UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

(X)  Annual report under section 13 or 15(d) of the Securities Exchange Act of
     1934.

     For the fiscal year ended December 31, 2000

( )  Transition report pursuant to section 13 or 15(d) of the Securities
     Exchange Act of 1934.

                         Commission File Number: 0-30899

                               MEDGRUP CORPORATION
              ----------------------------------------------------
             (Exact name of registrant as specified in its charter)

         Colorado                                              84-1504390
 ------------------------------                       -------------------------
(State or other jurisdiction of                      (I.R.S. Identification No.)
 incorporation or organization)

1824 Woodmoor Drive, Suite 102, Monument, Colorado                80132
--------------------------------------------------                -----
     (Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code:  (719) 481-1500
                                                     --------------

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

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

                          Common Stock, $.001 par value
                          -----------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
at least the past 90 days. Yes X No
                              ---  ---

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this form 10-KSB. [ ]


<PAGE>


The issuer's revenues for its most recent fiscal year were $3,895,712.

The aggregate market value of the 2,348,081 shares of voting stock held by
non-affiliates of the Company as of March 6, 2001 was $6,457,223 based upon the
last reported sale of the common stock on that date.

The number of shares outstanding of the issuer's common equity as of March 7,
2001 was 5,806,831.


                       Document incorporated by reference:

     The Proxy Statement for the Annual Meeting of Shareholders to be held on
May 17, 2001 is incorporated by reference herein into Part III, Items 9 through
12.

<PAGE>


                                TABLE OF CONTENTS



PART I.........................................................................1

   ITEM 1.  DESCRIPTION OF BUSINESS............................................1
   ITEM 2.  DESCRIPTION OF PROPERTY............................................7
   ITEM 3.  LEGAL PROCEEDINGS..................................................7
   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................8

PART II........................................................................8

   ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........8
   ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........9
   ITEM 7.  FINANCIAL STATEMENTS..............................................15
   ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.....................15

PART III......................................................................16

   ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................16
   ITEM 10. EXECUTIVE COMPENSATION............................................16
   ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....16
   ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................16

PART IV.......................................................................16

   ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..................................16

SIGNATURES....................................................................19

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                           Forward Looking Statements

     See "Special Note Regarding Forward-Looking Statements" at the end of "Item
6. Management's Discussion and Analysis or Plan of Operation" for cautionary
statements concerning forward-looking information contained in this report.



                          Reference to Other Documents

     The descriptions in this Report relating to the contents of any agreements
or other documents are qualified in their entirety by reference to those
documents, copies of which are filed with this report or otherwise filed with
the Securities and Exchange Commission. See "Item 13. Exhibits and Reports on
Form 8-K."

                                      iii

<PAGE>


                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

History

     MedGrup Corporation, a Colorado corporation ("MedGrup" or the "Company"),
was organized in 1998. In 1999, the assets and operations of MedGrup Development
Services, Inc., a Colorado corporation, were merged with the Company and we
began operation in the medical services industry. MedGrup Development Services,
Inc. was originally organized in 1995.

General

     We provide coding and consulting services for hospitals and other
healthcare providers located in the United States. Under existing Federal and
state requirements, these providers must submit billings for Medicare and
Medicaid reimbursement in a numerical coded format. Many private health insurers
also require submission of billing information in this coded format. These
providers are therefore faced with strict regulatory compliance issues, as well
as cash flow concerns in addressing coding requirements. We maintain a staff of
highly qualified individuals to satisfy these coding requirements and help the
providers operate more efficiently and profitably. We offer outsourcing of these
coding and related consulting services to our clients.

     Most of our service is provided off the premises of the providers, although
we often maintain personnel at the providers' location to facilitate our
service. We recruit highly-qualified individuals to serve as coders who work
primarily in a home-based business. Patient charts are sent confidentially to
our coders via high speed, secured fax lines. A specially configured computer
receives the charts, where the information is coded in accordance with Federal
and state law. We license the computer software used in connection with our
coding service from an independent third party and modify it to be used in our
business. We do not own the rights to this software.

     Some other highlights of our business include the following:

     o    We provide coding services for inpatient, outpatient and emergency
          room services provided by healthcare organizations.

     o    We assist our clients in staffing their medical records department to
          improve operations.

     o    We provide consulting services to healthcare providers to help their
          medical records and business office departments run more smoothly and
          profitably.

     o    We audit the medical records departments of our clients to assist them
          to comply with Federal and state regulations.

                                       1

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Operations

     We operate as an independent, third party service satisfying coding
requirements for hospitals and other healthcare providers. We offer a variety of
services, primarily independent coding of medical charts. While our executive
offices are located in Colorado, we maintain coders in approximately 14 states.
All of our coding service is provided off-site through qualified individuals
employed by us. The majority of our services are billed on a per-chart basis.

     We offer healthcare providers a reliable, quality alternative to in-house
medical record department staffing requirements. Coding is primarily an
administrative function which many healthcare providers find inefficient or
uneconomical. However, these same providers must comply with strict Federal,
state and private regulations to obtain reimbursement for services provided.
Accordingly, we believe there is a strong demand for our service.

     Our services can generally be broken down into the following categories:

     o    Independent coding. We provide off-site, independent coding for
          services provided by hospitals and other healthcare providers.
          Services rendered to medical patients is initially recorded in a
          narrative format and accumulated in a chart. In order for the
          healthcare provider to be reimbursed for its service, the chart must
          be converted to a coded format specified primarily by Federal law.
          Coding is required for inpatient treatment (where patients remain
          overnight), outpatient services and emergency room treatment. In this
          capacity, we may supplement the service of the provider's medical
          records department on a temporary or permanent basis, or completely
          replace in-house coders. We generally charge our clients on a
          per-chart basis.

     o    Coding review. We review coding originally performed by the healthcare
          providers' medical records department. Patient charts are randomly
          selected for review to determine the accuracy of in-house coding.
          Specific documentation from each chart which has previously been coded
          is reviewed by our personnel, and the results relayed to the client
          within as little as 24 hours. In this capacity, we act as a safety
          check and education tool for hospital records departments. By
          providing this service, we believe we can increase revenue to the
          client while reducing errors and potential penalties.

     o    Chargemaster review. We work with administrative staff in a consulting
          capacity to review the chargemaster schedule for hospitals. Because of
          our experience in the healthcare industry, we believe we possess
          expertise in evaluating various charges for all services provided by
          hospitals. Our goal is to increase the profitability and enhance
          compliance of all hospital departments.

     o    Staffing. We assist healthcare providers with permanent or temporary
          clerical staffing requirements to alleviate staffing problems
          associated with clean-up or ongoing projects. We believe this service
          provides an important supplement to our independent coding services
          since some clients prefer to retain the coding function in-house and
          hire our clerical personnel on a temporary basis.

                                       2

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     We derive approximately 90% of our revenue from out-sourced coding and
related services; the balance is derived from consulting services, clerical
services and data transport equipment rental. To conduct our coding services, we
maintain electronic data connections between our clients and our coding
personnel. We receive patient charts via facsimile from our clients, code the
information and return the coded summary to them within as little as 24 hours.
Our coding personnel are located in various states, often in home offices, which
allows them flexible working schedules and provides us access to highly
qualified personnel. We maintain the latest data transmission and computer
equipment, which is purchased or leased, depending on our working capital and
perceived cost savings.

     Our coders are required to maintain current credentials with the American
Health Information Management Association ("AHIMA"), or the American Academy of
Professional Coders ("AAPC"), Registered Health Information Administrator
("RHIA"), Registered Health Information Technician ("RHIT"), Certified Coding
Specialist ("CCS"), Certified Coding Specialist for Physician Offices ("CCS-P"),
Certified Procedural Coder ("CPC"), Certified Procedural Coder for Hospitals
("CPC-H") and RN and ER Specialists. We require inpatient coders to demonstrate
at least 5 years inpatient coding experience in a medium to large sized facility
prior to employment. This provides the expertise needed to code high acuity
illness and invasive procedures often performed at large medical centers. We
also require each full-time coder to complete 10 hours of continuing education
credits each year pertaining specifically to coding.

     In most cases, we are retained by our clients on an indefinite basis. This
means we may work with a client for one month or many years. While our
relationships may be terminated with as little as 90 days notice from our
clients, we believe the quality and efficiency of our service will afford long
working relationships. All of our contracts are in writing, but may be
terminated by either us or our clients on written notice.

Customers

     We presently have approximately 71 active clients in nine states. Many of
these clients are hospitals in rural areas, which can neither afford nor locate
qualified, full-time coding staff. We also work with larger, urban healthcare
providers who believe our services are more efficient than maintaining their own
staff, or who use our services to supplement their staff. Our future strategy is
to increase the number of clients we serve and to increase our services to each
client. As we continue to develop our coding expertise in smaller hospitals, we
hope to appeal to larger institutions, such as large urban hospitals throughout
the United States. Our existing clients are located in the United States,
primarily Texas, Oklahoma, California and Colorado. As our staff, technologies
and administrative functions increase, we hope to increase the geographic scope
of our markets.

     Our most important market is small to medium-sized hospitals (less than 150
beds) located in rural and small urban areas. Hospitals in these markets
typically lack financial and other resources sufficient to adequately staff
medical records departments or simply cannot find qualified people. These
institutions often find it more economical and efficient to retain outside
coders to provide this service.

                                       3

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     By initially concentrating on the rural and community hospital market, we
believe we are positioning ourselves for long-term, steady growth. By continuing
to market our service to medium to large urban facilities, especially those in
more remote urban areas, we hope to grow more rapidly.

     We work with hospital groups, such as T.O.R.C.H. and Covenant in Texas,
Western Healthcare Alliance in Colorado and Tenet on a nationwide basis. These
hospitals are typically located in rural and small urban markets. Two clients,
Covenant Medical Center in Lubbock, Texas and Hillcrest Healthcare Systems in
Tulsa, Oklahoma, each account for more than 10% of our revenue.

     In October of 2000, we announced the signing of an agreement with the
Dallas-Fort Worth Hospital Council ("DFWHC"), a hospital consortium representing
the interests of its members, as a "preferred vendor." The DFWHC has agreed to
recommend and promote our coding services to their 83 member hospitals. The
agreement includes a provision for DFWHC to provide office space within its
corporate headquarters to MedGrup, so that we can assure access and availability
to member hospitals. We have signed two coding agreements with member hospitals
under our preferred vendor agreement with DFWHC. The first agreement provides
for MedGrup to provide immediate coding services to Huguley Health System, a
252-bed hospital, which is part of the Adventist Health System. The second
agreement is with Parkland Health and Hospital System, a 1,000-bed facility,
initially to eliminate a substantial coding backlog.

     We also recently entered into a preferred vendor agreement with VHA
Southwest, Inc., another major hospital consortium. VHA will recommend and
promote our coding and consulting services to its 23 partner organizations
representing 83 acute care hospitals. We just entered into our first agreement
under this contract with Wilson N. Jones Memorial Hospital in Sherman, Texas. We
will provide coding services to two facilities, a 261-bed hospital and a 174-bed
hospital. We anticipate gaining additional new clients pursuant to these
preferred vendor agreements.

Year 2000 Developments

     In October of 2000, we announced the development of a new, proprietary
offsite coding system to compliment our existing technology. Code@Home(TM) is an
internet-based system of hardware and software to facilitate the transfer,
receipt and tracking of medical records between health care providers and
coders. We believe that this system represents a significant advance in medical
records transport technology that will improve our operation and create the
potential for new sources of revenue. It is anticipated that the beta testing
phase of the system will be completed in first or second quarter of 2001, and
complete implementation of the system will occur throughout the course of 2001.

     Code@Home(TM) utilizes proprietary internet-based technology to create,
transmit and track an electronic record. The system is comprised of three levels
of security, surpassing HIPPA requirements for security and privacy. The
capacity exists to directly integrate these records with a billing services

                                       4

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operation. Code@Home(TM) utilizes a unique automatic bi-directional routing
function, which reduces this otherwise human-intensive operation. Data captured
at admissions is imported into the electronic record and can be exported for
ROI, billing or statistical purposes. This eliminates the time and entry error
risk associated with the re-handling and entry of data. Online client tracking
of chart status and access to a wide range of statistical information is also
provided.

     Code@Home(TM) is designed to replace our existing system of faxing medical
records between healthcare providers and our coders. By facilitating the
transfer, receipt and tracking of medical records with our clients, we hope to
increase the productivity of our coders. It is anticipated that this increase in
productivity will result in improved margins and therefore, increased
profitability.

     The Code@Home(TM) system may also provide the opportunity for additional
sources of revenue. It is currently anticipated that this system will be offered
on a fee basis to healthcare providers that desire to hire off-site coders
themselves. Licensing of the system to third parties may provide revenues to
supplement our coding revenue. Availability of the Code@Home(TM) system may also
increase the opportunity for coding revenue, as independent healthcare providers
become aware of the capability of our business.

Marketing

     Our marketing is conducted primarily through a staff managed by William
Cronin, Chairman of the Board and Chief Executive Officer. Mr. Cronin has
substantial experience in the medical services industry and enjoys an excellent
reputation. Our marketing department calls periodically on numerous individual
and group hospitals to acquaint them with our services. They also maintain
contact with existing clients to ensure satisfaction with our service.

     To supplement the efforts of our employees, we also maintain various
marketing programs designed to acquaint healthcare providers with our services.
These include membership and participation in various industry related
associations, trade shows, public relations, print media and business
development. We maintain a database of prospective clients and endeavor to reach
providers through seminars, newsletters and targeted events. However, we believe
nothing contributes to our marketing more than the quality of service we provide
our clients.

     We also receive numerous referrals from our existing clients by
word-of-mouth advertising. However, we expect our marketing efforts will
increase in the future as competition in our industry increases.

Competition

     Competition in the coding segment of the medical services industry is
poorly defined due to the relatively new development of this segment. Our most
recognizable competition is from the existing medical records departments of
clients and potential clients. We continually strive to educate our clients and
potential clients of the advantages of outsourcing the coding function. We
believe education is an important part of our marketing function.

                                       5

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     Among the industry participants who offer outsourcing of the medical
records function are national and regional companies and independent
consultants.

     Several medium to large participants exist in the specialty coding segment
of the medical services industry. These include Laguna, MC Strategies and Care
Communications. Some of these organizations provide on-site coding review and
may be implementing off-site coding. While these entities present competition
for our business, we believe the quality and variety of our services gives us a
competitive advantage.

     We believe our service of off-site coding assistance has major competitive
advantages compared to services offered by most of our competitors. These
advantages include minor on-site space or equipment requirements,
non-threatening relationship with medical records staff and immediate response.
These advantages, coupled with the experience and variety of services we offer,
give us what we believe to be a competitive advantage.

Compliance and Industry Regulation

     While we are not directly regulated, the health care industry and our
clients are heavily regulated by Federal and state law. On the Federal level,
the U.S. Department of Health and Human Services ("DHHS"), through the Health
Care Finance Authority ("HCFA") and the Office of the Inspector General ("OIG"),
implement and enforce regulations specifying, among other things, uniform coding
requirements and strict billing guidelines for Medicare and Medicaid claims. The
regulations require that providers use standardized numerical codes and
descriptive terms to report procedures and services provided. These regulations
also impose substantial penalties for overbilling and other statutory
violations.

     HCFA can impose civil monetary penalties and additional assessments and may
exclude providers from participating in the Medicare and Medicaid programs for
certain specified time periods for violations of the regulations. The
assessments are additional monetary payments in lieu of damages sustained by the
government because of the claim. Maximum civil monetary penalties range up to
$10,000 per item or service in noncompliance, and assessments may be up to three
times the amount claimed for some violations. Additionally, a person who is
found guilty of committing Medicare fraud faces a host of different criminal,
civil and administrative sanctions. The regulations and the penalties are
directed at the health care providers who directly provide the services and
submit the claims for payment.

     State laws also govern health care providers. State regulations regarding
uniformity and submission of Medicaid claims are similar to the Federal
regulations.

     Because the Company does not actually submit the claims, we do not believe
that the regulations directly affect us, but we must follow state and Federal
regulations in our coding practices, or face potential liability to our client.
In addition, because we bill on a flat fee per chart basis, we have no financial
incentive to overbill, specify higher cost codes or otherwise incorrectly code.
As our primary business is coding, our staff keeps abreast of the regulations

                                       6

<PAGE>


regarding coding, including the pronouncement of new and additional procedure
codes that are or will be required by providers. The coding staff is trained on
new legal coding requirements prior to the implementation of such requirements.

Insurance

     We presently maintain errors and omissions insurance on all of our coders
to insure against claims resulting from the coding process. This policy provides
protection in the amount of $1 million per claim and $3 million in the aggregate
for acts or omissions resulting from the coding process of our business. We
believe such policy to be sufficient for the needs of our company for the
foreseeable future.

Employees

     As of March 5, 2001, we employed 79 people, including full and part-time
employees and contract employees. Of that amount, five are executive officers of
the Company, two are in sales, 23 are clerical level individuals servicing our
clients, one clerical person serves our corporate office, along with two
individuals who serve as administrative staff, three work in our information
technology department and 43 are coding providers. Of the coding providers, 22
are employed on a full-time basis, 13 are employed on a part-time basis and
eight are independent contractors. None of our employees are unionized and we
believe we enjoy excellent relations with our employees.

ITEM 2. DESCRIPTION OF PROPERTY

     The Company owns no real property. Our executive and administrative
headquarters are located in Monument, Colorado, north of Colorado Springs, in
office space leased from an unaffiliated third party. We presently occupy
approximately 3,400 square feet of office space which serves our executive
officers, billing, bookkeeping and certain other administrative functions. The
space is leased for a period lasting until June, 2002.

     Total annual rent for the 12 month period beginning July1, 2000 is $47,096,
escalating to $48,778 for the second year and $50,460 for the third year, each
payable in monthly installments. The lease also provides for payment of our pro
rata share of real estate taxes, insurance, utilities and other operating
expenses. We believe this space will be adequate for our needs for the
foreseeable future. The remainder of our employees are located on-site at
various client locations or in home offices throughout the United States.

ITEM 3. LEGAL PROCEEDINGS

     There are currently no material legal matters or other regulatory
procedures pending or threatened that involve the Company, its property or any
of the principal shareholders, officers or directors in their capacities as
such. No such legal proceeding is known by management to be contemplated.

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     In the future, we may be party to routine matters of litigation relating to
our business, such as personnel matters, which we do not believe will have a
material effect on our financial condition or operations.

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

     A special meeting of the shareholders was held on November 30, 2000 to
ratify and approve an amendment to our Articles of Incorporation to reclassify
5,000,000 shares of authorized but unissued common stock to preferred stock, par
value $.001. The proposal was passed with 4,073,859 votes casts for the
proposal, no votes cast against the proposal and no abstentions. There were no
other matters submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this Report.


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

     The following information sets forth the high and low bid prices for our
common stock for each quarter within the last two fiscal years. Our common stock
trades over-the-counter and has been quoted on the electronic Bulletin Board
("OTCBB") maintained by the National Association of Securities Dealers since
July, 2000. Between July,1999 and July, 2000, our common stock was quoted in the
Pink Sheets, a publication which tracks stock prices for the broker-dealer
community. Trading was sporadic prior to the listing of our stock on the OTCBB.

     The following information has been obtained from the Pink Sheets. The
prices set forth below do not include retail mark-ups, mark-downs or
commissions, and may not represent prices at which actual transactions occurred.

Fiscal Quarter Ended           High         Low
--------------------           ----         ---
    1999
    ----

September 30                  $1.50        $1.50
December 31                    1.50         1.00

    2000
    ----

March 31                       1.31         1.19
June 30                        1.50         1.19
September 30                   2.75         1.25
December 31                    3.81         1.00


                                       8
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     The Company's securities are presently classified as "Penny Stocks" as
defined by existing securities laws. This classification places significant
restrictions upon broker-dealers desiring to make a market in such securities.

Holders

     As of March 20, 2001, the Company had approximately 49 shareholders of
record, not including persons who hold their shares in "street name".

Dividends

     The Company has paid no dividends since inception and it is not anticipated
that any will be paid in the foreseeable future. The payment of dividends in the
future is dependent on the continued generation of revenue and profit, and the
discretion of the Board of Directors based upon such matters as our capital
needs and costs of obtaining capital from outside sources.

Recent Sales of Unregistered Securities

     In November of 2000, we sold a total of 250,000 shares of common stock for
a price of $2.375 per share pursuant to a non-public offering, which sales were
not registered under the Securities Act of 1933. We issued these shares through
J. E. Sheehan & Company, Inc., a registered broker-dealer, who served as
placement agent, and paid a commission to the placement agent in the amount of
10% of the purchase price of the shares. In addition, the placement agent was
issued a warrant entitling it to purchase up to 25,000 shares of our common
stock, exercisable at $2.6125 per share for a period of five years following
closing.

     The Company relied on the exemption from registration provided by
Regulation D, Rule 506 of the 1933 Act. Each purchaser in the placement was an
"accredited investor" within the meaning of Regulation D, and each was afforded
access to the type of information that would be contained in a registration
statement.

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

Overview

     On May 12, 1999, we merged with MedGrup Development Services, Inc., then a
privately held Colorado corporation. At that time, we changed our name to
MedGrup Corporation. MedGrup Development Services had been engaged in the
medical services industry since approximately 1995.

     Effective with the date of the merger, we issued 3,785,000 shares of our
common stock to the former shareholders of MedGrup Development Services. This
transaction has been treated as a recapitalization of MedGrup Development

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Services for accounting purposes, although MedGrup Corporation, formerly known
as Perseus Art Group, Inc., is the legal survivor. The transaction was treated
as a reverse acquisition for accounting purposes, as if MedGrup Development
Services had acquired Perseus. The merger was effective May 12, 1999. However,
the financial statements have been presented as if the transaction took place on
April 30, 1999.

Results of Operations

     Year ended December 31, 2000. Our operations improved substantially during
the year ended December 31, 2000 compared to 1999, as both revenue and net
income grew considerably. Revenue increased 90%, from $2,054,562 for the year
ended December 31, 1999 to $3,895,712 for 2000. Net income also increased
substantially, from $231,650, or $.05 per undiluted share for 1999, to $424,905,
or $.08 per undiluted share for 2000, an increase of 83%. We achieved this
improvement despite our continuing efforts to add corporate infrastructure to
support our growth and establish a platform to allow additional growth in the
future. The growth in net income also occurred despite a reserve of $165,000 for
future income taxes.

     Revenue. Our core service of coding grew as a percentage of total revenue,
from 80% in 1999 to 91% during 2000. This service includes coding of medical
charts which are outsourced to us for coding by our clients, as well as review
of coding done in-house by the medical service providers. We have placed an
emphasis on coding service in our marketing, and expect that it will comprise a
majority of our revenue for the foreseeable future. We expect that coding
revenue will continue to increase as a result of our marketing efforts,
especially due to our status as a preferred provider to two hospital groups in
Texas.

     Other revenue includes consulting and auditing services, fee review and fax
machine rental. We expect that consulting revenue will also increase during
2001, as we have certain long-term contracts with existing and new clients.

     The Code@Home(TM) system may provide the opportunity for additional sources
of revenue in the future. It is currently anticipated that this system will be
offered on a fee basis to healthcare providers that desire to hire off-site
coders themselves. Licensing of the system to third parties may provide revenues
to supplement our coding revenue. Availability of the Code@Home(TM) system may
also increase the opportunity for coding revenue, as independent healthcare
providers become aware of the capability of our business.

     Our growth during 2000 came without the benefit of any business
acquisitions. While we tentatively explored certain acquisitions during the past
year, and continue to evaluate opportunities which come to our attention, we
have so far focused on building our business internally. The substantial
increase in our revenue from 1999 to 2000 resulted from the addition of many new
clients, as well as additional services provided to existing clients. We are
continually adding infrastructure in an effort to expand our service to
additional clients. However, we do not wish to sacrifice service for the sake of
growth. Accordingly, additional clients will be added only as we believe we can
provide quality, reliable service.

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     Net Income. Our net income increased at a slightly slower rate than our
revenue. We believe this is primarily attributable to two factors. First, our
profit margin decreased slightly from 1999 to 2000, from 61% in 1999 to 58% in
2000. We believe this decrease is attributable to hiring and training many new
coders during 2000, with a concurrent increase in cost and decrease in
productivity by bringing coders on line prior to demand.

     The second factor affecting our income significantly was the increase in
general and administrative expenses. Payroll and related expenses increased
substantially from 1999 to 2000 with the increase in our management and
administrative staff. We believe salaries and benefits for our management and
administrative personnel will increase during 2001 as new people are added, and
will continue to represent a significant portion of our expenses. Travel and
related expenses also increased. This coincides with our increased marketing
efforts and client load.

     Costs of Revenue. Costs of revenue were approximately $1,635,753 during
year 2000, resulting in a gross profit margin of approximately 58%. Costs of our
revenue include primarily salaries and benefits for coding personnel. We believe
these costs were higher relative to our revenues during 2000 as compared to 1999
due to the integration of many new coders. We also added many new clients during
2000, which required set-up and familiarization with new information. We expect
each of these situations to continue for the foreseeable future.

     Year ended December 31, 1999. During the year ended December 31, 1999, we
realized net income after taxes of $231,650, or $.05 per share, on total revenue
of $2,054,562. Revenue consisted of coding services of $1,651,439 and other
services, including consulting, of $335,157. Costs of revenue were approximately
$800,000, resulting in a gross profit margin of approximately 60%.

     During the year ended December 31, 1999, we incurred approximately $83,000
of expenses for professional and consulting fees, many of which were related to
the merger. During 2000, we incurred additional professional fees as we began
filing reports with the SEC.

     We are unable at this time to accurately predict what effect, if any,
inflation will have on our operations in the future. While we believe labor
costs will increase in the short-term, we expect our prices will increase to
keep pace. However, there is no assurance that our clients will accept price
increases in the future. We also cannot predict what effect new services will
have on our operations, as we are a relatively new business.

Liquidity and Capital Resources

     December 31, 2000. We continued to enjoy a strong financial position at
December 31, 2000. At that date, we had working capital of $1,287,181,
consisting of current assets of $1,463,568 and current liabilities of $176,387.
On the basis of our financial condition at December 31, 2000, and our
foreseeable cash requirements, we believe our capital resources are sufficient
for the 2001 fiscal year. Beyond that time, we may require cash from outside
sources if we continue to grow at our current pace.

                                       11

<PAGE>


     Our working capital at December 31, 2000 increased by $725,201 from
year-end December 31, 1999. During that time, current assets increased
approximately $603,166 while current liabilities decreased $122,814. Our net
worth also improved during year 2000, from $811,088 at December 31, 1999 to
$1,774,716 at December 31, 2000.

     The improvement in our financial condition during 2000 is primarily
attributable to cash and accounts receivable generated by operations and cash
from financing activities. The increase in our current assets resulted from cash
generated by operations of $300,000, the receipt of proceeds from private
placements of $512,000 and an increase in accounts receivable.

     During the year ended December 31, 2000, our operations provided
approximately $300,000 in cash. A majority of that is attributable to an
increase in net income due to the growth of the business. Accounts receivable
and prepaid expenses accounted for approximately $422,000 of cash which we used
during the year. We used additional cash in connection with investing
activities, primarily the acquisition of equipment and leasehold improvements.

     We spent $631,000 on the purchase of equipment and leasehold improvements
during 2000, primarily computers and high-speed fax machines used in our coding
service. A substantial portion of this amount was invested in our Code@HomeTM
software and hardware. These purchases were financed with cash from operations
and proceeds from the private placements discussed below. Cash increased
$181,000 during the year. The remaining increase in our working capital came
from an increase in accounts receivable. We believe that the reservoir of
receivables accrued at year end, coupled with our existing cash, will be
sufficient to satisfy our cash and capital requirements for the year 2001.

     Accounts Receivable. Accounts receivable increased substantially during
2000, commensurate with the increase in revenue. At December 31, 2000, we had
accrued $986,481 of accounts receivable from our clients, net of allowances for
potentially uncollectable accounts. The increase in accounts receivable during
2000 of $321,000 contributed to the increase in our current assets. This
represents a substantial investment for us. Accordingly, we closely monitor our
receivables in an effort to insure collection, and were successful during 2000
in collecting all amounts which were outstanding at December 31, 1999.

     Historically, we have a very high collection rate for our receivables. As
many of our hospital clients are government funded, collections are reasonably
certain. However, our collection experience is historically approximately 45 to
60 days after billing. This resulted in the need to raise additional capital
during late 1999 and early 2000. As our revenues grow, our need to finance
additional receivables may increase as well.

     Equity Financing. We satisfied our cash requirements during 2000 partially
through private sales of our common stock. On July 9, 1999, we commenced an
offering of 600,000 shares of common stock for $1.00 per share. The shares were
offered pursuant to an exemption from the securities offering registration
requirements provided by rule 506 of Regulation D of the Securities Act of 1933,
as amended. The offering closed in January, 2000, following the sale of all
600,000 shares. Of that amount, 215,000 shares were sold in 2000 for net

                                       12

<PAGE>


proceeds of $162,350, after deducting $52,650 in offering costs. Pursuant to the
placement agent agreement, the placement agent also received warrants to
purchase 43,000 shares of our common stock for $1.10 per share. The warrants
have been valued at their fair value of $15,136 and recorded in the financial
statements as outstanding common stock warrants.

     In November 2000, the Company sold 250,000 shares for net proceeds of
$524,279 after deducting $69,471 in offering costs. Pursuant to the placement
agent agreement, we issued warrants to purchase 25,000 shares of the Company's
common stock to the placement agent exercisable at $2.50 per share. We also
issued 25,000 warrants to another NASD member firm for services rendered in
connection with the offering. The warrants have been valued at their fair value
of $29,875 and recorded in the financial statements as outstanding common stock
warrants.

     Capital Requirements. Our greatest need for capital currently is to finance
equipment acquisition and to implement Code@HomeTM. We have a substantial
investment in equipment to conduct coding services, both within our client
hospitals and at remote locations where our coders operate. We finance a portion
of these equipment acquisitions. We acquire this equipment, consisting of
sophisticated fax machines and computers, from independent third parties,
through a combination of outright purchase and capital leases. At December 31,
2000, we had acquired $888,776 of equipment, net of accumulated depreciation,
which included approximately $109,265 of capital leases. While we believe our
existing equipment is adequate for our immediate needs, we must replace and/or
expand our equipment in the future to maintain operations and our perceived
competitive edge.

     We also require cash for payment of salaries and benefits to our coders, as
well as management and administrative personnel. Whether our coders are paid on
a salary or piecework basis, we must compensate them in advance of payment from
our clients. Historically, our operations have been sufficient to fund these
costs, and we anticipate that revenue will suffice in the future.

     We believe we have a variety of resources to finance future capital
requirements. We believe we could obtain additional financing through additional
placement of our equity securities, or by obtaining a line of credit from a
commercial lender. We currently have very little long-term debt, and a limited
amount of short-term obligations.

     December 31, 1999. At December 31, 1999, we had working capital of
$561,201, consisting of current assets of $860,402 and current liabilities of
$299,201. During the year ended December 31, 1999, our operations used
approximately $57,000 in cash. A majority of that use is attributable to an
increase in accounts receivable, in the approximate amount of $450,000. We used
an additional $150,000 in cash in connection with investing activities,
primarily the acquisition of equipment and leasehold improvements.

     We satisfied our cash requirements during 1999 primarily through private
sales of our common stock. In July, 1999, we undertook an offering of up to
600,000 shares at a price of $1 per share pursuant to exemptions from the
registration requirements of existing Federal and state securities laws. A
securities broker/dealer acted as our placement agent for purposes of this

                                       13

<PAGE>


offering and charged us a 10% commission on sales and a non-accountable expense
allowance of 1% of the gross proceeds raised in the offering. We also issued
50,000 shares of common stock valued at $50,000 and warrants to acquire our
common stock at an exercise price of $1.10 per share at the rate of one warrant
for each five shares sold in the offering. We netted a total of $275,054 prior
to year-end on the sale of 385,000 shares after $110,000 of offering costs. The
remainder of the offering was sold during 2000.

     We also received $87,000 through the issuance of notes to private parties
during 1999. These notes were subsequently converted to common stock during the
year at a price of $.60 per share. Overall, our cash increased approximately
$100,000 during the year.

Special Note Regarding Forward-Looking Statements

     This Report contains forward-looking statements within the meaning of
federal securities laws. These statements plan for or anticipate the future.
Forward-looking statements include statements about the future of the medical
services industry, statements about our future business plans and strategies,
statements about our need for working capital, future revenues, results of
operations and most other statements that are not historical in nature. In this
Report, forward-looking statements are generally identified by the words
"anticipate," "plan," "believe," "expect," "estimate," and the like. Because
forward-looking statements involve future risks and uncertainties, there are
factors that could cause actual results to differ materially from those
expressed or implied. Some of these risks include, among others, the following:

     Effects of Rapid Growth. Because of our limited operating history and
revenues, we maintain a relatively limited staff of management and
administrative personnel. This situation places great stress on these
individuals to manage our growth. Our continued growth will depend on a variety
of factors, including our ability to initiate, develop and maintain new client
relationships. We must also assure that our existing clients receive quality
service from our coders. We must also develop systems to accurately record and
monitor our growth. We must also evaluate and expand our facilities and
equipment to ensure our clients receive quality service and we can continue to
grow as we hope. All of these factors place great demands on our people and our
systems, and we cannot assure that we will continue to grow at our past rate.

     Dependence on Health-Care Providers. Our customers are typically hospitals
and other healthcare providers, and we derive substantially all of our revenues
from services to hospitals. Our performance therefore depends on continued
demand for our service from these providers. Consolidation in the healthcare
industry, particularly in the hospital market, could decrease the number of
potential purchasers of our services or contribute to the loss of one or more of
our significant customers. Either of these events could negatively affect our
business, financial condition and results of operation. Legislative or
market-driven reforms could also negatively affect our business. Finally, the
decision to purchase our services typically involves the approval of several
members of management of a hospital. Consequently, it is difficult for us to
predict the timing or outcome of the buying decision of our customers or
potential customers.

                                       14

<PAGE>


     Dependence on Technology. We depend on our computer and telecommunications
equipment and software capabilities to run our business. Our failure to maintain
the competitiveness of our technological capabilities or respond effectively to
technological changes could negatively affect our business, results of
operations or financial condition. As we are not a computer software provider,
we do not typically invest funds in research and development for our coding
software. We depend on products acquired from independent third parties. Our
continued growth and future profitability will depend on a number of factors,
including our ability to (i) expand our existing service offerings to include
desired customer services and (ii) as our business matures, introduce new
services that leverage and respond to changing technological and healthcare
developments. We cannot assure that technologies or services developed by our
competitors will not render our products or services non-competitive or
obsolete.

     Lack of Long Term Contracts. Our contracts with clients may be terminated
on 90 days advance notice and do not ensure that we will generate a minimum
level of revenue. The profitability of each client may fluctuate, sometimes
significantly, depending on service required by that entity. We are not usually
designated as our clients' exclusive coding provider. However, we believe that
meeting our client's expectations can have a more significant impact on our
revenues and profitability than the specific terms of our contracts. We believe
we have excellent relations with all of our clients.

     Dependence on Qualified Coders. Our success depends largely on our ability
to recruit, hire, train and retain qualified employees, especially medical
coders. Our industry is very labor intensive and requires highly trained and
experienced personnel. While we believe we have excellent relations with our
existing employees, we must continually recruit new employees to sustain our
growth. Our employees are partially responsible for successful relations with
our clients. For that reason, it is important that we maintain a qualified labor
force. Qualified coders are in high demand and short supply in our industry. We
must also retain employees at acceptable costs, including wages, employee
benefits and taxes. An increase in these expenses could adversely affect our
business and financial condition.


ITEM 7. FINANCIAL STATEMENTS

     Reference is made to the Index of Financial Statements following Part IV of
this Report for a listing of the Company's financial statements and notes
thereto.


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

     We retained Cordovano & Harvey, P.C., independent accountants, to audit our
financial statements beginning with the year ended December 31, 1999. Cordovano
& Harvey replaced A. Liparulo, CPA, who acted as the accountant for MedGrup
Development Services, Inc. and audited its financial statements for the year
ended December 31, 1998. The dismissal of A. Liparulo and hiring of Cordovano &
Harvey was approved by our Board of Directors. Cordovano & Harvey, P.C. audited
the financial statements of Perseus Art Group, Inc. prior to its name change to
MedGrup Corporation.

                                       15

<PAGE>


     The report of A. Liparulo for December 31, 1998 did not contain an adverse
opinion or disclaimer of opinion, nor was such report modified as to
uncertainty, audit scope or accounting principles. There was no disagreement
with A. Liparulo on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which, if not resolved to
his satisfaction, would have caused him to make reference to the subject matter
of the disagreement in connection with his report.


                                    PART III

Item 9. Directors and Executive Officers of the Registrant

     The information required by this item is incorporated herein by reference
from the Company's proxy statement for the annual meeting of shareholders to be
held on May 17, 2001.

Item 10. Executive Compensation

     The information required by this item is incorporated herein by reference
from the Company's proxy statement for the annual meeting of shareholders to be
held on May 17, 2001.

Item 11. Security Ownership of Certain Beneficial Owners and Management

     The information required by this item is incorporated herein by reference
from the Company's proxy statement for the annual meeting of shareholders to be
held on May 17, 2001.

Item 12. Certain Relationships and Related Transactions

     The information required by this item is incorporated herein by reference
from the Company's proxy statement for the annul meeting of shareholders to be
held on May 17, 2001.


                                     PART IV

Item 13. Exhibits and Reports on Form 8-K

(a)  Exhibits

     The following is a list of exhibits filed or incorporated by reference into
this Report:

                                       16

<PAGE>


No.      Description

2(1)      Articles of Merger, MedGrup Corporation, as the survivor and MedGrup
          Development Services, Inc., as filed with the Secretary of State of
          the State of Colorado on May 12, 1999.

3.1(1)    Articles of Incorporation of the Company as filed on June 26, 1998
          with the Secretary of State of the State of Colorado.


3.2(1)    Articles of Amendment to the Articles of Incorporation, as filed with
          the Secretary of State of the State of Colorado May 12, 1999.

3.3*      Articles of Amendment to the Articles of Incorporation as filed with
          the Secretary of State of the State of Colorado on December 26, 2000.

3.4(1)    Amended and Restated Bylaws

4(1)      Form of Certificate for Common Stock

8         Not applicable.

9         Not applicable.

10.1(1)   Form of Agreement for Coding Services

10.2(1)   Form of Capital Lease Agreement between the Company and Wells Fargo
          Equipment Finance, Inc. dated June 2, 1999.

10.3(1)   Commercial Property Lease Agreement between the Company and Gary Bader
          dated March 15, 2000.

10.4(1)   Form of Warrant Agreement between the Company and Kashner Davidson
          Securities Corporation.

10.5(1)   Employment Agreement between the Company and William D. Cronin, dated
          January 1, 2000.

10.6(1)   Employment Agreement between the Company and Terry J. Holmes, dated
          February 14, 2000.

10.7(1)   Employment Agreement between the Company and Margaret M. Cronin, dated
          January 1, 2000.

10.8(1)   Employment Agreement between the Company and Gary B. Mendenhall, dated
          August 10, 2000.

10.9*     Employment Agreement between the Company and James Wantman, dated
          January 1, 2000.

10.10(1)  Incentive Stock Option Plan with Form of Option Agreement.

10.11(1)  Option Agreement between the Company and Gary Mendenhall, dated May
          26, 1999.

10.12(1)  Option Agreement between the Company and Terry Holmes, dated February
          14, 2000.

10.13*    Option Agreement between the Company and James Wantman, dated January
          3, 2000.

                                       17

<PAGE>


10.14(1)  Software Limited License Agreement between the Company and QuadraMed
          Corporation dated December 13, 1999.

11        Not applicable.

16(2)     Letter to the Company from A. Liparulo, CPA dated June 9, 2000

18        Not applicable

21        Not applicable

22        Not applicable

23        Not applicable

99        Not applicable.
-------------------------------

* Filed herewith.

(1)  Filed as an Exhibit to Registration Statement filed on Form SB-2, SEC File
     No. 333-35810 and incorporated herein by reference.

(2)  Filed as an Exhibit to Amendment to Registration Statement filed on Form
     SB-2/A, SEC File No. 333-35810 and incorporated herein by reference.

(b) Reports on Form 8-K.

     The Company has not filed any Reports on Form 8-K during the fourth quarter
of the fiscal year covered by this Report.

                                       18

<PAGE>



                               MEDGRUP CORPORATION
                               -------------------




                                                                            Page
                                                                            ----

Independent auditors' report.................................................F-2

Balance sheet as of December 31, 2000........................................F-3

Statements of operations, for the years ended December 31, 2000 and 1999.....F-4

Statement of shareholders' equity,  for the period January 1, 1999
 through December 31, 2000 ..................................................F-5

Statements of cash flows, for the years ended December 31, 2000 and 1999.....F-6

Notes to financial statements................................................F-7


                                      F-1


<PAGE>


To the Board of Directors and Shareholders
Medgrup Corporation

                          INDEPENDENT AUDITORS' REPORT

We have audited the accompanying balance sheet of Medgrup Corporation as of
December 31, 2000 and the related statements of operations, shareholders' equity
and cash flows for the years ended December 31, 2000 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medgrup Corporation, as of
December 31, 2000 and the results of its operations and cash flows for the years
ended December 31, 2000 and 1999, in conformity with generally accepted
accounting principles.



/s/ Cordovano and Harvey, P.C.
------------------------------
Cordovano and Harvey, P.C.
Denver, Colorado
February 16, 2001


                                       F-2

<PAGE>
<TABLE>
<CAPTION>

                                 MEDGRUP CORPORATION
                                 -------------------
                                    BALANCE SHEET
                                  DECEMBER 31, 2000


                                       ASSETS

CURRENT ASSETS
    <S> .................................................................   <C>
     Cash ...............................................................   $  363,376
     Accounts receivable, net of allowance for doubtful accounts $12,092       986,481
     Prepaid expenses ...................................................      113,711
                                                                            ----------
                                                     TOTAL CURRENT ASSETS    1,463,568


PROPERTY AND EQUIPMENT, net of
     accumulated depreciation of $223,545  (Note C) .....................      888,776


DEPOSITS ................................................................        5,300
                                                                            ----------
                                                                            $2,357,644
                                                                            ==========


                        LIABILITIES AND SHAREHOLDERS' EQUITY


CURRENT LIABILITIES
     Accounts payable, trade ............................................   $   60,350
     Accrued expenses ...................................................       39,365
     Income taxes payable ...............................................         --
     Current portion of note payable (Note D) ...........................       15,553
     Current portion of capital leases payable (Note D) .................       61,119
                                                                            ----------
                                                TOTAL CURRENT LIABILITIES      176,387
                                                                            ----------

NOTE PAYABLE (Note D) ...................................................       25,948

CAPITAL LEASES PAYABLE (Note D) .........................................       14,011

DEFERRED INCOME TAXES (Note F) ..........................................      366,582
                                                                            ----------
                                                       TOTAL  LIABILITIES      582,928
                                                                            ==========

COMMITMENTS (Note H) ....................................................         --


SHAREHOLDERS' EQUITY
     Preferred stock, $.001 par value; 5,000,000 shares authorized;
       0 shares issued and outstanding ..................................         --
     Common stock, $.001 par value; 45,000,000 shares authorized;
       5,806,831 shares issued and outstanding ..........................        5,807
       155,000 outstanding common stock warrants ........................       91,415
       25,000 outstanding common stock options ..........................        9,925
     Additional paid in capital .........................................    1,088,437
     Retained earnings ..................................................      579,132
                                                                            ----------
                                               TOTAL SHAREHOLDERS' EQUITY    1,774,716
                                                                            ----------
                                                                            $2,357,644
                                                                            ==========


                 See accompanying notes to the financial statements

                                         F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                               MEDGRUP CORPORATION
                               -------------------
                            STATEMENTS OF OPERATIONS


                                                       For the Years Ended December 31,
                                                       ------------------------------
                                                             2000          1999
                                                         -----------    -----------
REVENUES
      <S> ............................................   <C>            <C>
      Coding services ................................   $ 3,530,052    $ 1,651,439
      Other ..........................................       264,670        335,157
      Rental income ..................................       100,990         67,966
                                                         -----------    -----------
                                        TOTAL REVENUES     3,895,712      2,054,562
                                                         -----------    -----------

COSTS AND EXPENSES
      Cost of revenue ................................     1,635,753        809,723
      Stock based compensation, coding services ......        14,671          4,634
      Stock based compensation, consulting ...........         9,925           --
      Provision for doubtful accounts ................          --           39,136
      Professional and consulting fees ...............        80,779         83,404
      General and administrative .....................     1,367,869        807,512
      Depreciation ...................................       141,901         57,820
      Gain on disposal of assets .....................          --           (2,283)
                                                         -----------    -----------
                              TOTAL OPERATING EXPENSES     3,250,898      1,799,946
                                                         -----------    -----------

                                      OPERATING INCOME       644,814        254,616

NONOPERATING INCOME (EXPENSE)
      Interest expense ...............................       (12,180)       (14,912)
      Interest income ................................        16,237           --
      Other income ...................................          --            1,500
                                                         -----------    -----------
                        NET INCOME BEFORE INCOME TAXES   $   648,871    $   241,204


INCOME TAXES (NOTE F)
      Current tax expense ............................       (58,233)          (507)
      Deferred tax expense ...........................      (165,733)        (9,047)
                                                         -----------    -----------
                                            NET INCOME   $   424,905    $   231,650
                                                         ===========    ===========

NET INCOME PER SHARE:
      Basic ..........................................   $      0.08    $      0.05
                                                         ===========    ===========
      Diluted ........................................   $      0.07    $      0.05
                                                         ===========    ===========




SHARES USED FOR COMPUTING NET INCOME PER SHARE:
      Basic ..........................................     5,583,944      4,544,167
                                                         ===========    ===========
       Diluted .......................................     6,129,673      4,907,917
                                                         ===========    ===========

Pro forma information (Note A):


      Pro forma net income before income taxes .......           N/A    $   141,204
      Pro forma provision for income taxes ...........           N/A        (48,715)
                                                         -----------    -----------
      Pro forma net income ...........................           N/A    $    92,489
                                                         ===========    ===========
      Pro forma basic earnings per share .............           N/A    $      0.02
                                                         ===========    ===========


               See accompanying notes to the financial statements

                                       F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>


                                             MEDGRUP CORPORATION
                                             -------------------
                                      STATEMENT OF SHAREHOLDERS' EQUITY
                               From January 1, 1999 through December 31, 2000


                                                                      Common Stock      Outstanding  Common Stock
                                                                   Shares      Amount     Warrants     Options
                                                                  ---------   ---------   ---------   ---------
<S>                                                               <C>         <C>         <C>         <C>
                                       BALANCE, JANUARY 1, 1999   3,785,000*  $   3,785        --     $    --

Shareholders' distribution ....................................        --          --          --          --

Net income from January 1, 1999 to April 30, 1999 .............        --          --          --          --

Deferred income tax expense resulting from change in
tax reporting metods ..........................................        --          --          --          --

S Corporation termination .....................................        --          --          --          --

Merger with Perseus Art Group .................................     955,000         955        --          --

Sale of common stock, net of $109,946 offering costs ..........     385,000         385        --          --

Stock issued for payment of $50,000 offering costs,
valued at fair value of stock50 ...............................      50,000          50        --          --

Stock issued for conversion of notes payable ..................     145,000         145        --          --

77,000 warrants issued for payment of offering costs,
valued at fair value of warrants ..............................        --          --        27,104        --

15,293 options issued for coding services, valued at
fair value of optons ..........................................        --          --          --         4,634

Deferred taxes relating to the termination of S Corporation ...        --          --          --          --

Net income from May 1, 1999 through December 31, 1999 .........        --          --          --          --
                                                                  ---------   ---------   ---------   ---------
                                     BALANCE, DECEMBER 31, 1999   5,320,000       5,320      27,104       4,634

Sale of common stock, net of $52,650 offering costs ...........     215,000         215        --          --

43,000 warrants issued for payment of offering costs,
valued at fair value of warrants ..............................        --          --        15,136        --

42,000 options vested during 2000, granted for services,
valued at fair value of otions ................................        --          --          --        11,906

Common stock options exercised ................................      21,831          22        --        (6,615)

Sale of common stock, net of $69,471 offering costs ...........     250,000         250        --          --

25,000 warrants issued for payment of offering costs,
valued at fair value of warrants ..............................        --          --        29,875        --

10,000 warrants issued for payment of services,
valued at fair value of warrants ..............................        --          --        19,300        --

Net income for the year ended December 31, 2000 ...............        --          --          --          --
                                                                  ---------   ---------   ---------   ---------
                                     BALANCE, DECEMBER 31, 2000   5,806,831   $   5,807   $  91,415   $   9,925
                                                                  =========   =========   =========   =========

*Restated from 1,100  See Note A

                                        See accompanying notes to the financial statements

                                                                F-5
<PAGE>

                                            MEDGRUP CORPORATION
                                            -------------------
                                     STATEMENT OF SHAREHOLDERS' EQUITY
                              From January 1, 1999 through December 31, 2000


                                                                    Additional                       Total
                                                                      Paid in       Retainied     Shareholders'
                                                                      Capital       Earnings        Equity
                                                                    -----------    -----------    -----------

                                         BALANCE, JANUARY 1, 1999   $     1,415    $   234,264    $   239,464

Shareholders' distribution ......................................          --         (100,000)      (100,000)

Net income from January 1, 1999 to April 30, 1999 ...............          --           77,423         77,423

Deferred income tax expense resulting from change in
tax reporting metods ............................................          --         (118,516)      (118,516)

S Corporation termination .......................................        93,171        (93,171)          --

Merger with Perseus Art Group ...................................          (955)          --             --

Sale of common stock, net of $109,946 offering costs ............       274,669           --          275,054

Stock issued for payment of $50,000 offering costs,
valued at fair value of stock50 .................................           (50)          --             --

Stock issued for conversion of notes payable ....................        86,855           --           87,000

77,000 warrants issued for payment of offering costs,
valued at fair value of warrants ................................       (27,104)          --             --

15,293 options issued for coding services, valued at
fair value of optons ............................................          --             --            4,634

Deferred taxes relating to the termination of S Corporation .....          --           (4,418)        (4,418)

Net income from May 1, 1999 through December 31, 1999 ...........          --          158,645        158,645
                                                                    -----------    -----------    -----------
                                       BALANCE, DECEMBER 31, 1999       428,001        154,227        619,286

Sale of common stock, net of $52,650 offering costs .............       162,135           --          162,350

43,000 warrants issued for payment of offering costs,
valued at fair value of warrants ................................       (15,136)          --             --

42,000 options vested during 2000, granted for services,
valued at fair value of otions ..................................          --             --           11,906

Common stock options exercised ..................................        19,283           --           12,690

Sale of common stock, net of $69,471 offering costs .............       524,029           --          524,279

25,000 warrants issued for payment of offering costs,
valued at fair value of warrants ................................       (29,875)          --             --

10,000 warrants issued for payment of services,
valued at fair value of warrants ................................          --             --           19,300

Net income for the year ended December 31, 2000 .................          --          424,905        424,905
                                                                    -----------    -----------    -----------
                                       BALANCE, DECEMBER 31, 2000   $ 1,088,437    $   579,132    $ 1,774,716
                                                                    ===========    ===========    ===========

*Restated from 1,100  See Note A

                            See accompanying notes to the financial statements

                                               F-5(Con't)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                     MEDGRUP CORPORATION
                                     -------------------
                                   STATEMENTS OF CASH FLOWS


                                                                   For the Years Ended December 31,
                                                                   --------------------------------
                                                                          2000          1999
                                                                        ---------    ---------
OPERATING ACTIVITIES
    <S>                                                                 <C>          <C>
    Net income ......................................................   $ 424,905    $ 231,650
    Transactions not requiring cash:
        Depreciation ................................................     141,901       57,820
        Gain on disposition of assets ...............................        --         (2,283)
        Increase to allowance for doubtful accounts .................        --         39,136
        Stock based compensation expense ............................      24,596        4,634

    Changes in current assets and current liabilities:
        Increase in receivables and  prepaid expenses ...............    (422,233)    (501,515)
        Increase in accounts payable and accrued liabilities ........     130,332      113,132
                                                                        ---------    ---------
                                       NET CASH PROVIDED BY (USED IN)
                                                 OPERATING ACTIVITIES     299,501      (57,426)
                                                                        ---------    ---------


INVESTING ACTIVITIES
    Equipment and leasehold purchases ...............................    (626,808)    (155,153)
    Proceeds from sale of equipment .................................        --          7,000
    Cash paid for deposits ..........................................      (4,000)      (1,300)
                                                                        ---------    ---------
                                                   NET CASH (USED IN)
                                                 INVESTING ACTIVITIES    (630,808)    (149,453)
                                                                        ---------    ---------

FINANCING ACTIVITIES
    Sale of common stock ............................................     808,750      385,000
    Cash paid for offering costs ....................................    (122,121)    (109,946)
    Distributions, loan repayments to shareholder ...................    (100,000)     (10,287)
    Payments on capital leases ......................................     (58,338)     (42,748)
    Payments on note payable ........................................     (16,051)        (953)
    Proceeds from notes payable .....................................        --         87,000
                                                                        ---------    ---------
                                                 NET CASH PROVIDED BY
                                                 FINANCING ACTIVITIES     512,240      308,066
                                                                        ---------    ---------


NET INCREASE  IN CASH ...............................................     180,933      101,187
Cash, beginning .....................................................     182,443       81,256
                                                                        ---------    ---------
Cash, ending ........................................................   $ 363,376    $ 182,443
                                                                        =========    =========


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ..............................................   $  12,180    $  14,912
                                                                        =========    =========
Cash paid for income taxes ..........................................   $ 153,750    $    --
                                                                        =========    =========

NONCASH INVESTING AND FINANCING ACTIVITIES:
50,000 common shares issued for payment of offering costs ...........   $    --      $  50,000
68,000 and 77,000 stock warrants issued for payment of offering costs   $  45,011    $  27,104
145,000 common shares issued for conversion of notes payable ........   $    --      $  87,000
Vehicle acquired in exchange for note payable .......................   $  35,550    $  19,119
Equipment acquired under capital lease ..............................   $    --      $  88,919
10,000 stock warrants issued for software consulting costs ..........   $  19,300    $    --


                     See accompanying notes to the financial statements

                                           F-6
</TABLE>
<PAGE>


                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Note A: Organization and business, and summary of significant accounting
policies
------------------------------------------------------------------------

Organization and business

Effective May 7, 1999, Medgrup Development Services, Inc. ("MDSI") merged with
Perseus Art Group, Inc. ("Perseus") which was incorporated under the laws of the
state of Colorado on June 26, 1998. Concurrent with the merger, Perseus changed
its name to Medgrup Corporation (the "Company"). MDSI originated as an Illinois
corporation then moved all operations to Colorado in 1997 where it subsequently
became a corporation under the laws of the state of Colorado on February 2,
1997.

The Company is a medical consulting company that specializes in the coding of
medical record charts of previously discharged patients from various hospitals'
inpatient, outpatient and emergency rooms. The Company provides services to
approximately 70 hospitals in nine states. The contracts with the hospitals vary
from the Company coding all of the medical charts for the hospitals to the
hospitals having some of their coded medical charts reviewed by the Company.
Hospitals pay the Company on a per chart basis.

Acquisition and merger
----------------------
On May 7, 1999, MDSI exchanged 100 percent of its outstanding shares of common
stock for 3,785,000 shares of the common stock of the Company. This acquisition
has been treated as a recapitalization of MDSI, a Colorado corporation, with the
Company the legal surviving entity. Since the Company had, prior to the
recapitalization, no assets or liabilities and no operations, the
recapitalization has been accounted for as the sale of 1,100 shares of MDSI for
the net liabilities of the Company. The recapitalization took place on May 7,
1999; however, the financial statements have been prepared as if the
recapitalization took place on April 30, 1999. MDSI and the Company were
unrelated prior to the reverse merger.

S Corporation termination
-------------------------
MDSI terminated its S Corporation tax status as of April 30, 1999 in conjunction
with its merger with the Company. At that date, MDSI had $93,171 of
undistributed earnings as restated to reflect $118,516 and $73,286 for 1999 and
1998, respectively, in deferred income tax expense related to the difference in
accrual versus cash reporting for income taxes. The financial statements include
the transfer of $93,171 from retained earnings to additional paid-in-capital.
The financial statements show the pro forma effect on net income of shareholder
distributions totaling $100,000 for the year ended December 31, 1999, as if the
distributions were compensation expense to the shareholders. The pro forma
financial information shows pro forma corporate tax expense for the year ended
December 31, 1999. The pro forma amount has been restated to reflect the change
in income reporting methods. (See Note F-Income Taxes). Pro forma basis earnings
per share reflect the weighted average shares outstanding as if the merger was
effective at the beginning of all periods presented.

                                       F-7

<PAGE>


                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Summary of significant accounting policies:

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

Reclassifications
-----------------
Certain amounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year
financial statements.

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

Concentrations and credit risk
------------------------------
Approximately 34 percent and 41 percent of the Company's net revenues during
2000 and 1999, respectively were for services rendered to two hospitals.

The Company has concentrated its credit risk for cash by maintaining deposits in
financial institutions, which may at times, exceed the amounts covered by
insurance provided by the United States Federal Deposit Insurance Corporation
("FDIC"). The maximum loss that would have resulted from that risk totaled
$410,834 at December 31, 2000, for the excess of the deposit liabilities
reported by financial institutions over the amount that would have been covered
by federal insurance. The Company has not experienced any losses to date in such
accounts and accordingly, believes it is not exposed to any significant credit
risk.

Accounts receivable
-------------------
The Company closely monitors extensions of credit and has not experienced
significant losses related to its receivables. Two hospitals comprised 36
percent of the accounts receivable balance at December 31, 2000. Management
periodically reviews the aging of accounts receivable and records a charge to
provision for doubtful accounts for those accounts that significantly exceed 90
days past due:

     Acccounts receivable at January 1, 2000, net.......$   665,783
     Collection of accounts receivable..................   (665,783)
     Increase in allowance for doubtful accounts........       --
     Accounts written off, charged to allowance.........     42,593
     Increase in accounts receivable....................    943,888
                                                        -----------
     Accounts receivable at December 31, 2000, net......$   986,481
                                                        ===========


                                       F-8

<PAGE>


                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Summary of significant accounting policies continued:

Long-lived assets
-----------------
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of", the Company periodically
reviews the values assigned to long-lived assets, such as property and
equipment, to determine whether any impairments are other than temporary. SFAS
No. 121 requires that an impairment loss be recognized when the carrying amount
of an asset exceeds the expected future undiscounted net cash flows. Management
believes that the long-lived assets in the accompanying balance sheets are
appropriately valued.

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
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.

Revenue recognition
-------------------
Revenue is recognized at the time the services are rendered. Other revenue is
comprised of services provided to customers for clerical support, consulting and
review of charts coded by hospital employees. Fax rental income is for revenue
derived from renting fax machines to customers for use in facilitating the
coding process and is recognized when earned.

Stock-based compensation
------------------------
The Company accounts for any stock-based compensation plans using the intrinsic
value method prescribed by the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Compensation cost for
stock options, if any, is measured as the excess of the quoted market prices of
the Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.

SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") was issued
in October 1995. This accounting standard permits the use of either a fair value
based method or the method defined in APB 25 to account for stock-based
compensation arrangements. Companies that elect to use the method provided in
APB 25 are required to disclose the pro forma net income and earnings per share
that would have resulted from the use of the fair value based method. The
Company has elected to continue to determine the value of the stock-based
compensation arrangements under the provision of APB 25 and, accordingly, has
included the pro forma disclosures required under SFAS 123 in Note E.

                                       F-9

<PAGE>


                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Summary of significant accounting policies continued:

Fair value of financial instruments
-----------------------------------
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. The
Company has determined, based on available market information and appropriate
valuation methodologies, the fair value of its financial instruments
approximates carrying value. The carrying amounts of cash, prepaid expenses,
accrued compensation, and other accrued liabilities approximate fair value due
to the short-term maturity of the instruments.

Earnings per share
------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share" (SFAS 128). The Company adopted SFAS 128 for the
two-year period ended December 31, 2000. Under SFAS 128, net income per
share-basic excludes dilution and is determined by dividing income available to
common shareholders by the weighted average number of common shares outstanding
during the period. Net income per share-diluted reflects the potential dilution
that could occur if securities and other contracts to issue common stock were
exercised or converted into common stock.

Property and equipment
----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, which is estimated to be three to five years.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the consolidated statements of operations. Leasehold improvements
are amortized over thirty six months.

Leased property meeting certain criteria is capitalized and the present value of
the related lease payments is recorded as a liability. Amortization of
capitalized leased assets is computed on the straight-line method over the term
of the lease.

Note B:  Related party transactions
-----------------------------------

During the year ended December 31, 1999, the Company repaid advances received
from the President of the Company totaling $10,287. Also, during the year ended
December 31, 1999, the President of the Company leased office space to the
Company for three months for a total of $1,500.

Prior to the termination of the S Corporation status, the Company recorded a
distribution payable (return of earnings) of $100,000 to the S Corporation
shareholders. This was paid during the year ended December 31, 2000.

                                      F-10

<PAGE>

                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Note C:  Property and equipment
-------------------------------

The Company is in the process of launching a new project, Code@Home. The
project's new technology will allow hospitals to transmit charts to the
Company's central server. From the server, the charts will be automatically
routed to the appropriate coder(s) based on the facility and type of chart. When
the coder has finished the charts, the updated data will be transmitted back to
the server. During the fourth quarter 2000, the Company incurred $229,612 for
expenditures related to the project. The project is expected to become
operational during 2001. The Code@Home idle assets include computer hardware and
software costs and have not been placed in service, therefore no depreciation
expense has been recorded.


                                                       Property
                                       Property      under Capital     Total
                                       Acquired          Lease       Property
                                      ----------      ----------    ----------
    Furniture and fixtures............$   59,251      $   11,397    $   70,648
    Computer equipment................   291,286          39,658       330,944
    Fax equipment.....................   227,132         123,501       350,633
    Vehicles..........................    72,988            --          72,988
    Leasehold improvements............    57,496            --          57,496
    Code@Home, idle assets............   229,612            --         229,612
                                      ----------      ----------    ----------
                                         937,765         174,556     1,112,321
    Less accumulated depreciation.....  (158,254)        (65,291)     (223,545)
                                      ----------      ----------    ----------
                                      $  779,511      $  109,265    $  888,776
                                      ==========      ==========    ==========


Note D:  Debt
-------------

Convertible notes
-----------------
On April 30, 1999, the Company issued notes in the amounts of $15,000, $36,000
and $36,000 to three individuals. The notes were non-interest bearing and were
convertible into 25,000, 60,000 and 60,000, respectively, of shares of the
Company's common stock. On May 26, 1999, the notes were converted.

                                      F-11

<PAGE>
<TABLE>
<CAPTION>


                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Note D:  Debt, continued
------------------------

Long-term debt consists of the following notes payable and capital leases
payable at December 31, 2000:

Notes payable:
<S>                                                                             <C>
Note payable due in monthly installaments of $489, interest at .90 percent,
maturing October 15, 2002, collateralized by vehicle............................$   10,919

Note payable due in monthly installaments of 494, interest at .90 percent,
maturing February 1, 2003 collateralized by vehicle.............................$   12,715

Note payable due in monthly installaments of 447, interest at 8.99 percent,
maturing December 30, 2004 collateralized by vehicle............................$   17,867
                                                                                ----------
                                                                                    41,501
Less: Current maturities........................................................   (15,553)
                                                                                ----------
                                                                                $   25,948
                                                                                ==========


Maturities on notes payable, subsequent to December 31, 2000 are as follows:
                    2001........................................................$   15,553
                    2002........................................................    15,046
                    2003........................................................     5,909
                    2004........................................................     4,993
                                                                                ----------
                                                                                    41,501
                                                                                ==========

Capital leases payable:
Capital lease, due in monthly installments of $2,845, net of imputed interest,
maturing November 2001, collateralized by equipment.............................$   29,933

Capital lease, due in monthly installments of $2,845, net of imputed interest,
maturing May 2002, collateralized by equipment..................................    45,197
                                                                                ----------
                                                                                    75,130
Less: current maturities........................................................   (61,119)
                                                                                ----------
                                                                                $   14,011
                                                                                ==========

Payments on capital leases payable, subsequent to December 31, 2000 are as
follows:
                    2001........................................................$   65,435
                    2002........................................................    14,225
                                                                                ----------
                                                                                    79,660
                    Less: imputed interest......................................    (4,530)
                                                                                ----------
                    Present value of net minimum lease paymentrs................$   75,130
                                                                                ==========


                                            F-12
</TABLE>

<PAGE>


                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Note E:  Stock based compensation
---------------------------------

Common stock options
--------------------
The Company has an Incentive Stock Option Plan (the "Plan"), and has reserved
1,750,000 shares of common stock for issue as options are granted. Under the
Plan, the Company may grant incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended. Under Section 422 of the Code,
exercise of a qualified incentive stock option will not create income to the
option holder on the date of exercise; income recognition is deferred until
disposition of the stock acquired. Incentive stock options must be granted with
an exercise price equal to or greater than the fair market value of the
underlying common stock on the date of grant. Incentive stock options granted to
holders of more than ten percent of the outstanding common stock must have (1)
an exercise price equal to at least 110% of the fair market value of the
underlying common stock on the date of grant, and (2) a term not exceeding five
years.

The Plan provides that the total number of shares covered by such plan, the
number of shares covered by each option, and the exercise price per share may be
proportionally adjusted in the event of a stock split, reverse stock split,
stock dividend, or similar capital adjustment which is effected with receipt of
additional consideration by the Company.

During the years ended December 31, 2000 and 1999 the Company granted 936,000
and 693,500 options, respectively, pursuant to the Plan. In 2000 and 1999,
127,500 and 34,500, respectively, of the options were canceled prior to vesting
due to termination of the employee or non-performance of the terms of the option
agreement. During 2000, no options, pursuant to the plan, were exercised. The
options vest over a period of up to three years, or vest based on certain
performance criteria and are priced at or above the current over-the-counter
share trading price on the date of grant. The options expire on various dates
ending 2007. The expiration dates are based on the date of grant and expire from
five to seven years after date of grant. The following summarizes the expiration
schedule for options outstanding at December 31, 2000:


                       Expiration                     Number
                          Date                      of Options
                   -------------------------------------------
                   2nd Quarter 2006...............     572,000
                   3rd Quarter 2006...............       3,000
                   4th Quarter 2006...............      74,500
                   1st Quarter 2007...............     620,000
                   2nd Quarter 2007...............      27,000
                   3rd Quartre 2007...............      96,000
                   4th Quarter 2007...............      75,000
                                                     ---------
                                                     1,467,500
                                                     =========


                                      F-13

<PAGE>
<TABLE>
<CAPTION>

                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Note E:  Stock based compensation, continued
--------------------------------------------

Common stock options, continued
-------------------------------

                                                Incentive Stock Option Plan
                                                ---------------------------
                                                                                 Options and   Weighted
                                                         Incentive    Executive   Warrants      Average
                                                           Stock      Employment  Issued to    Exercise
                                                          Options      Options   NonEmployees    Price
                                                         ---------    ---------   ---------    ---------
                  <S>                                     <C>          <C>        <C>          <C>
                   Outstanding, January 1, 1998 ......        --           --          --      $    --

Options and warrants granted .........................        --           --          --           --
                                                         ---------    ---------   ---------    ---------
                Outstanding,  December 31, 1998 ......        --           --          --            --


Options and warrants granted .........................     193,500      500,000     342,293         1.04
Options and warrants cancelled .......................     (34,500)        --      (175,000)       (1.00)
                                                         ---------    ---------   ---------    ---------
                 Outstanding, December 31, 1999 ......     159,000      500,000     167,293         1.05


Options and warrants granted .........................     336,000      600,000      88,000         1.49
Options and warrants cancelled .......................    (127,500)        --       (18,462)       (1.45)
Options and warrants exercised .......................        --           --       (21,831)       (1.00)
                                                         ---------    ---------   ---------    ---------
                 Outstanding, December 31, 2000 ......     367,500    1,100,000     215,000    $    1.29
                                                         =========    =========   =========    =========


                                      F-14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS
                                     (Con't)


Note E:  Stock based compensation, continued
--------------------------------------------

Common stock options, continued
-------------------------------

                                                                                      Weighted
                                                          Weighted                     Average
                                                          Average                  Exercise Price
                                                           Fair       Currently      Currently
                                                           Value     Exercisable    Exercisable
                                                         ---------    ---------       ---------
                   <S>                                   <C>           <C>           <C>
                   Outstanding, January 1, 1998 ......   $    --           --         $    --

Options and warrants granted .........................        --           --              --
                                                         ---------    ---------       ---------
                Outstanding,  December 31, 1998 ......        --           --              --


Options and warrants granted .........................        0.32      363,293            1.02
Options and warrants cancelled .......................       (0.30)        --              --
                                                         ---------    ---------       ---------
                 Outstanding, December 31, 1999 ......        0.32      363,293            1.02


Options and warrants granted .........................       0.78       439,833            1.36
Options and warrants cancelled .......................      (0.72)         --              --
Options and warrants exercised .......................      (0.30)      (15,293)          (1.00)
                                                         ---------    ---------       ---------
                 Outstanding, December 31, 2000 ......   $   0.57       787,833       $    1.21
                                                         ========     =========       =========



                                                                            Options and Warrants as of December 31, 2000
                                                               -------------------------------------------------------------------
                                                                              Outstanding                        Exercisable
                                                               ----------------------------------------    -----------------------
                                                                                               Weighted
                                                                                Weighted       Average                     Weighted
                                                                                Average       Remaining                    Average
                                                                 Number         Exercise     Contracual       Number       Exercise
          Range of Exercisable Price                           Outstanding       Price          Life       Exercisable     Price
          --------------------------                           -----------      ---------     ---------    -----------    ---------
                 $1.00  $2.00                                   1,607,500       $    1.21         5.75        752,833     $    1.13
                 $2.01  $3.00                                      31,000       $    2.52         5.12         25,000     $    2.50
                 $3.01  $4.00                                      44,000       $    3.41         7.49         10,000     $    4.00
                                                                ---------       ---------     ---------     ---------
                                                                1,682,500       $    1.29         5.78        787,833     $    1.21
                                                                =========       =========     =========     =========     =========


                                   F-14(Con't)
</TABLE>
<PAGE>


                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Note E:  Stock based compensation continued
--------------------------------------------

Executive employment options
----------------------------
On May 26, 1999 the Company granted options for 500,000 shares of its common
stock, to an officer of the Company, exercisable for $1.00 per share. The
options begin vesting at the rate of 250,000 as of the grant date with the
remaining 250,000 vesting based on the performance of the Company's common stock
price. If, for thirty consecutive days, the stock trades greater than $2.00,
$3.00, $4.00 or $5.00 per share; 60,000, 60,000, 60,000 and 70,000, vest
respectively. The options expire on May 26, 2006. The options were granted at
the market value of the Company's common stock as of May 26, 1999. The market
price was based on the $1.00 cash offering price of the Company's common stock,
which was contemporaneous with the grant date. In accordance with APB 25, no
compensation expense was recorded.

On January 3, 2000 the Company granted options for 100,000 shares of its common
stock to an officer of the company, exercisable for $1.31 per share.

On February 14, 2000 the Company entered into an Executive Employment Agreement
(the "Agreement") with the new President of the Company. The Agreement provides
for an annual salary and a grant of 500,000 incentive stock options. The options
vest in increments of 83,333 options every six months, provided the President is
still employed by the Company. The options are exercisable for $1.31 per share
and the market price on the date of grant was $1.19.

Non-employee options
--------------------
On June 3, 1999 the Company granted options for 15,293 shares of its common
stock, exercisable for $1.00 per share to an individual for payment of coding
services rendered to the Company. The options were granted at the market value
of the Company's common stock as of June 3, 1999. They are fully vested and
expire on June 3, 2006. The fair value of the options as determined in
accordance with SFAS No. 123 is $4,634 and has been charged to operations with a
corresponding credit to equity shown as outstanding common stock options. During
2000, the options were exercised.

On December 30, 1999 the Company granted options for 50,000 shares of its common
stock, to a consultant, exercisable for $1.31 per share. The options vest based
on the performance of the Company's common stock price. If, for thirty
consecutive days, the stock trades greater than $2.00, $3.00, $4.00 or $5.00 per
share; 15,000, 10,000, 10,000 and 15,000, vest respectively. The options expire
on December 30, 2006. The options were granted at the market value of the
Company's common stock as of December 30, 1999. During 2000, 15,000 shares were
vested and the Company recorded compensation expense for the fair value of the
vested shares in the amount of $5,955.

On January 3, 2000, the Company granted options to a consultant to purchase
10,000 shares of the Company's common stock for $1.31 per share, when $1.19 was
the market value of the Company's common stock on that date. The options expire
seven years from date of grant. The fair value of the options, $3,970 was
recorded as compensation expense.

                                      F-15

<PAGE>


                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Note E:  Stock based compensation continued
-------------------------------------------

SFAS 123
--------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 123 encourages the use of a fair value based method of
accounting for compensation expense associated with stock option awards and
similar plans. SFAS 123 permits the continued use of the intrinsic value based
method prescribed by APB 25, but requires additional disclosures, including pro
forma calculations of net earnings and earnings per share, as if the fair value
method of accounting prescribed by SFAS 123 had been applied for the applicable
periods. The fair value of each option granted has been estimated as of the
grant date using the Black-Scholes option-pricing model with the following
weighted-average assumptions:

                                                 2000       1999
                                                -----------------
                 Risk-free interest rate.....    6.623%    6.623%
                 Expected volatility.........   50.00%    60.00%
                 Expected dividends..........     --        --
                 Expected life - years.......     7         7


During the year 1999, the weighted-average exercise price and fair values of
options granted and vested with an exercise price equal to the market price of
the stock were $1.00 and $.30, respectively. There were no options that were
granted at prices less than or in excess of the market price of the underlying
stock on date of grant.

During the year ended December 31, 2000, the weighted-average exercise price and
fair values of options granted and vested with an exercise price greater than
the market price of the stock were $1.31 and $.64, respectively. There were none
granted at prices less than or equal to the market price of the underlying stock
on date of grant.

Had compensation expense been determined based on the fair value at the grant
date, and charged to expense over vesting periods, consistent with the
provisions of SFAS 123, the Company's net income and net income per share would
have decreased to the pro forma amounts indicated below:

                                      F-16
<PAGE>
<TABLE>
<CAPTION>


                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Note E:  Stock based compensation continued
-------------------------------------------

SFAS 123 continued
------------------
                                                   For the year ended December 31,
                                                       2000             1999
                                                    ----------       ----------
     <S>                                            <C>              <C>
     Net income, as reported....................... $  424,905       $  231,650
        Decrease due to:
          Employee stock options...................    (94,487)          (6,363)
          Executive employment options.............   (144,680)         (75,750)
                                                    ----------       ----------
                                                    $  185,738       $  149,537
                                                    ==========       ==========

     Net income per share - basic, as reported..... $     0.08       $     0.05
     Net income per share - diluted, as reported... $     0.07       $     0.05

     Pro Forma:
     Net income per share - basic.................. $     0.03       $     0.03
     Net income per share - diluted................ $     0.03       $     0.03


The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. Option valuation models also require the input of highly
subjective assumptions such as expected option life and expected stock price
volatility. Because the Company's stock-based awards have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
Company believes that the existing option valuation models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards.

                                      F-17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                   MEDGRUP CORPORATION
                                   -------------------
                              NOTES TO FINANCIAL STATEMENTS


Note F:  Income taxes
---------------------

A  reconciliation  of net income at the statutory  Federal income tax rate of 34
percent to the benefit for income taxes follows:

                                                                      Eight Months Ended
                                                 December 31, 2000     December 31, 1999
                                                 --------------------------------------
<S>                                              <C>                   <C>
Tax expense at statutory rate..................  $       (222,230)     $        (55,685)
State income taxes, net of federal benefit.....           (30,263)               (7,583)
Accrual to cash conversion.....................           139,690                62,297
Expenses not deductible for income taxes.......            (6,207)               (6,694)
Difference in depreciation methods.............            22,792                 7,158
Net operating loss carryforward................            37,985                  --
(Increase) in deferred tax liability...........          (165,733)               (9,047)
                                                 ----------------      ----------------
Income tax expense from operations.............  $       (223,966)     $         (9,554)
                                                 ================      ================


At December 31 the deferred tax liability  consisted of the following  temporary
differences:
                                                       2000                  1999
                                                 ---------------------------------------
Accrual to cash conversion.....................  $        350,743      $        182,693
Tax versus book depreciation methods...........            15,839                18,156
                                                 ----------------      ----------------
Net deferred taxes.............................  $        366,582      $        200,849
                                                 ================      ================


The expense for income taxes consist of the following for the year ended
December 31, 2000:

                         Current          Deferred            Total
                      ----------         ----------        ----------
Federal.............  $   51,245         $  145,845        $  197,090
State...............       6,988             19,888            26,876
                      ----------         ----------        ----------
Total...............  $   58,233         $  165,733        $  223,966
                      ==========         ==========        ==========


As discussed in Note A, the Company reports income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes". Also, as discussed in Note A, the
Company terminated its S Corporation status on April 30, 1999. In connection
with that termination, the Company recorded deferred income taxes as of April
30, 1999 and a one-time charge to earnings of $4,418. The total income tax
provision for the eight months ended December 31, 1999 has been allocated as
follows:

                 Arising from termination of S Corporation........  $4,418
                 Subsequent to S Corporation termination..........   5,136
                                                                    ------
                                                                    $9,554
                                                                    ======


During 2000, the Company filed the final tax return for the S Corporation. In
the final tax return the Company changed the method of recording income taxes
for the S Corporation to the cash basis, the method which the Company currently
reports its income taxes. In connection with that change, the Company recorded a
$191,802 charge to retained earnings prior to the merger to reflect deferred
income taxes resulting from the change in income tax reporting method.

                                      F-18
</TABLE>
<PAGE>

                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Note G:  Shareholders' equity
-----------------------------

On July 9, 1999 the Company commenced an offering of 600,000 shares of its
common stock for $1.00 per share. The shares were offered pursuant to an
exemption from the securities offering registration requirements provided by
rule 506 of Regulation D of the Securities Act of 1933, as amended. The offering
closed on January 15, 2000. As of December 31, 1999 the Company sold 385,000
shares for net proceeds of $275,054 after deducting $109,946 in cash offering
costs. The Company also issued 50,000 shares to the placement agent as non-cash
offering costs valued at $50,000. Pursuant to the placement agent agreement, the
placement agent also received warrants to purchase 77,000 shares of the
Company's common stock for $1.10 per share. The warrants have been valued at
their fair value of $27,104 and recorded in the financial statements as
outstanding common stock warrants.

In January 2000 the Company sold the remaining 215,000 shares for net proceeds
of $162,350 after deducting $52,650 in offering costs. Pursuant to the placement
agent agreement, the placement agent also received warrants to purchase 43,000
shares of the Company's common stock for $1.10 per share. The warrants have been
valued at their fair value of $15,136 and recorded in the financial statements
as outstanding common stock warrants.

In November 2000 the Company sold 250,000 shares for net proceeds of $524,279
after deducting $69,471 in offering costs. Pursuant to the placement agent
agreement, the placement agent also received warrants to purchase 25,000 shares
of the Company's common stock for $2.50 per share. The warrants have been valued
at their fair value of $29,875 and recorded in the financial statements as
outstanding common stock warrants.

The Company issued 10,000 warrants to purchase 10,000 shares of the Company's
common stock for $4.00 per share. The warrants were issued to a consultant
assisting the Company with its Code@Home project. The warrants valued at their
fair value of $19,300 are recorded in the financial statements as outstanding
common stock warrants.

Offering costs consist primarily of placement and legal fees and selling
commissions.

Preferred Stock
---------------
The Company amended its articles of incorporation to allocate 5,000,000 shares
of its 50,000,000 authorized shares of common stock to be classified as
preferred stock. The Company is authorized to issue the $.001 par value
preferred stock in series with such designations, preferences, stated values,
rights, qualifications or limitations as determined by the Board of Directors.

                                      F-19
<PAGE>


                               MEDGRUP CORPORATION
                               -------------------
                          NOTES TO FINANCIAL STATEMENTS


Note H:  Commitments
--------------------

Non-cancelable leases
---------------------
The Company leased office space under a non-cancelable operating lease that
expires in March 2002. Without penalty, the Company terminated the lease in June
of 2000. The Company entered into a new non-cancelable operating lease for
office space beginning July 2000 and ending June 30, 2003. Total office rent
expense incurred under the leases for the years ended December 31, 2000 and 1999
was $39,475 and $16,000, respectively. The Company also leases vehicles and fax
machines under non-cancelable leases that begin to expire in November 2001.
Total lease expense for the vehicles for the years ended December 31, 2000 and
1999 was $22,971 and $14,633, respectively. Total lease expense for the fax
machines for the years ended December 31, 2000 and 1999 was $2,303 and $5,526,
respectively. Future minimum lease payments for the leases with initial terms in
excess of one year as of December 31, 2000 are as follows:

                       December 31, 2001........$   70,488
                       December 31, 2002........$   71,033
                       December 31, 2003........$   36,598
                       December 31, 2004........$      551


                                      F-20
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized in Monument, Colorado on the
21st day of March, 2001.

                                            MEDGRUP CORPORATION


                                            By:  /s/  WILLIAM D. CRONIN
                                               ---------------------------------
                                                      William D. Cronin,
                                                      Chairman of the Board
                                                      and Chief Executive
                                                      Officer

     Pursuant to the requirements of the Security Exchange Act of 1934, as
amended, this Report has been signed by the following persons in the capacities
and on the dates indicated.

Signatures                                  Title                      Date
----------                                  -----                      ----


/s/  WILLIAM D. CRONIN              Chairman of the Board,       March 21, 2001
-----------------------------       Chief Executive Officer
     William D. Cronin


/s/  TERRY J. HOLMES                President, Director          March 21, 2001
-----------------------------
     Terry J. Holmes


/s/  MARGARET M CRONIN              Executive Vice President,    March 21, 2001
-----------------------------       Secretary and Director
     Margaret M. Cronin



/s/  JAMES S. WANTMAN               Vice President - Finance,    March 21, 2001
-----------------------------       Controller (Chief Financial
     James S. Wantman               Officer)



/S/  ALAN W. BALDWIN                Director                     March 21, 2001
-----------------------------
     Alan W. Baldwin


/s/  ELIZABETH W. MURDAUGH          Director                     March 21, 2001
-----------------------------
     Elizabeth W. Murdaugh


                                       19