -------- | -
|Accrued special charges, April 30, 2000 |                                |  |  |         |   | $ | 376,000 |         
|                                        | Impaired long-term assets, net |  |  | (14,000 | ) |   |         |          |  
|                                        | Lease costs, net               |  |  | (97,000 | ) |   |         |          |  
|                                        | Severance, net                 |  |  | 15,000  |   |   |         |          |  
|                                        | Other, net                     |  |  | (15,000 | ) |   |         | (111,000 | )
|                                        |                                |  |  |         |   |   |         |         
|Accrued special charges, April 30, 2001 |                                |  |  |         |   | $ | 265,000 |         
|                                        |                                |  |  |         |   |   |         |         

16.     Related
Party

In January 2001, the Company retained McGettigan,
Wick & Co. Inc., a principal of which holds a seat in the
Companys Board of Directors, to provide financial advisory
services to the management and Board of Directors of the Company
relative to the structuring, evaluation, negotiation,
documentation, and closing of strategic alternatives for the
Company. The fee for providing such services was $10,000,
payable for three months commencing in February 2001, plus
out-of-pocket expenses. Also due and payable upon consummation
of any sale or merger of, acquisition by, or third-party
financing for the Company will be an advisory fee equal to 5% of
the consideration received or paid by the Company. The aggregate
retainer fee of $30,000 will be credited against the advisory
fee. If the Company were the acquiror, the advisory fee of
$270,000 will be paid upon closing of the transaction.

17.     Reverse Stock
Split

In connection with and as a condition to the
proposed merger discussed in Note 1, the Company is also
proposing an amendment to its charter in order to effect a
proposed 1-for-3 reverse stock split. The reverse stock split
will be subject to PMR stockholder approval.

18.     Disclosures
About Reportable Segments

In accordance with the criteria of SFAS
No. 131, Disclosures About Segments of an Enterprise and
Related Information, the Company determined that it operates
in two reportable segments: Health Services Business and Health
Information Business. The Companys reportable segments are
strategic business units that offer different services to a
variety of inpatient and outpatient recipients and healthcare
industry participants. The Health Services Business segment
consists of two Outpatient Programs and two Case Management
Programs. Under the Health Information Business, the Company has
licensed its

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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

software application to Conundrum in exchange for
eligibility to receive royalties for a period of five years. The
Company does not anticipate incurring any further costs
associated with the Health Information Business. Accounting
policies of segments are the same as those described in Note 1.
There are no intersegment revenues. All revenues are derived
from services performed in the United States.

Activities classified as Other in the following
schedule relate primarily to unallocated home office items.
Assets for Outpatient Programs, Case Management Programs, and
Health Information segment consist primarily of cash, accounts
receivable, furniture and office equipment, and intangible
assets. The Company evaluates the performance of each reportable
segment based on income (loss) from operations before
income taxes.

|     |                                                                  |              |   |            |           |             |   |            |           |       |   |            |           |  |   |             |            |  |   |             |            | 
|---- | ---------------------------------------------------------------- | ------------ | - | ---------- | --------- | ----------- | - | ---------- | --------- | ----- | - | ---------- | --------- |  | - | ----------- | ---------- |  | - | ----------- | ---------- | 
|     |                                                                  |              |   | Case       |           | Health      |   |            |           |      
|     |                                                                  | Outpatient   |   | Management |           | Information |   |            |           |      
|     |                                                                  | Programs     |   | Programs   |           | Business    |   | Other      |           | Total
|     |                                                                  |              |   |            |           |             |   |            |           |      
|2002 |                                                                  |              |   |            |           |             |   |            |           |       |   |            |           |  |   |             |            |  |   |            
|     | Revenues                                                         |              | $ | 3,106,813  |           |             | $ | 17,639,811 |           |       | $ |           |           |  | $ |            |            |  | $ | 20,746,624  |           
|     | Operating profit (loss)                                          |              |   | 2,458,442  |           |             |   | 1,917,519  |           |       |   | (801,488   | )         |  |   | (3,172,682  | )          |  |   | 401,791     |           
|     | Depreciation and amortization                                    |              |   | 4,273      |           |             |   | 235,096    |           |       |   |           |           |  |   | 303,624     |            |  |   | 542,993     |           
|     | Special charge                                                   |              |   |           |           |             |   |           |           |       |   | 658,223    |           |  |   | 411,823     |            |  |   | 1,070,046   |           
|     | Net interest income                                              |              |   |           |           |             |   | 48,069     |           |       |   | 56,346     |           |  |   | 500,596     |            |  |   | 605,011     |           
|     | Income (loss) from continuing operations
    before income taxes |              |   | 5,649,284  |           |             |   | 1,730,492  |           |       |   | (1,403,365 | )         |  |   | (3,387,533  | )          |  |   | 2,588,878   |           
|     |                                                                  | Total assets |   |            | 725,358   |             |   |            | 1,105,944 |       |   |            | 1,763,524 |  |   |             | 21,207,379 |  |   |             | 24,802,205 | 
|     |                                                                  |              |   |            |           |             |   |            |           |       |   |            |           |  |   |             |            |  |   |            
|2001 |                                                                  |              |   |            |           |             |   |            |           |       |   |            |           |  |   |             |            |  |   |            
|     | Revenues                                                         |              | $ | 3,265,169  |           |             | $ | 14,417,122 |           |       | $ |           |           |  | $ |            |            |  | $ | 17,682,291  |           
|     | Operating profit (loss)                                          |              |   | 1,629,151  |           |             |   | 1,321,783  |           |       |   | (5,091,671 | )         |  |   | (4,753,744  | )          |  |   | (6,894,481  | )         
|     | Depreciation and amortization                                    |              |   | 33,361     |           |             |   | 648,758    |           |       |   | 2,817,217  |           |  |   | 622,346     |            |  |   | 4,121,682   |           
|     | Special charge                                                   |              |   | 249,571    |           |             |   |           |           |       |   | 851,592    |           |  |   | 145,262     |            |  |   | 1,246,425   |           
|     | Net interest income                                              |              |   |           |           |             |   | 112,063    |           |       |   | 382,228    |           |  |   | 792,827     |            |  |   | 1,287,118   |           
|     | Income (loss) from continuing operations
    before income taxes |              |   | 1,513,628  |           |             |   | 141,672    |           |       |   | (8,378,252 | )         |  |   | (4,975,894  | )          |  |   | (11,698,846 | )         
|     |                                                                  | Total assets |   |            | 3,502,460 |             |   |            | 1,681,523 |       |   |            | 3,707,182 |  |   |             | 12,467,909 |  |   |             | 21,359,074 | 
|     |                                                                  |              |   |            |           |             |   |            |           |       |   |            |           |  |   |             |            |  |   |            
|2000 |                                                                  |              |   |            |           |             |   |            |           |       |   |            |           |  |   |             |            |  |   |            
|     | Revenues                                                         |              | $ | 26,861,993 |           |             | $ | 14,298,819 |           |       | $ |           |           |  | $ | 1,349,367   |            |  | $ | 42,510,179  |           
|     | Operating profit (loss)                                          |              |   | 7,412,352  |           |             |   | 1,693,444  |           |       |   | (1,296,519 | )         |  |   | (8,487,664  | )          |  |   | (678,387    | )         
|     | Depreciation and amortization                                    |              |   | 232,162    |           |             |   | 266,109    |           |       |   | 7,617      |           |  |   | 504,527     |            |  |   | 1,010,415   |           
|     | Special credit                                                   |              |   | 1,432,823  |           |             |   |           |           |       |   |           |           |  |   |            |            |  |   | 1,432,823   |           
|     | Net interest income                                              |              |   |           |           |             |   |           |           |       |   |           |           |  |   | 1,465,069   |            |  |   | 1,465,069   |           
|     | Income (loss) from continuing operations
    before income taxes |              |   | 5,672,808  |           |             |   | 748,586    |           |       |   | (1,304,136 | )         |  |   | (11,902,661 | )          |  |   | (6,785,403  | )         
|     |                                                                  | Total assets |   |            | 4,788,180 |             |   |            | 2,601,569 |       |   |            | 1,691,066 |  |   |             | 31,654,747 |  |   |             | 40,735,562 | 
|     |                                                                  |              |   |            |           |             |   |            |           |       |   |            |           |  |   |             |            |  |   |            

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##### Table of Contents



PMR CORPORATION


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

19.     Unaudited
Quarterly Financial Information

The following table presents unaudited quarterly
financial information for the eight quarters ended
April 30, 2002. Management believes this information
reflects all adjustments (consisting of normal recurring
adjustments) that they consider necessary for a fair
presentation with accounting principles generally accepted in
the United States. The results for any quarter are not
necessarily indicative of results for any future period:

|                             |         |                                          |       |                |  |          |       |         |  |         |       |         |  |          |        |         |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |       |  
|---------------------------- | ------- | ---------------------------------------- | ----- | -------------- |  | -------- | ----- | ------- |  | ------- | ----- | ------- |  | -------- | ------ | ------- | - | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                             |         |                                         
|                             |         | Quarters For The Years Ended,           
|                             |         |                                         
|                             |         |                                          |       |               
|                             |         | April 30, 2002                           |       | April 30, 2001
|                             |         |                                          |       |               
|                             |         |                                          |       |               
|                             |         | Unaudited                                |       | Unaudited     
|                             |         |                                          |       |               
|                             |         | 4/30/02                                  |       | 1/31/02        |  | 10/31/01 |       | 7/31/01 |  | 4/30/01 |       | 1/31/01 |  | 10/31/00 |        | 7/31/00
|                             |         |                                          |       |                |  |          |       |         |  |         |       |         |  |          |        |        
|                             |         |                                         
|                             |         | (In thousands, except per share amounts)
|Revenues                     |         | $                                        | 6,422 |                |  | $        | 4,887 |         |  | $       | 4,933 |         |  | $        | 4,505  |         |   | $ | 4,137  |       |   | $ | 4,100  |       |   | $ | 4,263  |       |   | $ | 5,182  |      
|Net income (loss)            |         |                                          | 4,320 |                |  |          | 2,051 |         |  |         | 948   |         |  |          | (1,498 | )       |   |   | (3,725 | )     |   |   | (2,869 | )     |   |   | (2,523 | )     |   |   | (1,653 | )    
|Net income (loss) per share: |         |                                          |       |                |  |          |       |         |  |         |       |         |  |          |        |         |   |   |        |       |   |   |        |       |   |   |        |       |   |   |        |      
|                             | Basic   |                                          |       | 0.60           |  |          |       | 0.29    |  |         |       | 0.13    |  |          |        | (0.21   | ) |   |        | (0.51 | ) |   |        | (0.40 | ) |   |        | (0.36 | ) |   |        | (0.24 | )
|                             | Diluted |                                          |       | 0.60           |  |          |       | 0.28    |  |         |       | 0.13    |  |          |        | (0.21   | ) |   |        | (0.51 | ) |   |        | (0.40 | ) |   |        | (0.36 | ) |   |        | (0.24 | )

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##### Table of Contents



SCHEDULE II

PMR CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

|                                |  |              |            |            |  |              |           |            |  |   |             |   |  |   |           | 
|------------------------------- |  | ------------ | ---------- | ---------- |  | ------------ | --------- | ---------- |  | - | ----------- | - |  | - | --------- | 
|COL. A                          |  | COL. B       |            | COL. C     |  | COL. D       |           | COL. E    
|                                |  |              |            |            |  |              |           |           
|                                |  |              |            | Additions  |  |              |           |           
|                                |  | Balance at   |            | Charged to |  |              |           | Balance at
|                                |  | Beginning of |            | Costs and  |  | Deductions  |           | End of    
|Description                     |  | Period       |            | Expenses   |  | Describe     |           | Period    
|                                |  |              |            |            |  |              |           |           
|Year ended April 30, 2002       |  |              |            |            |  |              |           |            |  |   |             |   |  |   |           | 
|Allowance for doubtful accounts |  | $            | 5,512,329  |            |  | $            | 389,340   |            |  | $ | 3,688,354(1 | ) |  | $ | 2,213,315 | 
|Contract settlement reserve     |  |              | 4,199,146  |            |  |              |          |            |  |   | 2,150,549(2 | ) |  |   | 2,048,597 | 
|Year ended April 30, 2001       |  |              |            |            |  |              |           |            |  |   |             |   |  |   |           | 
|Allowance for doubtful accounts |  |              | 7,142,662  |            |  |              | 723,376   |            |  |   | 2,353,709(1 | ) |  |   | 5,512,329 | 
|Contract settlement reserve     |  |              | 5,313,055  |            |  |              | 41,973    |            |  |   | 1,155,882(2 | ) |  |   | 4,199,146 | 
|Year ended April 30, 2000       |  |              |            |            |  |              |           |            |  |   |             |   |  |   |           | 
|Allowance for doubtful accounts |  |              | 10,781,138 |            |  |              | 5,128,847 |            |  |   | 8,767,323(1 | ) |  |   | 7,142,662 | 
|Contract settlement reserve     |  |              | 6,672,727  |            |  |              | 1,945,806 |            |  |   | 3,305,478(2 | ) |  |   | 5,313,055 | 



---



|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(1) | Uncollectible accounts written-off, net of
    recoveries and reclassification of allowance from contract
    settlement reserve.
|   
|(2) | Contract settlement reserve written-off and
    reclassified to allowance for doubtful accounts.                                 

S-1