SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20049

                                   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 December 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 No. 001-15179

                                H-QUOTIENT, INC.
             (Exact name of registrant as specified in its charter)

               Virginia                                       54-1947753
     (State or other jurisdiction                          (I.R.S. Employer
   of Incorporation or organization)                    Identification Number)

     8150 Leesburg Pike, Suite 503                             22182
             Vienna, VA                                      (Zip Code)
(Address of principal executive offices)

          Issuer's telephone number, including area code: 703-752-0690
         Securities registered under Section 12(b) of the Exchange Act:

          Title of each class                    Name of each Exchange on
                   None
                                                      Which registered
                                                     OTC Bulletin Board

         Securities registered under Section 12(g) of the Exchange Act:
                    Common Stock, par value $.0001 per share
                                (Title of Class)

      Check whether the issuer (a) filed all reports required to be filed by
Section 13 of 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 |_|


                                        1
<PAGE>

      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. |X|

      Revenues for its most recent fiscal year were: $1,122,818

      The aggregate market value of the voting stock held by non-affiliates
computed by reference to the closing price of such stock, as of April 30, 2002,
was $16,571,839. Non-Affiliates have been determined on the basis of holdings
set forth under Item 11 of this Annual Report on Form 10-KSB.

      At April 30, 2002, a total of 27,619,733 shares of the registrant's common
stock (par value, $0001 per share) were outstanding.

      Documents incorporated by reference: None
      Transitional Small Business Issuer: Yes |_| No |X|

      TABLE OF CONTENTS

      ITEM NUMBER AND CAPTION

                                                                            Page
      Part I

      1.  Description of Business                                             3
      2.  Description of Properties                                          15
      3.  Legal Proceedings                                                  15
      4.  Submission of Matters to a Vote of Security Holders                16

      Part II

      5.  Market for Common Equity and Related Stockholder Matters           16
      6.  Management's Discussion and Analysis of Financial Condition
          and Result's of Operations                                         18
      7.  Financial Statements                                               20
      8.  Changes in and Disagreements with Accountants on Accounting
          and Financial Data                                                N/A

      Part III

      9.  Directors, Executive Officers, Promoters and Control               20
      10. Executive Compensation                                             22
      11. Security Ownership of Certain Beneficial Owners and Management     22
      12. Certain Relationships and Related Transactions                     23
      13. Exhibits and Reports on Form 8-K                                   23

      Forward-Looking Statement Notice


                                        2
<PAGE>

      When used in this report, the words "may," "will," "expect," "anticipate,"
"continue." "estimate." "project." "intend." and similar expressions are
intended to identify forward-looking statements with the meaning of Section
27(a) of the Securities Act of 1933 and Section 21(e) of the Securities Exchange
Act of 1934 regarding events, conditions, and financial trends that may affect
the Company's future plans of operations, business strategy, operating results,
and financial position. Persons reviewing this report are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such factors are discussed under the headings in "Item 1. Business,"
and Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations," and also include general economic factors and conditions
that may directly or indirectly impact the Company's financial condition or
results of operations.

      PART I

      Item 1. Description of Business

      The Company

      H-Quotient, Inc., is a software development company that specializes in
designing, creating and marketing cost-effective custom software, information
collection and intranet network systems for the healthcare industry. This
includes hospitals and other healthcare facilities such as ambulatory care
centers, healthcare networks, in-home care agencies, independent practice
associations, clinics and extended care facilities (sometimes herein referred to
as "extended care facilities"). We supply hospitals and extended care facilities
with an electronic information system that provides a single access to records
of a patient's care and medical history for the medical facility and its staff.
This information includes a compilation and integration of data from all the
various departments and many other sources within or outside the hospital or
extended care facility and provides a continuing analysis and reporting of each
patient's clinical treatments and results. This data can be transmitted over an
Internet based Virtual Private Network to a central repository and is readily
accessible to the healthcare facilities' medical staff. Our proprietary
technology includes: the DataQual(R) software system, the DataQuotient software
system with the I-Link(SM) interface engine and the I-Link(SM) Enterprise, a
server on the hospital's or extended care facility's network which is connected
to a Central Data Repository. LabQuotient, a product designed to provide the
medical industry with immediate, appropriate tests for specific diagnoses, is in
development. BloodQuotient, a product designed to provide comparative analyses
to blood banks, is in development. We also provide our customers software
maintenance, system designs, consulting, installation, training and support for
all of our software products.

      Organization and Historical Background

      H-Quotient, Inc. is a Virginia corporation, incorporated on May 12, 1999,
and is the successor by merger to Integrated Healthcare Systems, Inc. ("IHS")
which was a Delaware corporation organized in 1993 under the name of Travel
Technologies International, Inc. Our business and assets were owned and operated
by IHS until June 14, 1999, the effective date of the merger.

      Our principal products consist of DataQual(R), DataQuotient, the
I-Link(SM) interface system and the I-Link(SM) Enterprise software system, which
includes a central data repository. DataQual is a software system designed to
capture information on quality of care, risk management, costs and other aspects
of the management of patients in hospitals. DataQuotient is a software system
designed to perform many of the same care oversight functions as our DataQual
system in extended care facilities such as nursing homes. DataQual's and
DataQuotient's companion product, I-Link(SM), an interface engine, is designed
to interconnect and extract data from any and all healthcare facilities
information systems in the hospitals or extended care facilities. I-Link(SM)
Enterprise is a system of servers installed on the hospital's or other extended
care facility's local area network (LAN), which acts as


                                        3
<PAGE>

an intelligent data collection system, to extract, cleanse, group and map
hospital wide data. This data is then transmitted over an Internet based Virtual
Private Network to a Central Data Repository. LabQuotient will provide
immediate, appropriate tests for specific diagnoses. BloodQuotient will provide
comparative analyses to blood banks. We believe there is a great need in the
healthcare industry for products of this type, and we intend to exploit that
need.

      Industry Background

      Managed healthcare is having a significant impact on the $1 trillion
healthcare industry, and this impact will, in our view, increase in the coming
years. There is significant ongoing pressure to contain costs, which is changing
the structure of healthcare payment from traditional fee-for-service
reimbursements to contract care reimbursements such as "capitation". This is
creating a demand for the continuing analysis and reporting of clinical
treatments and their expected outcomes.

      To implement a program of payments based on medical outcomes, patients
must be tracked on a continuous basis, and data must be readily available in
flexible digital form. This permits monitoring of procedures used in patient
treatment and the costs and results of those procedures. While the last 10 years
have brought a dramatic improvement in medical technology, there has yet to
emerge a comprehensive electronic information system providing a single
accessible set of records of a patient's care to the hospital or extended care
facility. The result is inefficiency, lack of coordination and, at times, danger
to the patient.

      Information on patient treatments must be made accessible to doctors,
nurses and other medical decision-makers in a format that will help them to do
their jobs. This kind of clinical decision support requires the compilation and
integration of data from many sources within and outside the hospital. We
believe that this need will move healthcare providers to turn to more
sophisticated and comprehensive computer-based solutions to assist in the
medical management process.

      The increased demand for integrated information concerning patient care
has already made itself felt. The Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO"), the principal national accreditation
organization for hospitals, and other private and government accrediting
organizations require increased availability of information on such matters as
the verification of physician credentials, quality improvement, risk management,
access to medical records and infection control. JCAHO has coupled these
increasingly stringent quality-control standards with a demand for delivery of
information through electronic filings. To meet these demands, hospitals and
other healthcare facilities are being forced to devote far greater attention and
resources to their data gathering and reporting programs concerning the delivery
of quality care than they have in the past.

      There are approximately 20,000 extended care facilities and according to
the American Hospital Association, there are now approximately 5,200 hospitals
in the United States. These, along with doctors, clinics and insurance
companies, are our primary market focus.

      Our Business Strategy

      Our long-term strategy is to become a leading provider of software
information products and services in the healthcare industry by responding to
the increased demand for information and data on quality of care, risk
management, costs and other matters concerning the management of
hospital/extended care facility patient care by the designing, development,
selling and maintenance of software systems which monitor the care of patients.
This will empower the hospitals to contain costs, increase efficiency, improve
the quality of care and manage risk and management of patients. We intend to
market DataQual, DataQuotient and I-Link Systems and other derived systems to
hospitals, extended care facilities, ambulatory care centers, healthcare
networks, in-home care agencies, independent practice associations and other
healthcare clinics.


                                        4
<PAGE>

      Until recently we concentrated on the acute care hospital market, which
constitutes over 60% of the existing market for patient care information
delivery software. We have, most recently, begun to provide software systems to
the extended care market. Our strategy includes the following key elements:

      - Continue sales and installation of DataQual with the I-Link interface
engine and provide enhancements of those products through additional research
and development;

      - Begin sales and installations of DataQuotient with the I-Link interface
engine to extended care facilities;

      - Continue sales and installation of I-Link Enterprise and the Central
Data Repository and enhancements of this product through additional research and
development;

      - Commence marketing of LabQuotient and BloodQuotient;

      - Expanded marketing of these products through direct implementation
contracts and joint marketing agreements with additional hospital associations,
nursing home associations and others, as well as the expansion of our direct
sales efforts focused on individual and groups of hospitals and other types of
healthcare facilities;

      - Maintenance of our existing client base by providing support, software
upgrades and consulting services;

      - Expansion of our operations through strategic mergers and acquisitions.

      Additionally we continue: (1) the marketing of these products to existing
customers and future customers; (2) the installation of the products in newly
licensed facilities; and, (3) the maintenance and updating of systems already
installed.

      Products

      DataQual

      DataQual is a modular healthcare system that can supply many of a
hospital's quality and risk management and analytical and reporting needs. Built
around the DataQual Data Repository, a relational database that runs stand-alone
or on local area networks (LANs) at the hospital, the system can gather data
from all information systems in a hospital, via the I-Link interface engine.
DataQual then integrates this data with pertinent quality and risk management
data, performs sophisticated analysis of the data and provides reports thereon,
in either paper or electronic form.

      The software system runs on an included Windows NT server, allowing it to
economically meet the hospital quality improvement and risk management needs of
many different size institutions. Its modular technology allows smaller
hospitals to buy the DataQual components they need and add more as their needs
change or their budget allows. The system is an integrated, standard-based
technology, highly adaptable to changing demands.

      Additionally, the DataQual system can take the hospital's sophisticated
quality and risk information that has been privacy formatted and send it, using
I-Link Enterprise, over an Internet based Virtual Private Network to our Central
Data Repository located at their affiliated healthcare group, to a state-wide
healthcare association and/or to an insurance company for performance
measurement and statistical analysis purposes.

      The DataQual system is composed of several modular systems and
sub-systems:

      - DataQual - Quality Improvement System (QIS)
      - DataQual - Risk Management System (RMS)
      - I-Link interface engine

      DataQual - (QIS)


                                        5
<PAGE>

      DataQual QIS is a Windows-based, fully integrated software system, which
gathers and reports data on the quality of care delivered. The system automates
one of the most labor-intensive aspects of a hospital's operation: data
collection, assessment, tracking and reporting. DataQual QIS tracks the entire
quality improvement process from data collection, through data analysis and
problem identification to final problem resolution. The major modules available
with the DataQual QIS System are:

      Quality Improvement
      Staff Credentialing
      Utilization Management
      Infection Control

      Each module is priced and installable independently. This allows a
hospital to configure the system according to their initial quality improvement
requirements and then add other function system modules as they grow or as the
need arises. The system provides vital quality of care data to hospital
management and affiliated outside organizations for comparative analysis of
quality against costs in an era of great concern for the total quality of the
delivery of healthcare.

      DataQual - (RMS)

      Tracking, comparing, reporting and evaluating the factors related to a
liability risk occurrence, incident or claim within or across hospitals is the
function performed by the DataQual Risk Management System (RMS). RMS brings
integrated occurrence, incident and claims tracking from hospital or groups of
hospitals through insurance carriers. RMS integrates into one unified risk
management system:

      Risk management
      Staff credentialing
      Worker's compensation features
      Quality monitoring and adjustment
      A risk data repository

      By capturing and tracking occurrences and incidents prior to becoming
claims, a hospital and its insurance carrier can identify the steps needed to
improve the quality of care delivered and, therefore, reduce risk occurrences
and costs. This process improvement can have dramatic effects on the delivery of
healthcare and provide significant cost savings.

      After risk related data capture at the hospital(s), DataQual- RMS can feed
information, using I-Link Enterprise, via an Internet based Virtual Private
Network into a Central Data Repository focused on risk, where risk information
analysis and reporting is performed. This analysis can incorporate other
hospitals privatized data and be shared with the hospitals for the purpose of
additionally reducing the risks associated with delivering cost-effective
quality healthcare.

      The DataQual Risk Management System runs on an included Windows NT server
in a stand-alone or networked mode. It also is available with the I-Link
interface engine, which provides non-invasive data connectivity and data
interchange with any number of disparate hospital information systems available
in the hospital. With I-Link in place, the entire spectrum of staff, patient and
visitor information is made available for context analysis and reporting by the
Risk Management System. The RMS system thus provides a unified and cost
effective hospital Risk Management System.

      I-Link interface engine


                                        6
<PAGE>

      I-Link interface engine connects the DataQual quality and risk hospital
based data repositories to the disparate mainframe and client/server systems in
most hospitals, including the new automated patient records systems. This
recently redesigned interface engine is a non-invasive, intelligent software
module adhering to and complying with the healthcare industry standards for
electronic data interchange. I-Link is a sophisticated data capture tool, which
transfers data between disparate software applications, regardless of software
languages, operating systems or hardware platforms.

      We can customize I-Link to automatically query any hospital system for the
specific data required and then send that data to the hospital DataQual
repository. I-Link creates an interface without invading or altering host
applications and without the need to know an application's software source code,
file layouts or structures. I-Link is designed to fully address and resolve a
broad range of real-time interface requirements within a hospital environment.

      We believe that if combined, DataQual QMS, DataQual RMS, and I-Link
interface engine can meet the overall quality and risk data analysis and
reporting needs of hospitals and affiliated organizations.

      DataQuotient

      The DataQuotient system, like its sister system DataQual, is a modular
healthcare system that can supply many of an extended care facilities quality
and risk management and analytical and reporting needs. Built around a data
repository, a relational database that runs stand-alone or on local area
networks (LANs) at the facility, the system can gather data from any available
information systems, via the I-Link interface engine. DataQuotient then
integrates this data with pertinent quality and risk management data, performs
sophisticated analysis of the data and provides reports thereon, in either paper
or electronic form.

      The software system is a bundled software system providing complete
quality and risk management for the extended care market. The System contains a
substantial portion of the functionality of the DataQual modules; Quality and
Risk Management, Utilization, Staff Credentialing and Infection Control, which
were combined into a single, full-function extended care facility quality and
risk management system. DataQuotient runs on an included Windows NT server, and
the entire system can be leased on a monthly basis or purchased by the extended
care facility and is priced to the market. The system is an integrated,
standards- based technology, highly adaptable to changing demands of the
extended care marketplace.

      Additionally, the DataQuotient system can take facilities' quality and
risk information that has been privacy formatted and send it, using I-Link
Enterprise, over an Internet based Virtual Private Network to our Central Data
Repository located at their affiliated healthcare group, to an extended care
association and/or to an insurance company for performance measurement and
statistical analysis purposes.

      I-Link Enterprise

      The I-Link Enterprise system automates the collection of real time
hospital and extended care facilities clinical information, including DataQual
and DataQuotient quality and risk information, and sends it via an Internet
based Virtual Private Network to a Central Data Repository healthcare database.
This virtual network, which uses an expanded version of our I-Link interface
engine, changes manual service bureau healthcare systems, which only collect
hospital/extended care facility billing data, into on-line, source data
collection systems for groups of hospitals and extended care facilities,
hospital association members or insurance company client hospitals.

      In-patient and outpatient clinical and quality and risk data is collected,
corrected, encrypted and sent, using I-Link Enterprise, to a client Central Data
Repository. Access to the data is then provided to affiliated hospital and
extended care facilities to facilitate performance improvement and measurement
strategies. Prior information


                                        7
<PAGE>

collection methods utilized billing data, which are many months to years old.
This timely, very accurate tactical information, which has not yet been
transmuted into billing data, then becomes extremely useful strategic
information available for use by all of the affiliated hospitals and extended
care facilities.

      -I-Link Enterprise's- Central Data Repository

      I-Link Enterprise is used to first gather, cleanse and map data and then
populate remote Central Data Repositories with the hospital and extended care
facilities information via a private and secure Internet based Virtual Private
Network. The sophisticated, detailed and timely hospital/extended care facility
information is privacy formatted prior to sending to the Central Data
Repository. These repositories can be configured to contain information as
simple as liability risk incidents, up to one containing timely, complete
detailed hospital/extended care facility clinical, administrative and financial
information, including the DataQual and DataQuotient quality and risk data.
These I-Link Enterprise Central Data Repositories are used by hospital groups,
extended care groups, affiliated statewide hospital and extended care
organizations including hospital and extended care associations and insurance
carriers, for performance improvement measurement and statistical analysis
purposes.

      LabQuotient (information is proprietary; product is in development)

      This product will provide immediate, appropriate tests for specific
diagnoses.

      BloodQuotient (information is proprietary; product is in development)

      This product will provide comparative analyses to blood banks.

      Installation and Training

      Installation includes system design, file creation, system implementation,
training, consulting and system start-up. Our installation and training
procedures are designed to instruct the hospital and extended care customer in
data entry, report generation and retrieval. Our operations group finalizes the
testing and system acceptance by the customer. Customer training is conducted at
the customer site and includes up to a proportionate number of initial product
training days, depending on the system and modules purchased.

      Support and Maintenance

      We provide software maintenance, system design, consulting, installation,
training and support for all of our software products. Support teams, which
include quality improvement nurses, registered nurses, communications and
software technicians and program developers, assist customers throughout the
course of their relationship with us. We also provide toll free telephone and
on-site support. Software maintenance is provided to all of our customers. Along
with telephone and on-site support, software enhancements are included under
license contracts. Customer support personnel are available to answer questions
and solve operational difficulties. The customer support group works closely
with the field support personnel to solve customer problems on-site.

      Sales and Marketing

      We generate sales opportunities through referrals, direct association
marketing, industry specific seminars, and trade conventions. Our sales staff
calls on potential customers to demonstrate the system and attempts to bring
software sales to closure.

      To date, we have focused our marketing efforts on hospital and extended
care associations in the United States, liability insurance companies and
selected referral opportunities. We intend to continue our current


                                        8
<PAGE>

marketing efforts, however, no assurance can be given that we will be able to
generate sufficient funds from our operations to enable us to undertake such
activities on an expanded basis.

      Management believes, based upon information received from JCAHO, that
healthcare provider's efforts for continuous quality improvement and total
quality management increasingly will not be limited to hospitals. Given this
market trend, management intends, given adequate financial resources, to market
the DataQual System to not only the hospital market segment but also to
ambulatory care centers, healthcare networks, in-home care agencies, independent
practice associations and clinics. We have in the past, sponsored an annual
national user conference, which includes seminars and training for DataQual
System users. Management believes it will continue sponsoring these conferences.

      Customers

      We have installed the DataQual System in over 100 public and privately
owned hospitals and currently support approximately 25 hospitals that use our
systems. In addition, we have installed DataQual Systems in 29 states including
Puerto Rico. Our client base ranges in bed size from 30 to over 1,500 beds.

      We market our products and services to substantially all hospitals,
regardless of specialties, and all extended care facilities. We believe that the
DataQual and DataQuotient Systems, including the I-Link interface engine and the
I-Link Enterprise system, including the Central Data Repository, provides the
flexibility required for installation in most hospitals and extended care
facilities. We further believe that increasing portions of our sales of DataQual
are likely to be made in hospitals with 400 beds or less and to hospital
networks in both urban and rural areas. Our hospital customers include medical
teaching centers, government hospitals and large hospital groups. We also
believe, from our research, that the extended care marketplace is very
underserved in quality of care systems and will provide increasing portions of
our overall system sales.

      Contract Awards

      We have a contract to automate the collection of hospital risk incidents
and to then implement a centralized risk management and quality improvement
system for the member hospitals of the Alabama Hospital Association Trust
(AHAT).

      This project creates an Internet based Virtual Private Network risk
management and quality improvement healthcare data collection system for 85
statewide hospitals. This will create the first statewide, Internet-based
healthcare risk and quality data collection and management system of its kind.
With this system, we are transforming a statewide manual, risk data submission
process into a fully automated one, extending on into a system utilizing
DataQual and DataQuotient to provide full quality improvement and measurement.

      By providing AHAT and its member hospitals and extended care facilities
with Internet access to a statewide, central source of timely risk event and
quality improvement information, we are producing a significant increase in the
hospitals and extended care facilities querying, tracking, reporting and
improvement capabilities. This combination of I-Link Enterprise and the DataQual
and DataQuotient System gives the AHAT members extensive tools to improve the
delivery of healthcare throughout the State of Alabama.

      We also have signed a comprehensive marketing agreement with a state
hospital association. The first of its kind is with the Center for Health
Affairs, Inc., a wholly owned subsidiary of the New Jersey Hospital Association.
("NJHA") Under the agreement, the Princeton-based Center for Health Affairs will
market DataQual, Quality and Risk Management Systems; along with the new I-Link
interface engine to the 84 acute care members of the NJHA.


                                        9
<PAGE>

      DataQual will be the tactical, quality improvement engine providing NJHA's
hospital members with staff credentialing, utilization review, risk management
and infection disease control functions, which are so integral to a hospital's
quality management activities. The joint marketing plan is to extend the
DataQual System into a statewide total quality improvement program for the
members of NJHA's Center for Health Affairs.

      Competition

      The market for healthcare information systems is highly competitive. We
believe the principal competitive factors include the breadth and quality of
system and product offerings, access to proprietary data, the proprietary nature
of methodologies and technical resources, price and the effectiveness of
marketing and sales efforts.

      We compete with larger vendors such as McKesson HBOC, Inc., HCIA, Inc. and
Eclipsys, Inc., and with vendors whose sizes are similar to ours, such as
Medical Information Data Systems, Inc. ("MIDS"), Cantor and Associates and
LANDACORP. DataQual competitors include McKesson HBOC, Inc., offering a quality
and risk overview only competing system; and MIDS, Cantor and Associates and
LANDACORP offering similar systems, but non-modular systems. I-Link Enterprise
competitors include HCIA, Inc. offering batch data collection services to
hospital associations and state governments and; Eclipsys providing central data
repositories along with a DataQual competing product.

      Some of our existing and potential competitors have significantly greater
research, development, financial, technical, marketing and personnel resources
and more extensive business experience than we do. As the market for our
products and services further develops, additional competitors may enter the
market and competition may intensify. There can be no assurance that we will be
able to maintain the quality of our software information products and services
relative to those of our competitors or continue to develop and market our
systems and services effectively or to compete successfully in new markets. We
are not aware of any recent announcements made on behalf of any of our
competitors or recent entrants into the healthcare information systems market,
which, in either case, would have a material adverse impact on our operating
results or financial position.

      Software Research and Development

      We conduct research and development to enhance and expand our existing
product offerings. The open, modular design of the both the DataQual and
DataQuotient Systems allows us to develop additional features rapidly and to
modify the systems to accommodate customers in different environments. I-Link
Enterprise development utilizes similar modularity and object oriented
programming strategies.

      Research and development priorities are derived from a combination of
strategic marketing requirements and customers' requests for additional
capabilities. New modules and enhancements are coordinated to optimize the
system as a whole and to ensure complete integration of the various
applications. We plan to continue development of the DataQual and DataQuotient
Systems with the I-Link interface engine and I-Link Enterprise, with the Central
Data Repository by continuing to expand the system's oversight and reporting
capabilities and information monitoring capabilities. This research and
development effort is focused on both existing products and new product
offerings. Although most of our products have been developed internally, we
believe that we can respond to changing market requirements more quickly by
acquiring complementary products or by licensing them for distribution either as
elements of our developed products or under private labels.

      The healthcare software industry is subject to rapid technological
advances and changes in client requirements. Our future success will depend to a
substantial degree upon our ability to enhance our current products and develop
and introduce new products that keep pace with technological developments,
respond to evolving client requirements, and continue to achieve market
acceptance. (See "Certain Factors That May Affect


                                       10
<PAGE>

Future Results. . . . - Dependence on Limited Number of Products -- Need for New
Technology" and "Risks of Our Business - New and Uncertain Markets").

      Intellectual Property

      We regard the technology incorporated in our products as proprietary.
However, like many other software companies, we do not hold any patents and rely
upon a combination of copyright, trademark and trade secret laws and contractual
restrictions to protect our rights in the software products. To date, our policy
has been to pursue copyright protection for the software and related
documentation. We have copyright and trademark registration in the United States
for "DataQual" and "I-Link". In addition, our key employees and independent
contractors and distributors are required to sign nondisclosure and secrecy
agreements. Despite our efforts to protect these proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing unauthorized use of
our products is difficult, and we may not be able to determine whether or the
extent, if any to which piracy of our software products may exist.

      It may be possible for unauthorized third parties (including competitors)
to copy aspects of our products, whether or not in violation of our rights. We
believe that because of the complexity of the technical know-how accumulated and
possessed by us, our software management, key personnel, and the rapid pace of
technological change in the healthcare software industry, legal protection is a
less significant factor in our success than the knowledge, ability and
experience of our employees, the frequency of product enhancements and the
timeliness and quality of support services that we provide.

      DataQual, DataQuotient, I-Link and I-Link Enterprise generally are sold
pursuant to software license agreements, which, in most cases, grant customers a
nonexclusive, nontransferable license to use our products at a specified site
and contains terms and conditions prohibiting the unauthorized reproduction or
transfer of our products.

      Government Regulation

      Our products and services are not currently subject to government
regulation per se. However, the United States Food and Drug Administration
("FDA") has promulgated a draft policy for the regulation of certain computer
products as medical devices under the 1976 Medical Device Amendments to the
Federal Food, Drug and Cosmetic Act. To the extent that computer software is
considered a medical device under the policy, computer software manufacturers
could be required, depending on the product, to (i) register and list their
products with the FDA, (ii) notify the FDA of, and demonstrate to the FDA, the
product's substantial equivalence to other products on the market before
marketing such product, and/or (iii) obtain FDA approval of such product by
demonstrating safety and effectiveness before marketing the product. In
addition, such products would be subject to other statutory controls, including
those relating to good manufacturing practices and adverse experience reporting.
Although it is not possible to anticipate the final form of the FDA's policy
with regard to computer software, we expect that, whether or not the draft is
finalized, the FDA is likely to become increasingly active in the regulation of
computer software intended for use in clinical settings.

      The United States healthcare industry is subject to extensive government
regulation relating to such matters as facility expansion, capital expenditures
and reimbursement policies. There can be no assurance that reimbursement for our
systems and services will be or continue to be available or that future
reimbursement policies of Medicare, the Healthcare Maintenance Organizations
("HMO") and other third party payers will not adversely affect our ability to
sell our systems and services on a profitable basis. The effect of future
legislation and government regulation upon prospective clients may, in certain
circumstances, have a material adverse effect upon our business. Conversely,
changes in the regulatory environment have increased, and may continue to
increase, the needs of healthcare organizations for cost-effective information
management, thereby increasing the demand for our


                                       11
<PAGE>

products and services. In addition, comprehensive federal healthcare reform
legislation could, depending on the form in which such legislation may in the
future, be enacted, have a substantial impact on our business. We cannot predict
the impact, if any, of future legislation and government regulation on our
business.

      Product Warranty

      We provide a limited warranty for a period of 90 days that our software is
free from defects in material and workmanship and operates substantially in
accordance with functional specifications. We are not responsible for any defect
caused by the user having made any changes or misused or damaged its programs or
for damages in excess of amounts paid by the user to us. To date we have not
experienced any financial loss due to our warranties and, to our knowledge,
there have been no warranty claims filed or threatened. See "Certain Factors
That May Affect Future Results ... - Risk of Product Defects; Product Liability.

      Compliance with Environmental Laws

      We have had no need to spend monies on compliance with local, state or
federal environmental laws.

      Number of Employees

      As of March 31, 2001, we have 12 full and parttime time
employees/contractors:

      Department                                Number of Employees/Contractors
      ----------                                -------------------------------
      Sales and Marketing                                      3
      Operations and Product Development                       6
      Administration                                           3

      We have recruited seasoned technical administrators and engineers with
considerable experience in business and the software industry. Douglas A. Cohn,
our Chairman, President and Chief Executive Officer joined our Company in
November 1999. Vice President of Operations Laurence. T. Burden joined the
company in March 2002.

      Certain Factors That May Affect Future Results, Financial Condition And
The Market Price of Securities

      COMPANY IN INITIAL STAGES

      While we have been in existence for over seven years, we only entered the
production stage in 1999 for DataQual with and the interface engine and I-Link
Enterprise with its Central Data Reporting. To continue to grow and become
profitable: we must promptly complete the upgrade installations of DataQual in
the presently licensed locations while continually adding new licensees; through
the assistance of our marketing partners, sell and install new DataQual Systems;
complete, sell and install new DataQuotient Systems, complete the installation
of I-Link Enterprise for the Alabama Hospital Association.

      WE HAVE A LIMITED OPERATING HISTORY
      UPON WHICH YOU MAY EVALUATE US

      We began operations in 1993. As a result, any evaluation of our prospects
and us will be based on a limited operating history. In addition, our products
have been recently developed and marketed and our business strategy has been
revised. Consequently, our historical results of operations may not give you an
accurate indication of our future results of operation or prospects.


                                       12
<PAGE>

      WE HAVE AN ACCUMULATED DEFICIT

      We have incurred substantial losses since inception. As of December 31,
2001, we had an accumulated deficit of approximately $ 8.7 million. Before 2001,
we experienced significant losses in connection with the development and
marketing of our new products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."

      WE NEED TO GENERATE ENOUGH CASH FROM
      OPERATIONS TO FUND OUR GROWTH PLANS

      For the year ended December 31, 2000, we incurred a loss from operations
of $393,717 and made a profit of $1,203,228 after other income primarily from
gains on the sale of securities, and extraordinary income. For the year ended
December 31, 2001, we made a profit from operations and investments. To fund our
operations, we require a continuation of the 2000 operating trend or additional
financing or a substantial increase in the number of contract awards to generate
additional operating revenue. There can be no assurance, however, that our
liquidity goals will be reached in the immediate future, if ever.

      OUR INABILITY TO MANAGE GROWTH COULD HURT OUR BUSINESS

      To manage our growth, we must implement systems, and train and manage our
employees. We may not be able to implement these action items in a timely manner
or at all. Our inability to manage growth effectively could have a material
adverse effect on our business, operating results and financial condition. There
can be no assurance that we will achieve our planned expansion goals, acquire
new contract awards, develop and market new products, manage our growth
effectively, or operate and service our existing and new business profitably.

      WE FACE SUBSTANTIAL COMPETITION

      The market for healthcare information systems is fragmented but highly
competitive and such competition is expected to continue to increase. There are
no substantial barriers to entry in this market and we believe that the
Company's ability to compete depends upon many factors within and beyond its
control. We believe the principal competitive factors include the breadth and
quality of software systems and product offerings, access to proprietary data,
the proprietary nature of our methodologies and technical resources, pricing and
the effectiveness of marketing and sales efforts.

      DEPENDENCE ON KEY PERSONNEL.

      As a small company, we are highly dependent on certain key employees, in
particular on Douglas A. Cohn, our Chairman, President and Chief Executive
Officer. The loss of Mr. Cohn without a qualified replacement would have a
material adverse effect on our ability to conduct operations. We have not
purchased a "key man" insurance policy on him. We believe that our success will
depend on continued employment of our management team. If one or more members of
our executive management team were unable or unwilling to continue in their
present positions, our business, financial condition and operating results could
me materially adversely affected if we could not find qualified replacements.
Our success also depends on having trained technical engineers. We will need to
continue to hire additional personnel as our business grows. Competition for
qualified technical personnel is strong everywhere. Our business, financial
condition and operating results will be materially adversely affected if we
cannot hire and retain suitable technical personnel.

      WE HAVE NOT PAID, AND WILL NOT PAY, CASH DIVIDENDS


                                       13
<PAGE>

      We have not paid cash dividends on our common stock and have no present
intention of paying cash dividends in the foreseeable future. It is the present
policy of the Board of Directors to retain all earnings to reinvest in the
Company. See "Dividends."

      PROVISIONS OF OUR ARTICLES OF INCORPORATION, BYLAWS, AND VIRGINIA LAW
      COULD MAKE ACQUISITION OF US DIFFICULT

      The Company is a Virginia corporation. Anti-takeover provisions of
Virginia law could make it more difficult for a third party to acquire control
of us, even if such change in control would be beneficial to shareholders. In
addition, our articles of incorporation provide that our Board of Directors may
issue preferred stock without shareholder approval. The issuance of preferred
stock could make it more difficult for a third-party to acquire us, even if
doing so would be beneficial for our shareholders.

      RISKS OF OUR BUSINESS DEPENDENCE ON LIMITED NUMBER PRODUCTS--NEED FOR NEW
      TECHNOLOGY

      Our business is almost exclusively dependent at this time on three
products, the DataQual System, with its I-Link interface engine and I-Link
Enterprise, with its Central Data Repository, and DataQuotient. In evaluating
the DataQual, I- Link Enterprise and DataQuotient systems, investors and
shareholders should also be aware that we have a registered copyright on the
DataQual System and a registered service market on I-Link. LabQuotient and
BloodQuotient are in development.

      As advances occur generally in the fields of networking of computers and
integration of database information, we will need to keep pace by continuing to
enhance DataQual and its I-Link interface engine and I-Link Enterprise with its
Central Data Repository to accommodate these developments. There can be no
assurance that we will succeed in doing so.

      NEW AND UNCERTAIN MARKETS

      The markets for healthcare software and services are relatively new, and
it is difficult to predict the rate at which these markets will grow or whether
new or increased competition will result in market saturation. If demand for
healthcare software products fails to grow, or grows more slowly than
anticipated, or if the market becomes saturated with competitors, our operations
will be materially and adversely affected.

      INCREASING COMPETITION

      There are limited barriers to entry in the healthcare software industry in
which we operate. This market is extremely competitive and can be significantly
influenced by the product developments and pricing decisions of its largest
participants. We have at least three active competitors that are now selling
patient information management systems similar to DataQual and competitors
selling statewide patient hospital billing information systems and services
similar to I-Link Enterprise. Others may appear in the future as the advantages
of this kind of healthcare patient information database aggregation and
integration and reporting system become apparent to hospitals and others in the
healthcare management field. Many of our potential competitors are large
software development and marketing companies who are fully capable of developing
new software products that would offer substantial competition to DataQual,
DataQuotient and I-Link Enterprise. There can, therefore, be no assurance that
we will have the financial resources, technical expertise marketing and support
capabilities to continue to compete successfully in this market.

      GOVERNMENT REGULATION


                                       14
<PAGE>

      The confidentiality of patient records and the circumstances under which
these records may be released are subject to substantial governmental regulation
governing both the disclosure and use of this information. While we believe that
the DataQual, DataQuotient and I-Link Enterprise Systems comply with existing
rules in substantially all jurisdictions, additional, more restrictive rules
governing the dissemination of medical record information may require
substantial changes in the systems in the future and result in substantial costs
to us. In addition, the U.S. Food and Drug Administration (the "FDA") have
promulgated a draft policy for the regulation of certain computer products as
medical devices. It is not possible at this time to anticipate the final form of
the FDA's policy with regard to computer software, but we expect that, whether
or not this draft policy is finalized, the FDA is likely to become increasingly
active in regulating software intended for use in the healthcare industry. Our
products could become subject to extensive regulation by the FDA.

      RISK OF PRODUCT DEFECTS; PRODUCT LIABILITY

      Software products as complex as those offered by us might contain
undetected errors or failures when first introduced or when new versions are
released. Although we have not experienced material adverse effects resulting
from any errors to date, there can be no assurance that, despite testing by us
and by current and potential customers, errors will not be found in new versions
of our products after commencement of shipments, resulting in loss of or delay
in market acceptance, which could have a material adverse effect upon our
business, operating results and financial condition. Although we do not maintain
an "errors and omissions" insurance policy, our license agreements with our
customers typically contain limited warranty provisions designed to limit our
exposure to potential product liability claims. While we have not experienced
product liability claims to date, the license and maintenance of our software
products may entail the risk of successful claims. A successful product
liability claim brought against the Company could have a material adverse effect
on our business, operating results and financial condition.

      EXTERNAL FACTORS COULD AFFECT OUR COMMON STOCK TRADING PRICE

      Fluctuations in the trading price of our common stock and purchase
warrants may result from a number of factors, some of which are beyond our
control, including: general economic and stock market conditions; actual or
anticipated fluctuations in our operating results; changes in expectations as to
our future financial performance or changes in financial estimates by securities
analysts; earnings and other announcements by, and changes in market valuations
of other comparable companies and trading of our common stock and purchase
warrants.

      OUR STOCK PRICE MAY BE EXTREMELY VOLATILE AND SHAREHOLDERS MAY NOT BE ABLE
      TO RESELL THEIR SHARES AT A PROFITABLE PRICE

      In addition, the stock market in general has experienced extreme
volatility that often has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely
affect the trading price of our common stock and purchase warrants, regardless
of our actual operating performance.

      ITEM 2. Description of Properties

      At present, we lease a 2,389 square feet of office space, located at 8150
Leesburg Pike, Suite 503, Vienna, Virginia 22182. These premises should suffice
for our administrative offices for the foreseeable future.

      ITEM 3. Legal Proceedings


                                       15
<PAGE>

      Suits arising in the ordinary course of business are pending against us.
We believe the ultimate outcome of these actions will not result in a material
adverse effect on our consolidated financial position, results of operations or
cash flows. See Note 8 to the Financial Statements for discussion of litigation.

      ITEM 4. Submission of Matter to a Vote of Security Holders

      NONE

      PART II

      ITEM 5. Market for Common Equity and Related Stockholder Matters

      Our Common Stock is traded on the NASDAQ Bulletin Board.

      Our Common Stock was listed on the NASDAQ Bulletin Board on approximately
April 16 of 1996.

      Our Common Stock is approved for trading on the NASDAQ Over the Counter
Bulletin Board, trading under the stock symbol "HQNT". The chart below breaks
down the high bid and the low bid prices for each of the last 9 quarters (as
reported by NASDAQ Trading & Market Services) which quotations reflect
inter-dealer prices, without retail mark-up, mark- down or commission, and may
not reflect actual transactions.

      During 1999, 2000 and the first quarter of 2002, our high and low prices
were is follows:

                                                     HIGH              LOW
                                                     ----              ----
         2000

         1/st/ Quarter                               7.06              1.47
         2/nd/ Quarter                               5.78              2.66
         3/rd/ Quarter                               5.59              1.50
         4/th/ Quarter                               1.78               .59

         2001

         1/st/ Quarter                               1.88               .38
         2/nd/ Quarter                                .62               .28
         3/rd/ Quarter                                .36               .19
         4/th/ Quarter                                .42               .16

         2002

         1/st/ Quarter                                .39               .19

      On May 13, 2002, the closing prices of our Common Stock were $0.68 bid and
$0.69 asked, as quoted on the NASDAQ OTC Bulletin Board. The Articles of
Incorporation authorize the issuance of 100,000,000 shares consisting of
90,000,000 shares of Common stock and 10,000,000 shares of Series Preferred
Stock. The Common Stock has a par value of $0.0001 per share and the series
Preferred Stock shall have such par value, as the Board of Directors shall
determine. No Preferred Stock shares have been issued. At the time of the
merger, effective June 14, 1999, the certificate of incorporation of the
predecessor corporation, Integrated Healthcare Systems, Inc., formed in March of
1993 authorized the issuance of 50,000,000 shares of common stock having a par
value of $0.0001 per


                                       16
<PAGE>

share. There are approximately 1,573 holders of record of our Common Stock as of
May 13, 2001, which figure does not take into consideration those shareholders
whose shares are held in the name of broker-dealers.

      Common Stock Issued in 2001

      In February 2001, warrant certificates for the purchase of 1,089,873
shares of our common stock were exercised at a price of $.48 per share in the
aggregate of $525,000. Payment was made by delivery to us of a promissory note
in the amount of $525,000 with an interest rate of 6% per annum. The note
matured on December 31, 2001. The note was reduced in 2002 by the exercise of an
option by the Company to purchase 700,000 shares of H-Quotient, Inc., common
stock at a price of $.40 per share. Demand for the balance has been made. In an
unrelated transaction, we issued 183,800 shares of our common stock, which are
restricted under Rule 144 of the Securities Act of 1933, at $0.22122 per share
in exchange for $39,000 and 1,500,000 shares of Veridien Corporation common
stock.

      On March 29, 2001, the Company filed Form S-8 in which 395,000 shares
owned by a former officer and director were registered under the Securities Act
of 1933, and is subject to a selling restriction for shares sold in the open
market through registered broker-dealers whereby no more than five percent of
the previous day's trading volume or 5,000 shares of the registered common stock
may be sold in open market transactions. The Company issued 228,170 shares of
common stock that are subject to restrictions under Rule 144 of the Securities
Act of 1933 at $.10 per share in exchange for $40,817 in cash and services.

      From April through June 2001, we issued 2,305,862 shares of our common
stock, all of which is restricted under Rule 144 of the Securities Act of 1933
as follows: 350,000 shares at $.205 per share to various individuals for
services valued at $71,750; 500,000 shares at $.327 per share in exchange for
$150,000 of SGD Commercial trade credits and 90,000 shares of ROSS Corporation
common stock; 1,110,000 shares to the holder of options for 1,110,000 shares of
our common stock at $.35 in exchange for $388,500 of SGD Commercial trade
credits; 63,600 shares of our common stock in exchange for 509,188 shares of
Veridien Corp. common stock at $.20 per share; 50,000 shares of our common stock
at $.205 per share as payment of $10,250 in a loan discount expense for a loan
of $100,0000 from July 1, 2000, to May 4, 2001; 22,162 shares of our common
stock at $1.50 per share as payment of a warrant exercise of $33,253.12; 100,000
shares of our common stock at $.10 per share in exchange for $10,000 of
services; 30,000 shares of our common stock at $.50 per share as repayment of a
$15,000 short term advance; 80,000 shares of our common stock at $.40 per share
in exchange for cash of $32,000.

      From July through September 2001, we issued 573,619 shares of our common
stock, all of which is restricted under Rule 144 of the Securities Act of 1933
as follows: 47,619 shares of our common stock at $0.105 per share to an
individual investor in exchange for cash of $5,000; 150,000 shares of our common
at $.10 per share in exchange for interest credit of $15,000; 41,000 shares of
our common stock in exchange for 71,400 shares of ROSS Corporation common stock,
which was subsequently sold; and 335,000 of our common stock at $0.15 per share
in exchange for public relations services. These 335,000 shares were issued in
23 certificates with additional restrictions that call for the share
certificates to be held in an attorney escrow account and released to the
shareholder at a rate of one certificate per month.

      On August 20, 2001, we sold 161,500 shares that we held in ROSS
Corporation securities in exchange for $23,475 in cash. These shares, which were
sold at cost constituted our entire holding in ROSS. As a result of the
transaction we no longer own any shares of ROSS Corporation.

      From October through December 2001, we issued 1,558,850 shares of our
common stock at $.10 per share, all of which is restricted under Rule 144 of the
Securities Act of 1933. These included 275,000 shares for securities
transactions, 35,000 shares to a consultant, 248,850 shares to a director,
200,000 for prepaid legal


                                       17
<PAGE>

expenses, 300,000 shares for services, and 500,000 shares as a reserve for
services or acquisitions. The Company sold 15,000 shares of Internet Guide,
Inc., common stock at $13.00 per share to a related party for $195,000 in cash.

      In 2001, the Company issued 2,224,629 shares of its common stock to
shareholders of record as of July 31, 2000 and August 31, 2000 respectively, who
submitted proof of ownership of the Company's common stock as of those dates in
accordance with the terms and conditions announced on July 12, 2000 and July 31,
2000 in a stock distribution program.

      Warrants and Options Issued in 2001

      In November 2001, the Company issued 200,000 warrants to purchase 200,000
shares of our common stock at $.25 per share for a period of five months.

      Dividend

      We have not paid any cash dividends on our Common Stock. Our Board of
Directors has no present intention of declaring any cash dividends, as we expect
to re-invest all profits in the business for additional working capital for
continuity and growth. Our Board of Directors, upon considering the conditions
then existing, including our earnings, financial condition, capital
requirements, and other factors will determine the declaration and payment of
dividends in the future.

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

      The following "Discussion and Analysis" provides information which
management believes is relevant to an assessment and understanding of the of the
Company's consolidated results of operation and financial condition for the
years ended December 31, 2001 and 2000. The discussion should be read in
connection with the audited consolidated financial statements of the Company and
accompanying notes.

      Material Changes in Results of Operations Overview

      H-Quotient, Inc. is a Virginia corporation, incorporated on May 20, 1999,
and is the successor by merger to Integrated Healthcare Systems, Inc. ("IHS")
which was a Delaware corporation organized in 1993 under the name of Travel
Technologies International, Inc. Our business, which we acquired from IHS
through the merger, is the designing, development, selling and maintenance of
computer software systems for the management of patient care in hospitals and
extended care facilities.

      Our business and assets were owned and operated by IHS until June 14,
1999, the effective date of a downstream merger between the companies. The
7,526,284 shares of outstanding common stock (par value $.0001) of Integrated
Healthcare Systems, Inc., was exchanged for 7,526,284 shares of H Quotient,
Inc., common stock, (par value $.0001).

      Year Ended December 31, 2001, Compared With the Year Ended December 31,
2000

      Revenues for the year ended December 31, 2001, were $1,122,819 compared to
$1,140,331 for the year ended December 31, 2000, not including the $791,316 sale
in 2000 of marketing rights for DataQuotient.

      Expenses for the year ended December 31, 2001, decreased to $133,222 from
$2,325,367 for the year ended December 31, 2000. The decrease resulted from the
elimination of $619,474 in expenses.


                                       18
<PAGE>

      Interest expense for the year ended December 31, 2001, was $45,957, as
compared to $38,706 for the year ended December 31, 2000. The increase in
interest expense resulted from a note payable in the amount of $100,000.

      Interest income for the year ended December 31, 2001, was $0 as compared
to $28,176 for the year ended December 31, 2000.

      Other income for the year ended December 31, 2001, was $61,893 compared to
$1,505,011for the year ended December 31, 2000. The difference resulted from the
sale of securities in 2000.

      Extraordinary losses for the year ended December 31, 2001, were $340,000
as compared to a gain of $91,934 for the year ended December 31, 2000. The
difference resulted from a $340,000 reserve for one account though management
expects to collect it.

      Net Income exclusive of extraordinary items for the year ended December
31, 2001, and the year ended December 31, 2000, were $1,051,489 and $1,111,294,
respectively, and with extraordinary items $711,489 and $1,203,228,
respectively.

      Liquidity and Capital Resources

      We have funded our operations and working capital needs through profits
and a series of private equity and debt offerings, the exercise of investor
warrants, investments and payments received from customers.

      Working capital at December 31, 2001, was $5,197,013 as compared to
$3,696,428 at December 31, 2000, an improvement of $1,500,585.

      Cash and cash equivalents at December 31, 2001, were $6,491 compared to
$151,462, on December 31, 2000. This resulted from the timing of receivable
collections. Receivables at December 31, 201, were $469,385 as compared to
$164,912 at December 31, 2000.

      During the year ended December 31, 2001, we generated $943,012 from
investing activities as compared to using $322,445 for the year ended December
31, 2000. The increase was due to the proceeds from a note receivable of
$747,000 and the sale of equity securities of $216,012.

      During the year ended December 31, 2001, we used net cash of $137,592 from
financing activities as compared to generating $311,249 for the year ended
December 31, 2000. This was due to $487,592 in proceeds from the sale of common
stock less $350,000 in the repayment of notes payable.

      Plan of Operation and Financial Condition

      Our sales of Dataqual and related service contracts are billed net due
upon receipt. Payment terms on I-Link Enterprise contracts are defined in the
contract and will vary.

      We had, at December 31, 2001, working capital of $5,197,013. We believe
that cash generated from operations will be totally sufficient to fund our
current operations. We anticipate that it will be likely that we will continue
to raise additional funds through the exercise of outstanding warrants.
Management believes that our current operational plans for the next 12 months
will not be curtailed or delayed because of the lack of sufficient financing. If
additional financing is required, there can be no assurances that we will be
able to obtain such additional financing, on terms acceptable to us and at the
times required by us, or at all.


                                       19
<PAGE>

      The major capital expenditures we may incur are for computers and related
local area network hardware and software and travel for sales representatives
and key support and installation personnel. We also intend to invest in
personnel and equipment to expand and enhance sales, software development and
customer support, as well as associated office support staff.

      We believe that our current staffing plan, including our expansion
strategy, cost structure, and current operating plans will allow us an
opportunity to compete effectively as a supplier of information management
software to the hospital market and possibly attain profitability in future
periods.

      Loss Carryforward

      For federal income tax purposes, we have net operating loss carryforwards
of approximately $6,100,000 as of December 31, 2001. This carryforward expires
between the years 2009 and 2020. The use of our net operating loss carryforwards
to offset taxable income, if achieved, may be subject to specified annual
limitations.

      ITEM 7. Financial Statements

      The financial statements of the Company appear at the end of this report
beginning with the Index to Financial Statements on Page  1.

      PART III

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

      Directors & Officers

      The Following table set forth the names, ages and positions with the
Company of each of the directors and officers of the Company.

      Name                       Age       Positions                     Since
      ----                       ---       ---------                     -----
      Douglas A. Cohn            56        Chairman, Director and        1999
                                           Chief Executive Officer
                                           and President

      J. Brian Copley            55        Secretary and Director        2000

      Jack Anderson              78        Treasurer and Director        2000

      Laurence T. Burden         62        Vice President                2002

      All executive officers are elected by the Board of Directors and hold
office until the next Annual Meeting of Shareholders and until their successors
are elected and qualify.

      The following is information on the business experience of each director
and officer.

      Douglas A. Cohn


                                       20
<PAGE>

      Douglas A. Cohn has been Chairman of the Board and Chief Executive Officer
of this Company since October, 1999. He is also Founder of Internet Guide, Inc.,
and it's Chairman of the Board of Directors, President, Chief Executive Officer
and Publisher. Mr. Cohn is Jack Anderson's writing partner in the nationally
syndicated column Jack Anderson & Douglas Cohn's Washington Merry-Go-Round. He
has been in the publishing business since 1985. He is the author of "Jackson's
Valley Campaign with Maps from West Point Atlas of American Wars". Mr. Cohn, a
1968 graduate of the U.S. Military Academy at West Point, N.Y., volunteered for
service in Vietnam, where he was wounded. Retired from the service as a result
of those wounds, he was awarded the Silver Star (twice), the Purple Heart, the
Vietnamese Cross of Gallantry and other medals. He is a syndicated writer and
speech writer and has appeared numerous times on national television and radio
shows.

      Jack Anderson

      Jack Anderson has been a director of the Company since April 2000 and
Treasurer since October 2000. Mr. Anderson won a Pulitzer Prize in 1973. "When
Ronald Reagan sought to discover the most trusted and most widely-read
journalist in the United States, his private pollster, Richard Wirthlin, ran a
national survey and concluded that Jack Anderson was that writer." - Advertising
Age, Dec. 6, 1982. Mr. Anderson's fledgling newspaper career was interrupted by
World War II, during which he served with Chinese guerrillas and the Merchant
Marine. Following the war, he joined the Washington, D.C., staff of Drew
Pearson, the influential radio broadcaster and columnist. Eventually, he took
over the column (which he and Douglas Cohn continue to this day)and succeeded in
exposing the Mafia, Sen. Joseph McCarthy, misdeeds of President Richard Nixon
(Pulitzer Prize), the ITT- Dita Beard Scandal and CIA plots. He founded the Utah
State University School of the Future, and with industrialist J. Peter Grace (of
Grace Commission fame), he formed Citizens Against Government Waste. He appeared
on Good Morning America for nine years. Currently, he is the Washington editor
of Parade Magazine, and continues his syndicated column.

      J. Brian Copley

      Dr. J. Brian Copley has been a director since April 2000 and secretary of
the Company since October 2000. He is the vice chairman, Dept. of Medicine, and
chief of Nephrology at the Ochsner Clinic in New Orleans, La. He was employed at
the Ochsner Clinic from 1990 to 2001 when he became chief of Nephrology at the
Cleveland Clinic in Westin, Fla. He is a 1968 graduate of the U.S. Military
Academy at West Point, N.Y., and a 1976 honors graduate of the University of
Washington School of Medicine at Seattle, Wash. Dr. Copley was awarded the
Bronze Star, Vietnamese Cross of Gallantry and other medals for service in
Vietnam. He is a retired colonel. Dr. Copley is the author or co-author of more
than 50 articles and studies. He is a much sought-after speaker on the lecture
circuit.

      Laurence T. Burden

      With degrees in mathematics and computer science, Mr. Burden's
distinguished career includes:

      - Corporate VP, Chief Information Officer (CIO), and member of the
turnaround team that helped make possible the $2.3 billion sale of Firestone to
Bridgestone;

      - As Senior VP and CIO of Freddie Mac, he redesigned the company's
computer systems and financial engineering systems, both for internal use and
the use of over one thousand banks and mortgage lenders, providing the basis for
hundreds of millions in revenues and savings;

      - As Consultant for IT software and telecommunications services to the
healthcare and financial services industries, he developed foundational large
new clients with individual sales of up to $6 million;

      - Past president of Society for Information Management, the international
professional organization of Fortune 1,000 chief technology officers.

      Section 16(a) Filing Compliance


                                       21
<PAGE>

      Section 16(a) of the Securities Exchange Act of 1934 requires officers and
directors of the Company and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in their ownership on Form 3, 4, and 5 with the Securities and
Exchange Commission, and forward copies of such filings to the Company.

      ITEM 10. Executive Compensation.

      The following table sets forth information concerning the compensation
paid during the Company's fiscal years ended December 31, 2000, 1999, and 1998
to the Company's Chief Executive Officer and all other executive officers whose
base salaries during the year were in excess of $100,000 (collectively, "Named
Executive Officers").

      Summary Compensation Table

<TABLE>
<CAPTION>
      Name and Principal Position        Year     Annual Compensation        Long-Term Compensation
                                                                             Shares Underlying Warrants
<S>                                      <C>               <C>                       <C>
      Douglas A. Cohn
      Chairman, CEO and President        2001              -0-                            -0-
                                         2000              -0-                       750,000
                                         1999              -0-                            -0-
</TABLE>

      No warrant or stock options were granted to officers during 2001.

      Employment Agreements

      None of the Company's executive officers have existing employment
agreements. Any previous employment agreements between the Company and its
executive officers have either lapsed or have been rescinded, and no new
agreements have been executed.

      ITEM 11. Security Ownership of Certain Beneficial Owners and Management

      The following table sets forth, as of December 31, 2001, certain
information with respect to the beneficial ownership of shares of Common Stock
of: (i) each person who is known to the Company to be the beneficial owner of
more than five percent of the Company's Common Stock, (ii) each Director of the
Company and Named Executive Officer, and (iii) all directors and executive
officers of the Company as a group. As of March 31, 2001, the Company had
21,019,311 shares of Common Stock outstanding

<TABLE>
<CAPTION>
      Beneficially Percent Name and Address of Beneficial Owner Owned (1) of Class
      ----------------------------------------------------------------------------
<S>                                                    <C>             <C>
      Internet Guide Inc. (1) ....................     5,427,825       19.5%
      Douglas A. Cohn (2) ........................     1,050,682        3.8%
      Jack Anderson ..............................       100,000        0.3%
      J. Brian Copley ............................       628,800        2.2%
      All Directors and Officers as a group ......     1,779,482        6.4%
      Total ......................................     5,935,639       21.4%
</TABLE>


                                       22
<PAGE>

Shares of the Company's Common Stock which any person or entity set forth in
this table has a right to acquire, pursuant to the exercise of options or
warrants, are deemed to be outstanding for the purpose of computing the
percentage ownership of such person or entity, but are not deemed outstanding
for the purpose of computing the percentage ownership of any other person or
entity. (1) Number of shares Beneficially Owned includes: 356,397 shares
issuable upon exercise of warrants exercisable until November 21, 2002, at a
price of $1.00, 250,000 shares issuable upon exercise of warrants exercisable
until August 31, 2002, at a price of $1.00 and 250,000 shares issuable upon
exercise of warrants exercisable until August 31, 2002, at a price of $2.00 all
held by such entity. This does not include warrants to purchase 750,000 shares
of common stock owned by Douglas A. Cohn, the Chairman and Chief Executive
Officer of the Company and of Internet Guide, Inc., in his individual capacity.
Mr. Cohn disclaims beneficial ownership of the shares of the Company common
stock and warrants held by Internet Guide, Inc., except to the extent of his
pecuniary interest therein. (2) Number of shares Beneficially Owned includes
750,000 shares issuable upon exercise of warrants exercisable until November 30,
2002, at a price of $1.00 each held by Mr. Cohn. This does not include warrants
to purchase 856,397 shares of common stock owned by Internet Guide, Inc. and Mr.
Cohn disclaims beneficial ownership thereof except to the extent of his
pecuniary interest therein, if any.

ITEM 12. Certain Relationships and Related Transactions Many of the transactions
during the last two years between the Company and any of its officers,
directors, principal stockholders or their affiliates are the issuance of common
stock to certain of the Company's officers described in the Registration
Statement on Form 10-SB incorporated by reference at "Recent Sales of
Unregistered Securities", described at page 54, the issuance of warrants to
certain of the Company's officers, described in "Executive Compensation" at page
45, the issuance of warrants to a certain director of the Company described in
"Executive Compensation" at page thereof, the issuance of warrants to Aesop
Financial Corporation, described in "Description of the Company's Securities" at
and the lease of computer equipment from Aesop, described in "Description of
Properties" at page 41 thereof. Aesop Financial Corporation is a wholly owned
subsidiary of Appleby Partners, Ltd., which is a principal stockholder as set
forth in "Principal Stockholders" at page 42. On February 8, 2001, a former
officer and director exercised 700,000 warrants in exchange for a promissory
note in the amount of $525,000. The warrants held anti-dilution rights and were
eligible to receive stock distributions from the July 31, 2000 and August 31,
2000 Stock Distribution programs.

ITEM 13. Exhibits and Reports on Form 8-K

      a)    The following financial statements are filed as part of this report:
            Financial Statements.

            1)    Balance Sheet as of December 31, 2000 and 1999.
            2)    Statements of Operations for the years ended December 31, 2000
                  and 1999.
            3)    Statements of Cash Flows for the years ended December 31, 2000
                  and 1999.
            4)    Statements of Stockholders' Equity (deficit) for the years
                  ended December 31, 2000 and 1999.
            5)    Notes to Financial Statements.
            6)    Independent Accountant's Report.

      b)    Exhibits:

      Exhibit
      Number                Description
      ------                -----------

      3.1     Copy of the Certificate of Incorporation of the predecessor
              corporation under the name of Travel Technologies International,
              Inc. (1)
      3.2     Copy of Restated Certificate of Incorporation of the predecessor
              corporation, which among other things changes its name to Traverse
              Technologies, Inc. (1)
      3.3     Copy of Amendment to the Restated Certificate of Incorporation,
              changing the name of the predecessor corporation to Integrated
              Healthcare Systems, Inc. (1)


                                       23
<PAGE>

      3.4     Copy of the Certificate of Renewal of Integrated Healthcare
              Systems, Inc. as filed with the State of Delaware (2)
      3.5     Copy of the By-Laws of the predecessor corporation (1)
      3.6     Copy of the Certificate of Incorporation of IHS of Virginia, Inc.
              a wholly owned subsidiary. (2)
      3.7     Copy of the Certificate of Renewal of the IHS of Virginia, Inc as
              filed with the State of Delaware (2)
      3.8     Copy of the By-Laws of IHS of Virginia, Inc. (2)
      3.9     Copy of the Articles of Incorporation our Company as filed with
              the State of Virginia on May 20, 1999 (2)
      3.10    Plan of Merger between IHS and the Company effective June 14,
              1999. (2)
      3.11    Articles of Merger effective June 14, 1999 as filed with the State
              of Virginia (2)
      3.13    Copy of the By-Laws of the Company (2)
      3.12    Agreement of Merger as filed with State of Delaware (2)
      23.2    Certified copy of the Certificate of Incorporation of The DataQual
              Group, Inc. a wholly owned subsidiary 920
      3.15    Copy of the By-Laws of the DataQual Group, Inc. (2)
      4.1     Form of Certificate evidencing shares of Common Stock of the
              Company. (2)
      4.6     Form of 1995 Redeemable Bridge Warrants (2)
      4.7     Form of Warrant Certificates issued to Investors, Placement Agents
              and Investment Banker in 1997 and 1998 (2)
      4.8     Form of Warrant Certificates issued to management executives, and
              consultants (2)
      4.9     Form of Class A Redeemable Common Stock Purchase Certificate (2)
      4.10    Warrant Agreement between the Company and the Warrant Agent
              covering the Class A Common Stock Warrants (2)
      10.1    Form of Software License and Support Agreement (2)
      10.2    Form of Licensed Software Agreement (2)
      10.3    Form of Software Maintenance Agreement (2)
      10.4    Form of DataQual(R) for Windows and I-Link(sm) Upgrade Addendum
              (2)
      21.1    Subsidiaries of Registrant (2)
      23.2    Consent of Kaufman Davis PC for Annual Statement, December 31,
              1997 and 1998(2)
      23.3    Consent of Kaufman Davis, PC for Annual Statement, December 31,
              1999
      23.4    Consent of Aronson, Fetridge & Weigle, PC for Annual Statement,
              December 31, 2000 and 2001

              (1)   Incorporated by reference to the Company's Regulation Form
                    1-A Offering Statement of Integrated Healthcare Systems,
                    Inc. (the predecessor corporation) filed on Form 1-A under
                    the Securities Act of 1933 as emended (file No. 24-3450).
              (2)   Incorporated by reference to the Company's Registration
                    Statement on Form 10-SB (File No. 001-15179).
              (3)   Incorporated by reference to our Quarterly Report on Form
                    10-QSB, for the fiscal quarter ended June 30, 2000.
              (4)   Incorporate by reference to our Quarterly Report on Form
                    10-QSB for the fiscal quarter ended September 30, 2000.


                                       24
<PAGE>

                        H-Quotient, Inc. And Subsidiaries

                                Table of Contents

                                                                            Page

Independent Auditor's Report                                                 F-2

Financial Statements

   Consolidated Balance Sheets                                         F-4 - F-5

   Consolidated Statements of Operations                               F-6 - F-7

   Consolidated Statements of Stockholders' Equity (Deficit)                 F-8

   Consolidated Statements of Cash Flows                              F-9 - F-10

   Notes to Consolidated Financial Statements                        F-11 - F-25


                                      F-2
<PAGE>

      Independent Auditor's Report

      To the Board of Directors
      H-Quotient, Inc.
      Vienna, Virginia

      We have audited the accompanying Consolidated Balance Sheet of H-Quotient,
Inc., and Subsidiaries (the "Company") as of December 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 financial statements based on our audit

      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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

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

      ARONSON & COMPANY
      CERTIFIED PUBLIC ACCOUNTANTS

      Rockville, Maryland
      May 17, 2002


                                      F-2
<PAGE>

<TABLE>
<CAPTION>
December 31,                                                                              2001          2000
===============================================================================================================
<S>                                                                                     <C>          <C>
Assets

Current assets
   Cash                                                                                 $    6,491   $  151,462
   Investment in equity securities                                                       2,604,499    2,598,637
   Accounts receivable, less allowance for doubtful accounts of $18,790,
       in 2001 and 2000                                                                    469,385      164,912
   Due from affiliates                                                                          --       24,236
   Costs and estimated earnings in excess of billings on uncompleted contracts                  --      518,977
   Notes receivable                                                                             --      747,000
   Prepaid expenses                                                                      2,672,188    1,732,694
---------------------------------------------------------------------------------------------------------------

Total current assets                                                                     5,752,563    5,937,918

Property and equipment, net                                                                134,193      206,358

Capitalized software, net                                                                  200,790      316,105

Deposits                                                                                    14,294       14,294
---------------------------------------------------------------------------------------------------------------

Total assets                                                                            $6,101,840   $6,474,675
===============================================================================================================
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                      F-3
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                                     Consolidated Balance Sheets

================================================================================

<TABLE>
<CAPTION>
December 31,                                                                                  2001             2000
========================================================================================================================
<S>                                                                                       <C>               <C>
Liabilities and Shareholders' Equity

Current liabilities
   Accounts payable and accrued expenses                                                  $    414,935      $  1,254,598
   Due to affiliates                                                                                --            50,077
   Notes payable                                                                               127,285           477,285
   Billings in excess of costs and estimated earnings on uncompleted
       contracts                                                                                                      --
   Unearned revenue                                                                             13,330           459,530
------------------------------------------------------------------------------------------------------------------------

Total current liabilities                                                                      555,550         2,241,490
------------------------------------------------------------------------------------------------------------------------

Shareholders' equity
   Preferred stock, 10,000,000 shares authorized, 100 shares issued and
       outstanding                                                                                                    --
   Common stock, $.0001 par value, 90,000,000 shares authorized,
       27,778,835 and 19,810,544 shares issued and outstanding at
       December 31, 2001 and 2000, respectively                                                  2,779             1,982
   Additional paid-in capital                                                               14,701,723        13,652,448
   Accumulated other comprehensive income                                                      114,024                --
   Subscription receivable                                                                    (562,480)               --
   Accumulated deficit                                                                      (8,709,756)       (9,421,245)
------------------------------------------------------------------------------------------------------------------------

Total shareholders' equity                                                                   5,546,290         4,233,185
------------------------------------------------------------------------------------------------------------------------

Total liabilities and shareholders' equity                                                $  6,101,840      $  6,474,675
========================================================================================================================
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                           Consolidated Statements of Operations

================================================================================

<TABLE>
<CAPTION>
Years Ended December 31,                                                              2001            2000
==============================================================================================================
<S>                                                                               <C>              <C>
Revenues
   Software sales                                                                 $   393,157      $   591,731
   Maintenance and service income                                                     729,661          548,600
   Sale of marketing rights                                                                            791,319
--------------------------------------------------------------------------------------------------------------

Total revenues                                                                      1,122,818        1,931,650
--------------------------------------------------------------------------------------------------------------

Total operating expenses                                                              133,222        2,325,367
--------------------------------------------------------------------------------------------------------------

Income from operations                                                                989,596         (393,717)
--------------------------------------------------------------------------------------------------------------

Other income (expenses)
   Interest expense                                                                   (45,957)         (38,706)
   Unrealized loss on securities                                                           --         (357,034)
   Realized gain on sale of securities                                                107,850        1,851,497
   Interest income                                                                         --           28,176
   Other                                                                                   --           21,078
--------------------------------------------------------------------------------------------------------------

Total other income (expense)                                                           61,893        1,505,011
--------------------------------------------------------------------------------------------------------------

Income before provision for income taxes and extraordinary item                     1,051,489        1,111,294

Provision for income taxes                                                                 --               --
--------------------------------------------------------------------------------------------------------------

Income before extraordinary item                                                    1,051,489        1,111,294

Extraordinary gains (losses)                                                         (340,000)          91,934
--------------------------------------------------------------------------------------------------------------

Net income                                                                        $   711,489      $ 1,203,228
==============================================================================================================
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                      F-5
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                               Consolidated Statements of Operations (Continued)

================================================================================

Years Ended December 31,                                2001           2000
================================================================================

Net income per common share
   Basic:
   Net income before extraordinary item              $      0.04     $      0.07
================================================================================

   Net income                                        $      0.03     $      0.08
================================================================================

   Diluted:
   Net income before extraordinary item              $      0.04     $      0.06
================================================================================

   Net income                                        $      0.03     $      0.07
================================================================================

Weighted average common shares
   Basic                                              24,582,298      16,123,896
================================================================================

   Diluted                                            25,086,913      17,725,850
================================================================================

          See accompanying Notes to Consolidated Financial Statements.


                                      F-6
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                       Consolidated Statements of Shareholders' Equity (Deficit)

================================================================================

<TABLE>
<CAPTION>
Years Ended December 31, 2001 and 2000
===========================================================================================================================
                                                                                                                   Total
                                                    Common Stock            Additional                         Shareholders'
                                             -------------------------        Paid-in         Accumulated         Equity
                                               Shares         Amount          Capital            Deficit         (Deficit)
                                             ------------------------------------------------------------------------------
<S>                                          <C>             <C>            <C>               <C>               <C>
December 31, 1999                            12,464,866      $   1,247      $ 12,191,130      $(10,624,473)     $ 1,567,904

Issuance of common stock for:
   Cash                                         206,552             21           149,619                --          149,640
   Services/expenses                            814,503             82           879,088                --          879,170
   Debt conversion                                4,415             --            21,523                --           21,523
   Two, one-for-seven distributions           3,857,289            386              (386)               --               --

Warrants exercised for:
   Cash                                       1,621,816            162         1,164,625                --        1,164,787
   Securities                                   125,000             12            99,988                --          100,000
   Other                                        819,617             82               (82)               --               --

Payment of Company debts by shareholder              --             --            98,436                --           98,436
Redemption of stock                            (317,814)           (31)       (1,915,075)               --       (1,915,106)
Issue of stock for acquisition                  214,300             21               (21)               --               --

Add: note receivable collection
on shares sold in 1999                               --             --           963,603                --          963,603

Net income for 2000                                  --             --                --         1,203,228        1,203,228
---------------------------------------------------------------------------------------------------------------------------

December 31, 2000                            19,810,544      $   1,982      $ 13,652,448      $ (9,421,245)     $ 4,233,185

Issuance of common stock for:
   Cash                                       2,579,869            258           799,111                            799,369
   Services/expenses                          1,770,000            177           235,750                            235,927
   Debt conversion
   Two, one-for-seven distributions           2,506,387            251              (251)

Warrants exercised for:
   Cash                                          22,162              2            14,774                             14,776
   Securities
   Other                                      1,089,873            109              (109)

Accumulated other comprehensive income                                                                              114,024
Subscription receivable                                                                                            (562,480)
Net income for 2001                                                                                711,489          711,489
---------------------------------------------------------------------------------------------------------------------------

December 31, 2001                            27,778,835      $   2,779      $ 14,701,723      $  8,709,756      $ 5,546,290
===========================================================================================================================
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                      F-7
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                           Consolidated Statements of Cash Flows

================================================================================

<TABLE>
<CAPTION>
Years Ended December 31,                                                           2001             2000
=============================================================================================================
<S>                                                                              <C>              <C>
Cash flows from operating activities
   Net income                                                                    $   711,489      $ 1,203,228
Adjustments to reconcile net income to net cash used in operating
   activities
   Depreciation                                                                       92,165           70,192
   Amortization                                                                      115,315          108,709
   Stock and warrants issued for current expenses                                         --          146,006
   Proceeds from sale of trading securities                                               --          484,982
   Unrealized loss on securities                                                          --          357,034
   Realized gain on sale of securities                                              (107,850)      (1,851,497)
   Extraordinary gains                                                                    --          (91,934)
   (Increase) decrease in
       Accounts receivable                                                          (304,473)         506,812
       Due from affiliates                                                            24,236          (24,236)
       Costs and estimated earnings in excess of billings                            518,977         (688,141)
       Prepaid expenses                                                             (939,494)         105,247
       Deposits                                                                           --           54,337
   Increase (decrease) in
       Accounts payable and accrued expenses                                        (839,663)        (642,038)
       Due to affiliates                                                             (50,077)          50,077
       Deferred revenues                                                            (446,200)         335,752
-------------------------------------------------------------------------------------------------------------
Net cash provided (used) in operating activities                                  (1,225,575)         124,537
-------------------------------------------------------------------------------------------------------------

Cash flows from investing activities
   Proceeds from sale of equity securities                                           216,012          760,136
   Purchases of equity securities                                                                    (500,317)
   Additions to property and equipment                                               (20,000)        (199,519)
   Proceeds from note receivable                                                     747,000          340,000
   Advances under note receivable                                                                     (25,000)
   Capitalized software                                                                               (52,855)
-------------------------------------------------------------------------------------------------------------
Net cash provided (used) in investing activities                                     943,012          322,445
-------------------------------------------------------------------------------------------------------------

Cash flows from financing activities
   Proceeds from sale of common stock                                                487,592        1,319,103
   Proceeds from notes payable                                                            --          350,000
   Repayment of notes payable                                                       (350,000)         (65,246)
   Redemptions of stock                                                                   --       (1,915,106)
-------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities                                     137,592         (311,249)
-------------------------------------------------------------------------------------------------------------
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                      F-8
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                               Consolidated Statements of Cash Flows (Continued)

================================================================================

Years Ended December 31,                               2001              2000
================================================================================

Net increase in cash                               $(144,971)           $135,733

Cash at beginning of year                            151,462              15,729
--------------------------------------------------------------------------------

Cash at end of year                                $   6,491            $151,462
================================================================================

          See accompanying Notes to Consolidated Financial Statements.


                                      F-9
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

1. Organization          Organization - H-Quotient, Inc. (the "Company"), was
   and significant       incorporated in the Commonwealth of Virginia on May 12,
   accounting            1999 as a wholly-owned subsidiary of Integrated
   policies              Healthcare Systems, Inc. ("IHS"). On June 14, 1999, IHS
                         executed a downstream merger with H-Quotient, Inc. in
                         which all the issued and outstanding shares of common
                         stock of IHS were exchanged for an equal number of
                         shares of the $.0001 par value common stock of the
                         Company. The Company develops, markets, installs and
                         maintains integrated hardware and software systems to
                         private and public healthcare facilities throughout the
                         United States.

                         Basis of Presentation - The consolidated financial
                         statements of the Company include the accounts of its
                         wholly owned subsidiaries, IHS of Virginia, Inc. (sold
                         December 28, 2000) (see note 15), DataQual Group, Inc.
                         (sold June 30, 2001) (see note 15) and Quotient Capital
                         Corporation. All significant intercompany balances and
                         transactions have been eliminated in consolidation.

                         Use of Estimates - The preparation of consolidated
                         financial statements in conformity with general
                         accepted accounting principles requires management to
                         make estimates and assumptions that affect the reported
                         amounts of assets and liabilities at the date of the
                         financial statements and the associated amounts of
                         revenues and expenses during the period reported.
                         Actual results could differ from the estimates.

                         Revenue Recognition - The Company sells software
                         systems under noncancelable sales agreements. Revenue
                         from a software system sale is recognized when a sales
                         agreement is in force, the product has been delivered,
                         the sales price is fixed and determinable, and
                         collectibility is reasonably assured. If a software
                         system sale includes multiple elements, the sale price
                         is allocated to each element according to its actual
                         selling price.

                         Revenues from software system sales requiring
                         significant modification or customization are
                         recognized using the percentage of completion method
                         based on the costs incurred relative to total estimated
                         costs.

                         Contract costs include all direct material, labor
                         costs, subcontract and those indirect costs related to
                         contract performance, such as equipment cost, supplies,
                         insurance, payroll taxes and other general costs.
                         General, administrative and overhead costs are charged
                         to expense as incurred. Provision for estimated losses
                         on uncompleted contracts are made in the period in
                         which such losses are determined. Changes in job
                         performance, job conditions, estimated profitability,
                         and final contract settlements may result in revisions
                         to costs and income, which are recognized in the period
                         in which the revisions are determined.


                                      F-10
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

1. Organization and      The Company offers non-specific upgrades to customers
   significant           with annual support agreements for a specific product
   accounting policies   when they are completed and available for release. If
   (continued)           an upgrade leads to a new product, the upgrade is
                         considered a new sale.

                         Revenues from consulting services are recognized as
                         performed. Revenues derived from maintenance contracts
                         are initially deferred and recognized as revenue
                         ratably over the terms of the contracts, which are
                         typically from one to two years.

                         Deferred Revenue - Deferred revenue represents either
                         billings related to, or payments received from
                         customers, for software system sales prior to customer
                         delivery and acceptance, and maintenance service fees
                         billed in advance.

                         Cash Equivalents - For the purposes of the consolidated
                         statements of cash flows, the Company considers all
                         highly liquid debt instruments purchased with a
                         maturity of three months or less at the time of
                         purchase to be cash equivalents.

                         From time to time, cash and cash equivalents exceeded
                         federally insured limits. Management does not believe
                         that this results in any significant credit risk.

                         Fair Value of Financial Instruments - The Company
                         considers the recorded value of its financial assets
                         and liabilities, consisting principally of contracts
                         receivable, investments in equity securities, accounts
                         payable, accrued expenses, and debt to approximate the
                         fair value of the respective assets and liabilities at
                         December 31, 2001 and 2000.

                         Property and Equipment - Property and equipment are
                         stated at cost. Depreciation of property and equipment
                         is determined using the straight-line method over an
                         estimated useful life of two to five years.

                         Capitalized Software Costs - The Company capitalizes
                         software development costs incurred subsequent to the
                         internal release of the product for acceptance testing.
                         Upon the general release of the product to customers,
                         development costs for that product are amortized over
                         periods not exceeding four years, based on the economic
                         life of the product. Capitalized software costs consist
                         of the following:

                                                             2001        2000
                         ======================================================

                         Capitalized software             $ 474,474   $ 474,474
                         Accumulated amortization          (273,684)   (158,369)
                         ------------------------------------------------------

                         Net                              $ 200,790   $ 316,105
                         ======================================================


                                      F-11
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

1. Organization and      Amortization expense for the years ended December 31,
   significant           2001 and 2000 totaled $115,315 and $108,709,
   accounting            respectively.
   policies
   (continued)           The carrying amount of acquired technology and software
                         development is periodically reviewed by the Company for
                         impairment. Impairment is recognized when the future
                         gross revenues from products, reduced by the estimated
                         future costs of completing and disposing of that
                         product, including the costs of maintenance and
                         customer support required at the time of sale, is less
                         than the carrying amount of that product.

                         Income Taxes - Income taxes are provided for the tax
                         effects of transactions reported in the financial
                         statements and consist of taxes currently due plus
                         deferred taxes. Deferred taxes are recognized for
                         differences between the basis of assets and liabilities
                         for financial statement and income tax purposes.
                         Deferred tax assets and liabilities represent the
                         future tax return effects of those differences, which
                         will either be deductible or taxable when the assets
                         and liabilities are recovered or settled. Deferred
                         taxes are also recognized for operating losses and tax
                         credits that are available to offset future taxable
                         income. The Company evaluates the likelihood of
                         realization of deferred tax assets and provides an
                         allowance where, in management's opinion, it is more
                         likely than not that the asset will not be realized.

                         Net Income Per Share - Basic earnings per share is
                         computed by dividing net income by the weighted average
                         number of shares outstanding for the period. Diluted
                         earnings per share include the dilutive effect of
                         warrants and contingent shares.

2. Investments in        The Company's investment in equity securities consists
   equity securities     of marketable securities that the Company has
                         classified as trading securities and common stock in a
                         closely held Company that is a shareholder of the
                         Company and is reported at cost.

                         The trading securities consist of 13,651,723 and
                         12,687,500 shares of Veridien Corporation as of
                         December 31, 2001 and 2000, respectively. The
                         unrealized loss on this investment as of December 31,
                         2001 and 2000 was 0 and $357,034, respectively.


                                      F-12
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

2. Investments in        The investment in the stock of a shareholder of the
   equity securities     Company consists of 295,516 and 310,516 shares of
   (continued            common stock of Internet Guide, Inc. (Internet Guide)
                         as of December 31, 2001 and 2000, respectively. These
                         shares are carried at cost of $1,804,288 and
                         $1,717,138, as of December 31, 2001 and 2000,
                         respectively. On August 20, 2001, we sold 161,500
                         shares that we held in ROSS Corporation securities in
                         exchange for $23,475 in cash. These shares, which were
                         sold at cost constituted our entire holding in ROSS. As
                         a result of the transaction we no longer own any shares
                         of ROSS Corporation. In December 2001, the Company sold
                         15,000 shares of Internet Guide stock to a relative of
                         an officer for $195,000 in cash. The Company recognized
                         a gain of $107,850 on the sale. In December 2000, the
                         Company acquired 79,890 shares of Internet Guide stock
                         in an exchange of a marketable security that was valued
                         at $305,216, the fair value of the stock exchanged on
                         the date of the exchange. The Company sold 138,500
                         shares of Internet Guide in September 2000 for
                         $1,800,000, consisting of $732,000 of notes receivable
                         from unrelated parties and $1,068,000 of commercial
                         trade credits. A gain of $899,750 was recognized on the
                         sale. In addition, in September 2000, the Company
                         exchanged 61,500 shares of Internet Guide stock at
                         $6.50 per share, an aggregate of $800,000, for
                         8,000,000 shares of the common stock of Veridien
                         Corporation. No gain or loss was recognized on the
                         exchange.

3. Notes                 Notes receivable at December 31, 2000, consist of a
   receivable            note from an employee for a cash advance of $15,000 and
                         a group of notes from Canadian individuals that totaled
                         $732,000 and were due at various dates in 2000 and
                         2001. On May 4, 2001, the $732,000 of notes were
                         exchanged for $382,000 of commercial trade credits and
                         a $350,000 note payable to the other party to the
                         exchange transaction.

4. Prepaid               Prepaid expenses at December 31, 2001 and 2000 include
   expenses              $2,629,000 and $1,068,000 of Asset Recovery Credits
                         from SGD International Corp. and $622,500 of Cash
                         Collateral Credits at December 31, 2000 issued by SGD
                         International Corp. acquired from Veridien Corporation,
                         respectively. The credits represent amounts that the
                         Company expects to use in the fulfillment of future
                         sales contracts.

5. Property and          Property and equipment consists of the following:
   equipment

                                                             2001        2000
                         ======================================================

                         Office and computer equipment    $ 339,225   $ 339,225
                         Furniture and fixtures              77,804      57,804
                         ------------------------------------------------------
                                                            417,029     397,029
                         Less: accumulated depreciation    (282,836)   (190,671)
                         ------------------------------------------------------

                                                          $ 134,193   $ 206,358
                         ======================================================


                                      F-13
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

                         Depreciation expense of property and equipment was
                         $92,165 and $70,192 for the years ended December 31,
                         2001 and 2000, respectively.

6. Short-term            Short-term debt consists of the following:
   debt

<TABLE>
<CAPTION>
                                                                                  2001        2000
                         ===========================================================================
<S>                                                                            <C>          <C>
                         Unsecured note payable to 967474 Ontario, Inc.
                            with interest at 12%, due March 28, 2001           $      0     $350,000

                         Legal settlement with a law firm with interest at
                            9%. Terms are being negotiated                       62,475       62,475

                         Unsecured promissory notes payable with interest
                            at 15%                                               64,810       64,810
                         ---------------------------------------------------------------------------

                                                                               $127,285     $477,285
                         ===========================================================================
</TABLE>

7. Uncompleted
   contracts

<TABLE>
<CAPTION>
                                                                                 2001         2000
                         ===========================================================================
<S>                                                                            <C>          <C>
                         Costs incurred on uncompleted contracts               $      0     $725,164
                         Gross profit recognized to date on uncompleted
                            contracts                                                 0      720,657
                         Less:  Billings to date                                      0     (926,838)
                         ---------------------------------------------------------------------------

                         Net                                                   $      0     $518,977
                         ===========================================================================
</TABLE>

                         Included in the accompanying consolidated balance
                         sheets under the following captions:

<TABLE>
<CAPTION>
                                                                                 2001          2000
                         ===========================================================================
<S>                                                                            <C>          <C>
                         Costs and estimated earnings in excess of billings
                            on uncompleted contracts                           $      0     $518,977
                         Billings in excess of cost and estimated earnings
                            on uncompleted contracts                                 --           --
                         ---------------------------------------------------------------------------

                                                                               $      0     $518,977
                         ===========================================================================
</TABLE>


                                      F-14
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

8. Commitments           Lease Commitments - The Company entered into a lease
   and                   agreement for office space beginning December 1, 2000.
   contingencies         The lease requires monthly payments of $4,294 plus a
                         pro rata share of taxes and operating costs.

                         Rent expense under all operating leases was $43,948 and
                         $105,386 for the years ended December 31, 2001 and
                         2000, respectively.

                         Litigation - On January 10, 1997, the Internal Revenue
                         Service ("IRS") filed in the Circuit Court for the
                         County of Fairfax, Virginia a Notice of Federal Tax
                         Lien in the amount of $386,000 for employment
                         withholding tax liabilities of Integrated Systems
                         Technology, Inc. ("IST"), formerly a wholly owned
                         subsidiary of the Company. It is the opinion of counsel
                         that there is no "alter ego" liability on the part of
                         the Company. Since the filing of the Notice the IRS has
                         not made any effort to enforce it against the Company
                         Management has removed the liability during the year
                         ended December 31, 2001 and the $386,000 is included as
                         a reduction of expenses.

                         On May 17, 2001, a stockholder filed a lawsuit against
                         the Company alleging that restrictions be removed from
                         certain stock certificates owned by the stockholder,
                         and that certain shares be issued to the stockholder.
                         The restrictions had never been disputed, and they were
                         removed. The claim for approximately 500,000 shares
                         from the year 2000 one-for-seven stock distributions
                         was dropped in 2001.

                         A suit with a significant customer is ongoing, and a
                         $340,000 reserve has been allocated as an Extraordinary
                         Loss. The Company, however, expects to recover this sum
                         and all other amounts due.

                         Other suits arising in the ordinary course of business
                         are pending against the Company. Management believes
                         the ultimate outcome of these actions will not result
                         in a material adverse effect on its consolidated
                         financial position, results of operations or cash
                         flows.


                                      F-15
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

9. Shareholders'               In February 2001, warrant certificates for the
   equity                purchase of 1,089,873 shares of our common stock were
  (continued)            exercised at a price of $.48 per share in the aggregate
                         of $525,000. Payment was made by delivery to us of a
                         promissory note in the amount of $525,000 with an
                         interest rate of 6% per annum. This note is
                         collateralized by 834,434 shares of the Company's
                         stock. The note matured on December 31, 2001, with a
                         balance due of $510,095, which is included in
                         subscriptions receivable as a deduction in
                         stockholders' equity. Also in February 2001, we issued
                         183,800 shares of our common stock, which are
                         restricted under Rule 144 of the Securities Act of
                         1933, at $0.22122 per share in exchange for $39,000 and
                         1,500,000 shares of Veridien Corporation common stock.

                               On March 29, 2001, the Company filed Form S-8 in
                         which 395,000 shares owned by a former officer and
                         director were registered under the Securities Act of
                         1933, and is subject to a selling restriction for
                         shares sold in the open market through registered
                         broker-dealers whereby no more than five percent of the
                         previous day's trading volume or 5,000 shares of the
                         registered common stock may be sold in open market
                         transactions. The Company issued 228,170 shares of
                         common stock that are subject to restrictions under
                         Rule 144 of the Securities Act of 1933 at $.10 per
                         share in exchange for $40,817 in cash and services.

                               From April through June 2001, we issued 2,305,862
                         shares of our common stock, all of which is restricted
                         under Rule 144 of the Securities Act of 1933 as
                         follows: 350,000 shares at $.205 per share to various
                         individuals for services valued at $71,750; 500,000
                         shares at $.327 per share in exchange for $150,000 of
                         SGD Commercial trade credits and 90,000 shares of ROSS
                         Corporation common stock; 1,110,000 shares to the
                         holder of options for 1,110,000 shares of our common
                         stock at $.35 in exchange for $388,500 of SGD
                         Commercial trade credits; 63,600 shares of our common
                         stock in exchange for 509,188 shares of Veridien Corp.
                         common stock at $.20 per share; 50,000 shares of our
                         common stock at $.205 per share as payment of $10,250
                         in a loan discount expense for a loan of $100,0000 from
                         July 1, 2000, to May 4, 2001; 22,162 shares of our
                         common stock at $1.50 per share as payment of a warrant
                         exercise of $33,253; 100,000 shares of our common stock
                         at $.10 per share in exchange for $10,000 of services;
                         30,000 shares of our common stock at $.50 per share as
                         repayment of a $15,000 short term advance; 80,000
                         shares of our common stock at $.40 per share in
                         exchange for cash of $32,000.

                               From July through September 2001, we issued
                         573,619 shares of our common stock, all of which is
                         restricted under Rule 144 of the Securities Act of 1933
                         as follows: 47,619 shares of our common stock at $0.105
                         per share to an individual investor in exchange for
                         cash of $5,000; 150,000 shares of our common at $.10
                         per share in exchange for interest credit of $15,000;
                         41,000 shares of our common stock in exchange for
                         71,400 shares of ROSS Corporation common stock, which
                         was subsequently sold; and 335,000 of our common stock
                         at $0.15 per share in exchange for public relations
                         services. These 335,000 shares were issued in 23
                         certificates with additional restrictions that call for
                         the share certificates to be held in an attorney escrow
                         account and released to the shareholder at a rate of
                         one certificate per month.


                                      F-16
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

                               From October through December 2001, we issued
                         1,558,850 shares of our common stock at $.10 per share,
                         all of which is restricted under Rule 144 of the
                         Securities Act of 1933. These included 275,000 shares
                         for securities transactions, 35,000 shares to a
                         consultant, 248,850 shares to a director, 200,000 for
                         prepaid legal expenses, 300,000 shares for services,
                         and 500,000 shares as a reserve for services or
                         acquisitions.

                               In 2001, the Company issued 2,224,629 shares of
                         its common stock to shareholders of record as of July
                         31, 2000 and August 31, 2000 respectively, who
                         submitted proof of ownership of the Company's common
                         stock as of those dates in accordance with the terms
                         and conditions announced on July 12, 2000 and July 31,
                         2000 in a stock distribution program.

                               In January 2000, 50,000 shares of common stock
                         were issued to the holder of a warrant at an exercise
                         price of $0.75 per share in exchange for $37,500 in
                         cash.

                               In January 2000, the Company issued 3,800 shares
                         of common stock at $2.625 per share to a director of
                         the Company in exchange for $9,975 in cash.

                               February 2000, 325,000 shares of common stock
                         were issued to the holder of a warrant at an exercise
                         price of $0.75 per share in exchange for $243,750 in
                         cash.

                               In February 2000, the Company issued 10,000
                         shares of common stock at $2.375 per share in exchange
                         for $23,750 in cash.

                               In March 2000, the Company issued 4,415 shares of
                         common stock which are subject to restrictions under
                         Rule 144 of the Securities Act of 1933 in exchange for
                         $35,320 less $13,797 in debt forgiveness at $4.875 per
                         share.

                               In March 2000, the Company issued a total of
                         258,309 shares of common stock to the holders of
                         warrants, in exchange for an aggregate of $208,808
                         which included $108,808 in cash and $100,000 in
                         marketable securities as follows: 8,309 shares at an
                         exercise price of $1.06 per share and 250,000 shares at
                         an exercise price of $0.80 per share.

                               In March 2000, the Company issued 3,000 shares of
                         common stock at $3.00 per share in exchange for $9,000
                         in cash.

                               From March through July 2000, the Company issued
                         33,550 shares of common stock to the holders of Class A
                         Redeemable Warrants at an exercise price of $5.00 per
                         share in exchange for $167,750 in cash.


                                      F-17
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

9. Shareholders'         From March through September 2000 the Company issued
   equity                113,273 shares of common stock in exchange for an
   (continued)           aggregate of $125,851 for prepaid and current year
                         expenses as follows: 15,000 shares at $2.00 per share;
                         20,000 shares at $1.55 per share; 5,000 shares at $1.33
                         per share; 13,273 shares at $1.00 per share and 60,000
                         shares at $0.75 per share.

                         In April 2000, 1,007,795 shares of common stock were
                         issued to the holders of 1,384,971 warrants exercisable
                         as follows: 575,000 at $1.00 per share; 200,000 at
                         $1.50 per share and 619,971 at $2.00 per share, in
                         exchange for $536,236 in cash and the return of 387,176
                         warrants valued at $4.08 per share as of the date of
                         the transaction.

                         In May and September 2000, the Company issued 819,617
                         shares of its common stock at par value in exchange for
                         5,737,319 Class A Redeemable warrants at a conversion
                         rate of one share of common stock for every seven
                         warrants received in the exchange pursuant to the
                         Exchange Program announced February 29, 2000 in which
                         the warrant holders participating in the exchange
                         program agreed to a two year restriction on selling the
                         shares under Rule 144 of the Securities Act of 1933.

                         In May 2000, 50,000 shares were issued to the holder of
                         a warrant at an exercise price of $0.75 per share in
                         exchange for $37,500 in cash.

                         From June through December 2000, the Company purchased
                         317,814 shares of its common stock and sold 214,300
                         shares leaving a balance of 103,514 shares held by the
                         Company at December 31, 2000.

                         In July and August 2000, the Company issued 3,857,289
                         shares of its common stock to shareholders in two,
                         one-for-seven distributions.

                         In July 2000, the Company issued 75,000 shares of
                         common stock at $ 1.00 per share in exchange for
                         $75,000 in cash.

                         In August 2000, the Company issued 107,667 shares of
                         common stock at $ 0.23 per share in exchange for
                         $25,000 in cash.

                         In September 2000, the Company issued 415,000 shares of
                         common stock in exchange for $622,500 in commercial
                         trade credits.

                         In September 2000, the Company granted an option to a
                         company to purchase 680,000 shares of the Company's
                         common stock at the lower of $1.00 per share or the
                         lowest trade price on the date of exercise but not less
                         than $.35 per share. The purchase price may be
                         satisfied, at the discretion of the grantee by either
                         cash or commercial trade credits. The option expires on
                         December 31, 2001 if not exercised. In May 2001, the
                         option was exercised for $.35 per share with payment
                         made with commercial trade credits valued at $238,000.

                         In October 2000, 22,162 shares were issued to the
                         holder of a warrant at an exercise price of $1.50 per
                         share in exchange for $33,243 in cash.


                                      F-18
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

9. Shareholders'         In December 2000, the Company issued an aggregate of
   equity                281,300 shares of its common stock to a former officer
   (continued)           and director as payment for accrued salary and
                         repayment of debt and other expenses totaling $126,092.

                         During 2000, an officer/stockholder of the Company paid
                         certain debts of the Company totaling $98,436. This
                         amount has been recorded as additional paid-in capital
                         in the Statement of Stockholders' Equity.

                               Warrants and Options Issued in 2001

                         In November 2001, the Company issued 200,000 warrants
                         to purchase 200,000 shares of our common stock at $.25
                         per share for a period of five months.

                         A summary of warrant activity follows:

<TABLE>
<CAPTION>
                                                                          Exercise Period             Exercise        Number of
                                                                    -----------------------------       Price          Shares
                                                                        From             To             Range         Reserved
                         ------------------------------------------------------------------------------------------------------
<S>                                                                 <C>              <C>             <C>             <C>
                         December 31, 1999 - Warrants outstanding                                                    14,130,770
                         ------------------------------------------------------------------------------------------------------

                         ------------------------------------------------------------------------------------------------------
                         Issued during 2000                         November 2000    October 2005    $   .69-1.50       505,000
                         ------------------------------------------------------------------------------------------------------
                         Exercised during 2000                                                       $   .75-2.00    (2,100,442)
                         ------------------------------------------------------------------------------------------------------
                         Exchanged for common stock                                                  $       5.00    (5,207,889)
                         ------------------------------------------------------------------------------------------------------
                         Terminated during 2000                                                      $  1.00-7.00    (1,107,838)

                         December 31, 2000 - Warrants outstanding                                                     6,219,601
                         Issued during 2001                         November 2001      April 2002    $        .25       200,000
                         Exercised                                                                   $         48    (1,089,873)
                         Exercised                                                                   $       1.50
                                                                                                                        (22,162)
                         ------------------------------------------------------------------------------------------------------
                         Terminated during 2001                                                                      (3,168,395)
                         December 31, 2001 - Warrants outstanding                                                     2,139,171
                         ======================================================================================================
</TABLE>

10. Stock based          On November 15, 1999, the Company instituted a
    compensation         non-qualified employee stock purchase program under
    plan                 which all employees could purchase restricted common
                         stock from the Company at a purchase price equivalent
                         to the closing price on the date of purchase. Under
                         this program, the Company matched all stock purchases
                         on a one for one basis. During the year ended December
                         31, 2000, 4,929 shares, respectively, were purchased at
                         prices ranging from $0.63 per share to $2.38 per share
                         with the Company issuing an equivalent amount under the
                         matching terms. Compensation expense totaling $4,726
                         was recorded in 2000 in connection with this
                         non-qualified employee stock purchase program.

                         Pursuant to SFAF No. 123 "Accounting for Stock-based
                         Compensation", the Company has elected to account for
                         its stock purchase warrants and other equity
                         instruments under APB Opinion 25 "Accounting for Stock
                         Issued to Employees" and adopt the disclosure only
                         provisions of SFAS No. 123. Under APB 25, no
                         compensation costs are recognized because the exercise
                         price is equal to the fair market price of the common
                         stock on the date of grant. Under SFAS No. 123, stock
                         purchase warrants are valued at grant date using the
                         Black-Shoals valuation model. Had compensation costs
                         been determined as prescribed by SFAS No. 123, the
                         Company's net earnings and earnings per share would not
                         have changed, since the stock purchase warrants were
                         considered to have little or no value.


                                      F-19
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

11. Extraordinary        During 2000, the Company settled various debts with
    gains                creditors having recorded balances of $233,703 for cash
                         payments of $120,246 and 4,415 shares of Company stock
                         valued at $21,523. This settlement gain of $91,934 is
                         reported as an extraordinary gain in 2000.

12. Income taxes         The effective income tax rate varied from the federal
                         statutory tax rate as follows:

<TABLE>
<CAPTION>
                                                                                            2001           2000
                         =======================================================================================
<S>                                                                                         <C>             <C>
                         Statutory rate                                                     34.0%           34.0%
                         State rate                                                          6.0             5.0
                         Capitalized software costs                                           --             1.8
                         Long-term capital loss carryover                                     --           (47.6)
                         Unrealized (Gain) loss on securities                                 --            11.6
                         Other                                                                --             3.5
                         Valuation allowance                                                40.0            (8.3)
                         ---------------------------------------------------------------------------------------
                                                                                             0.0%            0.0%
                         =======================================================================================
</TABLE>

                         The deferred tax asset and the deferred tax liability
                         is comprised of the following:

<TABLE>
<CAPTION>
                                                                                        2001             2000
                         =======================================================================================
<S>                                                                                   <C>            <C>
                         Deferred tax asset:
                             Expenses not currently deductible for tax purposes       $       --     $     7,328
                             Net operating loss carryfoward                            2,394,074       2,629,493
                         ---------------------------------------------------------------------------------------
                                                                                       2,394,074       2,636,821
                         Valuation allowance                                           2,394,074      (2,636,821)
                         ---------------------------------------------------------------------------------------
                         Gross deferred tax assets                                            --              --
                         Gross deferred tax liability                                         --              --
                         ---------------------------------------------------------------------------------------

                         Net deferred tax asset (liability)                           $       --     $        --
                         =======================================================================================
</TABLE>

                         At December 31, 2001, the Company has approximately
                         $6,100,000 in net operating loss carryfowards which
                         expire at varying dates between the years 2009 and
                         2020. The annual utilization of these carryfowards are
                         significantly limited under Section 382 of the Internal
                         Revenue Code as a result of ownership changes
                         experienced by the Company. A valuation allowance equal
                         to the total deferred tax asset has been established in
                         each period due to the uncertainty regarding the
                         realization of the net deferred tax assets.


                                      F-20
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

13. Net income           The following data shows the amounts used in computing
    per share            basic and diluted net income per share for the years
                         ended December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                                 2001            2000
                         ===============================================================================
<S>                                                                           <C>            <C>
                         Net income to common shareholders                   $   711,489     $ 1,203,228
                         ===============================================================================
                         Weighted average number of outstanding common        24,582,298      16,123,896
                            shares-basic
                         Dilutive effect of warrants to purchase common
                            shares                                               504,615       1,601,954
                         -------------------------------------------------------------------------------
                         Diluted common shares outstanding                    25,086,913      17,725,850
                         ===============================================================================

                         Basic
                         Income before extraordinary item                    $      0.04     $       .07
                         ===============================================================================
                         Net income                                          $      0.03     $       .08
                         ===============================================================================

                         Diluted
                         Income before extraordinary item                    $      0.04     $       .06
                         ===============================================================================
                         Net income                                          $      0.03     $       .07
                         ===============================================================================
</TABLE>

14. Related party        During 2000, the Company made cash advances to an
    transactions         officer of the Company and two company's controlled by
                         the officer, one of whom is Internet Guide. The net
                         amount due to the Company at December 31, 2000 was
                         $24,236. There are no specified terms of repayment for
                         these advances. In addition, during 2000 various
                         officers and shareholders advanced funds to the
                         Company. At December 31, 2000, the Company owed $25,077
                         to an officer and shareholder of the Company and
                         $25,000 to an individual that is a shareholder of the
                         Company. These advances do not accrue interest and have
                         no specified terms of payment.

                         In December 1999, the Company loaned an officer and
                         director of the Company $50,000 to purchase shares of
                         common stock of the Company (at $.6875 per share) on an
                         unsecured promissory note that is due upon demand, but
                         no later than December 31, 2000. During 2000, a new
                         note was issued extending the due date to December 31,
                         2001. The note accrues interest at a rate of eight
                         percent (8%) per annum. This promissory note receivable
                         has been reflected as a reduction of additional paid-in
                         capital at December 31, 2001 and 2000.


                                      F-21
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

14. Related party        On December 31, 1999, the Company sold 150,000 shares
    transactions         of common stock of Internet Guide, Inc. at $10.375 per
    (continued)          share and 185,000 shares of common stock of the Company
                         at $1.75 per share plus had debt of $70,833 paid on
                         behalf of the Company, in exchange for a promissory
                         note totaling $1,950,883. The promissory note is
                         secured by underlying securities and collateralized by
                         additional securities held by a third-party Trust. The
                         promissory note accrues interest at an annual rate of
                         seven percent (7%) calling for payments in January,
                         February and March 2000. The payment terms were
                         renegotiated calling for two equal payments on April
                         30th and May 31st, 2000. The Company has accounted for
                         these transactions in 1999 as if the Company exchanged
                         common shares of common stock of the Company for a
                         promissory note receivable. As these transactions are
                         considered related party transactions, accordingly, any
                         gain resulting from this sale has been deferred and
                         will be recognized in earnings in the period paid, and
                         the promissory note receivable has been offset against
                         paid-in-capital. The promissory note was subsequently
                         paid on May 20, 2000 via cash of $330,000 and stocks in
                         publicly traded companies with a fair value of
                         $1,648,800. As a result, the gain has been recognized
                         in the year ended December 31, 2000 and the note
                         receivable has been credited to paid-in capital. As
                         described in Note 2, in December 2001, the Company sold
                         15,000 shares of Internet Guide stock to a relative of
                         an officer.

15. Sale of              On December 28, 2000, the Company sold HIS of Virginia,
    subsidiary           Inc., a wholly-owned subsidiary to an affiliate of a
                         former officer and director in exchange for the
                         assumption of $791,319 in liabilities for which the
                         subsidiary was obligated and the granting of a license
                         to resell certain of the Company's software products.
                         The Company recognized this transaction as revenue from
                         sale of marketing rights in 2000. On June 30, 2001, the
                         Company sold its wholly-owned subsidiary, DataQual
                         Group, Inc., to an affiliate of a former officer and
                         director in exchange for the assumption of $395,157 in
                         liabilities for which the subsidiary was liable and the
                         granting of a licinse to resell certain of the
                         Company's products. This transaction has been
                         recognized as software sales in 2001.

16. Supplemental         Supplemental disclosure of cash flows and noncash
    information to       investing and financing activities are as follows:
    consolidated
    Statement of
    Cash Flows


                                      F-22
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

                         Year ended December 31, 2001:

                         o     The Company exchanged non-marketable securities
                               valued at $40,660 for cash and equity securities.
                         o     The Company exchanged non-marketable securities
                               valued at $163,500 for commercial trade credits
                               and nonmarketable securities.
                         o     The Company exchanged non-marketable securities
                               valued at $12,750 equity securities.
                         o     The Company exchanged nonmarketable securities
                               valued at $5,945 for non-marketable securities.
                         o     The company paid interest of $45,957.

                         Year ended December 31, 2000:

                         o     The Company received equity securities valued at
                               $1,620,883 as partial payment on a promissory
                               note receivable of $1,950,883 entered into in
                               1999 (Note 14). Deferred gain at December 31,
                               1999 of $987,230 related to the promissory note
                               was recognized in 2000.
                         o     The Company exchanged non-marketable equity
                               securities valued at $399,750 for marketable
                               equity securities. No gain or loss was recognized
                               on this transaction.
                         o     The Company exchanged non-marketable securities
                               for notes receivable of $732,000 and commercial
                               trade credits of $1,068,000.
                         o     Common stock was issued for commercial trade
                               credits valued at $622,500.
                         o     Common stock was issued in payment of current
                               expenses and prepaid expenses totaling $105,938
                               and settlement of debts to various creditors
                               totaling $21,523.
                         o     Company stock was used by a shareholder to settle
                               $101,337 of liabilities on behalf of the Company.
                         o     The Company paid interest of $10,911 in 2000.

17. Significant          The Company derived a significant portion of its sales
    customers            from one customer. Sales from this customer totaled
                         $263,000 and $904,432 during the years ended December
                         31, 2001 and 2000, respectively, representing 23% and
                         79% of total sales for these years exclusive of revenue
                         from sale of marketing rights (Note 15).


                                      F-23
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

      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, in the City of Vienna,
State of Virginia, on May 29, 2001.

      H-QUOTIENT, INC.

      By: /s/ Douglas A. Cohn
      ---------------------------------
      Chairman of the Board and
      Chief Executive Officer

      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, in the City of Vienna,
State of Virginia, on May 15, 2002.

                Signature                           Title
                ---------                           -----

      By: /s/  Douglas A. Cohn             Chairman of the Board,
          --------------------------
          Douglas A. Cohn

      By  /s/  Douglas A. Cohn             President and Chief Executive Officer
          --------------------------
          Douglas A. Cohn

      By  /s/  J. Brian Copley             Secretary, and Director
          --------------------------
          J. Brian Copley

      By: /s/ Jack Anderson                Treasuer and Director
          --------------------------
          Jack Anderson

      Aronson & Company
      CERTIFIED PUBLIC ACCOUNTANT
      Report of Independent Auditors


                                      F-24
<PAGE>

                                               H-Quotient, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements

================================================================================

      As independent certified public accountants, we hereby consent to the
inclusion of our report relating to the financial statements of H-Quotient,
Inc., which report appears in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2001, and to all references to this firm included in
such Annual Report.


      By: s/ Aronson & Company, P.C.
      Certified Public Accountants

      May 17, 2002
      Rockville, MD


                                      F-25