U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                 --------------
                                   FORM 10-KSB
(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended          May 31, 2001
                          --------------------------

                                       OR

[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934.

For the transition period from                        to
                               ----------------------    -----------------------
                         Commission file number: 0-14401
                                  Sandata, Inc.

                 (Name of Small Business Issuer in Its Charter)
Delaware                                                11-2841799
(State or Other Jurisdiction of                         (IRS Employer
Incorporation or Organization)                          Identification No.)

26 Harbor Park Drive, Port Washington, NY                      11050
(Address of Principal Executive Offices)                    (Zip Code)

                               (516) 484 - 9060
                (Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:

Title of Each Class                                     Name of Each Exchange
                                                        on Which Registered

         Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
                                (Title of Class)

                                (Title of Class)

     Check  whether  the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been  subject to such  filing  requirements  for the past 90 days.

Yes     X             No

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

     The issuer's revenues for year ended May 31, 2001 were $18,322,882.

     The aggregate market value of the voting and non-voting  common equity held
by non-affiliates  computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of August
30, 2001 was $735,404.

                   ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                           DURING THE PAST FIVE YEARS

     Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the  distribution  of
securities under a plan confirmed by a court.

Yes                   No

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS

     The number of shares  outstanding of each of the issuer's classes of common
equity, as of August 30, 2001 was 2,506,473.

     Transitional Small Business Disclosure Format (check one):

Yes                   No      X

     DOCUMENTS INCORPORATED BY REFERENCE

     None.

<PAGE>



<TABLE>
<S>                                                                         <C>
                                      INDEX
                                                                            Page No.
Forward Looking Statements

                                     PART I

Item 1.      Description of Business                                             1

Item 2.      Description of Property                                             8

Item 3.      Legal Proceedings                                                   9

Item 4.      Submission of Matters to a Vote of Security Holders                11

                                    PART II

Item 5.      Market for Common Equity and Related Stockholder Matters           12

Item 6.      Management's Discussion and Analysis or Plan of Operations         13

Item 7.      Financial Statements                                               19

Item 8.      Changes in and Disagreements with Accountants on Accounting        19
             And Financial Disclosure

                                    PART III

Item 9.      Directors, Executive Officers, Promoters and Control Persons;      20
             Compliance with Section 16(a) of the Exchange Act

Item 10.     Executive Compensation                                             21

Item 11.     Security Ownership of Certain Beneficial Owners and Management     25

Item 12.     Certain Relationships and Related Transactions                     26

                                    PART IV

Item 13.     Exhibits, List and Reports on Form 8-K                             28

Signatures
</TABLE>
<PAGE>

Forward-Looking Statements

     Certain  information  contained  in this Annual  Report on Form 10-KSB (the
"Form 10-KSB") includes  "forward-looking  statements" within the meaning of the
Private  Securities  Litigation  Reform Act of 1995,  and is subject to the safe
harbor created by that act. Sandata,  Inc. (the "Company") cautions readers that
certain  important  factors may affect the  Company's  actual  results and could
cause such  results to differ  materially  from any  forward-looking  statements
which may be deemed to have been made in this Form 10-KSB or which are otherwise
made by or on behalf of the Company.  For this purpose, any statements contained
in this Form 10-KSB that are not statements of historical  fact may be deemed to
be forward-looking statements. Without limiting the generality of the foregoing,
words  such as  "may",  "will",  "expect",  "believe",  "anticipate",  "intend",
"could",  "estimate",  "plan", or "continue" or the negative variations thereof,
or comparable terminology,  are intended to identify forward-looking statements.
Factors which may affect the Company's results include,  but are not limited to,
the  risks  and  uncertainties  associated  with  new  technology  developments,
competitive  bidding,  litigation,  risks and uncertainties  associated with the
Internet and Internet-related products, and other factors.

     The Company is also subject to other risks detailed herein or detailed from
time to time in its Securities and Exchange Commission ("SEC") filings.  Readers
are also urged to carefully review and consider the various  disclosures made by
the Company  which  attempt to advise  interested  parties of the factors  which
affect the Company's business,  including,  without limitation,  the disclosures
made under the  captions  "Description  of  Business"  in Item 1,  "Management's
Discussion  and  Analysis  or  Plan  of  Operation"  in  Item  6,  and  "Certain
Relationships and Related  Transactions" in Item 12, of this Annual Report.  All
references to a fiscal year are to the Company's fiscal year which ends May 31.

                                     PART I

ITEM 1 - DESCRIPTION OF BUSINESS

Business Development

     General

     The  Company,  by itself and  through  its wholly  owned  subsidiaries,  is
engaged in providing technology services to its customers. These services either
a) utilize software products  developed,  acquired or licensed by the Company or
b)  leverage  the  technology-based  core  competencies  that  the  Company  has
developed in formulating and delivering its software services.

     Applications  of the  Company's  software  include:  an  automated  payroll
processing and billing service  delivered via leased lines or over the Internet,
computerized preparation of management reports,  telephone based data collection
services,  automated  database  driven  outbound  telephone  notification,   and
biometric  verification  systems involving the use of both voice recognition and
fingerprint technologies.

     Services that leverage the Company's  core  competencies  are driven by the
Company's Information Technology ("IT") support services. The services currently
offered  include:  facilities  outsourcing  for  database and  operating  system
support, technology consulting,  custom software development and support, resale
and  implementation  of software  written and  distributed  by others,  web site
development  and  hosting,  help desk  services,  and hardware  maintenance  and
related administrative services.

     The  Company's  software  is  written in a variety  of  software  languages
including JAVA, C++, Oracle PL/SQL, CGI, Perl, VB, Foxpro, Access and COBOL.

     The Company  was  incorporated  in the State of New York in June,  1978 and
reincorporated  in the State of Delaware in December 1986, at which time it also
assumed its present name.

Business of Issuer

     Principal Products and Services

     Computerized  Information  Processing  Services.  The Company,  through its
wholly owned subsidiary,  Sandsport Data Services, Inc. ("Sandsport"),  provides
computer  services  to the home health care  industry,  principally  through its
SHARP (Sandsport Home Attendant Reporting Program) offering.

     The primary customers are vendor agencies which, pursuant to contracts with
the Human Resources Administration ("HRA") of the City of New York, provide home
attendant  services  to the  elderly  and infirm in New York City.  The  Federal
Government  offers this program (the "Home Attendant  Program") to participating
states and  municipalities  as an optional  part of its  Medicaid  program.  The
Federal  Government  funds a substantial  portion of the program and in New York
City, the State Department of Social Services and New York City fund the balance
of the program.  In New York City, the Home Attendant Program is administered by
HRA, which  sub-contracts with proprietary and not-for-profit  agencies ("Vendor
Agencies")  to provide  home  attendant  services  to those in need.  HRA refers
patients to Vendor  Agencies  that, in turn,  send home  attendants to patients'
homes to assist in homemaking  chores.  Vendor  Agencies  also provide  periodic
nurse's visits to patients.

     Sandsport processes payroll,  preparing paychecks  indicating  year-to-date
earnings and  deductions,  payroll  journals and payroll  earnings and deduction
summaries.  Sandsport  provides  computerized  information  which permits Vendor
Agencies to prepare their Employers Quarterly Federal Tax Return, New York State
unemployment insurance returns,  deposits for Federal unemployment insurance and
all required New York City tax returns and deposits.

     Annually, Sandsport prepares for each Vendor Agency employee Transmittal of
Income and Tax  Statements,  reconciliation  of state tax  withheld  and Federal
Unemployment  Insurance  Returns.  Sandsport also  furnishes to Vendor  Agencies
employee-earning  ledgers  that  enable  them to review a full  year's  earnings
history for each of their employees.

     Generally,  in providing  software-related  services,  the Company receives
data from its  customers,  processes the data on the Company's  equipment at its
premises, and generates reports based on such data.

     These services are primarily provided through SHARP. Vendor Agencies enlist
Sandsport's  computer services to provide weekly time sheets,  billing,  payroll
processing and management  reports.  For the fiscal years ended May 31, 2001 and
2000,  approximately  $5,445,000 or 31% and $5,224,000 or 28%, respectively,  of
the Company's  total operating  revenues were derived from services  rendered to
Vendor Agencies.

     The Company's  strategy is to diversify and expand its health care customer
base. Its wholly-owned  subsidiary,  Pro-Health  Systems,  Inc.,  ("Pro-Health")
intends to utilize newly  acquired and enhanced  software to provide  additional
payroll and billing  functionality for SHARP users and, by expanding its billing
capabilities,  make the product relevant to home healthcare agencies that cannot
use SHARP in its current form.

     Pro-Health  offers  a  system  which  is  designed  to be  delivered  as an
Application  Service Providers  ("ASP") solution,  which allows its customers to
access  certain  Pro-Health  software  over the  Internet  without the  customer
needing  sophisticated  hardware at its site to house the  software or store the
data.  This allows the Company's  customers to have access to software  programs
via low-cost  hardware and on a fee per transaction  basis,  and enables them to
utilize the Company's software services without a substantial upfront investment
in either hardware or software.  The software consists of a comprehensive  suite
of  on-line   interactive   modules  that  are  integrated  with  other  Company
applications such as Santrax(R) (see below). The Pro-Health systems' modular and
flexible design makes it adaptable to the changeable needs of a wide spectrum of
health care entities.

     For the fiscal years ended May 31, 2001 and 2000, approximately $516,000 or
3% and $405,000 or 2%,  respectively,  of the Company's total operating revenues
were derived from services rendered to customers using the Pro-Health system.

     Telephone-Based  Data  Collection  Services.  The Company has  developed an
automated  electronic system known as Sandata(R)  SANTRAX(R) that allows the use
of Automated  Number  Identification  ("ANI")  technology and voice  recognition
technology to assist in capturing  data via telephone.  The system  incorporates
telephone technologies into the data reporting process and is currently designed
to monitor the arrival and departure times of off-site workers who simply call a
unique  toll-free  number to record  their  arrival  and  departure.  The system
automatically  and  immediately  confirms  that the  assigned  person  is at the
expected place at the expected time for the approved and scheduled duration, and
produces  real-time  exception  reports  to enable its  clients to manage  their
off-site staff.

     In addition to  collecting  the  arrival  and  departure  times of off-site
workers  from the visit  site,  SANTRAX  is also able to collect a wide range of
additional  information.  By collecting  additional  data,  SANTRAX can increase
operational  efficiencies  and enable its  customers to generate  administrative
savings.  Some of the information  provided by SANTRAX includes  expense-related
data such as mileage and  supplies,  as well as tasks  performed by the off-site
worker. This data is used to produce weekly payroll and to automatically prepare
reimbursement submissions.  Reports are generated to the customer based upon its
specific requirements.

     The  software  operates  on the ASP  model,  and the  Company  receives  an
aggregate of approximately  620,000 calls per week or 32 million calls per year.
The service is currently utilized  principally by the Company's home health care
clients,  and approximately  seventy-two per cent (72%) of current SANTRAX calls
are Vendor Agencies using the SHARP program.

     Effective June 1, 1998, the Company and MCI Telecommunications  Corporation
("MCI") entered into a License Agreement (the "License  Agreement")  pursuant to
which the Company was granted a license,  under  certain of MCI's  patents (each
individually a "Patent" and collectively the "Patents"), which enables it to use
and sell its SANTRAX time and attendance  verification  product  non-exclusively
nationwide and  exclusively in the home health care  industries for the five New
York boroughs. The License Agreement remains in effect until October 19, 2010 or
until the expiration date of the last to expire Patent,  whichever is the latter
to occur.  Pursuant  to the  License  Agreement,  the  Company  pays MCI certain
royalties on a per call basis.

     For the fiscal years ended May 31, 2001 and 2000,  approximately $7,562,000
or 43% and $7,366,000 or 40%,  respectively,  of the Company's  total  operating
revenues were derived from services rendered relating to SANTRAX.

     Although no assurances  can be given,  it is  anticipated  that the SANTRAX
product  can  be  utilized  by  other  industry  applications.  The  Company  is
developing  the  product  so that it can be sold  into  the  general  commercial
market,  and the service is currently being modified to meet the needs of a wide
range of businesses wishing to monitor or collect data from off-site employees.

     Technology  Infrastructure and Outsourcing  Services.  The Company supports
specialized  system  applications  for  businesses  based upon its analysis of a
client's particular need and specialized system applications.

     The Company provides data processing services and technology infrastructure
consulting  services  on an  outsourced  basis to National  Medical  Health Card
Systems,  Inc.  ("Health Card"), a public company (NASDAQ:  NMHC) engaged in the
pharmacy prescription benefits management business.  Health Card is an affiliate
of the Company,  of which Mr.  Brodsky is Chairman of Directors  and a principal
shareholder  (See Item 6 -  "Management's  Discussion  and  Analysis  or Plan of
Operation -  Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations - Liquidity and Capital  Resources" and Item 12 - "Certain
Relationships and Related Transactions").

     In addition,  the Company develops web sites, runs e-commerce  applications
and resells  telephone  services,  leveraging the favorable rates it receives by
virtue of the  substantial  call volume driven by SANTRAX.  The Company has also
offered  managed  services  in the  security  arena  such  as  security  audits,
enterprise  firewalls  and  network  monitoring,  although it  currently  is not
providing  such  services.  While  the web  site  development,  e-commerce,  and
telephone services are currently provided to an affiliate,  the Company plans to
diversify these offerings and resell them to businesses  throughout the New York
metropolitan area.

     For the fiscal years ended May 31, 2001 and 2000,  approximately $2,071,000
or 12% and $2,635,000 or 14%,  respectively,  of the Company's  total  operating
revenues were derived from services rendered for outsourcing services.

     Information  Technology  Services.  The Company,  through its SandataNet(R)
division,  provides IT consulting services for businesses and the public sector.
It  delivers  computer,   communications  and  networking  sales  and  services,
including training, maintenance and repair services, to companies and government
and professional services organizations.

     SandataNet(R)  manages a help desk for the Company's  internal  operations.
This help desk is responsible for desk side support services, including software
support,  hardware  support/break-fix,   LAN  administration  and  configuration
services.

     The  Company  has  installed  critical  software  applications  at a  local
municipal  government  office.  It also provides  custom  programming,  software
development and installation services to this sector.

     For the fiscal years ended May 31, 2001 and 2000  approximately  $2,170,000
or 12% and  $2,358,000 or 13%,  respectively  of the Company's  total  operating
revenues were derived from services rendered relating to SandataNet(R).

     On April 27, 2001,  the Company  acquired  certain assets of North American
Internet Services,  Inc. ("NAIS"),  a provider of broadband  services,  Internet
access, and co-location services.  NAIS had entered bankruptcy  proceedings and,
under the auspices of the Bankruptcy Court, the Company was permitted to "credit
bid" approximately  $124,000 of expenses (including salaries) it had incurred on
behalf of NAIS as the purchase  price for the assets,  and was given 180 days to
exploit the assets it had acquired.  The Company  incurred $77,000 in additional
costs  related to the  acquisition  of these  assets.  The tangible  assets were
determined to have no significant  fair value.  Therefore,  all the expenditures
related to the  acquisition  were  allocated  to  goodwill.  The Company has the
option to abandon the exploitation of these assets within the 180 day period. If
the Company  continues  to use the NAIS assets,  10% of the profits  (defined as
earnings before interest  expense and taxes)  generated by such use must be paid
to the bankruptcy estate for the first three years.

     At May 31, 2001, the Company performed an evaluation of the  recoverability
of the assets acquired from NAIS and concluded that a significant  impairment of
these assets had occurred  based on actual results during the year ended May 31,
2001 and on  estimated  future  cash flows not being  sufficient  to recover the
carrying  value of the  goodwill.  As such,  the carrying  value of the impaired
goodwill  was written down to its  estimated  fair value,  which was  determined
based on discounted  estimated cash flows. The Company  recognized an impairment
loss and write down of the  goodwill  of  approximately  $201,000.  Considerable
management  judgment is necessary to estimate  fair value;  accordingly,  actual
results could vary significantly from such estimates.


     Seasonality

     The Company's revenues are not subject to seasonal fluctuations.

     Marketing and Distribution

     The Company provides its computerized  information processing services to a
variety of users, although principally to the health care industry.  Many of the
Company's  software  programs are  adaptable  to customers in related  fields of
enterprise.  Thus,  the  components  of the SHARP system for the Home  Attendant
Program - Medicaid reimbursable billing, management reports, payroll processing,
tax reports - are being  developed for  utilization in other  settings,  such as
nursing homes, skilled nursing facilities, and rehabilitation facilities.

     The  Company's  telephone-based  data  collection  services  are  currently
principally used to monitor  off-site  workers in the home healthcare  industry.
The SANTRAX  proprietary  software could be used to monitor  off-site workers in
other industries,  and the Company is currently  exploring  opportunities in the
temporary staffing, security guard and building maintenance industries.

     Technology  infrastructure and outsourcing  services are currently utilized
in-house and within  affiliate  companies.  The Company intends to take the core
competencies  that it has  developed in  supporting  its service  offerings  and
resell them into the business  community in the New York metropolitan  area. The
Company cannot assure its ability to resell such services.

     The Company believes it can leverage its in-house capabilities to develop a
new IT services  business,  and intends  that such IT services  will be marketed
primarily to businesses in the New York metropolitan  area, where it believes it
can support  professional  services with on-site  technical help. In the future,
the Company believes it will have the capability of rolling out such IT services
to a wider  geographical  audience.  The  Company  cannot  assure its ability to
develop a new IT service  business and cannot predict that such services will be
successful.

     The Company markets its products and services through  telemarketing  and a
combination of inside and outside sales  representatives,  all directly employed
by the Company.

     Competition

     The Company competes with different companies for the sale of its different
products  and  services.  In the  sale of its  software  products,  the  Company
competes  for  customers  on the basis of the range,  price,  functionality  and
quality of its software and on its ability to develop  programs  tailored to its
customers'  requirements.  Many of its  competitors  are companies with directly
competitive software products, and a number have substantially greater financial
resources and substantially larger marketing, technical and field organizations.

     With respect to the Company's  SHARP business,  there is added  competitive
pressure and  uncertainty  because the City of New York  requires all  contracts
with City agencies to undergo competitive bidding.  Furthermore,  the success of
the SHARP business rests with a key officer of the Company,  who has established
strong relationships with the Company's SHARP customers over the years. Although
the  Company  has been  awarded  contracts  based on its  bids,  there can be no
assurance that its bids will be accepted in the future.

     The computer services industry is characterized by competition in the areas
of service, quality, price and technical expertise.  Competitors in this segment
vary from the small, local companies to multinational  consulting and accounting
firms.

     Customers

     The  Company's  customer  base is  primarily  drawn  from the  health  care
industry.  During the fiscal years 2001 and 2000, the Company  derived  revenues
from  the  Vendor  Agencies  who  are all  funded  by one  governmental  agency,
amounting to  approximately  $10,608,000 or 60% and  $10,623,000 or 57% of total
operating revenues,  respectively. The Company was owed approximately $1,160,000
and $1,362,000 from these customers at May 31, 2001 and 2000, respectively.  The
Company also  derived  approximately  $2,458,000  or 14% and  $1,753,000  or 9%,
respectively,  of revenue  from Health Card for database  and  operating  system
support, hardware leasing, maintenance and related administrative services. (See
Item  6  -  "Management's  Discussion  and  Analysis  or  Plan  of  Operation  -
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations - Liquidity and Capital Resources").

     Proprietary Rights

     The Company filed a United States Trademark  application  which renames its
voice recognition timekeeping system to SANTRAX. The trademark was registered on
September 16, 1997.

     On March 3, 1997 the Company  filed an  application  with the United States
Patent  and  Trademark  Office to  register  its  SandataNet(R)  trademark.  The
trademark was registered on February 24, 1998.

     On March 30, 1999, the Company filed an application  with the United States
Patent and Trademark Office to register its PRO-TRAX trademark. Such application
is currently  pending;  the deadline for a decision by the Company as to whether
or not to proceed with such application has been extended to October 2001.

     On April 28, 1999, the Company filed an application  with the United States
Patent and Trademark Office to register its RXTRAX  trademark.  Such application
is currently  pending;  the deadline for a decision by the Company as to whether
or not to proceed with such application has been extended to October 2001.

     The Company has not applied  for  Federal  copyright  registration  for its
computer  software  systems now in existence or being  developed.  However,  the
Company believes that its systems are trade secrets and that they, together with
the  documentation,  manuals,  training aids,  instructions  and other materials
supplied  to users,  are  subject to the  proprietary  rights of the Company and
protected by applicable trade secret laws. The Company generally seeks to obtain
trade  secret  protection   pursuant  to  non-disclosure   and   confidentiality
agreements with its employees. Although the Company's customers are advised that
the Company  retains title to all of its  products,  and they agree to safeguard
against  unauthorized  use of such systems,  there can be no assurance  that the
Company  will be able to protect  against  misappropriation  of its  proprietary
rights and trade secrets.

     Research and Development

     The Company incurred  approximately  $10,000 and $122,000 during the fiscal
years 2001 and 2000,  respectively,  on research  and  development.  The Company
incorporates its research and development into its on-going business activities.
The Company's  employees may develop new software  programs and expand or modify
existing  ones.  After  determining  that a program  has  reached  technological
feasibility,  the subsequent development costs are capitalized.  All other costs
are expensed.

     Employees

     As of  May  31,  2001,  the  Company  and  its  subsidiaries  employed  152
employees,  including  146  full-time  and 6  part-time  employees.  The Company
believes  that  its  success  will  depend  in part on its  ability  in a highly
competitive   environment  to  attract  and  retain  highly  skilled  technical,
marketing and management personnel.

     On August 8, 2001, the Company  eliminated certain positions and terminated
approximately  thirty (30) employees.  Projected  revenue  reductions and recent
operating losses combined to cause management to re-evaluate staffing needs. The
eliminations  and  terminations  from within the Company and its subsidiaries is
expected  to  generate  between  $1.7 and $2 million in  reduced  expenses.  The
Company also incurred approximately $47,000 in severance payments.

     The Company  considers  its  employee  relations  to be  satisfactory.  The
Company is not a party to any collective bargaining agreement.


ITEM 2 - DESCRIPTION OF PROPERTY

     The Company and its  subsidiaries  currently  occupy  approximately  31,350
square feet of office space  located at 26 Harbor Park Drive,  Port  Washington,
New York 11050 (the  "Facility").  The Company  subleases  the Facility from BFS
Realty,  LLC,  successor  to BFS Sibling  Realty,  Inc.  and an affiliate of the
Company's Chairman (the "Affiliate"). The Affiliate leases the Facility from the
Nassau County Industrial  Development Agency (the "NCIDA"),  pursuant to a lease
(the  "Lease"),  which was entered into by that Agency and the Affiliate in July
1994. (Subsequent  assignments and re-assignments of that Lease have, in effect,
returned the parties to their original  positions.).  The Lease expires in March
2005.  The  Affiliate  has the right to become  the owner of the  Facility  upon
expiration of the Lease.  The  Affiliate  subleases a portion of the Facility to
the Company.  The Company  currently pays rent to The Affiliate in the amount of
$47,370 per month.  The Affiliate  also receives rent from other  companies that
occupy space in the Facility,  some of which are  affiliated  with the Company's
Chairman.  The Company  believes  that its  facilities  are adequate for current
purposes. (See Item 6 - "Management Discussion and Analysis or Plan of Operation
-  Management's  Discussion  and Analysis of Financial  Condition and Results of
Operations  -  IDA/SBA  Financing",  and  Note  6a to the  Financial  Statements
contained in Item 7 of this Form 10-KSB,  for a discussion of the NCIDA and U.S.
Small  Business  Administration   financing  transactions.   See  also  Note  5,
Commitments  and  Contingencies  to the Financial  Statements  comprising Item 7
hereof, for a description of the lease entered into as of June 1, 2001.


ITEM 3 - LEGAL PROCEEDINGS

     An action has been  commenced by a former  executive  of Health Card,  Mary
Casale,  who alleges that employees of both Health Card and the Company  engaged
in sex  discrimination  as to Ms.  Casale,  and thus,  violated Title VII of the
Civil Rights Act of 1964.  The matter is presently  pending before New York City
office of the Equal Employment  Opportunity  Commission  ("EEOC").  The EEOC has
made no findings or other determinations as to the merits of the parties' claims
or defenses.  The Company is being defended pursuant to an employment  practices
liability  insurance policy,  the coverage of which is subject to various terms,
conditions, and exclusions.

     Only a preliminary  investigation into this matter has been conducted,  and
discovery  has not  commenced.  Ms.  Casale  has yet to  bring  suit in state or
federal court,  and, thus,  could  conceivably  assert  additional  claims.  The
Company denies the material  allegations  Ms. Casale has brought  against it and
intends to defend itself as vigorously as is necessary.

     The  Company has been  providing  services to  Federation  of Puerto  Rican
Organizations,   and/or  its  affiliates  (individually  and  collectively,  the
"Federation"),  an HRA Vendor  Agency,  since 1995.  By November 30,  1997,  the
Company had acquired a loan  receivable  for an  aggregate  of $300,000  from an
affiliate  of the  Company's  Chairman,  due  from  the  Federation.  Such  loan
receivable  was  supposed  to be  secured  by  accounts  receivable  due  to the
Federation  from various  affiliates of the  Federation.  Shortly  following the
Company's acquiring such receivable, the Federation and its affiliates filed for
bankruptcy  protection.  While the bankruptcy petition for the Federation itself
has been dismissed,  some of the  Federation's  affiliates  remain in bankruptcy
proceedings. At May 31, 2000, the Company had written off the $300,000 principal
loan receivable in addition to $47,296 for services  rendered  against a reserve
established  in prior  years  for these  amounts.  The  affiliate  from whom the
Company  acquired the loan receivable  subsequently  obtained a judgment against
the Federation in the amount of $527,760,  including  pre-judgment interest. The
Company has been advised that, in light of the continuing bankruptcy proceedings
for the Federation's affiliates, from whom the Federation received substantially
all of its revenues, the collectibility of this judgment is extremely doubtful.

     In August of 1999, the Company's  wholly-owned  subsidiary,  Sandsport Data
Services,  Inc.  ("Sandsport")  was named as a defendant in Greater Bright Light
Home Care Services,  Inc. et al. v. Joseph  Jeffries-El,  El Equity Corporation,
Sandsport  Data  Services,  Inc. et al (Supreme  Court of the State of New York,
Kings  County).  Sandsport's  contractual  obligation  to Greater  Bright  Light
involved the depositing of certain government-issued checks into a specific bank
account.  Upon receiving written notification from the agency issuing the checks
to stop depositing them in that account,  Sandsport ceased  depositing them. The
plaintiff  brought the action against Joseph  Jeffries-El and El Equity,  and El
Equity  counterclaimed  against  the  plaintiff,  each  basing its claims on the
financing   agreement  between  them.  El  Equity  also  cross-claimed   against
Sandsport,  asserting that Sandsport converted the  government-issued  checks to
its own use. Although Sandsport is named as a defendant,  the Complaint seeks no
affirmative  relief  against  Sandsport.   Co-defendant  Citibank  has  asserted
indemnification  claims  against  Sandsport  and  all of the  other  defendants.
Sandsport disputes all liability.  The aggregate amount of the funds at issue is
approximately $262,000.

     On October 19, 1999, the Company and  Pro-Health  brought an action against
Provider  Solutions  Corporation  ("Provider"),  Michael  Milvain and  Charlotte
Fritchie in Supreme Court, New York County, Index No. 99-26033,  based on breach
of contract,  fraudulent misrepresentation and other causes of action, demanding
damages of approximately $10,000,000 (the "State Action").

     On October 22, 1999, Provider brought a federal action in the United States
District Court,  Eastern District (the "Federal Action"),  seeking to enjoin the
Company and Pro-Health from (i) hiring certain named employees;  (ii) soliciting
any present or former employees of Provider; and (iii) using, without Provider's
permission,  any trade  secret or other  proprietary  information  belonging  to
Provider.  The Federal Action also sought to enjoin employees from (i) divulging
to the Company,  Pro-Health or any other third party,  any trade secret or other
proprietary  information;  and  (ii)  accepting  employment  from  the  Company,
Pro-Health  or any  other  customer  or  competitor  of  Provider.  The  amended
complaint  ultimately  served on the  Company and  Pro-Health  on March 31, 2000
demanded  relief in the form of a permanent  injunction and damages  against the
Company  and   Pro-Health  for  total  amounts   ranging  from   $10,000,000  to
$15,000,000.  The amended  complaint  alleged  claims of  declaratory  judgment,
copyright  infringement,  breach of  fiduciary  duty,  breach of  contract,  and
misappropriation  of trade secrets,  among others.  The State Action was removed
and consolidated with the Federal Action.

     The Company and Pro-Health  asserted  various  counterclaims in the Federal
Action, demanding damages of $10,000,000,  seeking an injunction and declaratory
judgment,  and  asserting  claims based on, among other  things,  imposition  of
constructive trust, breach of contract, and unfair competition.

     On March 8, 2001 the Company, Pro-Health, Provider and all involved parties
and individuals settled the consolidated Federal Action,  globally resolving all
issues,  claims and disputes.  The  settlement  entailed the exchange of general
releases  between the Company,  Pro-Health,  Provider  and all parties,  and the
payment of $600,000 to Provider,  of which $50,000 was paid by the Company.  The
balance  of the  payment  under  the  settlement  was  funded  by the  Company's
insurers.  The  settlement  did not  have a  material  effect  on the  Company's
financial performance.  The Company has retained its proprietary interest in the
subject software.

     On April 2, 2001,  the Company was served  with a First  Amended  Complaint
filed by Dataline,  Inc.  against MCI WorldCom and the Company for alleged trade
libel and related  counts,  in the United States  District Court of the Southern
District of New York,  Civil  Action No.  00-CV-1578.  The Company has filed its
answer,  denying all claims, and the case has been consolidated with a case that
MCI WorldCom filed against  Dataline for patent  infringement,  Civil Action No.
01-CV-3849.  The Company is taking steps to bring a motion for summary  judgment
against  Dataline,  and the judge is  considering  whether the summary  judgment
motion can be  brought.  The  Company  denies  all  substantive  allegations  by
Dataline and intends to contest the case vigorously.

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

     Not applicable.

<PAGE>
                                    PART II

ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Market Information

     The  Company's  Common  Stock is traded on the  SmallCap  Market  under the
symbol  "SAND" on the  National  Association  of  Securities  Dealers  Automated
Quotation System ("NASDAQ"). The table below sets forth high and low sale prices
of the Common Stock, as furnished by NASDAQ.

                                           Sale Prices
                                       High           Low
Fiscal Year Ended
May 31, 2001

First Quarter                         $1.875         $1.250
Second Quarter                         1.500           .531
Third Quarter                          1.406           .844
Fourth Quarter                         1.375           .86

Fiscal Year Ended
May 31, 2000

First Quarter                         $1.75          $1.06
Second Quarter                         1.44            .97
Third Quarter                          4.34            .75
Fourth Quarter                         3.94           1.34

Holders

     Management has been advised by its transfer agent (North American  Transfer
Co.) that the number of holders of record of the Company's  Common Stock,  as of
August 30, 2001 was 1,003.

Dividends

     No cash  dividends have been paid by the Company on its Common Stock and no
such payment is anticipated in the foreseeable future.

     The Company's  ability to declare and pay dividends is restricted  pursuant
to the terms of a revolving  credit  agreement  dated April 18, 1997 between the
Company and HSBC Bank USA,  formerly Marine Midland Bank (the "Bank"),  and also
under the terms of the  Guaranty  Agreement  dated June 1, 1994 by and among the
Company  (as a  guarantor),  BFS  Realty,  LLC (a  company  affiliated  with the
Company's  Chairman)  (the  "Affiliate"),  and  the  Bank  (among  others).  The
Guarantee  Agreement was entered into in connection  with the IDA/SBA  Financing
discussed  in Item 6 hereof,  "Management's  Discussion  and Analysis or Plan of
Operation".

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     Analysis of Operations

     Fiscal Years ended May 31, 2001 compared with May 31, 2000

     Service  fee  revenues  for fiscal  2001 were  $17,769,069  as  compared to
$17,987,646  for the  previous  fiscal  year,  a decrease of $218,577 or 1%. The
decrease is primarily  attributable  to decreases  in revenues  from  SandataNet
offset by increases in revenue from SHARP and Santrax.

     Other  income for the year ended May 31,  2001 was  $368,502 as compared to
$432,279  for the year ended May 31,  2000,  a decrease  of $63,777 or 15%.  The
decrease is attributable to a decrease in income  recognized on  sales/leaseback
transactions.

     Expenses Related to Services

     Operating  expenses  were  $10,372,524  for the year ended May 31, 2001, as
compared  to  $11,419,625  for the  year  ended  May 31,  2000,  a  decrease  of
$1,047,101  or 9%.  Decreased  payroll  expenses and decreased bad debt expenses
were the primary factors for the decrease in operating expenses.

     Selling,  general and  administrative  expenses  for the year ended May 31,
2001 were $5,004,255  compared to $4,346,757 for the year ended May 31, 2000, an
increase of $657,498 or 15%. The  increases  were  primarily due to increases in
consulting,  payroll and commission  expenses  relative to increased  efforts to
increase sales in the SANTRAX and SandataNet product lines.

     Depreciation and  amortization  expenses were $2,748,411 for the year ended
May 31, 2001,  as compared to  $2,384,045  for the year ended May 31,  2000,  an
increase of $364,366 or 15%. The increase was  primarily  attributable  to fixed
asset additions,  including computer hardware and software capitalization costs,
in connection with ongoing computer systems upgrades.

     Interest  expense for the year ended May 31, 2001 was  $189,240 as compared
to $243,637  for the year ended May 31,  2000, a decrease of $54,397 or 22%. The
decrease  was a  result  of lower  overall  average  daily  balances  under  the
Company's revolving credit agreement.

     Impairment of Developed Software

     During the fourth  quarter of the year ended May 31, 2001, the Company shut
down  certain  operating  systems and  hardware  configurations,  which had been
capitalized  in  previous  years.  The  Company  had  determined  that the older
system's  architecture  had become  obsolete and too costly to maintain,  so the
Company  coordinated  placing  several new systems in  production  after running
parallel  with  pre-existing  systems  resulting in the  retirement of the older
systems during the fourth quarter.  The Company further determined that there is
no net realizable value remaining since no future revenue would be recognized in
the retired systems because the architecture was completely  replaced by the new
systems.  As such the Company  recognized  an impairment  loss of  approximately
$3,300,000 for the year ended May 31, 2001.

     Impairment of Goodwill

     On April 27, 2001,  the Company  acquired  certain assets of North American
Internet Services,  Inc. ("NAIS"),  a provider of broadband  services,  Internet
access, and co-location  services for approximately  $201,000.  NAIS had entered
bankruptcy  proceedings  and,  under the auspices of the Bankruptcy  Court,  the
Company  was  permitted  to "credit  bid"  approximately  $124,000  of  expenses
(including salaries) it had incurred on behalf of NAIS as the purchase price for
the assets,  and was given 180 days to exploit the assets it had  acquired.  The
Company  incurred  approximately  $77,000  in  additional  costs  related to the
acquisition  of these  assets.  The tangible  assets were  determined to have no
significant  fair  value.  Therefore,   all  the  expenditures  related  to  the
acquisition  were  allocated to goodwill.  The Company has the option to abandon
the  exploitation  of these  assets  within the 180 day  period.  If the Company
continues to use the NAIS assets, 10% of the profits (defined as earnings before
interest expense and taxes) generated by such use must be paid to the bankruptcy
estate for the first three years.

     At May 31, 2001, the Company performed an evaluation of the  recoverability
of the assets acquired from NAIS and concluded that a significant  impairment of
these assets had occurred  based on actual results during the year ended May 31,
2001 and on  estimated  future  cash flows not being  sufficient  to recover the
carrying  value of the  goodwill.  As such,  the carrying  value of goodwill was
written  down to its  estimated  fair  value,  which  was  determined  based  on
discounted  estimated cash flows. The Company  recognized an impairment loss and
write down of the goodwill of approximately  $201,000.  Considerable  management
judgment is necessary to estimate fair value; accordingly,  actual results could
vary significantly from such estimates.

     Income Tax Expenses

     Income tax (benefit)  expense was $(1,293,401) and $189,158 for fiscal 2001
and 2000,  respectively.  The  decrease  in income  tax  expense is due to lower
pretax  income,  the  recognition of a deferred tax asset for net operating loss
carryforwards,  and a reduction of a deferred tax liability  associated with the
different  recognition  of  software  development  costs  for tax and  financial
statement purposes.  The effective tax rates for fiscal 2001 and 2000 were 37.0%
and 93.1%, respectively.

     IDA/SBA Financing

     In November, 1996 the Company entered into an agreement with the Affiliate,
the Nassau County Industrial  Development  Agency ("NCIDA"),  and Marine Midland
Bank (the  "Bondholder")  (the  "Agreement").  Pursuant  to the  Agreement,  the
Affiliate (i) assumed all of the Company's rights and obligations  under a Lease
Agreement that was  previously  between the Company and the NCIDA (the "Lease"),
and (ii) entered into a Sublease Agreement with the Company for the premises the
Company  occupies.  Pursuant to the  Agreement,  the Affiliate also obtained the
right to become the owner of the premises upon  expiration  of the Lease.  Under
the terms of the Agreement,  the Company is jointly and separately liable to the
NCIDA for all  obligations  owed by the  Affiliate to the NCIDA under the Lease;
however,  the  Affiliate  has  indemnified  the Company  with respect to certain
obligations relative to the Lease and the Agreement.  In addition, the Agreement
provides that the Company is bound by all the terms and conditions of the Lease,
and that a security interest is granted to the Affiliate in all of the Company's
fixtures constituting part of the premises.

     The  foregoing  transactions  and  agreements  were the last in a series of
transactions involving the Company, the Affiliate, NCIDA, the Bondholder and the
U.S. Small Business  Administration.  Chief among these was the borrowing by the
Affiliate in June of 1994 of $3,350,000  in the form of  Industrial  Development
Revenue Bonds (the "Bonds") to finance the acquisition of the Company's facility
(the  "Facility").  Simultaneously  with the  issuance  of the Bonds:  (1) NCIDA
obtained title to the Facility and leased it to the Affiliate, (2) the Affiliate
subleased the Facility to the Company,  (3) the Bondholder bought the Bonds, (4)
the  Bondholder  received a mortgage  and  security  interest in the Facility to
secure the payment of the Bonds.  The  Affiliate's  obligations  under the Lease
were  guaranteed  by  Mr.  Brodsky,  the  Company,  Sandsport  and  others.  The
Affiliate's  obligations  respecting repayment of the Bonds were also guaranteed
by Mr. Brodsky, the Company, Sandsport and others.

     The Bonds  currently  bear interest at the rate of 9%, and the  outstanding
balance  due on the Bonds as of May 31,  2001 was  $1,617,778.  During the years
ended  May 31,  2001  and  2000,  the  Company  paid  rent to the  Affiliate  of
approximately $615,000 and $695,000, respectively.

     At the same time as the Bond issuance,  the Company incurred  approximately
$500,000  of  indebtedness  to  affiliates  of Mr.  Brodsky in  connection  with
additional capital  improvements.  As of July, 1998, this debt was paid in full.
In addition,  the Company assumed certain indebtedness owed to affiliates of the
Company's Chairman. This indebtedness was also paid in full in July, 1998.

     On August 11, 1995, the Company entered into a $750,000 loan agreement with
the Long Island Development Corporation ("LIDC"),  under a guarantee by the U.S.
Small  Business  Administration  ("SBA")  (the  "SBA  Loan").  The SBA  Loan was
assigned to the Affiliate in November 1996;  however,  repayment of the SBA loan
is guaranteed by the Company and various subsidiaries of the Company. The entire
proceeds  were used to repay a portion of the Bonds.  The SBA Loan is payable in
240 monthly  installments of $6,255,  which includes principal and interest at a
rate of 7.015%. The balance of the SBA Loan as of May 31, 2001 was $625,787.

     Liquidity and Capital Resources

     The Company's  working  capital  increased as of May 31, 2001 to $1,956,661
from $1,872,360 as of May 31, 2000. The primary factors that  contributed to the
increase were increases in receivables  from  affiliates,  partially offset by a
decrease in accounts receivable and accounts payable.

     The Company has spent  approximately  $3,795,000 for fixed asset additions,
including  software  capitalization  costs in connection with revenue growth and
new  product  development.  The  Company  expects a  reduction  in the levels of
capital expenditures in the future.

     On July 14, 1998, the Chairman,  certain officers,  directors and, a former
director  and the  spouse  of an  officer  and an  employee  of  Sandsport  Data
Services, Inc. ("Sandsport"),  the Company's wholly owned subsidiary,  exercised
their respective options and warrants to purchase an aggregate of 921,334 shares
of Common Stock at exercise  prices ranging from $1.38 to $2.61 per share for an
aggregate cost of $1,608,861. Payment for such shares was made to the Company in
the amount of $921  representing  the par value of the shares,  and a portion in
the form of  non-recourse  promissory  notes due in July 2001,  with interest at
eight and one-half percent (8-1/2%) per annum, payable annually,  and secured by
the number of shares  exercised.  The Company has received  interest payments on
such notes in the amount of $162,110 and $120,658  during the fiscal years ended
May 31, 2001 and 2000. As of May 31, 2001 and 2000, the  outstanding  balance on
such notes,  including principal and accrued but unpaid interest, was $1,722,547
and $1,746,145, respectively. On July 14, 2001, the Company agreed to extend the
due dates of the Promissory Notes for one hundred twenty days.

     On April 18,  1997,  the  Company's  wholly  owned  subsidiary,  Sandsport,
entered into a revolving credit agreement (the "Credit Agreement") with the Bank
which allows  Sandsport to borrow amounts up to $3,000,000.  Interest accrues on
amounts  outstanding  under the Credit  Agreement  at a rate equal to the London
Interbank  Offered  Rate plus 2% and will be paid  quarterly  in arrears  or, at
Sandsport's  option,  interest may accrue at the Bank's  prime rate.  The Credit
Agreement requires Sandsport to pay a fee equal to 1/4% per annum payable on the
unused average daily balance of amounts under the Credit Agreement. In addition,
there are other  fees and  charges  imposed  based upon  Sandsport's  failure to
maintain certain minimum balances.  The Credit Agreement has been amended by the
Bank to permit  Sandsport to borrow amounts up to $4,500,000  until February 14,
2003.  Interest accrues at the same rate as the original Credit  Agreement.  The
indebtedness  under the  Credit  Agreement  is  guaranteed  by the  Company  and
Sandsport's  sister  subsidiaries  (the "Group").  All of the Group's assets are
pledged to the Bank as  collateral  for amounts due under the Credit  Agreement,
which pledge is secured by a first lien on all equipment owned by members of the
Group,  as well as a  collateral  assignment  of  $2,000,000  of life  insurance
payable on the life of the Company's Chairman.  The Group's guaranty to the Bank
was  modified to include  all  indebtedness  incurred  by the Company  under the
Credit Agreement.

     In  addition,  pursuant to the Credit  Agreement,  the Group is required to
maintain  certain  levels  of net  worth and meet  certain  financial  ratios in
addition to various other  affirmative and negative  covenants.  At May 31, 2001
and May 31, 2000, the Group failed to meet these net worth and financial ratios,
and the Bank granted the Group a waiver. As of August 24, 2001,  Sandsport,  the
Company and the other members of the Group,  and the Bank,  entered in the Third
Amendment and Waiver (the "Third  Amendment") to the Credit Agreement.  Pursuant
to the Third Amendment,  Sandsport's covenants to the Bank to maintain a certain
net  worth  and  to  maintain  certain  financial  ratios  were  revised,  on  a
going-forward  basis,  and the  noncompliance  with the existing  covenants  was
waived  by the Bank.  In  addition,  in  connection  with the  Third  Amendment,
Sandsport  and each member of the Group  executed  and  delivered  to the Bank a
Collective Amended and Restated Security Agreement, pursuant to which the Bank's
security  interest  was  extended  to include a security  interest in all of the
personal and fixture  property of Sandsport,  the Company and the members of the
Group.  Copies of the Third Amendment and of the Security Agreement are attached
hereto as Exhibits 10.30 and 10.31. There can be no assurance that the Bank will
continue to grant waivers if the Group fails to meet the net worth and financial
ratios in the future.  If such  waivers are not granted,  any loans  outstanding
under the Credit Agreement become immediately due and payable, which may have an
adverse effect on the Company's business,  operations or financial condition. As
of May 31, 2001, the outstanding  balance on the Credit  Agreement with the Bank
was $3,850,000.

     The  Company is a party to various  sale/leaseback  transactions  involving
certain fixed assets,  principally  computer  hardware,  software and equipment.
Gains on these transactions have been deferred and are being recognized over the
lives of the related leases. Approximately $344,000 and $401,000 of the deferred
gains were recognized in other income for the years ended May 31, 2001 and 2000,
respectively.  Included  in these  amounts  are the  effects  of  sale/leaseback
transactions entered into in fiscal 2001 and 2000, as follows:

     (a) In January 1998, the Company  consummated a  sale/leaseback  of certain
fixed assets which had a net book value of approximately $515,000, were sold for
$700,000.  The resulting gain of approximately $185,000 was recorded as deferred
income and is being  recognized over the life of the lease,  which is thirty-six
(36)  months.  Approximately  $36,000  and  $62,000  of the  deferred  gain  was
recognized  for the  years  ended  May  31,  2001  and  2000,  respectively.  An
unaffiliated third party purchased the residual rights in such lease.

     (b) In January 1999, the Company  consummated a  sale/leaseback  of certain
fixed assets which had a net book value of approximately $830,000, were sold for
$1,100,000.  The  resulting  gain of  approximately  $270,000  was  recorded  as
deferred  income and is being  recognized  over the life of the lease,  which is
thirty-six (36) months.  Approximately  $90,000 and $90,000 of deferred gain was
recognized  for the  years  ended  May  31,  2001  and  2000,  respectively.  An
unaffiliated third party purchased the residual rights in such lease.

     (c) In May 1999, the Company entered into a sale/leaseback of certain fixed
assets  which  had a net book  value of  approximately  $896,000  were  sold for
$1,100,000.  The  resulting  gain of  approximately  $204,000  was  recorded  as
deferred  income and is being  recognized  over the life of the lease,  which is
thirty-six (36) months.  Approximately  $68,000 and $68,000 of deferred gain was
recognized  for the  years  ended  May  31,  2001  and  2000,  respectively.  An
unaffiliated third party purchased the residual rights in such lease.

     (d) In October 1999, the Company  consummated a  sale/leaseback  of certain
fixed assets which had a net book value of approximately $895,000, were sold for
$1,115,000.  The  resulting  gain of  approximately  $220,000  was  recorded  as
deferred  income and is being  recognized  over the life of the lease,  which is
thirty-six (36) months.  Approximately  $73,000 and $49,000 of the deferred gain
was  recognized  for the years  ended May 31,  2001 and 2000,  respectively.  An
unaffiliated third party purchased the residual rights in such lease.

     (e) In January 2000, the Company  consummated a  sale/leaseback  of certain
fixed assets which had a net book value of approximately $442,000, were sold for
$561,000.  The resulting gain of approximately $119,000 was recorded as deferred
income and is being  recognized over the life of the lease,  which is thirty-six
(36) months.  Approximately  $40,000 and $13,000 of deferred gain was recognized
for the years ended May 31, 2001 and 2000,  respectively.  An unaffiliated third
party purchased the residual rights in such lease.

     (f) In February 2000, the Company entered into a sale/leaseback  of certain
fixed assets which had a net book value of approximately $237,000, were sold for
$277,000.  The resulting gain of approximately  $40,000 was recorded as deferred
income and is being  recognized over the life of the lease,  which is thirty-six
(36) months.  Approximately  $14,000 and $3,000 of deferred gain was  recognized
for the years ended May 31, 2001 and 2000,  respectively.  An unaffiliated third
party purchased the residual rights in such lease.

     (g) In November 2000, the Company entered into a sale/leaseback  of certain
fixed assets which had a net book value of approximately $421,500, were sold for
$548,300.  The resulting gain of approximately $126,800 was recorded as deferred
income and is being  recognized over the life of the lease,  which is thirty-six
(36) months.  Approximately  $21,000 of the deferred gain was recognized for the
year ended May 31, 2001.  An  unaffiliated  third party  purchased  the residual
rights in such lease.

     The  Company has been  providing  services to  Federation  of Puerto  Rican
Organizations,   and/or  its  affiliates  (individually  and  collectively,  the
"Federation"),  an HRA Vendor  Agency,  since 1995.  By November 30,  1997,  the
Company had acquired a loan  receivable  for an  aggregate  of $300,000  from an
affiliate  of the  Company's  Chairman,  due  from  the  Federation.  Such  loan
receivable  was  supposed  to be  secured  by  accounts  receivable  due  to the
Federation  from various  affiliates of the  Federation.  Shortly  following the
Company's acquiring such receivable, the Federation and its affiliates filed for
bankruptcy  protection.  While the bankruptcy petition for the Federation itself
has been dismissed,  some of the  Federation's  affiliates  remain in bankruptcy
proceedings. At May 31, 2000, the Company had written off the $300,000 principal
loan receivable in addition to $47,296 for services  rendered  against a reserve
established  in prior  years  for these  amounts.  The  affiliate  from whom the
Company  acquired the loan receivable  subsequently  obtained a judgment against
the Federation in the amount of $527,760,  including  pre-judgment interest. The
Company has been advised that, in light of the continuing bankruptcy proceedings
for the Federation's affiliates, from whom the Federation received substantially
all of its revenues, the collectibility of this judgment is extremely doubtful.

     Sandsport  leases  certain  computer  equipment  to Health  Card as well as
computer hardware for its data processing center pursuant to a verbal agreement.
The monthly  cost to Health  Card was $44,770 and $39,800  during the year ended
May 31,  2001 and 2000,  respectively.  Sandsport  is  expected  to  continue to
provide  data  processing  services  to Health  Card at a  monthly  fee of about
$36,000. As of May 31, 2000, the Company owed Health Card $500,000 pursuant to a
promissory  note,  dated May 31, 2000 and due June 1, 2001, plus interest at the
rate of 9-1/2%;  interest  on such note is payable  quarterly  and such note was
paid in full  on May 31,  2001.  On June  9,  2001,  the  Company  again  gave a
promissory  note to  Health  Card in the  principal  amount  of  $500,000,  with
interest  at the rate of 7%,  which was to have been due on June 8,  2002.  This
Note  was  paid  in  full on  August  15,  2001.  (See  Note 6 to the  Financial
Statements.) (See Item 12 - "Certain Relationships and Related Transactions").

     The Company believes the results of its present  operations,  together with
the available  Credit Line,  should be adequate to fund present and  foreseeable
working capital requirements.

     Prospects for the Future, Trends and Other Events

     There is added competitive  pressure and uncertainty in the Company's SHARP
business  because the City of New York requires all contracts with City agencies
to undergo competitive bidding.  Furthermore,  the success of its SHARP business
rests  with  a  key  officer  of  the  Company,   who  has  established   strong
relationships  with the Company's SHARP  customers over the years.  Although the
Company has been awarded  contracts based on its bids, there can be no assurance
that its bids will be accepted in the future.

     Except as  discussed  above,  the Company has no  knowledge of any specific
prospects,  industry, or other trends, events or uncertainties that might have a
material impact on the Company's net sales or income from continuing operations,
or  that  would  increase  the  value  of the  shares  in the  long-term  or the
short-term.

     The Company  believes  that  inflation  and changing  prices have not had a
material impact on the Company's operations.


ITEM 7 - FINANCIAL STATEMENTS

     (BEGINS ON PAGE F-1 BELOW)


ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     Not applicable.

<PAGE>
                                    PART III

ITEM 9 - DIRECTORS,  EXECUTIVE  OFFICERS,  PROMOTERS  AND CONTROL  PERSONS;
         COMPLIANCE  WITH SECTION 16(a) OF THE EXCHANGE ACT

     The  following  persons are the  Directors  and  executive  officers of the
Company.
<TABLE>
<S>   <C>                         <C>       <C>
      =========================== ========= ===========================================================
                                                              Positions and Offices
                                                               Presently Held with
                 Name             Age                              the Company
      --------------------------- --------- -----------------------------------------------------------
      --------------------------- --------- -----------------------------------------------------------
      Bert E. Brodsky             58        Chairman and Treasurer, President Pro Tem
      --------------------------- --------- -----------------------------------------------------------
      --------------------------- --------- -----------------------------------------------------------
      Hugh Freund                 63        Executive Vice President, Secretary and Director
      --------------------------- --------- -----------------------------------------------------------
      --------------------------- --------- -----------------------------------------------------------
      Gary Stoller                48        Executive Vice President and Director
      --------------------------- --------- -----------------------------------------------------------
      --------------------------- --------- -----------------------------------------------------------
      Paul J. Konigsberg          65        Director
      --------------------------- --------- -----------------------------------------------------------
      --------------------------- --------- -----------------------------------------------------------
      Ronald L. Fish              60        Director
      =========================== ========= ===========================================================
</TABLE>

     Bert E. Brodsky has been  Chairman and  Treasurer of the Company since June
1, 1983 and President from December 1989 through  January 2000. From August 1983
through  November 1984,  from December 1988 through  January 1991, from February
1998 to June 1998 and from  December  1998 to  present,  Mr.  Brodsky  served as
Chairman  of Health  Card and from June 1998  through  December  1998  served as
President of Health Card.  From October 1983 through  December 1993, Mr. Brodsky
served as Chairman of Compuflight,  a provider of  computerized  flight planning
services.  Since August 1980, Mr. Brodsky has served as Chairman of P.W. Medical
Management,   Inc.,  which  provides   financial  and  consulting   services  to
physicians. Since 1979, Mr. Brodsky has also served as President of Bert Brodsky
Associates, Inc., which provides consulting services.

     Hugh Freund,  a founder of the Company,  was the Company's  President  from
1978 to November  1986,  and a Director of the Company  since its  formation  in
1978.  Since November 1986, Mr. Freund has served as an Executive Vice President
of the Company  and  Secretary  since  1995.  Mr.  Freund is also  President  of
Sandsport,  the Company's  wholly-owned health care data processing  subsidiary.
Additionally,  Mr.  Freund  has been  serving  as the  President  of  Pro-Health
Systems,  Inc.  since  March 9, 1999.  In addition  to  managing  the  Company's
operations,  Mr. Freund has been  responsible  for the marketing  efforts of the
Company.

     Gary Stoller joined the Company at the time of its formation in 1978 as its
Senior Programmer and Analyst, and has been its Chief Information Officer and an
Executive  Vice  President and a Director of the Company since January 1983. Mr.
Stoller has been responsible for computer design,  programming and operations of
the Company as its Chief Technology  Officer since 1995, and is the architect of
the SHARP and SanTrax systems.

     Paul J.  Konigsberg  has served as a Director of the Company  since January
1998. Mr. Konigsberg  previously served on the Company's Board of Directors from
November  1987  through  August  1995.  Mr.  Konigsberg  is a  certified  public
accountant and has been a senior  partner in the  accounting  firm of Konigsberg
Wolf & Co., P.C. since 1970. Mr.  Konigsberg  also serves on the Company's Audit
Committee.

     Ronald L. Fish  served as a Director of the Company  since  January,  1998.
Since  1975,  Mr.  Fish  served as  Administrator,  Treasurer  and  Director  of
Unlimited  Care  Inc.,  a  nursing  services  firm,  and is a  certified  public
accountant. Mr. Fish also serves on the Company's Audit Committee.

     Section 16(a) Beneficial Ownership Reporting Compliance

     To the Company's knowledge,  based solely on a review of copies of Forms 3,
4 and 5 furnished to it and written  representations  that no other reports were
required,  during the fiscal year ended May 31, 2001,  the  Company's  officers,
Directors  and  10%   shareholders   complied  with  all  Section  16(a)  filing
requirements  applicable to them except:  Jessica  Brodsky failed to timely file
one report relative to one transaction. Mr. Davies, the President of the Company
until August 6, 2001 (see Note 12 to the Financial Statements  comprising Item 7
of this Annual Report) failed to file one report relative to one transaction.


ITEM 10 - EXECUTIVE COMPENSATION

     Summary Compensation Table

     The  following  table sets forth certain  information  for the fiscal years
ending  May 31,  2001,  2000 and 1999  concerning  the  compensation  of Bert E.
Brodsky,  the  Chairman  and Chief  Executive  Officer of the  Company;  Stephen
Davies,  President of the Company from February 2000 until August 6, 2001;  Gary
Stoller,  Executive Vice President and Chief Technology  Officer of the Company;
and Hugh Freund, Executive Vice President and Secretary of the Company. No other
executive  officer had a total  salary and bonus in excess of  $100,000  for the
fiscal year ended May 31, 2001:

<PAGE>
<TABLE>
<S>                         <C>     <C>          <C>        <C>           <C>         <C>          <C>       <C>
=========================== ======= ===================================== ================================== ===========
                                           Annual Compensation                 Long-Term Compensation

--------------------------- ------- ------------------------------------- ---------------------------------- -----------
--------------------------- ------- ------------ ---------- ------------- ------------------------ --------- -----------
                                                                                  Awards           Payouts
--------------------------- ------- ------------ ---------- ------------- ------------------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
                                                               Other      Restricted  Securities             All Other
                                                               Annual     Stock       Underlying   LTIP      Compensation
                                      Salary       Bonus     Compensa-    Awards      Options/    Payouts      ($)
    Name and Principal       Year       ($)         ($)         tion         ($)       SARs (#)      ($)
         Position                                               ($)

--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
Bert E. Brodsky, Chairman    2001   310,000 (2)     -0-      27,918(4)       -0-          -0-        -0-      41,246(5)


--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
                             2000   200,000 (2)  31,650(3)   14,013 (4)      -0-        350,000      -0-     110,564 (5)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
                             1999   200,000 (2)     -0-      22,049 (4)      -0-        310,000      -0-      16,678

--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
 Gary Stoller, Executive     2001   150,000         -0-      22,391(4)       -0-          -0-        -0-     21,840 (6)
  Vice President, Chief
        Technology
         Officer
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
                             2000   150,000         -0-      22,391 (4)      -0-          -0-        -0-     21,040 (6)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
                             1999   119,039         -0-      22,391 (4)      -0-         73,500       -0-    21,040
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
  Hugh Freund, Executive     2001   165,000         -0-      15,585 (4)      -0-          -0-        -0-     60,170 (7)
Vice President, Secretary                                                                                    17,064 (8)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
                             2000    82,789         -0-      15,585 (4)      -0-          -0-        -0-     50,670 (7)
                                                                                                             17,064 (8)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
                             1999   151,346         -0-      15,585 (4)      -0-        137,000      -0-     22,669
                                                                                                             17,066(8)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
Stephen Davies, President    2001   200,159         -0-         -0-          -0-        150,000      -0-     -0-
           (1a)
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
--------------------------- ------- ------------ ---------- ------------- ----------- ------------ --------- -----------
                             2000    62,307         -0-         -0-          -0-        100,000      -0-     -0-
                             (1b)
=========================== ======= ============ ========== ============= =========== ============ ========= ===========
</TABLE>

(1a) Mr. Davies' employment as President of the Company was terminated on August
     6, 2001. For a description  of the  circumstances  surrounding  Mr. Davies'
     termination,  reference is made to the Company's Current Report on Form 8-K
     filed  on  August  13,  2001,  and to Note 12 to the  Financial  Statements
     comprising Item 7 of this Annual Report on Form 10-KSB.

(1b) Represents  compensation  paid to Mr.  Davies from February 1, 2000 through
     May 31, 2000, of which $12,000 were consultation fees.

(2)  As of May 31, in each of 1999,  2000 and 2001 Mr.  Brodsky  signed a waiver
     wherein he agreed to waive his rights to an additional  $300,000,  $300,000
     and $190,000,  respectively,  of compensation due to be paid to him for the
     fiscal  years then ended,  pursuant to the terms of the Brodsky  Employment
     Agreement  discussed  below under  "Employment  Agreements,  Termination of
     Employment and Change-in-Control Agreements."

(3)  Represents 25,000 shares of Common Stock granted to Mr. Brodsky on February
     4, 2000.

(4)  Represents   personal  benefits  relating  to  the  use  of  Company-leased
     automobiles  provided  for  business  purposes  from  an  affiliate  of the
     Company's Chairman.

(5)  Includes  insurance  premiums paid by the Company on behalf of Mr. Brodsky,
     for life insurance  policies on his life, the benefits of which are payable
     to his  spouse;  includes  $82,000 in  director's  fees paid in fiscal year
     ended May 31, 2000.

(6)  Includes  insurance  premiums paid by the Company on behalf of Mr. Stoller,
     for life insurance  policies on his life, the benefits of which are payable
     to his spouse; includes $5,800 and $5,000 in director's fees paid in fiscal
     years ended May 31, 2001 and 2000.

(7)  Includes  insurance  premiums paid by the Company on behalf of Mr.  Freund,
     for life insurance  policies on his life, the benefits of which are payable
     to his spouse;  includes  $37,500 and  $28,000 in  director's  fees paid in
     fiscal years ended May 31, 2001 and 2000.

(8)  Represents  insurance  premiums paid by the Company on behalf of Mr. Freund
     for life insurance  policies on his life, the benefits of which are payable
     to an insurance trust, of which Mr. Freund is a co-Trustee.


Option/SAR Grants in Last Fiscal Year

     The following table sets forth certain  information  concerning  individual
grants of stock options during the fiscal year ending May 31, 2001:
<TABLE>
<S>                         <C>                    <C>                     <C>                   <C>
======================================================================================================================

                                Individual Grants

----------------------------------------------------------------------------------------------------------------------
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
                                                     Percent of Total
                                                      Options/SARs
                                Number of              Granted to
                               Securities             Employees in            Exercise or
                               Underlying             Fiscal Year             Base Price             Expiration
          Name            Options/SARs Granted            (%)                   ($/Sh)                  Date
                                   (#)
------------------------- ---------------------- ----------------------- ---------------------- ----------------------
------------------------- ---------------------- ----------------------- ---------------------- ----------------------

     Stephen Davies            150,000 (1)                59.2                   3.00                 12/21/10

------------------------- ---------------------- ----------------------- ---------------------- ----------------------
</TABLE>

(1)  These options were originally  exercisable  over a seven year period to the
     extent of (i) 33,333 shares of Common Stock in 2001,  (ii) 33,333 shares of
     Common Stock in each of 2004,  2005 and 2,006,  and (iii) 16,668  shares of
     Common Stock in 2007.  Mr.  Davies'  employment as President of the Company
     was terminated on August 6, 2001.  Pursuant to the terms of the Plans under
     which the options were granted, those options that were vested on that date
     are  exercisable  for three (3) months after that date.  All other  options
     expired as of that date.

Aggregated Option/SAR Exercise in Last Fiscal Year and
Fiscal Year-End Option Value Table

     The following table sets forth certain information  concerning the value of
unexercised options and warrants for the fiscal year ended May 31, 2001:

<PAGE>
<TABLE>
<S>                       <C>                    <C>               <C>                        <C>

===================== ======================= ================= ========================== ==========================
                                                                  Number of Securities       Value of Unexercised
                                                                 Underlying Unexercised    in-the-Money Options and
                                                                 Options and Warrants at      Warrants at May 31,
        Name            Shares Acquired on     Value Realized        May 31, 2001(#)                2001($)
                           Exercise(#)              ($)         Exercisable/Unexercisable  Exercisable/Unexercisable
--------------------- ----------------------- ----------------- -------------------------- --------------------------
--------------------- ----------------------- ----------------- -------------------------- --------------------------
  Bert E. Brodsky              -0-                  -0-              461,000/199,000                1,510/0
--------------------- ----------------------- ----------------- -------------------------- --------------------------
--------------------- ----------------------- ----------------- -------------------------- --------------------------
    Gary Stoller               -0-                  -0-                 143,500/0                     0/0
--------------------- ----------------------- ----------------- -------------------------- --------------------------
--------------------- ----------------------- ----------------- -------------------------- --------------------------
    Hugh Freund                -0-                  -0-                 137,000/0                     0/0
--------------------- ----------------------- ----------------- -------------------------- --------------------------
--------------------- ----------------------- ----------------- -------------------------- --------------------------
   Stephen Davies              -0-                  -0-              66,683/183,317                   0/0
===================== ======================= ================= ========================== ==========================
</TABLE>

Compensation of Directors

     During the fiscal year ended May 31, 2001 non-qualified options to purchase
up to 10,000  shares of Common Stock,  at an exercise  price of $3.00 per share,
were issued to each of Messrs.  Konigsberg  and Fish.  In  addition,  during the
fiscal year ended May 31,  2001,  the Company  paid an  aggregate  of $45,300 in
Director's fees.

Employment Contracts, Termination of Employment and
Change-in-Control Arrangements

     In  May  1992,  Mr.  Brodsky  and  the  Company  entered  into  a  deferred
compensation agreement pursuant to which the Company will pay (i) to Mr. Brodsky
a lump sum ranging from  $75,000 to $255,000 if he  voluntarily  terminates  his
employment  with  the  Company  after  attaining  55 years of age or (ii) to Mr.
Brodsky's  beneficiary a lump sum ranging from $200,000 to $450,000 in the event
of Mr.  Brodsky's death during the term of his employment with the Company.  The
amount of the payment is  dependent  upon the age of Mr.  Brodsky at the time of
termination  of employment or death.  The Company has obtained  insurance on Mr.
Brodsky's life to fund its obligations under the above agreement.

     On February 1, 1997 the Company and its Chairman  ("Mr.  Brodsky")  entered
into an  employment  agreement  for a five year term  (the  "Brodsky  Employment
Agreement").  Among other  things,  the Brodsky  Employment  Agreement  provides
compensation  at the annual  rate of  $500,000  or a lesser  amount if  mutually
agreed. The Brodsky Employment  Agreement also provides for payment of an annual
bonus at the sole  discretion of the Board of Directors.  Mr.  Brodsky agreed to
accept a reduction  in  compensation  for the fiscal  years ended May 31,  2001,
2000,  and  1999  and  has  signed  waivers  evidencing  his  agreement  to such
reductions.

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          AS OF MAY 31, 2001

     The following  table sets forth the beneficial  share ownership of (i) each
person who is known by the Company to be the beneficial  owner of more than five
(5%) percent of the Company's Common Stock;  (ii) each of the Company's  current
Directors (iii) each person listed in the Summary  Compensation  Table; and (iv)
all of the Company's  executive officers and Directors as a group. The ownership
percentages  indicated are calculated,  on a fully-diluted  basis, in accordance
with Rule 13d-3 promulgated  pursuant to the Securities Exchange Act of 1934, as
amended,  which  attributes  beneficial  ownership of  securities to a person or
entity who holds options or warrants to purchase such securities.
<TABLE>
<S>                                           <C>                                       <C>
============================================= ========================================= ==========================================

   Name of Management Person and Name and                                                        Approximate Percentage
        Address of Beneficial Owner                       Number of Shares                        of Outstanding Shares
--------------------------------------------- ----------------------------------------- ------------------------------------------
Bert E. Brodsky
26 Harbor Park Drive
Port Washington, NY                                        2,207,134 (1)                                  74.4%
--------------------------------------------- ----------------------------------------- ------------------------------------------
Hugh Freund
26 Harbor Park Drive
Port Washington, NY                                          137,000 (2)                                   5.2%
--------------------------------------------- ----------------------------------------- ------------------------------------------
Gary Stoller
26 Harbor Park Drive
Port Washington, NY                                          164,500 (3)                                   6.2%
--------------------------------------------- ----------------------------------------- ------------------------------------------
Stephen Davies
26 Harbor Park Drive
Port Washington, NY                                           66,673 (4)                                   2.6%
--------------------------------------------- ----------------------------------------- ------------------------------------------
Paul J. Konigsberg
Konigsberg Wolf & Co.
440 Park Avenue South                                         27,400 (5)                                   1.1%
New York, NY 10016
--------------------------------------------- ----------------------------------------- ------------------------------------------
Ronald L. Fish
Unlimited Care Inc.
245 Main Street                                               19,400 (5)                                    *
White Plains, NY 10601
--------------------------------------------- ----------------------------------------- ------------------------------------------
Jessica Heather Brodsky
26 Harbor Park Drive
Port Washington, NY                                          292,470                                      11.7%
--------------------------------------------- ----------------------------------------- ------------------------------------------
Jeffrey Holden Brodsky
26 Harbor Park Drive
Port Washington, NY                                          184,925                                       7.4%
--------------------------------------------- ----------------------------------------- ------------------------------------------
All executive officers and Directors as a
group (6 persons)                                          2,621,907  (1) (2) (3)                         78.2%
                                                                      (4) (5)
============================================= ========================================= ==========================================
</TABLE>
<PAGE>

(1)  Includes  18,684  shares of the  Company's  Common Stock owned by the trust
     established  for the benefit of Mr.  Brodsky's  minor son;  includes 20,500
     shares of the Company's Common Stock owned by Mr. Brodsky's wife;  includes
     292,470  shares of Common  Stock  owned by Mr.  Brodsky's  adult  daughter;
     includes  an  aggregate  of  203,708  shares of Common  Stock  owned by Mr.
     Brodsky's adult sons.  Includes 200,000 shares of Common Stock owned by the
     Bert E. Brodsky Revocable Trust.  Includes presently exercisable options to
     purchase  310,000  shares of Common Stock at $1.41 per share under the 1995
     Stock  Option  Plan;  includes  presently  exercisable  options to purchase
     151,000  shares of common  stock at $1.31  per share  under the 1998  Stock
     Option Plan.

(2)  Represents  presently  exercisable  options to purchase  137,000  shares of
     Common Stock at $1.41 per share under the 1995 Plan. Excludes 41,464 shares
     of Common Stock owned by Mr. Freund's adult children.  Mr. Freund disclaims
     any  beneficial  interest in, or voting or dispositive  control over,  such
     shares.

(3)  Includes presently  exercisable options to purchase 20,000 shares of Common
     Stock at $2.34  per share  under the 1995  Plan,  which  options  have been
     extended  to expire  on March  14,  2006;  includes  presently  exercisable
     options to purchase  50,000 shares of Common Stock at $2.61 per share under
     the 1995 Plan, which options have been extended to expire on June 10, 2006;
     includes presently  exercisable options to purchase 73,500 shares of Common
     Stock at $1.41 per share  under the 1995 Plan.  Includes  21,000  shares of
     Common Stock owned by trusts  established for the benefit of Mr.  Stoller's
     children of which Mr. Stoller is a trustee.

(4)  Includes presently  exercisable options to purchase 33,340 shares of Common
     Stock  at  $3.00  per  share  under  the  1998  Plan;   includes  presently
     exercisable  options to purchase 33,333 shares of Common Stock at $3.00 per
     share under the 2000 Plan.

(5)  Includes presently  exercisable options to purchase 10,000 shares of Common
     Stock  at  $3.00  per  share  under  the  1998  Plan;   includes  presently
     exercisable  options to purchase  6,000 shares of Common Stock at $3.00 per
     share  under the 1998  Plan;  includes  presently  exercisable  options  to
     purchase  3,400  shares of Common  Stock at $3.00 per share  under the 1998
     Plan.

*    Less than one percent (1%)


ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     IDA/SBA Financing

     Reference is hereby made to Item 6 - "Management's  Discussion and Analysis
or Plan of  Operation  -  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations - IDA/SBA  Financing" for a discussion of an
industrial  development  revenue bond and SBA  financing,  pursuant to which the
Company pays rent for its facility to an affiliate of the Company's Chairman.

     Federation of Puerto Rican Organizations

     Reference is made to Item 6, "Management's  Discussion and Analysis or Plan
of  Operation - Liquidity  and Capital  Resources -  Federation  of Puerto Rican
Organizations"  for a discussion of the judgment  obtained on a loan  receivable
which was  acquired  from an  affiliate of the  Company's  Chairman,  and of the
anticipated  difficulty  in enforcing  the  judgment  due to certain  bankruptcy
proceedings.

     Advances and Loans to Affiliates

     During the years ended May 31, 2001 and 2000, the Company paid an aggregate
of $65,894 and $36,404 on behalf of certain  officers  to  companies  affiliated
with the Company's Chairman for payment of automobile leases.

     National Medical Health Card Systems, Inc.

     The Company derived revenue from Health Card, a company affiliated with the
Company's  Chairman,  principally  for data base and operating  system  support,
hardware leasing,  maintenance and related administrative services. The revenues
generated from Health Card amounted to  approximately  $2,458,000 and $1,753,000
for the years ended May 31,  2001 and 2000,  respectively.  The  Company  billed
Health Card approximately $821,000 and $540,000 for quality assurance testing of
software programs developed by Health Card and network support, and $561,000 and
$302,000 for help desk  services,  $447,800  and  $320,000  for data  processing
center as well as $533,600 and $472,000 for certain  computer  equipment  leases
and other  services  for $94,600 and  $119,000  for years ended May 31, 2001 and
2000,  respectively.  In addition the Company resells its telephone  services to
Health Card. The billings for such telephone  services amounted to approximately
$133,500  and $151,000 for the years ended May 31, 2001 and May 31, 2000 and are
recorded as a reduction of operating expense. The Company was owed $550,000 from
Health Card at May 31, 2001.  Subsequent to May 31, 2001,  the Company  received
approximately  $536,300 from Health Card,  representing  substantially  complete
payment of amounts  due as of that date.  Sandsport  is  expected to continue to
provide  data  processing  services  to Health  Card at a  monthly  fee of about
$36,000,  subject to reduction in the event Health Card decides to provide these
services internally.

     As of May 31, 2000, the Company owed National  Medical Health Card Systems,
Inc. ("Health Card"), a company affiliated with the Company's Chairman, $500,000
pursuant to a  promissory  note,  dated May 31, 2000 and due June 1, 2001,  plus
interest at the rate of 9-1/2%; interest on such note was payable quarterly. The
Note was paid in May 31, 2001.

     On June 9, 2001, the Company again gave a promissory note to Health Card in
the principal amount of $500,000, with interest at the rate of 7%, which was due
on June 8, 2002. This Note was paid in full on August 15, 2001.

     Equipment Leases

     The Company makes equipment  lease payments to P.W.  Capital Corp. and P.W.
Medical  Management,  Inc.,  both  of  which  are  affiliates  of the  Company's
Chairman.  The  payments  were  $395,989  and  $393,903 in fiscal 2001 and 2000,
respectively.

     Medical Arts Office Services, Inc.

     Medical  Arts  Office  Services,  Inc.  ("MAOS"),  of which  the  Company's
Chairman  is  the  sole  shareholder,  provided  the  Company  with  accounting,
bookkeeping and paralegal services.  For the fiscal years ended May 31, 2001 and
2000 the total  payments  made by the Company to MAOS were $279,894 and $399,592
respectively.

ITEM 13 - EXHIBITS, LISTAND REPORTS ON FORM 8-K

(a)  Exhibit Index

3(A)(i)  Certificate  of   Incorporation   and  Amendments   thereto   including
     Certificate  of Ownership  and Merger (DE) and Agreement and Plan of Merger
     (1)

3(A)(ii) Certificate of Amendment to Certificate of Incorporation filed July 27,
     1993 (1)

3(A)(iii) Certificate of Amendment to Certificate of Incorporation filed May 26,
     1995 (1)

3(B) By-Laws (1)

4.1  Nassau County Industrial  Development Agency Industrial Development Revenue
     Bonds (1994 Brodsky Sibling Realty Inc. Project) dated June 1, 1994 (1)

4.2  Revolving  Credit  Agreement  dated  as of  April  20,  1995  by and  among
     Sandsport Data Services, Inc. and Marine Midland Bank (1)

4.3  Nassau County Industrial  Development Agency Industrial Development Revenue
     Bonds (1994 Brodsky Sibling Realty Inc.  Project)  Assumption and Amendment
     of Certain Agreements dated July 1, 1995 (1)

4.4  Loan Agreement dated August 11, 1995 between Sandata,  Inc. and Long Island
     Development Corporation (1)

4.5  "504"  Note  dated  August  11,  1995  from  the  Long  Island  Development
     Corporation to Sandata, Inc. (1)

4.6  Nassau County Industrial  Development Agency Industrial Development Revenue
     Bonds (1994 Brodsky Sibling Realty Inc.  Project)  Assumption and Amendment
     of Certain Agreements dated November 1, 1996 (3)

4.7  Revolving  Credit  Agreement  dated  as of  April  18,  1997  by and  among
     Sandsport Data Services, Inc., the Registrant,  certain subsidiaries of the
     Registrants and Marine Midland Bank (3)

4.8  Second  Amendment  dated  as of  February  14,  2000  to  Revolving  Credit
     Agreement by and among  Sandsport  Data  Services,  Inc.,  the  Registrant,
     certain subsidiaries of the Registrants and HSBC Bank USA (6)

10.1 Software License Agreement and Distribution  Agreement between Sandata Home
     Health Systems, Inc. and Fastrack Healthcare Systems, Inc. dated as of June
     15, 1995 (1)

10.2 Employees' Incentive Stock Option Plan (1)

10.3 First Amendment to Incentive Stock Option Plan dated April 4, 1989 (1)

10.4 Second Amendment to Incentive Stock Option Plan dated December 18, 1990 (1)

10.5 1986 Non-qualified Stock Option Plan (1)

10.6 Amendment to 1986 Non-qualified Stock Option Plan dated April 4, 1989 (1)

10.7 1995 Stock Option Plan (1)

10.8 1998 Stock Option Plan (5)

10.9 Common Stock Purchase Warrants as issued to Bert E. Brodsky (1)

10.10Deferred  Compensation  Plan dated May 1, 1992 between the  Registrant  and
     Bert E. Brodsky (1)

10.11Form of agreement between  Sandsport Data Services,  Inc. and vendor agency
     (2)

10.12Form of agreement between  Sandsport Data Services,  Inc. and vendor agency
     (2)

10.13 Form of Subscription Agreement dated December 23, 1996 (2)

10.14 Form of Subscription Agreement dated September 12, 1996 (2)

10.15 Form of Common Stock Purchase Warrant ($5.00 Exercise Price) (2)

10.16 Form of Common Stock Purchase Warrant ($7.00 Exercise Price) (2)

10.17 Form of Redeemable Common Stock Purchase Warrant (2)

10.18Employment  Agreement  dated  February 1, 1997 between the  Registrant  and
     Bert E. Brodsky (3)

10.19 Form of Pledge Agreement (4)

10.20 Form of Non-Negotiable Promissory Note (4)

10.21Stock Option  Agreement  dated December 10, 1998 between the Registrant and
     Bert E. Brodsky (6)

10.22Stock Option  Agreement  dated  February 3, 2000 between the Registrant and
     Bert E. Brodsky (6)

10.23Stock  Option  Agreement  dated April 15, 2000 between the  Registrant  and
     Stephen Davies (6)

10.24Stock Option  Agreement  dated October 17, 2000 between the  Registrant and
     Stephen Davies

10.25Employment  Agreement  dated  October 17, 2000 between the  Registrant  and
     Stephen Davies

10.26Promissory Note dated May 31, 2000 from the Registrant to National  Medical
     Health Card Systems, Inc. (6)

10.27Lease Agreement dated June 1, 2001,  between the Registrant and BFS Sibling
     Realty,  Inc. for premises at 26 Harbor Park Drive,  Port  Washington,  New
     York

10.28Promissory Note dated June 8, 2001 from the Registrant to National  Medical
     Health Card Systems, Inc.

10.29Extension  Agreement  dated  July 14,  2001,  between  the  Registrant  and
     certain shareholders

10.30Third  Amendment  and Waiver dated as of August 24, 2001 to Loan  Agreement
     dated as of April 18, 1997 by and among Sandsport Data Services,  Inc., the
     Registrant, certain subsidiaries of the Registrant, and HSBC Bank, USA

10.31Collective  Amended and Restated Security  Agreement dated as of August 24,
     2001, by and among Sandsport Data Services,  Inc., the Registrant,  certain
     subsidiaries of the Registrant, and HSBC Bank, USA

16   Letter re Change in Certifying Accountant (1)

21   Subsidiaries  of Registrant (6)

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

(1)  Denotes a  document  filed as an Exhibit  to the  Company's  Report on Form
     10-KSB for the fiscal year ended May 31, 1995, and  incorporated  herein by
     reference.

(2)  Denotes a  document  filed as an  Exhibit  to  Amendment  No. 1 to Form S-3
     Registration Statement as filed with the Securities and Exchange Commission
     on May 27, 1997 and incorporated herein by reference.

(3)  Denotes a  document  filed as an Exhibit  to the  Company's  Report on Form
     10-KSB for the fiscal year ended May 31, 1997, and  incorporated  herein by
     reference.

(4)  Denotes a  document  filed as an Exhibit  to the  Company's  Report on Form
     10-KSB for the fiscal year ended May 31, 1998, and  incorporated  herein by
     reference.

(5)  Denotes a  document  filed as an Exhibit  to the  Company's  Report on Form
     10-KSB for the fiscal year ended May 31, 1999, and  incorporated  herein by
     reference.

(6)  Denotes a  document  filed as an Exhibit  to the  Company's  Report on Form
     10-KSB for the fiscal  year ended May 31, 2000 and  incorporated  herein by
     reference.

     (b) Reports on Form 8-K

         None.

<PAGE>

                                 SANDATA, INC.
                     FINANCIAL STATEMENTS COMPRISING ITEM 7
                            OF REPORT ON FORM 10-KSB
                     TO SECURITIES AND EXCHANGE COMMISSION
                            YEAR ENDED MAY 31, 2001

<PAGE>
                         SANDATA, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                             <C>
                                                                                Page

Report of Independent Public Accountants                                        F-2

Financial Statements

        Consolidated Balance Sheets as of May 31, 2001 and 2000                 F-3 F-4

        Consolidated Statements of Operations for the years ended               F-5
                May 31, 2001 and 2000

        Consolidated Statements of Shareholders' Equity for the years           F-6
                ended May 31, 2001 and 2000

        Consolidated Statements of Cash Flows for the years ended               F-7
                May 31, 2001 and 2000

        Notes to Consolidated Financial Statements                              F-8 F-30
</TABLE>

<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Board of Directors and Shareholders
of Sandata, Inc. and Subsidiaries

     We have audited the  accompanying  consolidated  balance sheets of Sandata,
Inc. and Subsidiaries as of May 31, 2001 and 2000, and the related  consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended.  These  consolidated  financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  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 our audits provide a reasonable basis for our opinion.

     As  more  fully  described  in  the  Notes  to the  consolidated  financial
statements,  the Company had certain transactions with companies affiliated with
the Company's Officers and Chairman.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Sandata, Inc. and Subsidiaries as of May 31, 2001 and 2000, and the consolidated
results  of their  operations  and their  cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.

Marcum & Kliegman LLP

/s/ Marcum & Kliegman LLP


Woodbury, New York
August 30, 2001


                         SANDATA, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<S>                                                                                       <C>                  <C>
                        ASSETS                                                              2001                     2000
                                                                                            ----                     ----

CURRENT ASSETS
       Cash and cash equivalents                                                           $475,578            $  1,229,718
       Accounts receivable, net of allowance for doubtful accounts
           of $347,000 and $448,000 at 2001 and 2000, respectively                        2,160,675               2,308,901
       Receivables from affiliates                                                          802,787                 405,732
       Inventories                                                                           35,993                  17,165
       Prepaid expenses and other current assets                                            416,056                 413,119
         Deferred income taxes                                                              274,470                 439,394
                                                                                            -------                 -------

                  Total Current Assets                                                    4,165,559               4,814,029

FIXED ASSETS, NET                                                                         6,036,203               8,911,655

DEFERRED INCOME TAXES                                                                       335,773                     ---

OTHER ASSETS
       Notes receivable                                                                     117,262                 126,221
       Cash surrender value of officer's life insurance, security
         deposits and other                                                                 866,774                 832,988
                                                                                       ------------             -----------
             Total Assets                                                                $11,521,571            $14,684,893

</TABLE>

     See notes to consolidated financial statements

<PAGE>
                         SANDATA, INC. AND SUBSIDIARIES

                    CONSOLIDATED BALANCE SHEETS (Continued)

<TABLE>
<S>                                                                                  <C>                     <C>


     LIABILITIES AND SHAREHOLDERS' EQUITY                                                   2001                     2000
                                                                                            ----                     ----

CURRENT LIABILITIES
       Accounts payable and accrued expenses                                         $    1,881,269          $    2,580,143
       Deferred/unearned revenue                                                             31,069                  38,848
       Deferred income                                                                      296,560                 322,678
                                                                                      -------------             -----------

                  Total Current Liabilities                                               2,208,898               2,941,669
                                                                                          ---------               ---------

LONG-TERM DEBT                                                                            3,850,000               2,750,000

DEFERRED INCOME                                                                             124,401                 315,253

DEFERRED INCOME TAXES                                                                           ---               1,141,552

                  Total Liabilities                                                       6,183,299               7,148,474
                                                                                      -------------           -------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
       Common stock; par value $.001; authorized 6,000,000
          shares 2,506,475 shares issued and outstanding in 2001 and 2000;                    2,506                   2,506
       Additional paid in capital                                                         5,803,704               5,803,704
       Retained earnings                                                                  1,051,721               3,249,868
       Notes receivable - officers                                                       (1,519,659)             (1,519,659)
                                                                                         -----------             -----------

                  Total Shareholders' Equity                                              5,338,272               7,536,419
                                                                                          ---------               ---------

                  Total Liabilities and Shareholders' Equity                          $  11,521,571           $  14,684,893
                                                                                      =============           =============

</TABLE>

     See notes to consolidated financial statements

<PAGE>


                         SANDATA, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                               Years ended May 31,
<TABLE>
<S>                                                                                    <C>                     <C>
                                                                                            2001                     2000
                                                                                            ----                     ----

REVENUES:
       Service fees                                                                    $ 17,769,069            $ 17,987,646
       Other income                                                                         368,502                 432,279
       Interest income                                                                      185,311                 177,396
                                                                                            -------                 -------
                                                                                         18,322,882              18,597,321
                                                                                         ----------              ----------
COSTS AND EXPENSES:
           Operating                                                                     10,372,524              11,419,625
           Selling, general and administrative                                            5,004,255               4,346,757
           Depreciation and amortization                                                  2,748,411               2,384,045
           Interest expense                                                                 189,240                 243,637
           Impairment of developed software                                               3,298,872                     ---
           Impairment of goodwill                                                           201,128                     ---
                                                                                        -----------              -----------
TOTAL COSTS AND EXPENSES                                                                 21,814,430              18,394,064
                                                                                         ----------              ----------

(Loss) Earnings from operations before income taxes                                     (3,491,548)                 203,257

       Income tax (benefit) expense                                                     (1,293,401)                 189,158
                                                                                        -----------                 -------

NET (LOSS) EARNINGS                                                                     $(2,198,147)             $   14,099

BASIC AND DILUTED (LOSS) EARNINGS PER SHARE                                        $           (.88)          $         .01
                                                                                   =================          =============

</TABLE>
     See notes to consolidated financial statements

<PAGE>


                         SANDATA, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<S>                                                                                    <C>                     <C>

                               Years ended May 31, 2001 and 2000




                                                     Additional                           Notes
                           Common  Stock              Paid-In         Retained          Receivable
                         Shares       Amount          Capital         Earnings           Officers           Total

Balance at
June 1, 1999               2,481,481  $ 2,481      $5,772,079        $3,235,769       $(1,519,659)        $7,490,670
Effect of
fractional shares
paid out in cash                 (6)      ---             ---               ---                ---               ---
Stock Based
Compensation                  25,000       25          31,625               ---                ---            31,650

Net earnings                     ---      ---             ---            14,099                ---            14,099
                           ---------  -------      ----------        -----------      ------------            ------

Balance at
May 31, 2000               2,506,475    2,506       5,803,704         3,249,868         (1,519,659)         7,536,419


Net loss                         ---      ---             ---        (2,198,147)               ---         (2,198,147)
                           ---------    -----       ---------       -----------          ----------        -----------

Balance at
May 31, 2001               2,506,475    $2,506     $5,803,704        $1,051,721       $ (1,519,659)        $5,338,272
                           =========  ========     ==========        ==========        ============        ==========

</TABLE>
                 See notes to consolidated financial statements


<PAGE>



                         SANDATA, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               Years ended May 31,
<TABLE>
<S>                                                                                 <C>                     <C>
                                                                                           2001                   2000
                                                                                           ----                   ----
Cash flows from operating activities:
         Net (loss) earnings                                                         $(2,198,147)           $   14,099
         Adjustments to reconcile net (loss) earnings to net cash
           provided by operating activities:
              Depreciation and amortization                                            2,748,411             2,384,045
              Loss (gain) on disposal of fixed assets                                     75,111              (379,290)
              Decrease in allowance for doubtful accounts                               (100,879)              (85,093)
              Recognition of deferred income                                            (343,820)             (400,840)
              Recognition of deferred revenue                                           (116,702)             (340,389)
              Impairment of developed software                                         3,298,872                   ---
              Impairment of goodwill                                                     201,128                   ---
              Stock based compensation                                                       ---                31,650
              Deferred tax provision                                                  (1,312,401)              167,158
         (Increase) decrease in operating assets
              Accounts receivable                                                        249,105              (189,560)
              Receivables from affiliates                                               (397,055)              518,694
              Other receivable                                                               ---             1,100,000
              Inventories                                                                (18,828)               12,142
              Prepaid expenses and other current assets                                   (2,937)               72,336
              Other assets                                                               (24,827)              (57,431)
         (Decrease) Increase in operating liabilities
              Accounts payable and accrued expenses                                     (698,874)             (442,252)
              Deferred revenue                                                           108,923               365,604
              Deferred income                                                            126,850               379,290
                                                                                       ---------            ----------
              Net cash provided by operating activities                                1,593,930             3,150,163
                                                                                       ---------            ----------

Cash flows from investing activities:
              Purchases of fixed assets                                               (3,795,285)           (5,700,662)
              Proceeds from sale/leaseback transactions                                  548,343             1,953,254
              Collection on note receivable                                                  ---                43,387
              Acquisition of intangible asset                                           (201,128)                  ---
                                                                                        ---------              -------
              Net cash used in investing activities                                   (3,448,070)           (3,704,021)
                                                                                      -----------            ----------

Cash flows from financing activities:
              Principal payments on note payable                                        (500,000)                  ---
              Proceeds from note payable                                                     ---               500,000
              Proceeds from line of credit                                             2,200,000             2,400,000
              Principal payments on line of credit                                      (600,000)           (2,650,000)
                                                                                    -------------           -----------
              Net cash provided by financing activities                                1,100,000               250,000
                                                                                    -------------           -----------
Decrease in cash and cash equivalents                                                   (754,140)             (303,858)
Cash and cash equivalents at beginning of year                                         1,229,718             1,533,576
                                                                                       ---------             ---------
Cash and cash equivalents at end of year                                                $475,578            $1,229,718
                                                                                        ========            ==========
</TABLE>

                 See notes to consolidated financial statements


<PAGE>


                         SANDATA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Nature of Business and Economic Dependency

          Sandata,  Inc. and Subsidiaries  (the "Company") are primarily engaged
     in the  business of providing  computerized  data  processing  services and
     custom  software  and  programming  services  using  Company-developed  and
     licensed  software  principally  to the  healthcare  industry.  The Company
     primarily  operates in the New York metropolitan  area. During fiscal years
     2001 and 2000, the Company received  revenues from a group of customers who
     are all  funded by the Human  Resources  Administration  of the City of New
     York  ("HRA"),  amounting to  approximately  $10,608,000  and  $10,623,000,
     respectively.  The Company was owed approximately  $1,160,000 and 1,362,000
     from these customers at May 31, 2001 and 2000, respectively.

          Principles of Consolidation

          The consolidated financial statements include the accounts of Sandata,
     Inc. and its wholly owned  subsidiaries:  Sandsport  Data  Services,  Inc.,
     Sandata Home Health Systems, Inc., Sandata Spectrum, Inc., SANTRAX Systems,
     Inc.,   SANTRAX   Productivity,   Inc.   and   Pro-Health   Systems,   Inc.
     ("Pro-Health",   formerly   known  as  Sandata   Inteck,   Inc.).   SANTRAX
     Productivity,  Inc. is an inactive subsidiary. All significant intercompany
     accounts and transactions have been eliminated in consolidation.

          Fixed Assets

          Fixed assets are recorded at cost.  Depreciation  and amortization are
     computed  principally  by the  straight-line  method over the lesser of the
     estimated useful lives or lease terms of the related assets.

          Impairment of Long-Lived Assets

          The Company evaluates its long-lived assets,  including goodwill,  for
     impairment  whenever events or changes in  circumstances  indicate that the
     carrying  amount of such  assets  or  intangibles  may not be  recoverable.
     Recoverability of assets to be held and used is measured by a comparison of
     the  carrying  amount of the asset to future net cash flows  expected to be
     generated by the asset.  If such assets are considered to be impaired,  the
     impairment to be recognized is measured by the amount by which the carrying
     amount of the assets  exceed the fair value of the assets as  determined by
     estimated  discounted cash flows.  Assets to be disposed of are reported at
     the lower of the carrying amount or fair value less costs to sell.

          Income Taxes

          The Company uses the liability method to account for income taxes. The
     primary  objectives of accounting for income taxes are to (a) recognize the
     amount of income tax  payable for the current  year and (b)  recognize  the
     amount of deferred tax liability or asset based on management's  assessment
     of the tax consequences of events that have been reflected in the Company's
     financial  statements or tax returns.  Deferred tax assets and  liabilities
     are recognized for the future tax consequences  attributable to differences
     between the financial  statement  carrying  amounts of existing  assets and
     liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
     liabilities  are  measured  using  enacted  tax rates  expected to apply to
     taxable  income  in the  years in which  those  temporary  differences  are
     expected to be recovered or settled.  Valuation  allowances are established
     when necessary to reduce deferred tax assets to the amounts  expected to be
     realized.

          Software Costs

          The Company capitalizes  software  development costs from the point in
     time  where  technological  feasibility  has  been  established  until  the
     computer software product is available to be sold. The annual  amortization
     of the  capitalized  amounts is the greater of the ratio of current revenue
     to total projected revenue for a product, or the straight-line  method, and
     is applied  over  periods  ranging up to five years.  The Company  performs
     periodic   reviews  to  ensure  that   unamortized   program  costs  remain
     recoverable from future revenue.

          Research and Development

          Research and development costs are charged to expense as incurred.

          Inventories

          Inventories,  consisting of computer hardware and peripherals held for
     resale, are stated at the lower of cost or market; cost is determined using
     the specific identification method.

          Net Earnings Per Common Share

          The Company  computes  earnings per share in accordance with Statement
     of Financial  Accounting  Standards  No. 128  "Earnings  per Share".  Basic
     earnings per share has been computed  using the weighted  average number of
     shares of common  stock  outstanding.  Diluted  earnings per share has been
     computed  using the basic  weighted  average  shares of common stock issued
     adjusted for the dilutive effect of outstanding stock options.

          Basic earnings per share are based on the  weighted-average  number of
     shares of common stock outstanding, which were 2,506,475 for the year ended
     May 31, 2001 and  2,489,562  for the year ended May 31, 2000.  For the year
     ended May 31, 2001, outstanding stock options, warrants and other potential
     stock  issuances  have not been  considered in the  computation  of diluted
     earnings per share  amounts  since the effect of their  inclusion  would be
     antidilutive.  For the year  ended May 31,  2000,  the  Company's  dilutive
     instruments  are "in the money" stock options with various  exercise  dates
     and  prices  and the  weighted  average  number of  shares of common  stock
     adjusted for the effects of assumed  exercises was  2,682,784.  The Company
     uses the treasury  stock method to calculate the effect that the conversion
     of the stock  options  would have on  earnings  per share and the  weighted
     average number of shares of common stock.

          Revenue Recognition

          The  Company  generates  revenues  for  its  computerized  information
     processing  services from its Sandsport  Home Attendant  Reporting  Program
     ("SHARP")  and  Pro-Health  software  applications.  The SHARP  application
     provides  weekly time sheets,  billing,  payroll  processing and management
     reports for not-for-profit agencies that provide home attendant services to
     those in need.  Revenues are  recognized  for these  services in the period
     they are provided.  The Pro-Health  application  is an application  service
     provider  solution that provides home health care  customers  access to the
     Company's software over the Internet without needing sophisticated hardware
     at its site to house the software or store the data.  Customers  using this
     application  are  charged a monthly  fee and  revenue  is  recognized  on a
     monthly basis as the service is provided.

          The Company generates revenues for its telephone-based data collection
     services  from  its  automated   electronic   system  knows  as  Sandata(R)
     SANTRAX(R) ("SANTRAX") software application.  The SANTRAX application is an
     automated electronic system that incorporates  telephone  technologies into
     the data  reporting  process to monitor the arrival and departure  times of
     off-site workers.  Revenues from this application are recognized based on a
     per call or visit basis in the period in which the services are provided.

          Revenues from technology  infrastructure and outsourcing services such
     as  data  processing,   technology  infrastructure  consulting,  web  sites
     development,   running  e-commerce  applications  and  reselling  telephone
     services are  recognized  based on per hour or call rates in the period the
     service is provided.

          The Company generates  revenues from information  technology  services
     under  the  name of  SandataNet  and  includes  services  such as  software
     support, hardware  support/break-fix,  LAN administration and configuration
     services and the reselling of computer  hardware and  third-party  software
     systems.  Support  revenue  is  recognized  based on per hour  rates in the
     period the service is provided.  For maintenance contracts greater than one
     month,   revenue  is  recognized  over  the  term  of  the  contract  on  a
     straight-line  basis.  Computer  hardware and software  resale revenues are
     recognized  when the units are shipped and  accepted by the  customer.  The
     Company does not bundle maintenance with any software sold.

          The Company recognizes gains from sale/leaseback  transactions ratably
     over the  term of the  underlying  lease.  All such  leases  are  operating
     leases.  Any losses from these  transactions  are  recognized in the period
     incurred.

          Cash and Cash Equivalents

          The Company  considers  all  short-term  investments  with an original
     maturity of three months or less to be cash equivalents.

          Concentration of Credit Risk

          The Company is subject to a concentration  of credit risk with respect
     to its trade receivables, as disclosed above. The Company performs on-going
     credit  evaluations  of  its  customers  and  generally  does  not  require
     collateral.   The  Company  maintains  allowances  to  cover  potential  or
     anticipated losses for uncollectible accounts.

          The Company has cash balances in banks in excess of the maximum amount
     insured by the FDIC as of May 31, 2001.

          Statements of Cash Flows

          The Company paid income taxes of approximately $23,000 and $21,000 and
     interest of approximately $252,000 and $231,000 for the years ended May 31,
     2001 and 2000, respectively.

          Use of Estimates in the Financial Statements

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

          Reclassifications

          Certain  accounts in the prior year's  financial  statements have been
     reclassified  for comparative  purposes to conform with the presentation in
     the current year  financial  statements.  These  reclassifications  have no
     effect on previously reported income.

          Fair Value of Financial Instruments

          The Company's short term financial  instruments include cash, accounts
     receivable,  receivable  from affiliates and accounts  payable.  Due to the
     short-term nature of these instruments, the fair value of these instruments
     approximates   their  recorded  value.   The  Company  has  long-term  debt
     instruments which it believes are stated at their estimated fair value.

          Stock Options and Similar Equity Instruments

          The Company accounts for stock options and similar equity  instruments
     (collectively  "Options")  issued to employees  and directors in accordance
     with  Accounting  Principles  Board Opinion No. 25,  "Accounting  for Stock
     Issued to Employees," rather than the fair value based method of accounting
     prescribed  by  Statement  of  Financial   Accounting  Standards  No.  123,
     "Accounting for Stock-Based  Compensation."  The exercise price for Options
     issued to employees and  directors  equals or exceeds the fair value of the
     Company's  Common  Stock  at  the  date  of  grant  and,  accordingly,   no
     compensation  expense is  recorded.  Equity  instruments  issued to acquire
     goods and services from  non-employees  are accounted for based on the fair
     value  of the  consideration  received  or the  fair  value  of the  equity
     instruments issued, whichever is more readily determinable.

          Comprehensive Income

          The Company adopted  Statement of Financial  Accounting  Standards No.
     130  ("SFAS  No.  130"),  "Reporting  Comprehensive  Income".  SFAS No. 130
     establishes  standards for reporting and display of  comprehensive  income,
     its components and accumulated balances. Comprehensive income is defined to
     include all changes in equity except those  resulting  from  investments by
     owners and distributions to owners.  Among other disclosures,  SFAS No. 130
     requires  that all items that are required to be  recognized  under current
     accounting standards as components of comprehensive income be reported in a
     financial  statement  that is displayed  with the same  prominence as other
     financial statements.

          Business Segments

          The Company adopted  Statement of Financial  Accounting  Standards No.
     131 ("SFAS No. 131"),  "Disclosures  About  Segments of an  Enterprise  and
     Related  Information",  which supercedes SFAS No. 14, "Financial  Reporting
     for Segments of a Business  Enterprise." SFAS No. 131 establishes standards
     for the way that public  enterprises  report  information  about  operating
     segments in annual financial  statements and requires reporting of selected
     information  about  operating  segments  in  interim  financial  statements
     regarding  products and services,  geographical  areas and major customers.
     SFAS No. 131 defines  operating  segments as  components  of an  enterprise
     about which separate  financial  information is available that is evaluated
     regularly by the chief operating decision maker in deciding how to allocate
     resources and in assessing performance. The Company has determined that its
     operations  are in one  segment,  computer  services  to  the  health  care
     industry.

          New Accounting Pronouncements

          In December 1999, the SEC staff  released Staff  Accounting  Bulleting
     ("SAB") No. 101, Revenue Recognition in Financial  Statements.  SAB No. 101
     provides  interpretive  guidance  on  the  recognition,   presentation  and
     disclosure of revenue in the financial statements.  SAB No. 101 was adopted
     by the Company during the fourth quarter of fiscal 2001, and did not have a
     material impact on the Company's financial results.

          In July 2001, the Financial Accounting Standards Board ("FASB") issued
     Statement  of  Financial  Accounting  Standards  No. 141 ("SFAS No.  141"),
     "Business  Combinations."  SFAS No. 141  requires  the  purchase  method of
     accounting  for  business  combinations  initiated  after June 30, 2001 and
     eliminates the  pooling-of-interests  method.  The Company does not believe
     that the  adoption  of SFAS No. 141 will have a  significant  impact on its
     financial statements.

          In July  2001,  the FASB  issued  Statement  of  Financial  Accounting
     Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets",
     which is effective for all fiscal years  beginning after December 15, 2001;
     however, early adoption is permitted for fiscal years beginning after March
     15, 2001. SFAS No. 142 requires,  among other things, the discontinuance of
     goodwill  amortization.  In addition,  the standard includes provisions for
     the   reclassification  of  certain  existing  recognized   intangibles  as
     goodwill,   reassessment  of  the  useful  lives  of  existing   recognized
     intangibles,  reclassification  of certain  intangibles  out of  previously
     reported goodwill and the identification of reporting units for purposes of
     assessing  potential  future  impairment  of  goodwill.  SFAS No.  142 also
     requires the Company to complete a transitional  goodwill  impairment  test
     six months from the date of adoption. The Company is required to adopt SFAS
     No. 142 in fiscal 2003. The Company is currently  assessing but has not yet
     determined the impact of SFAS No. 142 on its financial position and results
     of operations.



<PAGE>


NOTE 2 - FIXED ASSETS

         Fixed assets consist of the following:

<TABLE>
<S>                                                            <C>                     <C>               <C>
                                                                Useful                           May 31,
                                                                                                 -------
                                                                  Life                    2001              2000
                                                                ------                    ----              ----

         Computer equipment                                       5 years              $2,883,819        $2,901,023
         Software costs                                           5 years              10,047,618        13,167,965
         Furniture, fixtures and automobiles                    4-7 years                 415,330           327,465
         Leasehold improvements                                  10 years               2,809,278         2,781,728
                                                                                      -----------       -----------
                                                                                       16,156,045        19,178,181

         Less accumulated depreciation and amortization                                10,119,842        10,266,526
                                                                                      -----------        ----------
                                                                                      -----------        ----------
                                                                                       $6,036,203        $8,911,655

</TABLE>

          Depreciation and amortization  expense relating to fixed assets (other
     than software  costs)  amounted to  approximately  $443,000 and $561,000 in
     2001 and 2000, respectively.

          Unamortized  software costs amounted to  approximately  $4,186,000 and
     $6,755,000 at May 31, 2001 and 2000, respectively. Amortization expense for
     these costs totaled  approximately  $2,305,000  and  $1,823,000 in 2001 and
     2000, respectively.

          Research and development  expenses  amounted to approximately  $10,000
     and $122,000 in 2001 and 2000, respectively.

          During the fourth  quarter of the year ended May 31, 2001, the Company
     shut down certain operating systems and hardware configurations,  which had
     been  capitalized in previous  years.  The Company had determined  that the
     older system's architecture had become obsolete and too costly to maintain,
     so the Company  coordinated placing several new systems in production after
     running parallel with  pre-existing  systems resulting in the retirement of
     the older systems during the fourth quarter. The Company further determined
     that there is no net  realizable  value  remaining  since no future revenue
     would be recognized in the retired  systems  because the  architecture  was
     completely  replaced by the new systems.  As such the Company recognized an
     impairment  loss of  approximately  $3,300,000  for the year  ended May 31,
     2001.

NOTE 3 - DEBT

          Credit Agreement

          The Company's wholly owned subsidiary,  Sandsport Data Services,  Inc.
     ("Sandsport"),  has a revolving credit  agreement (the "Credit  Agreement")
     with a bank (the  "Bank")  which allows  Sandsport to borrow  amounts up to
     $4,500,000  and is due on February  14, 2003.  Interest  accrues on amounts
     outstanding  under  the  Credit  Agreement  at a rate  equal to the  London
     Interbank Offered Rate plus 2% and will be paid quarterly in arrears or, at
     Sandsport's  option,  interest  may accrue at the Bank's  prime  rate.  The
     Credit  Agreement  requires  Sandsport to pay a fee equal to 1/4% per annum
     payable on the unused  average  daily  balance of amounts  under the Credit
     Agreement. In addition, there are other fees and charges imposed based upon
     Sandsport's failure to maintain certain minimum balances.  The indebtedness
     under the Credit  Agreement is  guaranteed  by the Company and  Sandsport's
     sister subsidiaries (the "Group"). All of the Group's assets are pledged to
     the Bank as  collateral  for the  amounts  due under the Credit  Agreement,
     which pledge is secured by a first lien on all  equipment  owned by members
     of the Group,  as well as a collateral  assignment  of  $2,000,000  of life
     insurance payable on the life of the Company's Chairman.  In addition,  the
     Company is restricted in its ability to declare and pay dividends  pursuant
     to the Credit  Agreement.  The Group's guaranty to the Bank was modified to
     include all  indebtedness  incurred by the Company under the amended Credit
     Agreement.

          In addition,  pursuant to the Credit Agreement,  the Group is required
     to maintain  certain levels of net worth and meet certain  financial ratios
     in addition to various other affirmative and negative covenants. At May 31,
     2001 and 2000,  the  Group  failed  to meet  these net worth and  financial
     ratios, and subsquently the Bank granted the Group a waiver.

          On August 24, 2001,  Sandsport,  the Company and the other  members of
     the Group,  and the Bank,  entered in the Third  Amendment  and Waiver (the
     "Third  Amendment")  to  the  Credit  Agreement.   Pursuant  to  the  Third
     Amendment,  Sandsport's  covenants  to the Bank to  maintain a certain  net
     worth,  and  to  maintain  certain  financial  ratios  were  revised  on  a
     going-forward  basis and the noncompliance  with the existing covenants was
     waived by the Bank. In addition,  in connection  with the Third  Amendment,
     Sandsport and each member of the Group executed and delivered to the Bank a
     Collective Amended and Restated Security  Agreement,  pursuant to which the
     Bank's security interest was extended to include a security interest in all
     of the  personal  and fixture  property of  Sandsport,  the Company and the
     members of the Group.

          There can be no assurance that the Bank will continue to grant waivers
     if the Group fails to meet the net worth and financial  ratios or any other
     affirmative  or negative  covenants in the future.  If such waivers are not
     granted,   any  loans   outstanding   under  the  Credit  Agreement  become
     immediately  due and  payable,  which  may have an  adverse  effect  on the
     Company's business,  operations or financial condition. As of May 31, 2001,
     the  outstanding  balance  on  the  Credit  Agreement  with  the  Bank  was
     $3,850,000

          Long Term Debt

          Long-term debt at May 31, 2001 and 2000 was as follows:
<TABLE>
<S>                                                                     <C>            <C>

                                                                           2001             2000
                                                                           ----             ----

         Note payable to affiliate, due 2001                            $      ---     $    500,000

         Variable Rate Term Loan under Credit Agreement                  3,850,000        2,250,000
                                                                        ----------     ------------
         Long-term debt                                                 $3,850,000     $  2,750,000
                                                                        ==========      ===========
</TABLE>

          As of May 31, 2000,  the Company  owed  National  Medical  Health Card
     Systems,  Inc.  ("Health  Card"),  a company  affiliated with the Company's
     Chairman,  $500,000  pursuant to a promissory  note, dated May 31, 2000 and
     due June 1, 2001,  plus  interest  at the rate of 9-1/2%;  interest on such
     note was payable quarterly. The Note was paid on May 31, 2001.

          On June 9, 2001,  the Company  again gave a promissory  note to Health
     Card in the principal amount of $500,000,  with interest at the rate of 7%,
     which was due on June 8,  2002.  This  Note was paid in full on August  15,
     2001.


<PAGE>


NOTE 4 - INCOME TAXES

          The income tax (benefit) expense is comprised of the following:
<TABLE>
<S>                                                                           <C>               <C>

                                                                               Year ended May 31,
=====================================================================================================
                                                                               2001              2000
                                                                               ----              ----
         Current
            Federal                                           $                 ---  $            ---
            State                                                            19,000            22,000
                                                                             ------            ------
            Total current                                                    19,000            22,000
                                                                             ------            ------
         Deferred
            Federal                                                      (1,089,293)          138,741
            State                                                          (223,108)           28,417
                                                                           ---------           ------
            Total deferred                                               (1,312,401)          167,158
                                                                         -----------          -------

         Income tax (benefit) expense                                $   (1,293,401)      $   189,158
                                                                     ===============      ===========

</TABLE>

          The  Company's  effective  income tax rate differs from the  statutory
     U.S. Federal income tax rate as a result of the following:
<TABLE>
<S>                                                                           <C>               <C>
                                                                                   Year ended May 31,
                                                                                   2001                2000
                                                                                   ----                ----

         Statutory U.S. federal tax rate                                           (34.0%)             34.0%
         State taxes                                                                (5.8)              21.4
         Permanent Differences                                                       1.2               19.5

         Other                                                                       1.6               18.2
                                                                                     ---               -----

                                                                                     37%               93.1%
                                                                                     ===               =====
</TABLE>

<PAGE>



          The components of deferred tax assets and  liabilities at May 31, 2001
     and 2000 consist of the following:
<TABLE>
<S>                                                                     <C>               <C>

                                                                               2001              2000
                                                                               ----              ----
         Deferred Tax Assets-Current portion
           Allowance for Doubtful Accounts                              $   142,230       $   183,590
           Deferred Income                                                   43,340           132,298
           Accured Expenses                                                  79,706           116,638
           Other                                                              9,194             6,868
                                                                              -----             -----
             Deferred Tax Assets, current                               $   274,470       $   439,394
                                                                        ===========       ===========

         Deferred Tax Assets-Long term portion
           Net Operating Loss Carryforwards                               1,255,038         1,084,575
           Deferred Income                                                  129,255           129,254
           Goodwill                                                          82,872               ---
           Other                                                                615            24,438
                                                                                ---            ------
             Deferred Tax Assets, long term                               1,467,780         1,238,267
                                                                          ---------         ---------

         Deferred Tax Liabilities-Long term
           Depreciation and amortization                                 (1,132,007)       (2,379,819)
                                                                          -----------     -----------

           Total deferred tax asset (liability), net                    $   335,773     $  (1,141,552)
                                                                        ===========     ==============
</TABLE>

          Management  determined  that it was more  likely  than not that future
     taxable  income would be sufficient to enable the Company to realize all of
     its  deferred tax assets.  Accordingly,  no  valuation  allowance  has been
     recorded at May 31, 2001 and 2000.

          At May 31, 2001, the Company had net operating loss  carryforwards for
     tax purposes of approximately $3,061,000, expiring at various dates through
     2022.


<PAGE>


NOTE 5- COMMITMENTS AND CONTINGENCIES

          Lease Agreements

          The  Company  leases  office  space  at 26  Harbor  Park  Drive,  Port
     Washington, NY 11050 (the "Facility") from BFS Realty LLC, successor to BFS
     Realty LLC and an affiliate of the  Company's  Chairman  (the  "Affiliate")
     (see Note 6). The Company  paid rent in the amount of $615,412 and $694,943
     to the Affiliate for the years ended May 31, 2001 and 2000, respectively.

          The Company has  obligations to pay rental expense in connection  with
     seven  sale/leaseback   transactions.   The  rental  expenses  amounted  to
     approximately  $1,630,000  and  $1,956,000 for the years ended May 31, 2001
     and 2000 respectively. (See Note 8)

          Total office space and  equipment  rental  expense under all operating
     leases amounted to  approximately  $3,417,155 and $3,669,000 in fiscal 2001
     and 2000, respectively.

          Future minimum lease payments for all non cancelable  operating leases
     at May 31, 2001 are as follows:

                                                Amount
           Year ending May 31,
                2002                            $3,407,325
                2003                             1,931,007
                2004                               708,516
                2005                               481,541
                2006                               505,618
                Thereafter                       2,288,240
                                                 ---------
                                                $9,322,247

          As of June 1, 2001, the Company entered into a lease for the Company's
     Facility with the Affiliate.  The lease provides for annual rental payments
     of  $369,165  for the period June 1, 2001 to May 31,  2002,  with annual 5%
     increments  in each  12-month  period  thereafter.  The lease also requires
     monthly  payments of various  types,  such as the  Company's  proportionate
     share of real  estate  taxes and  common  area  maintenance  charges,  that
     aggregate approximately $16,000 per month.

     Litigation

     a.   The Company has been providing  services to Federation of Puerto Rican
          Organizations,  and/or its affiliates  (individually and collectively,
          the "Federation"),  an HRA Vendor Agency,  since 1995. By November 30,
          1997,  the Company had acquired a loan  receivable for an aggregate of
          $300,000  from an affiliate of the  Company's  Chairman,  due from the
          Federation.  Such  loan  receivable  was  supposed  to be  secured  by
          accounts  receivable due to the Federation from various  affiliates of
          the  Federation.   Shortly  following  the  Company's  acquiring  such
          receivable,  the Federation  and its  affiliates  filed for bankruptcy
          protection.  While the bankruptcy  petition for the Federation  itself
          has been  dismissed,  some of the  Federation's  affiliates  remain in
          bankruptcy  proceedings.  At May 31, 2000, the Company had written off
          the  $300,000  principal  loan  receivable  in addition to $47,296 for
          services  rendered  against a reserve  established  in prior years for
          these amounts.  The affiliate from whom the Company  acquired the loan
          receivable  subsequently obtained a judgment against the Federation in
          the amount of $527,760,  including  pre-judgment interest. The Company
          has been advised that,  due to the continuing  bankruptcy  proceedings
          for the  Federation's  affiliates,  from whom the Federation  received
          substantially all of its revenues, the collectibility of this judgment
          is extremely doubtful.

     b.   On  December  21,  1998,   the  Company  and  MCI   Telecommunications
          Corporation,  now  know  as MCI  WorldCom  ("MCI")  settled  a  patent
          infringement  lawsuit brought by MCI against the Company in the United
          States District Court for the Eastern District of New York,  captioned
          MCI  Telecommunications  Corporation  v. Sandata,  Inc. The settlement
          provides,  among other  things,  that the Company is granted a license
          under  certain of MCI's  patents which permits the Company to continue
          to  market  and sell its  SANTRAX  time  and  attendance  verification
          product non-exclusively nationwide, and exclusively in the home health
          care  industries for the five New York boroughs,  and that the Company
          will pay MCI  certain  royalties,  on a per call  basis.  The  license
          remains in effect until the last to expire of various  patents held by
          MCI or until October 19, 2010, whichever is later.

     c.   On October 19,  1999,  the Company  and  Pro-Health  brought an action
          against Provider Solutions Corporation  ("Provider"),  Michael Milvain
          and Charlotte  Fritchie in Supreme Court,  New York County,  Index No.
          99-26033,  based on breach of contract,  fraudulent  misrepresentation
          and  other  causes  of  action,  demanding  damages  of  approximately
          $10,000,000 (the "State Action").

               On October 22,  1999,  Provider  brought a federal  action in the
          United States District Court, Eastern District (the "Federal Action"),
          seeking to enjoin the Company and  Pro-Health  from (i) hiring certain
          named  employees;  (ii) soliciting any present or former  employees of
          Provider;  and (iii) using, without Provider's  permission,  any trade
          secret or other  proprietary  information  belonging to Provider.  The
          Federal  Action also sought to enjoin  employees from (i) divulging to
          the Company,  Pro-Health or any other third party, any trade secret or
          other proprietary information;  and (ii) accepting employment from the
          Company,  Pro-Health or any other  customer or competitor of Provider.
          The amended complaint  ultimately served on the Company and Pro-Health
          on  March  31,  2000  demanded  relief  in  the  form  of a  permanent
          injunction  and damages  against the Company and  Pro-Health for total
          amounts ranging from $10,000,000 to $15,000,000. The amended complaint
          alleged claims of declaratory judgment, copyright infringement, breach
          of fiduciary duty, breach of contract,  and  misappropriation of trade
          secrets,  among others.  The State Action was removed and consolidated
          with the Federal Action.

               The Company and Pro-Health asserted various  counterclaims in the
          Federal  Action,   demanding   damages  of  $10,000,000,   seeking  an
          injunction and declaratory  judgment,  and asserting  claims based on,
          among  other  things,  imposition  of  constructive  trust,  breach of
          contract, and unfair competition.

               On  March 8,  2001  the  Company,  Pro-Health,  Provider  and all
          involved  parties and  individuals  settled the  consolidated  Federal
          Action,  globally  resolving  all  issues,  claims and  disputes.  The
          settlement  entailed  the  exchange  of general  releases  between the
          Company,  Pro-Health,  Provider  and all  parties,  and the payment of
          $600,000 to Provider,  of which  $50,000 was paid by the Company.  The
          balance  of  the  payment  under  the  settlement  was  funded  by the
          Company's  insurers.  The settlement did not have a material effect on
          the  Company's  operations.  The Company has retained its  proprietary
          interest in the subject software.

     d.   In August of 1999, the Company's  wholly-owned  subsidiary,  Sandsport
          was named as a defendant in Greater  Bright Light Home Care  Services,
          Inc. et al. v. Joseph Jeffries-El,  El Equity  Corporation,  Sandsport
          Data  Services,  Inc. et al  (Supreme  Court of the State of New York,
          Kings County).  Sandsport's  contractual  obligation to Greater Bright
          Light involved the depositing of certain government-issued checks into
          a specific bank account.  Upon receiving written notification from the
          agency  issuing the checks to stop  depositing  them in that  account,
          Sandsport  ceased  depositing  them. The plaintiff  brought the action
          against   Joseph   Jeffries  -  El  and  El  equity,   and  El  Equity
          counterclaimed  against the  plaintiff,  each basing its claims on the
          financing agreement between them. El Equity also cross-claimed against
          Sandsport,  asserting that Sandsport  converted the  government-issued
          checks to its own use. Although Sandsport is named as a defendant, the
          Complaint seeks no affirmative relief against Sandsport.  Co-defendant
          Citibank has asserted indemnification claims against Sandsport and all
          of the other defendants.  Sandsport  disputes all liability.  However,
          the  Company is unable to  predict  the  outcome  of these  claims and
          accordingly,  no  adjustments  have  been  made  in  the  consolidated
          financial statements in response to these claims.

     e.   On  April  2,  2001,  the  Company  was  served  with a First  Amended
          Complaint  filed by Dataline,  Inc.  ("Dataline")  against MCI and the
          Company for alleged  trade  libel and  related  counts,  in the United
          States  District  Court of the  Southern  District of New York,  Civil
          Action No. 00-CV-1578.  The Company has filed its answer,  denying all
          claims,  and the case has been consolidated with a case that MCI filed
          against Dataline for patent infringement, Civil Action No. 01-CV-3849.
          The  Company is taking  steps to bring a motion for  summary  judgment
          against  Dataline,  and the judge is  considering  whether the summary
          judgment  motion can be brought.  The Company  denies all  substantive
          allegations  of Dataline  and intends to contest the case  vigorously.
          However,  the Company is unable to predict the outcome of these claims
          and  accordingly,  no adjustments  have been made in the  consolidated
          financial statements in response to these claims.

     f.   An action has been commenced  against the Company and Health Card by a
          former  executive  of Health  Card,  Mary  Casale,  who  alleges  that
          employees  of  both  Health  Card  and  the  Company  engaged  in  sex
          discrimination as to Ms. Casale,  and thus,  violated Title VII of the
          Civil Rights Act of 1964.  The matter is presently  pending before New
          York  City  office  of the  Equal  Employment  Opportunity  Commission
          (`EEOC").  The EEOC has made no findings or other determinations as to
          the merits of the parties'  claims or  defenses.  The Company is being
          defended  pursuant  to an  employment  practices  liability  insurance
          policy, the coverage of which is subject to various terms, conditions,
          and exclusions.

               Only a  preliminary  investigation  into  this  matter  has  been
          conducted,  and  discovery  has not  commenced.  Ms. Casale has yet to
          bring suit in state or federal  court,  and, thus,  could  conceivably
          assert additional claims. The Company denies the material  allegations
          Ms.  Casale has  brought  against it and  intends to defend  itself as
          vigorously as is necessary.  However, the Company is unable to predict
          the outcome of these claims and accordingly,  no adjustments have been
          made in the  consolidated  financial  statements  in response to these
          claims.

          Employment and Deferred Compensation Agreements

               On February 1, 1997 the Company and its Chairman ("Mr.  Brodsky")
          entered  into  an  employment  agreement  for a five  year  term  (the
          "Brodsky  Employment  Agreement").  Among  other  things,  the Brodsky
          Employment  Agreement  provides  compensation  at the  annual  rate of
          $500,000 or a lesser amount if mutually agreed. The Brodsky Employment
          Agreement  also  provides  for payment of an annual  bonus at the sole
          discretion of the Board of Directors.  Mr.  Brodsky agreed to accept a
          reduction in compensation  for the fiscal years ended May 31, 2001 and
          2000  and  has  signed  waivers   evidencing  his  agreement  to  such
          reductions.

               The Company also has a deferred  compensation  agreement with Mr.
          Brodsky  pursuant to which the Company  will pay (i) to Mr.  Brodsky a
          lump sum ranging from $75,000 to $255,000 if he voluntarily terminates
          his employment  with the Company after  attaining 55 years of age (ii)
          to Mr.  Brodsky's  beneficiary  a lump sum  ranging  from  $200,000 to
          $450,000 in the event of Mr.  Brodsky's  death  during the term of his
          employment  with the  Company.  The amount of the payment is dependent
          upon the age of Mr. Brodsky at the time of  termination or death.  The
          Company has obtained insurance on Mr. Brodsky's life pursuant to which
          its  obligations  under the above  agreement may be funded by the cash
          surrender value of the policy.

NOTE 6 - RELATED PARTY TRANSACTIONS

     a.   In  November,  1996 the Company  entered  into an  agreement  with the
          Affiliate,  the Nassau County Industrial Development Agency ("NCIDA"),
          and Marine Midland Bank (the "Bondholder") (the "Agreement"). Pursuant
          to the  Agreement,  the  Affiliate  (i) assumed  all of the  Company's
          rights and  obligations  under a Lease  Agreement  that was previously
          between the Company and the NCIDA (the "Lease"), and (ii) entered into
          a Sublease  Agreement  with the Company for the  premises  the Company
          occupies.  Pursuant to the Agreement,  the Affiliate also obtained the
          right to  become  the owner of the  premises  upon  expiration  of the
          Lease.  Under the terms of the  Agreement,  the Company is jointly and
          separately  liable  to the  NCIDA  for  all  obligations  owed  by the
          Affiliate to the NCIDA under the Lease;  however,  the  Affiliate  has
          indemnified the Company with respect to certain  obligations  relative
          to the Lease and the Agreement.  In addition,  the Agreement  provides
          that the  Company  is bound by all the  terms  and  conditions  of the
          Lease, and that a security interest is granted to the Affiliate in all
          of the Company's fixtures constituting part of the premises.

               The  foregoing  transactions  and  agreements  were the last in a
          series of transactions  involving the Company,  the Affiliate,  NCIDA,
          the Bondholder and the U.S.  Small  Business  Administration  ("SBA").
          Chief among these was the  borrowing by the  Affiliate in June of 1994
          of $3,350,000 in the form of Industrial Development Revenue Bonds (the
          "Bonds") to finance the  acquisition  of the  Company's  facility (the
          "Facility").  Simultaneously with the issuance of the Bonds: (1) NCIDA
          obtained title to the Facility and leased it to the Affiliate, (2) the
          Affiliate  subleased the Facility to the Company,  (3) the  Bondholder
          bought the Bonds, (4) the Bondholder  received a mortgage and security
          interest  in the  Facility  to secure the  payment  of the Bonds.  The
          Affiliate's  obligations  under  the  Lease  were  guaranteed  by  Mr.
          Brodsky,   the  Company,   Sandsport  and  others.   The   Affiliate's
          obligations  respecting repayment of the Bonds were also guaranteed by
          Mr. Brodsky, the Company, Sandsport and others.

               The Bonds  currently  bear  interest  at the rate of 9%,  and the
          outstanding  balance  due  on  the  Bonds  as  of  May  31,  2001  was
          $1,617,778.  The Company  paid rent to the  Affiliate  of $615,412 and
          $694,943 for the years ended May 31, 2001 and 2000.

               On August 11,  1995,  the Company  entered  into a $750,000  loan
          agreement with the Long Island Development Corporation ("LIDC"), under
          a guarantee by the SBA (the "SBA Loan").  The SBA Loan was assigned to
          the Affiliate in November 1996; however,  repayment of the SBA loan is
          guaranteed by the Company and various subsidiaries of the Company. The
          entire  proceeds  were used to repay a portion of the  Bonds.  The SBA
          Loan is payable in 240 monthly  installments of $6,255, which includes
          principal  and  interest  at a rate of 7.015%.  The balance of the SBA
          loan as of May 31, 2001 was $625,787.

     b.   The Company  derived  revenue from Health  Card, a company  affiliated
          with the Company's  Chairman,  principally for data base and operating
          system   support,   hardware   leasing,    maintenance   and   related
          administrative  services.  The  revenues  generated  from  Health Card
          amounted to  approximately  $2,458,000  and  $1,753,000  for the years
          ended May 31, 2001 and 2000,  respectively.  The Company billed Health
          Card approximately $821,000 and $540,000 for quality assurance testing
          of software programs developed by Health Card and network support, and
          $561,000 and $302,000  for help desk  services,  $447,800 and $320,000
          for data  processing  center  as well as  $533,600  and  $472,000  for
          certain  computer  equipment leases and other services for $94,600 and
          $119,000  for years  ended May 31,  2001 and  2000,  respectively.  In
          addition the Company  resells its  telephone  services to Health Card.
          The billings for such  telephone  services  amounted to  approximately
          $133,500  and  $151,000  for the years  ended May 31, 2001 and May 31,
          2000 and are recorded as a reduction of operating expense. The Company
          was owed $550,000 from Health Card at May 31, 2001.  Subsequent to May
          31, 2001,  the Company  received  approximately  $536,300  from Health
          Card, representing substantially complete payment of amounts due as of
          that  date.   Sandsport  is  expected  to  continue  to  provide  data
          processing  services to Health Card at a monthly fee of about $36,000,
          subject to reduction in the event Health Card decides to provide these
          services internally.

     c.   The  Company  makes  lease  and rent  payments  to  affiliates  of the
          Company's  Chairman.  The payments for leased  equipment  were made to
          P.W.  Capital  Corp.  and  P.W.  Medical  Management,  Inc.,  and were
          $395,989  and  $393,903  for the years  ended  May 31,  2001 and 2000,
          respectively.  The payments for the Facility  were made to BFS Realty,
          LLC,  and were  $615,412 and $694,943 for the years ended May 31, 2001
          and 2000,  respectively.  In June 2001, the Company entered into a new
          lease for the Facility with Affiliate. (See Note 5).

     d.   Medical Arts Office Services,  Inc.  ("MAOS"),  of which the Company's
          Chairman  is  the  sole   shareholder,   provided   the  Company  with
          accounting,  bookkeeping and paralegal  services.  For the years ended
          May 31, 2001 and 2000 the total  payments  made by the Company to MAOS
          were $279,894 and $399,592, respectively.

     e.   During  the years  ended  May 31,  2001 and 2000 the  Company  paid an
          aggregate  of $65,894 and $36,404,  respectively  on behalf of certain
          officers to  companies  affiliated  with the  Company's  Chairman  for
          payment of automobile leases.

NOTE 7 - SHAREHOLDERS' EQUITY

     a.   Stock Based Compensation

               On February 4, 2000, the Company  granted 25,000 shares of Common
          Stock  with a fair value of $31,650  to the  Company's  Chairman  as a
          bonus for services to the Company. As such, the Company has recorded a
          charge to its  operations  for this  amount for the year ended May 31,
          2000.

     b.   Stock Options

               The Company maintains the following stock option plans:

               1984 Stock Option Plan

               There had been  2,536  options  granted at an  exercise  price of
          $1.88 under an incentive stock option plan adopted in October 1984 and
          subsequently amended.  Options granted under this plan were granted at
          exercise  prices not less than fair market value on the date of grant.
          All of the  options  outstanding  under  this plan  expired in January
          2001. No additional options may be granted under this plan.

               1995 Stock Option Plan

               At May 31, 2001, there were 590,500 incentive options outstanding
          under a stock option plan  adopted in January 1995 (the "1995  Plan"),
          which provides for both incentive and  nonqualified  stock options and
          reserves 1,000,000 shares of common stock for grant under the plan. Of
          these options,  520,500 are held by officers of the Company.  The plan
          requires that incentive options be granted at exercise prices not less
          than the fair market  value at the date of grant,  and  terminates  in
          January 2005. All options  outstanding under this plan are exercisable
          at May 31, 2001 at prices ranging from $1.41 to $2.61 per share over a
          period of five years from date of grant.

               On July 14, 1997, the Company filed a  Registration  Statement on
          Form S-8  relative  to  reofferings  of shares of Common  Stock of the
          Company which may be acquired pursuant to the 1995 Plan.

               1998 Stock Option Plan

               At May 31,  2001  there  were  987,092  incentive  stock  options
          outstanding  under a stock option plan adopted in October  1998,  (the
          "1998 Plan") which provides for both incentive and nonqualified  stock
          options and reserves  1,000,000 shares of common stock for grant under
          the plan.  The plan  requires  that  incentive  options  be granted at
          exercise  prices  not less than the fair  market  value at the date of
          grant and terminates in August 2008. Of the options outstanding at May
          31, 2001,  484,545 were  exercisable  at prices  ranging from $1.31 to
          $3.00 over three to five years from the date of grant.

               2000 Stock Option Plan

               In October 2000 the Board of Directors approved the adoption of a
          stock option plan (the "2000  Plan").  The 2000 Plan was  subsequently
          adopted by  Shareholders  at the Company's  Annual Meeting on November
          20,  2000.  At May 31,  2001,  there were  150,000  incentive  options
          outstanding  under the plan,  which  provides for both  incentive  and
          nonqualified  stock  options and reserves  1,500,000  shares of common
          stock for issuance in  connection  with option  grants.  The 2000 Plan
          terminates in September 2010. Options  outstanding under the plan vest
          over a  seven-year  period  commencing  December  31,  2000 and ending
          December 31, 2007 and are exercisable at $3.00 per share over a period
          of ten  years  from the date of grant.  At May 31,  2001,  there  were
          33,333 options currently exercisable.

               Summary  information  with  respect  to the  stock  option  plans
          follows:
<TABLE>
<S>                                         <C>               <C>                 <C>
                                            Range of          Outstanding         Outstanding
                                            exercise             options           options
                                            prices ($)           granted          exercisable
                                            ----------        -----------         -----------
         Balance, June 1, 1999              1.41 - 3.00         958,246             684,806
         Granted                            1.31 - 3.00         682,977             177,965
         Cancelled                                             (117,321)            (12,900)
                                                               ---------            --------
         Balance, May 31, 2000              1.31 - 3.00       1,523,902             849,871
         Granted                            3.00                279,808             269,653
         Cancelled                                              (76,118)            (11,146)
                                                                --------            --------
         Balance May 31, 2001               1.31 - 3.00       1,727,592           1,108,378
                                                             ==========           =========
</TABLE>
               Stock option  grants to certain  officers and  directors  were as
          follow:

               On July 14, 1998, the Chairman, certain officers,  directors and,
          a former  director  and the spouse of an officer  and an  employee  of
          Sandsport  Data Services,  Inc.  ("Sandsport'),  the Company's  wholly
          owned subsidiary,  exercised their respective  options and warrants to
          purchase an  aggregate  of 921,334  shares of Common Stock at exercise
          prices  ranging from $1.38 to $2.61 per share for an aggregate cost of
          $1,608,861.  Payment  for such  shares was made to the  Company in the
          amount of $921 representing the par value of the shares, and a portion
          in the form of  non-recourse  promissory  notes due in July 2001, with
          interest at eight and one-half  percent  (8-1/2%)  per annum,  payable
          annually,  and secured by the number of shares exercised.  The Company
          received interest payments on such notes in the amount of $162,110 and
          $120,658  during the fiscal  years ended May 31, 2001 and 2000.  As of
          May 31,  2001  and  2000,  the  outstanding  balance  on  such  notes,
          including  principal and accrued but unpaid  interest,  was $1,722,547
          and $1,746,145,  respectively. On July 14, 2001, the Company agreed to
          extend the due dates of such notes for one hundred twenty days.

               In October 1998,  the Company  granted  certain  directors of the
          Company  qualified  stock  options to purchase an  aggregate of 20,000
          shares  of the  Company's  common  stock  under  the  1998  Plan at an
          exercise  price of  $3.00.  These  options  vest  immediately  and are
          exercisable over a five-year period.

               In December 1998, the Company granted 520,500  incentive  options
          to certain  officers of the Company under the 1995 Plan at an exercise
          price of $1.41 per  share.  These  options  vest  immediately  and are
          exercisable over a five-year period.

               In February  2000,  the Company  granted its  Chairman  incentive
          stock  options to purchase an  aggregate  of 350,000  shares under the
          1998 Plan at an exercise  price of $1.31.  These  options vest and are
          exercisable over a five year period.

               In April  2000,  the Company  granted  certain  directors  of the
          Company non-qualified stock options to purchase an aggregate of 72,000
          shares  under  the 1998  Plan at an  exercise  price of  $3.00.  These
          options vest and are exercisable over a six year period.

               In April 2000, the Company granted its President  incentive stock
          options to purchase an aggregate of 100,000 shares under the 1998 Plan
          at an exercise price of $3.00.  In October 2000,  the Company  granted
          its President incentive stock options to purchase 150,000 shares under
          the 2000 plan, at an exercise price of $3.00 per share. The employment
          of the Company's  President was terminated on August 6, 2001, at which
          date the President became entitled to exercise, for ninety days, those
          options which had already  vested.  Those options  consisted of 33,340
          shares under the 1998 Plan, and 33,333 under the 2000 Plan.

               In November 2000, the Company  granted  certain  directors of the
          Company non-qualified stock options to purchase an aggregate of 20,000
          shares  of the  Company's  common  stock  under  the  1998  Plan at an
          exercise price of $3.00.  These options vest over a three-year  period
          and are exercisable over a five-year period.

               Pro forma information regarding net income and earnings per share
          is required by SFAS 123, and has been determined as if the Company had
          accounted  for its  employee  stock  option plans under the fair value
          method of SFAS 123. The fair value for these  options was estimated at
          the date of grant using a Black-Scholes  option-pricing model with the
          following weighted-average assumptions for 2001 and 2000.

          ASSUMPTIONS

                                                  Years  ended  May 31,
                                                  2001             2000
                                                  ----             ----
          Risk free rate                        5.25-6.04%         5.790%-6.44%
          Dividend  yield                        .00               .00
          Volatility factor of the expected
                market price of the             117%               115%
                Company's common stock
          Average life                          5 years            5 years

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

               For purposes of pro forma  disclosures,  the estimated fair value
          of the options is amortized to expense over the vesting  period of the
          options. The Company's pro forma income (loss) is as follows:

                                                Years ended May 31,
                                                2001           2000
                                                ----           ----

                  Pro forma net loss            $(2,470,616)  $(92,036)
                  Pro forma net loss per share  $      (.99)  $   (.04)

               The  weighted  average fair value of options  granted  during the
          years ended May 31,  2001 and 2000 were $.86 and $1.29,  respectively.
          The weighted average remaining contractual life of options exercisable
          at May 31, 2001 is 5 years. The exercisable prices range from $1.31 to
          $3.00 for options outstanding as of May 31, 2001.

     c.   Restricted Stock Grant Plan

               On September 1, 2000 the Board of Directors approved the adoption
          of the Company's  2000  Restricted  Stock Grant Plan (the "Stock Grant
          Plan").  The  Stock  Grant  Plan  was  subsequently   adopted  by  the
          Shareholders at the Company's Annual Meeting on November 20, 2000. The
          Stock Grant Plan  provides for the issuance of shares that are subject
          to both standard  restrictions  on the sale or transfer of such shares
          (e.g., the standard seven year vesting schedule set forth in the Stock
          Grant Plan)  and/or  restrictions  that the Board may impose,  such as
          restrictions relating to length of service, corporate performance,  or
          other restrictions.  As of May 31, 2001, no grants had been made under
          the Stock Grant Plan and,  therefore,  no shares had vested  under it.
          There are 700,000  shares of Common  Stock  reserved  for  issuance in
          connection with grants made under the Stock Grant Plan.

NOTE 8 - SALE/LEASEBACK TRANSACTIONS

               The  Company  is a party to various  sale/leaseback  transactions
          involving  certain  fixed  assets,   principally   computer  hardware,
          software and equipment. Gains on these transactions have been deferred
          and are  being  recognized  over  the  lives  of the  related  leases.
          Approximately  $344,000  and  $401,000  of  the  deferred  gains  were
          recognized  in other income for the years ended May 31, 2001 and 2000,
          respectively.  Included  in  these  amounts  are  the  effects  of the
          following sale/leaseback transactions:

               In January  1998,  the Company  consummated a  sale/leaseback  of
          certain  fixed  assets  which  had a net book  value of  approximately
          $515,000,  were sold for $700,000. The resulting gain of approximately
          $185,000 was recorded as deferred income and is being  recognized over
          the life of the lease, which is thirty-six (36) months.  Approximately
          $36,000 and $62,000 of the  deferred  gain was  recognized  for fiscal
          2001 and 2000, respectively. An unaffiliated third party purchased the
          residual rights to such lease.

               In January  1999,  the Company  consummated a  sale/leaseback  of
          certain  fixed  assets  which  had a net book  value of  approximately
          $830,000,   were  sold  for   $1,100,000.   The   resulting   gain  of
          approximately  $270,000 was  recorded as deferred  income and is being
          recognized  over  the life of the  lease,  which  is  thirty-six  (36)
          months.  Approximately  $90,000  and  $90,000  of  deferred  gain  was
          recognized for the years ended May 31, 2001 and 2000, respectively. An
          unaffiliated third party purchased the residual rights in such lease.

               In May 1999, the Company  consummated a sale/leaseback of certain
          fixed  assets  which had a net book value of  approximately  $896,000,
          were sold for $1,100,000. The resulting gain of approximately $204,000
          was recorded as deferred income and is being  recognized over the life
          of the lease, which is thirty-six (36) months.  Approximately $ 68,000
          and $68,000 of deferred  gain was  recognized  for the years ended May
          31, 2001 and 2000, respectively. An unaffiliated third party purchased
          the residual rights in such lease.

               In October  1999,  the Company  consummated a  sale/leaseback  of
          certain  fixed  assets  which  had a net book  value of  approximately
          $895,000,   were  sold  for   $1,115,000.   The   resulting   gain  of
          approximately  $220,000 was  recorded as deferred  income and is being
          recognized  over  the life of the  lease,  which  is  thirty-six  (36)
          months.  Approximately  $73,000 and $49,000 of the  deferred  gain was
          recognized for the years ended May 31, 2001 and 2000 respectively.  An
          unaffiliated third party purchased the residual rights in such lease.

               In January  2000,  the Company  consummated a  sale/leaseback  of
          certain  fixed  assets  which  had a net book  value of  approximately
          $442,000,  were sold for $561,000. The resulting gain of approximately
          $119,000 was recorded as deferred income and is being  recognized over
          the life of the lease, which is thirty-six (36) months.  Approximately
          $40,000  and  $13,000 of deferred  gain was  recognized  for the years
          ended May 31, 2001 and 2000, respectively. An unaffiliated third party
          purchased the residual rights in such lease.

               In February 2000,  the Company  consummated a  sale/leaseback  of
          certain  fixed  assets  which  had a net book  value of  approximately
          $237,000,  were sold for $277,000. The resulting gain of approximately
          $40,000 was recorded as deferred  income and is being  recognized over
          the life of the lease, which is thirty-six (36) months.  Approximately
          $14,000 and $3,000 of deferred gain was recognized for the years ended
          May 31,  2001 and 2000,  respectively.  An  unaffiliated  third  party
          purchased the residual rights in such lease.

               In November 2000,  the Company  consummated a  sale/leaseback  of
          certain  fixed  assets  which  had a net book  value of  approximately
          $421,500,  were sold for $548,300. The resulting gain of approximately
          $126,800 was recorded as deferred income and is being  recognized over
          the life of the lease, which is thirty-six (36) months.  Approximately
          $21,000 of the deferred gain was recognized for the year ended May 31,
          2001.

NOTE 9 - ASSET ACQUISITION AND IMPAIRMENT

               On April 27, 2001, the Company  acquired  certain assets of North
          American Internet  Services,  Inc.  ("NAIS"),  a provider of broadband
          services,  Internet access, and co-location services for approximately
          $201,000.  NAIS had  entered  bankruptcy  proceedings  and,  under the
          auspices of the Bankruptcy Court, the Company was permitted to "credit
          bid" approximately  $124,000 of expenses  (including  salaries) it had
          incurred on behalf of NAIS as the purchase  price for the assets,  and
          was given 180 days to exploit the assets it had acquired.  The Company
          incurred  approximately  $77,000 in  additional  costs  related to the
          acquisition of these assets.  The tangible  assets were  determined to
          have no  significant  fair  value.  Therefore,  all  the  expenditures
          related to the acquisition were allocated to goodwill. The Company has
          the option to abandon the  exploitation of these assets within the 180
          day period.  If the Company  continues to use the NAIS assets,  10% of
          the profits  (defined as earnings before  interest  expense and taxes)
          generated  by such use must be paid to the  bankruptcy  estate for the
          first three years.

               At May 31,  2001,  the Company  performed  an  evaluation  of the
          recoverability  of the assets  acquired from NAIS and concluded that a
          significant  impairment  of these assets had occurred  based on actual
          results  during the year ended May 31,  2001 and on  estimated  future
          cash flows not being  sufficient to recover the carrying  value of the
          goodwill.  As such, the carrying value of goodwill was written down to
          its estimated  fair value,  which was  determined  based on discounted
          estimated cash flows.  The Company  recognized an impairment  loss and
          write down of the  goodwill of  approximately  $201,000.  Considerable
          management judgment is necessary to estimate fair value;  accordingly,
          actual results could vary significantly from such estimates.

NOTE 10 - Retirement Plan

               The Company  has a 401(k)  savings  plan  covering  all  eligible
          employees  in which the  Company  matches a portion of the  employees'
          contribution.  The amount of this  match was  $38,197  and  $31,296 in
          fiscal years 2001 and 2000, respectively.

NOTE 11 - REVENUE BY PRODUCT LINE

               The Company  derives its revenue from several  product lines that
          are similar in nature.  The following  table  provides the service fee
          revenues  for the product  lines earned for the fiscal years ended May
          31, 2001 and 2000:
<TABLE>
<S>                                                                  <C>                <C>
                                                                       For the years ended May 31,
                                                                               2001              2000
                                                                               ----              ----
         Computerized information processing                          $   5,960,450     $   5,628,718
         Telephone-based data collection                                  7,561,852         7,365,949
         Technology infrastructure and outsourcing                        2,071,266         2,634,642
         Information technology                                           2,170,240         2,358,337
         Other                                                                5,261               ---
                                                                              -----               ---

                                                                       $ 17,769,069      $ 17,987,646
                                                                       ============      ============
</TABLE>

NOTE 12 - SUBSEQUENT EVENTS

     On   August  9,  2001 the  Company  announced  that it had  terminated  the
          employment of Stephen Davies as President of the Company, and would be
          terminating  approximately 30 other employees.  Under the terms of Mr.
          Davies'  Employment  Agreement,  he is entitled to a severance payment
          equal to six (6) months'  base salary,  or  $100,000,  and has 90 days
          from the date of  termination to exercise the 66,673 options that were
          vested on that date.  In  addition,  the  Company  paid  approximately
          $47,000 in severance  payments for  approximately  30 other terminated
          employees.


<PAGE>


                                   SIGNATURES

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

By     /s/ Bert E. Brodsky
       Bert E. Brodsky, Chairman
       (Principal Executive Officer and
       Principal Financial and Accounting Officer)

Date: September 7, 2001

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


By   /s/ Bert E.Brodsky
         Bert E. Brodsky, Chairman, Treasurer, Director

Date: September 7, 2001


By   /s/ Hugh Freund
         Hugh Freund, Executive Vice President, Secretary, Director

Date: September 7, 2001


By   /s/ Gary Stoller
         Gary Stoller, Executive Vice President, Director

Date: September 7, 2001


By    /s/ Paul J.Konigsberg
          Paul J. Konigsberg, Director

Date: September 7, 2001

By   /s/ Ronald L. Fish
         Ronald L. Fish, Director

Date: September 7, 2001