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, 2001

( )  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. Employer Identification No.)
incorporation or organization)

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

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

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 $5,384,817.

The  aggregate  market  value of the  2,519,777  shares of voting  stock held by
non-affiliates of the Company as of March 20, 2002 was $3,905,654 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 20,
2002 was 5,899,777.


                       Document incorporated by reference:

None

<PAGE>



                                TABLE OF CONTENTS



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


   ITEM 1.  DESCRIPTION OF BUSINESS...........................................1

   ITEM 2.  DESCRIPTION OF PROPERTY...........................................8

   ITEM 3.  LEGAL PROCEEDINGS.................................................8

   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............8


PART II.......................................................................9


   ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........9

   ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........10

   ITEM 7.  FINANCIAL STATEMENTS.............................................18

   ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS....................18


PART III.....................................................................19


   ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............19

   ITEM 10. EXECUTIVE COMPENSATION...........................................23

   ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...24

   ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................26


PART IV......................................................................27

   ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.................................27


SIGNATURES...................................................................30

                                       ii
<PAGE>

                           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  and  scanners.  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 have  signed  "preferred  vendor"  agreements  with two large Texas
          hospital  consortiums,  which  essentially help market our services to
          their members.

     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.

                                        1
<PAGE>

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

     o    We market our software,  Code@Home(TM), to healthcare organizations to
          facilitate their independent coding needs.

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 twenty-four
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  are 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.

                                        2
<PAGE>

     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.

     We derive  approximately  86% 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
allow 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.

Code@Home(TM) Software

     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.  The first  implementation  of the system
commenced in August of 2001,  and  Code@Home(TM)  is now installed in ten of our
hospitals, and is being utilized by about 25% of our coding staff.

                                        3
<PAGE>

     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
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 also  provides the  opportunity  for  additional
sources of revenue.  This system is being  offered on a fee basis to  healthcare
providers  that desire to hire  off-site  coders  themselves.  Licensing  of the
system to third parties will provide  revenues to supplement our coding revenue.
The 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.  We have executed our first license agreement with a
Texas hospital system for an April 2002 installation.

Customers

     We presently have  approximately  77 active clients in ten 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.

                                        4
<PAGE>

     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 or consortiums, such as T.O.R.C.H.,  Covenant,
Dallas-Fort  Worth Hospital  Council and VHA Southwest,  Inc. 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 Baptist St. Anthony's Hospital in Amarillo,
Texas 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 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 have entered into five agreements under
this contract  covering ten  facilities.  We anticipate  gaining  additional new
clients pursuant to these preferred vendor agreements.

Marketing

     Our  marketing is conducted  primarily  through a staff  managed by William
Cronin, Chairman of the Board, Chief Executive Officer and President. 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.

                                        5
<PAGE>

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.

     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  Quadra-Med,   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.

Recent Events

     The Company and Provider HealthNet Services Inc. of Dallas,  Texas ("PHNS")
signed a merger  agreement on March 26, 2002 for the  acquisition by PHNS of all
shares  of  MedGrup  stock  not  owned  by  two of our  officers  and  principal
shareholders, William and Margaret Cronin, at a cash price of $2.2465 per share,
subject  to  possible   adjustment  based  on  our  financial   performance  and
capitalization  prior to closing. In addition,  William and Margaret Cronin have
agreed,  subject  to  certain  conditions,  to sell all of their  MedGrup  stock
(approximately  56.8% of the outstanding  MedGrup stock) to PHNS for $1.2537 per
share in cash and $0.8358 per share in PHNS stock,  plus a  contingent  earn-out
based on future  performance.  If the  transactions  are completed,  the medical
coding businesses of MedGrup and PHNS will be combined into an approximately $17
million  revenue PHNS coding  subsidiary  that will be managed by the management
team from MedGrup.

     The agreement  between the Cronins and PHNS is structured as an option that
may be  exercised  by  PHNS  during  a  ten-day  period  after  the  vote of our
shareholders,  and must be exercised by PHNS following  satisfaction  of certain
conditions,  including  approval  of the merger by holders of a majority  of the
outstanding  MedGrup  stock and a  majority  of the  outstanding  MedGrup  stock
excluding the Cronins' MedGrup stock. Consummation of the merger also is subject
to  completion of due  diligence  investigations,  receipt by MedGrup of a final
fairness  opinion  from  a  financial  advisor  retained  by  MedGrup,   various
Securities and Exchange Commission filing requirements, and other conditions.

                                        6
<PAGE>

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
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.

                                        7
<PAGE>

Employees

     As of March 1, 2002, we employed 114 people,  including  full and part-time
employees. Of that amount, six are executive officers of the Company, two are in
sales, 27 are clerical level  individuals  servicing our clients,  four serve as
customer service staff, four work in our information technology department, four
are coding auditors,  four serve as  administration in our corporate offices and
63 are coding providers. Of the coding providers,  approximately 53 are employed
on a  full-time  basis and 10 are  employed on a  part-time  basis.  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  7,300  square  feet of office  space which  serves our  executive
officers,  billing,  bookkeeping and certain other administrative functions. The
space is leased for a period expiring June 2003.

     Total  annual  rent  for the 12 month  period  beginning  July 1,  2000 was
$47,096,  escalating  to $48,778  for the second  year and $50,460 for the third
year,  each  payable  in monthly  installments.  We leased  additional  space in
December of 2000 at a rate of $15,000 per year,  escalating to $15,650 effective
June 1, 2001.  The lease also provides for payment of our pro rata share of real
estate  taxes,  insurance,  utilities  and other  operating  expenses.  We added
another 1,200 square feet in September of 2001 at a rate of $12,800 per year. 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.

     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 affect on our financial condition or operations.

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

     No matters  were  submitted to a vote of the  security  holders  during the
fourth quarter of the last fiscal year.

                                        8
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

     The  following  table  shows the range of high and low bids for our  common
stock for the last two  fiscal  years.  Our  common  stock has  traded  over the
counter since July, 1999 and is currently  quoted on the OTC Bulletin Board. The
bid prices  through the second  quarter of 2000 were reported in the Pink Sheets
by the National  Quotations Bureau. Bid prices from the third quarter of 2000 to
date have been  reported by NASDAQ based on  quotation in the OTCBB.  Trading in
our common stock is very limited at present.

     The  quotations  below  represent  prices between  dealers,  do not include
retail markup, markdown or commissions, and may not necessarily represent actual
transactions.

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

         2000
         ----

March 31                     1.31        1.19
June 30                      1.50        1.19
September 30                 2.75        2.19
December 31                  4.63        1.00

         2001
         ----

March 31                     4.25        1.25
June 30                      3.34        2.33
September 30                 2.65        1.50
December 31                  2.05        1.50

     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, 2002,  the Company had  approximately  42  shareholders  of
record, not including persons who hold their shares in "street name."

                                        9
<PAGE>

Dividends

     The Company has paid no dividends since inception and it is not anticipated
that any will be paid in the foreseeable future. Payment of future dividends, if
any,  will be at the  discretion  of our Board of  Directors  after  taking into
account  various  factors,   including  our  financial  condition,   results  of
operations, current and anticipated cash needs and plans for expansion.

Recent Sales of Unregistered Securities

     Throughout  the 2001 fiscal year, the Company issued options to acquire its
common stock to  employees  and  consultants.  The options were issued under the
1999  Incentive  Stock Option Plan, as amended.  As of the 2001 fiscal year end,
options to purchase  1,316,000 shares of our common stock were  outstanding,  of
which  682,833  had  vested.  The  number of shares  of common  stock  remaining
available  for new option grants under this Plan was 532,233 at fiscal year end.
A total of 92,946  shares  were  acquired  on the  cashless  exercise of 168,667
options  during the last fiscal year.  The exercise  prices of the options range
from $1.00 per share to $3.71 per share,  with a weighted average exercise price
of $1.48 per share.


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


Results of Operations

     Year ended December 31, 2001.  Our business  continued to expand during the
year ended  December 31, 2001 compared to 2000.  Revenue  increased  nearly 50%,
from  $3,895,712  for the year ended  December 31, 2000 to $5,834,817  for 2001.
Although revenue increased, net income decreased  substantially,  from $424,905,
or $.08 per undiluted  share for 2000, to $202,315,  or $.03 per undiluted share
for 2001, a decrease of 52%.

     Revenue.  Our core service of coding decreased  slightly as a percentage of
total revenue, from 91% during 2000 to 86% in 2001. 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 have increased our emphasis on consulting by adding billing
services to our  available  services,  and  consulting  accounted for 11% of our
total  revenues,  an increase  of 4% of total  revenues as compared to the prior
fiscal year.

                                       10
<PAGE>

     The  Code@Home(TM)  system will provide an additional  source of revenue in
the future.  We have signed our first agreement to license the system to a major
hospital system with installation scheduled for April of 2002.

     Our  growth   during  2000  came   without  the  benefit  of  any  business
acquisitions.  While we have continued to build our business internally, we have
placed greater  emphasis on possible  external  growth by exploring  acquisition
possibilities  during the past year,  and we continue to evaluate  opportunities
which come to our attention.  The substantial  increase in our revenue from 2000
to 2001  resulted  from the addition of new  clients,  as well as an increase in
coding  volume and  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.

     Net Income.  Although our revenue increased  substantially,  our net income
decreased  significantly  because of an increase in cost of revenue, an increase
in general and  administrative  expenses  and a one time charge for  stock-based
compensation to a company officer at termination. Our cost of revenue was 48% of
our total revenues,  an increase of 6% compared to the year ended December 2000.
Our general and  administrative  expenses  increased  62% and made up 38% of our
total  revenues,  up 3% as compared to the year ended  December 2000. Our profit
margin decreased from 2000 to 2001, from 58% in 2000 to 52% in 2001.

     In addition to the stock compensation  expense, we believe this decrease is
attributable  to  overstaffing  of coders during 2001. We hired and trained many
new coders during 2001 in  anticipation  of demand for services during the third
and fourth quarters which did not materialize as anticipated.  This overstaffing
caused a concurrent  increase in cost and decrease in  productivity  by bringing
the coders on line prior to demand.  The events of September 11th proved to have
a  negative  impact on our  business  as well,  as we saw a marked  decrease  in
interest  by  hospitals  in  considering  financial  changes  to their  business
structures through the end of the year. Additionally during 2001, we experienced
a temporary  but  substantial  loss of  revenues  from a major  customer  due to
closure  of the  hospital  as a result  of major  flooding,  and the  concurrent
retention  of the  coding  staff  hired for that  hospital  during the period of
closure.

     Although we were  overstaffed for portions of 2001, we choose to retain the
coders because of the limited supply of these highly skilled,  specially trained
individuals.  Although  demand  did not  increase  as  anticipated,  some of the
additional  coders were hired in part in anticipation of serving two major urban
hospitals  recently added to our client list.  Coding demand and staffing levels
are now stabilized.

     Increase in general  and  administrative  expenses  also  impacted  our net
income.  Payroll and related  expenses  continued to increase  from 2000 to 2001
with a substantial increase in our management and administrative  staff. Payroll
expenses were impacted in 2001 by the use of an outsourced  payroll service that
imposed a  significant  fee. This service has been  discontinued  because of its
high   administrative   costs.   Travel  and  related  expenses  also  increased
significantly.  This coincides with our increased  marketing  efforts and client
load.

                                       11
<PAGE>

     Although our net income  decreased by 52%,  our earnings  before  interest,
taxes,  depreciation  and amortization  ("EBITDA")  decreased at a substantially
lower  rate.  Our EBITDA of  $550,684  for the period  ended  December  31, 2001
decreased 30% compared to $786,715 for the period ended  December 31, 2000.  Our
EBITDA for the 2001 fiscal year was 9.4% of total  revenues,  as compared to 20%
for the 2000 fiscal year.

     Costs of Revenue.  Costs of revenue were  approximately  $2,800,067  during
year 2001, resulting in a gross profit margin of approximately 52%. Costs of our
revenue include primarily salaries and benefits for coding personnel. We believe
these costs were higher relative to our revenues during 2001 as compared to 2000
due to the integration of many new coders. We also added many new clients during
2001, which required set-up and familiarization with new information.  We expect
each of these situations to continue for the foreseeable  future.  Code@Home(TM)
development  expenses continued to accrue through the fourth quarter. We believe
development  of  this  system  is  substantially   complete,  but  expenses  for
installation will continue as a regular expense.

     Year ended  December 31, 2000.  During the year ended December 31, 2000, we
realized net income after taxes of $424,905, or $.08 per share, on total revenue
of  $3,895,712.  Revenue  consisted of coding  services of $3,530,052  and other
services, including consulting, of $365,990. Costs of revenue were approximately
$1,635,753, resulting in a gross profit margin of approximately 58%.

     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 affect new services  will
have on our operations, as we are a relatively new business.

Liquidity and Capital Resources

     December 31, 2001.  We  continued to enjoy a strong  financial  position at
December  31,  2001.  At  that  date,  we had  working  capital  of  $1,215,630,
consisting of current assets of $1,580,390 and current  liabilities of $364,760.
On  the  basis  of our  financial  condition  at  December  31,  2001,  and  our
foreseeable cash  requirements,  we believe our capital resources are sufficient
for the 2002 fiscal  year.  Beyond that time,  we may require  cash from outside
sources if we continue to grow at our current pace.

     Our working capital at December 31, 2001 decreased by $71,551 from year-end
December 31, 2000, or about 5.5%.  During that time,  current  assets  increased
approximately $116,822 and current liabilities increased $188,373. Our net worth
improved during year 2001, from $1,774,716 at December 31, 2000 to $2,171,136 at
December 31, 2001.

                                       12
<PAGE>

     The improvement in our financial  condition  during 2001 is attributable to
cash and accounts receivable  generated by operations,  along with a substantial
increase in  property  and  equipment.  Because of our  substantial  increase in
business,  we acquired  additional property and equipment necessary to serve our
clients, and our accounts receivable increased by nearly 30%.

     During  the  year  ended  December  31,  2001,   our  operations   provided
approximately  $654,610  in  cash.  Accounts  receivable  and  prepaid  expenses
accounted for  approximately  $276,737 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  $673,475 on the purchase of equipment and leasehold  improvements
during 2001,  primarily computers and high-speed fax machines used in our coding
service. A substantial  portion of this amount was invested in our Code@Home(TM)
software and hardware.  These purchases were financed with cash from operations.
Cash  decreased  $96,649  during the year.  While our cash and  working  capital
decreased  from 2000,  we did not  receive  any cash from  financing  activities
during 2001. 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 2002.

     Accounts  Receivable.  Accounts receivable  increased  substantially during
2001,  commensurate  with the increase in revenue.  At December 31, 2001, we had
accrued  $1,280,218 of accounts  receivable from our clients,  net of allowances
for  potentially  uncollectable  accounts.  The increase in accounts  receivable
during 2001 of $293,737  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, to date,  have  collected
approximately 98% of the accounts receivable outstanding at December 31, 2001.

     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 60 to
90 days after  billing.  As our revenues  grow,  our need to finance  additional
receivables may increase as well.

     Capital  Requirements.  Our  greatest  need for capital  continues to be to
finance  equipment  acquisition  and  to  implement  Code@Home(TM).  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,
2001, we had acquired $1,372,712 of equipment, net of accumulated  depreciation,
which included  approximately  $41,329 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.

                                       13
<PAGE>

     We  believe  we have a variety  of  resources  to  finance  future  capital
requirements. We currently have a line of credit agreement with Wells Fargo Bank
for $250,000,  and did not carry an outstanding balance at December 31, 2001. We
believe we could obtain additional financing through additional placement of our
equity  securities if necessary.  We currently have very little  long-term debt,
and a limited amount of short-term obligations.

     December  31,  2000.  At  December  31,  2000,  we had  working  capital of
$1,287,181,  consisting of current assets of $1,463,568 and current  liabilities
of  $176,387.  During the year ended  December  31, 2000,  our  operations  used
approximately  $422,000 in cash.  A majority of that use is  attributable  to an
increase in accounts  receivable  and prepaid  expenses.  We used an  additional
$631,000  in  cash  in  connection  with  investing  activities,  primarily  the
acquisition of equipment and leasehold improvements.

     We satisfied our cash  requirements  during 2000 primarily through accounts
receivable  generated from  operations and cash from  financing  activities.  At
December  31,  2000,  we had accrued  $986,481 of accounts  receivable  from our
clients,  net of allowances for  potentially  uncollectible  accounts.  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. The offering closed in January of 2000, and
215,000 shares were sold in 2000 for net proceeds of $162,350,  after  deducting
$52,650 in  offering  costs.  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. The warrants
have been  valued at their fair value of $29,875 and  recorded in the  financial
statements as outstanding common stock warrants.

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:

                                       14
<PAGE>

     We depend in part upon  collection  of accounts  receivable  to finance our
working capital requirements,  and failure to collect or unanticipated delays in
collection  could  adversely  impact  our  operations.   Accounts   represent  a
substantial  portion of our  working  capital.  This  represents  a  substantial
investment  for us. We depend on  collecting  those  receivables  to finance our
working capital  requirements.  While we believe we maintain an adequate reserve
against those  receivables,  we cannot assure we will succeed in collecting  the
remainder.  As most of our customers are hospitals which are wholly or partially
government funded, we believe our collections are reasonably  certain.  However,
we  typically  collect  our  receivables  60 to 90 days after  billing.  We must
finance our operations during this collection time.

     We are growing at a rapid rate,  and,  if we cannot  expand our  personnel,
equipment and facilities  fast enough to keep up with our growth,  we may not be
able to maintain quality service.  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 assure that our existing clients receive quality service
from our coders.  We must 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 that 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.

     We are  dependent on the hospital  market for our  business,  and cannot be
assured of the level of demand for our services in the future. 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.

     Our success depends on retaining  qualified  coders.  There is no guarantee
that we will be able to find experienced and quality staff to serve our clients.
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
somewhat 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.

                                       15
<PAGE>

     We are dependent on the services of certain key personnel,  and the loss of
any of the key personnel could adversely  impact our business.  We depend on the
continued service of key management employees. These individuals include William
Cronin,  Chairman of the Board, Chief Executive Officer and President,  Margaret
Cronin,  Executive Vice  President,  Secretary and Treasurer,  Gary  Mendenhall,
Senior Vice  President,  James S.  Wantman,  Controller  and Vice  President  of
Finance,  Kemmel Dunham,  Vice  President of Systems  Support and Steven Holmes,
Vice  President of  Operations.  Mr. Cronin founded the Company and is primarily
responsible for marketing the Company's  services to our clients.  Mrs.  Cronin,
also a founder of the  Company,  is  responsible  for  financial  aspects of the
business,  with a focus on  billing  and  reporting  functions.  The loss of the
services of any of these  individuals  could adversely  affect our business.  We
have employment  agreements with each of these  individuals for a term of one to
three years.  However,  we maintain no "key man" life  insurance on any of their
lives. The loss of any of these individuals could adversely affect our business.

     Our  success  depends  upon our  ability to keep up with  rapidly  changing
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  historically  a  computer
software provider,  we do not typically invest funds in research and development
for  our  coding  software.  We  generally  depend  on  products  acquired  from
independent third parties.  We are, however,  in the process of implementing our
Code@Home(TM) software,  which we believe to be a significant advance in medical
records transport technology. When fully implemented, we expect this system will
supplement  our existing  technology  for  transporting  records and improve our
efficiency.  We also expect to make it an  additional  source of revenue for our
Company.  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, whether developed
by  us  or  our   competitors,   will  not  render  our   products  or  services
non-competitive or obsolete.

     We compete with other industry participants,  and may not be able to market
our services as  effectively  or provide the most  cost-effective  services when
competing  against larger  companies with greater  resources or against in-house
departments  of our potential  customers.  Although the  outsourcing  of medical
coding is a relatively  new service,  we compete with larger,  well  established
companies with greater  resources than ours. Most  importantly,  we compete with
the medical  records  departments  of hospitals  and other clients and potential
clients.  However,  these providers are often unable to find qualified personnel
to work in their  medical  records  department.  In marketing  our  service,  we
attempt to  educate  healthcare  providers  about the  benefit  of our  service.
Providers  are  beginning  to look to third  parties for their  coding and other
administrative needs. This has created competition for our service.

                                       16
<PAGE>

     Larger,  established  services companies such as QuadraMed Corp., provide a
variety of coding and  consulting  services to  participants  in the  healthcare
industry.  Large professional  accounting and management  services firms such as
Arthur  Andersen  and Ernst and Young,  have also  developed  departments  which
provide  coding  services  to  their  hospital  clients.  These  companies  have
substantially  greater  financial  and personnel  resources  than we do and have
established  relationships  with  certain  clients.  We also  compete with other
specialty  coding  companies,  which provide  services similar to ours. While we
believe we are favorably  positioned to compete with these  specialty and larger
companies,  we cannot assure that our business will be successful in the future.
We must  continually  expand  and  refine our  services  to remain  competitive.
Finally,  pressures  from  current  or future  competitors  could also cause our
services to lose market  acceptance or result in price erosion,  with a negative
affect on our business, results of operations or financial condition.

     We face liability for incorrect  coding,  and could be subject to financial
losses related thereto. If we incorrectly code charts for a client, we may incur
additional  costs associated with correcting the errors and assisting the client
in the  "reconsideration  process" with the payor, i.e. Medicare,  Medicaid or a
private health insurance company.  This is done without additional charge to the
client.  In addition,  if monetary or other  penalties  are  assessed  against a
client by a state or Federal agency,  it is possible that the client could claim
reimbursement  or  damages  from us. We  cannot  assure  that the  amount of our
liability insurance will be adequate to insure against our potential losses.

     A business  interruption  could  materially  disrupt  our  operations.  Our
operations  depend on our  ability to protect  our  communication  systems  with
clients,  including  computer and  telecommunications  equipment  and  software,
against damage from fire, power loss, interruption or failure,  natural disaster
and other  similar  events.  In the event we experience a temporary or permanent
interruption at one or more of our coding locations, through casualty, operating
malfunction or otherwise,  our business could be negatively  affected and we may
be required  to  compensate  clients  for any loss that they incur.  In order to
reduce the possibility of such an interruption,  we maintain  redundant  service
locations  for our  computer  and other  operating  systems.  We also  currently
maintain property and business interruption  insurance;  however, such insurance
may not adequately compensate for any losses we or our clients may incur.

     Our client contracts may be terminated on short notice and do not guarantee
specific  revenues.  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  clients'  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.

                                       17
<PAGE>

     Our clients'  business is heavily regulated by Federal and state law and we
must continually  monitor regulations and train our staff to ensure we remain in
compliance.  We could be subject to penalties or financial losses for failure to
comply  with  regulations,  and  cannot  guarantee  that  the  rapidly  evolving
regulations will not restrict our ability to conduct our business.  While we are
not  directly  regulated,  the health care  industry and our clients are heavily
regulated by Federal and state laws. On the Federal level,  the U.S.  Department
of Health and Human Services, through the Health Care Finance Authority ("HCFA")
and the Office of the  Inspector  General,  implement  and  enforce  regulations
specifying,  among other thing,  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 incorrect billing.  The regulations and the penalties are directed
at the health care providers,  who directly  provide the services and submit the
claims for payment.  HCFA may impose civil  monetary  penalties,  assessments or
exclusion  from  the  Medicare  and  Medicaid  programs  for  violations  of the
regulations.  State laws also govern health care  providers.  State  regulations
regarding  uniformity  and  submission  are similar to the Federal  regulations.
Because  we do 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 work.

     The  confidentiality  of patient records and the circumstances  under which
such  records may be released  for  inclusion  in the  Company's  databases  are
regulated  by Federal and state  governments.  These state laws and  regulations
govern both the disclosure and the use of  confidential  patient  medical record
information.  Although  compliance with these laws and regulations is at present
principally the  responsibility  of the hospital,  physician or other healthcare
provider,  regulations  governing  patient  confidentiality  rights are evolving
rapidly.  Additional  legislation  governing the dissemination of medical record
information  has been  proposed  at both  the  state  and  federal  level.  This
legislation  may  require  holders of such  information  to  implement  security
measures that may require substantial  expenditures by us. We cannot assure that
changes to state or Federal  laws will not  materially  restrict  the ability of
healthcare  providers to transmit information from patient records to facilitate
our service.


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

     Cordovano  and  Harvey,  P.C.  have  acted  as  the  Company's  independent
accountants and have audited the Company's financial statements  commencing with
the year  ended  December  31,  1999.  There  have  been no  disagreements  with
Cordovano and Harvey, P.C.

                                       18
<PAGE>

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

     The Board of Directors  currently  consists of four members.  The following
table  reflects the directors  and  executive  officers of the Company as of the
date of this report.

         Name                           Age         Position
         ---------------------------    ---         ----------------------------
         William D. Cronin               43         Chairman of the Board of
                                                    Directors,  Chief Executive
                                                    Officer and President

         Margaret M. Cronin(1)           43         Executive Vice President,
                                                    Secretary,  Treasurer and
                                                    Director

         Alan W. Baldwin(1),(2)          64         Director

         Elizabeth W. Murdaugh(1),(2)    47         Director

         Gary B. Mendenhall              42         Senior Vice President

         James S. Wantman                58         Vice President of Finance,
                                                    Controller

         Kemmel Dunham                   35         Vice President of Systems
                                                    Support

         Steven Holmes                   50         Vice President of Operations

____________________________

(1) Members of the Audit Committee.
(2)  Members of the Compensation Committee.
____________________________

     The following  information  summarizes the business experience for the last
five years of our  directors  and  officers,  as well as,  where  relevant,  the
educational  background  of such  individuals.  Each  director  was elected at a
meeting of the  shareholders  and will serve  until the next  annual  meeting of
shareholders,  until his successor is duly elected and  qualified,  or until his
resignation or removal. All officers of the Company serve at the pleasure of the
Board of Directors.

     Margaret  Cronin is the wife of William  Cronin and Gary  Mendenhall is the
brother-in-law  of William Cronin. No other family  relationship  exists between
any of the officers or directors of the Company.

                                       19
<PAGE>

Directors
---------

William D. Cronin.  Mr. Cronin has been our Chairman and Chief Executive Officer
since the Company was merged with MedGrup  Development  Services in 1999. He has
also acted as President of the Company since June 1, 2001. Prior to that, he was
the  president  and  founder  of MedGrup  Development  Services,  a position  he
occupied since 1994.  Prior to that, he spent over 15 years in  engineering  and
related  sales  and  marketing  positions  for  privately  held  companies  both
nationally  and  internationally.  Mr. Cronin is a graduate of the Bolton Street
College of Engineering in Dublin, Ireland.

Margaret M. Cronin.  Mrs.  Cronin became  Executive Vice  President,  Treasurer,
Secretary  and a Director of MedGrup  Development  Services in August,  1998 and
assumed those  positions  with the Company  following  the merger in May,  1999.
Prior to those  positions,  she  functioned  as the  office  manager  of MedGrup
Development  Services since approximately  March, 1997. Prior to her association
with the Company and its predecessor,  she worked as a senior financial  analyst
for  Texaco  Corporation  in a Texas  office.  Mrs.  Cronin  graduated  from the
Illinois State University with a Bachelors of Business Administration in 1979.

Alan W. Baldwin.  Mr.  Baldwin  became a director in August 2000. Mr. Baldwin is
currently chief  executive  officer of Copper Glass Optical  Solutions,  Inc., a
private  Delaware  corporation,  a position  he has held  since July 2000.  From
November,  1997 through June,  2000, he served as president of Wren  Associates,
Ltd.,  a  management   consulting  firm  specializing  in  advanced   materials,
Internet-based business to business,  EMF/ELF radiation suppression for cellular
communications and other business  situations.  Since November 1997, he has also
served  as  a  director  of  Advanced  Technical  Products,   Inc.,  a  Delaware
corporation  with  securities  traded on the  Nasdaq  exchange.  From March 1994
through October 1997, he served as chairman and chief executive  officer of Lunn
Industries,  Inc., where he completed a turnaround,  reorganization and eventual
merger of the company.  Mr. Baldwin  received a Bachelor of Science in 1959 from
the U.S.  Military  Academy at West Point,  New York,  and  received his Masters
Degree in engineering and mathematics from the University of Alabama in 1963.

Elizabeth W. Murdaugh.  Dr.  Murdaugh became a director in August 2000. In 1994,
Dr.  Murdaugh  co-founded,  and since  that time has  served as an  officer  of,
Woodmoor Group, a privately held Colorado corporation providing executive search
services.  Since  1994,  she has also  served on the board of  directors  of the
Center for Prevention of Domestic Violence, a Colorado Springs-based  non-profit
organization, also serving on the finance committee for three of those years and
as vice  president and president of the  organization.  Prior to that, she was a
practicing  physician.  She  received  her  Bachelors  Degree in 1976 from Brown
University,  her Doctorate in Medical  Sciences in 1981 from Duke University and
completed her Pediatric Residency at Johns Hopkins Hospital.

                                       20
<PAGE>

Officers
--------

Gary B. Mendenhall. Mr. Mendenhall joined the Company in his current capacity in
February,  1999.  Prior to that,  he was the  director  of  international  event
marketing for Meckler  Media/Penton Media, a publicly-traded  company,  where he
was responsible for internet world trade shows in 32 countries.  Mr.  Mendenhall
occupied that position from January,  1998 until  February,  1999. From October,
1994 to December,  1997, he was the manager of international event marketing for
Softbank  Comdex,  a  publicly-traded  entity.  He is a  1981  graduate  of  the
University of Michigan School of Engineering.

James S. Wantman.  Mr.  Wantman  joined us as Controller on January 3, 2000, and
became  Vice  President  of Finance  on August 10,  2000.  From  March,  1998 to
December  1999, he was the Vice President of Finance and controller for National
Accounts,  Inc., a national service  company.  From 1990 until 1997, Mr. Wantman
was the owner of a photo  processing  and  custom  framing  business  with three
locations in the North Boston area.  He is a graduate of the Bentley  College of
Accounting and Finance with a Bachelor of Science in Accounting in 1967.

Kemmel  Dunham.  Mr. Dunham joined  MedGrup as Director of Business  Services in
July 2000.  In July,  2001,  he became Vice  President of Systems  Support.  Mr.
Dunham is a 1989 graduate of Abilene Christian  University with a BS in Biology.
Mr.  Dunham  has had 14  years  experience  in  healthcare  accounts  receivable
management,  including admissions,  charge master, billing, collections and cash
reconciliation.  Prior to joining MedGrup,  Mr. Dunham held manager and director
positions  in two  Texas  healthcare  systems.  As a  result,  he has  extensive
experience in business  services  reorganization  resulting in improved customer
service,  data  integrity,  billing  compliance  and accuracy and improved  cash
collections.  Mr.  Dunham's  primary  focus is the  development  of the business
services consulting department, which will enhance the client services we offer.

Steven  Holmes.  Mr.  Holmes joined  MedGrup as Vice  President of Operations in
September of 2001. Prior to joining MedGrup,  Mr. Holmes had 20 years experience
in senior  management.  From January 1995 to August 2001,  he served as Regional
Hospital  Administrator  for Covenant  Health  System with a 50,000  square mile
service area. During his tenure, Mr. Holmes served as the Administrator for four
hospitals,  one hospital  district and managed  twenty-one rural health clinics.
For the sixteen years prior his  association  with Covenant  Health System,  Mr.
Holmes was employed with the Lubbock County Criminal District  Attorney's Office
where he served as the Chief  Administrator.  Mr.  Holmes is a 1976  graduate of
Wayland Baptist  University with a Bachelor of Science in Criminal Justice and a
1980 graduate of the FBI National Police Academy.  Mr. Holmes'  responsibilities
include Coding Services, Auditing, Scheduling and Customer Relations.

                                       21
<PAGE>

Significant Employees
---------------------

Alice Zentner.  Ms. Zentner is our Director of Education and Outpatient  Coding.
She  joined  MedGrup  Development  Services,  Inc.  in 1997 as Manager of Coding
Services and occupied that position with us from the merger in May, 1999 through
approximately  September  of 2001.  In her  current  capacity,  Ms.  Zentner  is
responsible  for  overseeing  training  of all of our coders to ensure  they are
current on all coding updates.  She also acts as the liaison with our clients to
provide physician training and medical coding resource information. Prior to her
association with us or our predecessor,  she worked as an independent contractor
for various  hospitals in the Denver area and other companies  providing  coding
services,  coding  support and  education.  She functioned in that capacity from
1995 to 1998.  Ms.  Zentner  is a 1987  graduate  of  Carroll  College,  Helena,
Montana, with a Bachelor of Arts in Medical Records Administration.

Debra B. Adams. Ms. Adams is the Director of Coding Services. She joined MedGrup
in June, 2001. Ms. Adams graduated with an Associate Degree in Nursing from Troy
State  University  in 1981 and  obtained a Bachelor of Science  Degree in Health
Information Management from Western Carolina University. Ms. Adams has worked as
a health  information  consultant,  coding for medium  sized  hospitals to large
trauma,  research  and  teaching  hospitals.  She also  performed  the duties of
assistant  coding  manager at the Medical  College of Virginia in Richmond.  Ms.
Adams is  responsible  for inpatient and same day surgery  coding and all issues
related to MedGrup  coders.  She also works  very  closely  with the  hospitals,
ensuring the quality of coding services.

Steven  Wilcox,  Jr. Mr. Wilcox joined  MedGrup as the IT Manager in May,  2000.
Prior to his position  with  MedGrup,  Mr.  Wilcox was the city manager for High
Speed Access,  a company which  specializes  in high-speed  internet  access via
cable  modems.  When he was in college,  he was  instrumental  in designing  and
implementing  a "Learning at a Distance"  program at the  University of Colorado
Springs for the Math and ECE  departments,  which allows students to take online
courses.

Compliance with Section 16(a) of the Securities Exchange Act of 1934
--------------------------------------------------------------------

     The following table sets forth each director,  officer or beneficial  owner
of more than ten  percent of any class of equity  securities  of the  registrant
registered  pursuant to Section 12 of the  Securities  Exchange Act of 1934 that
failed to file on a timely  basis,  Forms 3, 4 or 5 as required by Section 16(a)
during the most recent fiscal year or prior years.

     The numbers of late Form 3, Form 4 and Form 5 reports,  and the late Form 4
transactions reported are as follows:

                            Late         Late       Late
Name of reporting Person    Form 3       Form 4     Form 5       Transactions
------------------------   -------       -------    -------      ------------

     James S. Wantman                                  1              1

     Kemmel R. Dunham         1                                      n/a

     Steve S. Holmes          1                                      n/a

                                       22
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

Director Compensation

     Each member of the Board of Directors who is not an employee of the Company
receives a grant of 2,500  options  to  purchase  our common  stock each year in
which the  individual  serves on the Board.  The options  vest one year from the
date  of the  grant.  Each  director  is  also  entitled  to be  reimbursed  for
reasonable and necessary expenses incurred on behalf of the Company.

Executive Compensation

     The  following  table  summarizes  the  total  compensation  of  our  chief
executive  officer  (the "Named  Executive  Officer")  for the last three fiscal
years.  No other  executive  officer  received  more than $100,000 in salary and
bonuses during the last fiscal year. However,  see "Certain  Transactions" for a
description of stock options  issued to certain  executive  officers  during the
last two fiscal years.

<TABLE>
<CAPTION>

                              SUMMARY COMPENSATION

                                              Annual                              Long Term
                                           Compensation                          Compensation
                                           -------------                         ------------
                                                                  Other          Securities
                           Year Ended                            Annual          Underlying
           Name           December 31,         Salary         Compensation         Options
           ----           ------------     -------------      ------------       ------------
<S>                       <C>              <C>                <C>                <C>
William D. Cronin,            2001            $140,030
Chairman of the Board,
Chief Executive Officer,
and President                 2000            $105,000                                 0
                              1999             $72,500             --                  0(1)
</TABLE>

__________________________

     (1)  Excludes  3,154,000  shares of common  stock  issued to Mr.  Cronin in
connection with the merger with MedGrup Development Services,  Inc.
__________________________


Employment Contracts

     Each of our executive  officers,  William  Cronin,  Margaret  Cronin,  Gary
Mendenhall and James Wantman are subject to an employment  agreement with us for
a three-year term, with automatic one-year renewals. Additionally, our executive
officers Kemmel Dunham and Steven Holmes are subject to an employment  agreement
with us for a one-year term, with automatic  one-year  renewals.  The agreements
grant each officer a base salary,  with an automatic  annual increase of no less
than  5%,  the  possibility  of  incentive   compensation,   benefits  generally
applicable to employees,  reimbursement of expenses and a vehicle allowance. Mr.
Wantman was also granted stock options as part of his employment agreement.  The
agreements  for William  Cronin,  Margaret  Cronin,  Gary  Mendenhall  and James

                                       23
<PAGE>

Wantman contain provisions that obligate us to pay one year's base salary and to
provide  twelve  months of  benefits  as a  severance  package,  in the event of
termination  during the  contract  term  without  "cause" by the Company or with
"good reason" by the employee.  Good reason  includes a change in control of the
Company,  whereby 50% or more of our outstanding  voting securities shall change
ownership,  we sell more than 75% of our assets,  or, within a six month period,
there is a change in the  individuals  constituting  a majority  of the Board of
Directors.  The agreements for Kemmel Dunham and Steve Holmes obligate us to pay
three months base salary and to provide  three  months  benefits as severance in
the event of  termination  during  the  contract  term  without  "cause"  by the
Company.

Qualified Stock Option Plan

     Our 1999 Incentive Stock Option Plan, as amended (the "Plan")  provides for
the granting of stock options for up to 1,750,000  shares of our common stock to
our executive officers and other employees,  and provides for an annual increase
of  shares   available  for  grant.  The  Plan  also  permits  the  granting  of
non-qualified  options to  persons  who are not  employees  of the  Company  but
none-the-less provide valuable service to the Company.  Currently,  the Board of
Directors administers the Plan, but the Plan permits a compensation committee to
administer  it.  The  Board  intends  to  delegate  the  responsibility  to  the
Compensation  Committee.  The  Board of  Directors  has the sole  discretion  to
determine  eligibility of persons to receive incentive stock options, as well as
the amounts,  terms and conditions of the granting of options.  Our shareholders
have approved this Plan.

     The stock  option  grants under the Plan have  various  vesting  schedules,
including partial vesting immediately upon date of the grant,  partial quarterly
automatic  vesting,  quarterly  vesting  based  upon the  occurrence  of certain
events,  vesting on a date  certain,  vesting  based  upon  stock  price or some
combination  thereof.  Early vesting of all or part of the unvested  options may
occur upon certain events,  including  retirement or permanent disability of the
employee, dissolution,  liquidation,  reorganization, merger or consolidation of
the  Company,  or upon sale of all or  substantially  all of the property of the
Company.  The  majority of the options  expire seven years after the date of the
grant.

     As of the 2001 fiscal year end, options to purchase 1,316,000 shares of our
common stock were outstanding, of which 682,833 had vested. The number of shares
of common stock  remaining  available  for new option grants under this Plan was
532,233 at fiscal year end. A total of 92,946  shares were  acquired on exercise
of options during the last fiscal year. The exercise prices of the options range
from $1.00 per share to $3.71 per share,  with a weighted average exercise price
of $1.48 per share.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth certain  information  regarding  beneficial
ownership of our common  stock by each person  known by us to be the  beneficial
owner of more than 5% of our common stock, each of our executive officers,  each
of our directors, and all executive officers and directors as a group.


                                       24
<PAGE>

     Unless otherwise indicated,  to our knowledge,  each stockholder  possesses
sole voting and investment power over the shares listed, except for shares owned
jointly with that person's spouse.

     The percentage of common stock owned by individuals  described in the table
is based on 5,899,777 shares of common stock outstanding as of the date of March
20, 2002. This excludes 185,000 warrants and up to 1,309,000 outstanding options
exercisable for shares of common stock,  unless owned by the named  individuals.
For purposes of calculating each person's percentage ownership, stock options or
warrants  exercisable within 60 days of the date of this Report are included for
that  person,  but not the stock  options  or  warrants  of any other  person or
entity.

     Unless otherwise  stated,  the current address for each beneficial owner is
that  of the  Company,  1824  Woodmoor  Drive,  Suite  102,  Monument,  Colorado
80132-9086.

Name and address of
Executive Officers and Directors                         Number       Percentage
-----------------------------------------------------   ---------     ----------
William D. Cronin(1)                                    2,744,300      45.52%

Margaret M. Cronin(1)                                     605,700      10.27%

Gary B. Mendenhall(2)                                     310,000       4.99%

James S. Wantman(3)                                       200,000       3.28%

Kemmel Dunham(4)                                           41,667          *

Steven Holmes(5)                                           10,000          *

Elizabeth W. Murdaugh(6)                                   35,000          *
550 Silhouette Way
Monument, Colorado 80132

Alan W. Baldwin(6)                                          5,000          *
1400 Winsted Drive
Fallston, Maryland 21047

All Directors and Executive
Officers as a Group (8 individuals) (1, 2, 3, 4, 5, 6)  3,951,667     61.06%
-----------------
         *Less than 1%.
                                       25
<PAGE>

___________________________

     (1)Margaret Cronin is the wife of William Cronin. Each individual disclaims
beneficial  ownership  of shares owned by his or her spouse.  Margaret  Cronin's
number of shares  includes  55,000 shares owned by the Cronins' minor  children,
for which she is the custodian.

     (2)Includes 310,000 shares immediately  issuable upon exercise of an option
at a purchase price of $1 per share until 2006.  Excludes an additional  190,000
shares underlying an option which are not yet vested.

     (3)Includes 125,000 shares immediately issuable upon exercise of options at
prices  ranging  from $1.30 per share to $1.65 per share  until  2007.  Includes
75,000 shares immediately  issuable upon exercise of an option at purchase price
of $1.41 per share until 2008.

     (4)Includes 41,667 shares immediately  issuable upon exercise of options at
a price range of $1.28 per share to $1.54 per share until July 2007. Excludes an
additional 58,333 shares underlying options which are not yet vested.

     (5)Includes 10,000 shares  immediately  issuable upon exercise of an option
at a purchase  price of $1.31 per share  until  2007.  Excludes  100,000  shares
underlying options which are not yet vested.

     (6)Includes 5,000 shares immediately issuable upon exercise of an option at
a price of $1.41 per share until 2008.
___________________________


Changes in Control

     See "Recent Events" in Item 1 above for discussion of a transaction  which,
if consummated, will effectuate a change in control of the Company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Options issued to Directors

     Elizabeth  Murdaugh and Alan Baldwin  were each granted  5,000  options for
their  service on the Board of  Directors.  These  options  vested on January 1,
2002, have an exercise price of $1.41 per share and expire on January 1, 2008.

Options issued to Executive Officers.

     Gary  Mendenhall,  Senior Vice  President of MedGrup,  was granted  500,000
options upon  employment  with the Company.  A total of 310,000 of these options
are presently vested;  60,000  additional  options vest when the Company's stock
price reaches $3 per share;  60,000  additional  options vest when the Company's
stock  price  reaches $4 per share and 70,000  options  vest when the  Company's
stock price reaches $5 per share.  For purposes of this vesting  provision,  the
share  price will be  measured  based upon the  average of the mean  between the
closing bid and the asked  prices  during the  preceding 30 calendar  days.  The
exercise price of Mr. Mendenhall's options is $1.00 per share and they expire on
May 26, 2006.

     James Wantman,  our Vice President of Finance,  was granted  100,000 shares
upon  employment with the Company.  Those options have vested,  have an exercise
price of $1.30 per share and expire on January 3, 2007. In addition, Mr. Wantman
was granted 10,000 options on July 1, 2000,  which vested on July 1, 2001,  have
an exercise  price of $1.54 per share and expire on July 1, 2007. He was granted
an  additional  15,000  options on December 31, 2000,  which  options  vested on
December  31, 2001,  have an exercise  price of $1.65 and expire on December 31,
2007, and 75,000 options on January 2, 2001,  which options vested on January 2,
2002, have an exercise price of $1.41 and expire on January 1, 2008.

                                       26
<PAGE>

     Kemmel Dunham,  our Vice President of Support Services,  was granted 50,000
options on July 10, 2000, which options vest at the rate of 16,667 per year over
three  years,  have an  exercise  price of $1.54  and  expire  on July 9,  2007.
Additionally,  Mr. Dunham was granted 10,000 options on December 31, 2000,  with
an exercise  price of $1.50,  15,000 options on January 2, 2001 with an exercise
price of $1.28 and  25,000  options  on July 2, 2001 with an  exercise  price of
$2.75.  All of these  options  vest one year  after the date of grant and expire
seven years from the date of grant.

     Finally,  Steven  Holmes,  our Vice  President  of  Operations  was granted
100,000  options on September 4, 2001,  which options vest at the rate of 33,333
per year over three  years,  have an  exercise  price of $2.48 and expire  seven
years from the date of the grant.  Mr. Holmes was also granted 10,000 options in
his capacity as a consultant  prior to his  employment  with the Company.  These
options  have vested,  have an exercise  price of $1.31 and expire on January 3,
2007.

     The  grants of these  options  were  unanimously  approved  by the Board of
Directors as it existed at the time of the grants.

Other related transactions.

     Prior to termination of its status as an "S" corporation for Federal income
tax  purposes,  we recorded a  distribution  payable of $100,000 to Mr. and Mrs.
Cronin,  shareholders  of MedGrup  Development  Services,  Inc.  That amount was
repaid to the Cronins during the year ended December 31, 2000.


                                     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:

No.      Description
------   -----------------------------------------------------------------------
2.1(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.

                                       27
<PAGE>

2.2*     Agreement and Plan of Merger by and among Provider HealthNet Services,
         Inc., MGC Acquisition Corp. and MedGrup Corporation dated as of
         March 26, 2002

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(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*    Credit  Agreement  between the Company and Wells  Fargo Bank West,
         National  Association  dated March 20, 2001.

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 Margaret M. Cronin, dated
         January 1, 2000.

10.7(1)  Employment Agreement between the Company and Gary B. Mendenhall, dated
         August 10, 2000.

10.8(3)  Employment  Agreement  between  the Company  and James  Wantman,  dated
         January 1, 2000.

10.9*    Employment  Agreement  between the Company and Kemmel Dunham dated
         June 1, 2001.

                                       28
<PAGE>

10.10*   Employment Agreement between the Company and Steve Holmes dated
         September 1, 2001.

10.11(1) Incentive Stock Option Plan with Form of Option Agreement.

10.12(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.

(3)  Filed as an Exhibit to Form 10-KSB for the year ended December 31, 2000

(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.

                                       29
<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
31st day of March, 2002.

                                 MEDGRUP CORPORATION


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

     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                                            March 31, 2002
--------------------------
William D. Cronin               Chairman of the Board,
                                Chief Executive Officer
                                and President

/s/ Margaret M. Cronin                                           March 31, 2002
--------------------------
Margaret M. Cronin              Executive Vice President,
                                Secretary and Director


/s/ James S. Wantman                                             March 31, 2002
--------------------------
James S. Wantman                Vice President - Finance,
                                Controller (Chief
                                Financial Officer)
/s/ Alan W. Baldwin                                              March 31, 2002
--------------------------
Alan W. Baldwin                 Director


/s/ Elizabeth W. Murdaugh                                        March 31, 2002
--------------------------
Elizabeth W. Murdaugh           Director


                                       30

<PAGE>

                               MEDGRUP CORPORATION
                          Index to Financial Statements

                                                                            Page
                                                                            ----
Report of Independent Auditors ...........................................   F-2

Balance sheet as of December 31, 2001 ....................................   F-3

Statements of operations, for the years ended
   December 31, 2001 and 2000 ............................................   F-4

Statement of shareholders' equity, for the period
   January 1, 2000 through December 31, 2001 .............................   F-5

Statements of cash flows, for the years ended
   December 31, 2001 and 2000 ............................................   F-6

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

<PAGE>

To the Board of Directors and Shareholders
MedGrup Corporation

                         Report of Independent Auditors

We have audited the  accompanying  balance  sheet of MedGrup  Corporation  as of
December 31, 2001 and the related statements of operations, shareholders' equity
and cash flows for the years ended December 31, 2001 and 2000.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of MedGrup  Corporation  as of
December 31, 2001 and the results of its  operations  and its cash flows for the
years ended December 31, 2001 and 2000, in conformity with accounting principles
generally accepted in the United States of America.





/s/ Cordovano and Harvey, P.C.
------------------------------
Cordovano and Harvey, P.C.
Denver, Colorado
February 16, 2002


                                       F-2
<PAGE>

                               MEDGRUP CORPORATION
                                  BALANCE SHEET
                                DECEMBER 31, 2001

                                     ASSETS

CURRENT ASSETS
      Cash .....................................................   $  266,727
      Accounts receivable, net of allowance for
        doubtful accounts of $41,780 ...........................    1,280,218
      Prepaid expenses .........................................       33,445
                                                                   ----------
                                            TOTAL CURRENT ASSETS    1,580,390

PROPERTY AND EQUIPMENT, net of
      accumulated depreciation of $455,471 (Note A) ............    1,372,712

DEPOSITS .......................................................        6,050
                                                                   ----------
                                                                   $2,959,152
                                                                   ==========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
      Accounts payable, trade ..................................   $   79,899
      Accrued expenses .........................................      215,698
      Income taxes payable .....................................       40,228
      Current portion of notes payable (Note B) ................       15,045
      Current portion of capital lease payable (Note B) ........       13,890
                                                                   ----------
                                       TOTAL CURRENT LIABILITIES      364,760
                                                                   ----------

NOTES PAYABLE, net of current maturities (Note B) ..............       10,662

CAPITAL LEASE PAYABLE, net of current maturities (Note B) ......         --

DEFERRED INCOME TAXES (Note E) .................................      412,594
                                                                   ----------
                                              TOTAL  LIABILITIES      788,016

COMMITMENTS (Note F) ...........................................         --

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; 5,899,777 shares issued
        and outstanding ........................................        5,900
      185,000 outstanding common stock warrants ................      137,165
      25,000 outstanding common stock options ..................        9,925
      Additional paid in capital ...............................    1,236,699
      Retained earnings ........................................      781,447
                                                                   ----------
                                      TOTAL SHAREHOLDERS' EQUITY    2,171,136
                                                                   ----------
                                                                   $2,959,152
                                                                   ==========

               See accompanying notes to the financial statements

                                       F-3
<PAGE>

<TABLE>
                              MEDGRUP CORPORATION
                            STATEMENTS OF OPERATIONS
<CAPTION>


                                                                      For the Years Ended
                                                                          December 31,
                                                                   --------------------------
                                                                      2001           2000
                                                                   -----------    -----------
<S>                                                                <C>            <C>
REVENUES
      Coding services ..........................................   $ 5,044,667    $ 3,530,052
      Other ....................................................       663,447        264,670
      Rental income ............................................       126,703        100,990
                                                                   -----------    -----------
                                                  TOTAL REVENUES     5,834,817      3,895,712
                                                                   -----------    -----------

COSTS AND EXPENSES
      Cost of revenue ..........................................     2,800,067      1,635,753
      Stock based compensation, employee compensation ..........       148,356           --
      Stock based compensation, coding services ................          --           14,671
      Stock based compensation, consulting .....................          --            9,925
      Provision for doubtful accounts ..........................        30,750           --
      Professional and consulting fees .........................        81,308         80,779
      General and administrative ...............................     2,223,652      1,367,869
      Depreciation .............................................       235,288        141,901
                                                                   -----------    -----------
                                        TOTAL OPERATING EXPENSES     5,519,421      3,250,898
                                                                   -----------    -----------

                                                OPERATING INCOME       315,396        644,814
NON-OPERATING INCOME (EXPENSE)
      Interest expense .........................................        (5,697)       (12,180)
      Interest income ..........................................        11,778         16,237
                                                                   -----------    -----------
                                  NET INCOME BEFORE INCOME TAXES       321,477        648,871

INCOME TAXES (NOTE F)
      Current tax expense ......................................       (73,150)       (58,233)
      Deferred tax expense .....................................       (46,012)      (165,733)
                                                                   -----------    -----------
                                                      NET INCOME   $   202,315    $   424,905
                                                                   ===========    ===========

NET INCOME PER SHARE:
      Basic ....................................................   $      0.03    $      0.08
                                                                   ===========    ===========
      Diluted ..................................................   $      0.03    $      0.07
                                                                   ===========    ===========

SHARES USED FOR COMPUTING NET INCOME PER SHARE:
      Basic ....................................................     5,876,045      5,583,944
                                                                   ===========    ===========
      Diluted ..................................................     6,667,711      6,129,673
                                                                   ===========    ===========
</TABLE>


               See accompanying notes to the financial statements

                                       F-4
<PAGE>

<TABLE>
                               MEDGRUP CORPORATION
             STATEMENT OF SHAREHOLDERS' EQUITY From January 1, 2000
                            through December 31, 2001
<CAPTION>

                                                                         Common Stock            Outstanding Common Stock
                                                                   -------------------------     -------------------------
                                                                     Shares        Amount          Warrants     Options
                                                                   -----------   -----------     -----------   -----------
<S>                                                                <C>           <C>             <C>           <C>
                                        BALANCE, JANUARY 1, 2000     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 options .............................          --            --              --          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

Cashless exercise of 166,667 Executive Stock Options ...........        91,954            92            --            --

Cashless exercise of 2,000 Employee Stock Options ..............           992             1            --            --

30,000 warrants issued in exchange for consulting
   services, at fair value of warrants .........................          --            --            45,750          --

Net income for the year ended December 31, 2001 ................          --            --              --            --
                                                                   -----------   -----------     -----------   -----------
                                      BALANCE, DECEMBER 31, 2001     5,899,777   $     5,900     $   137,165   $     9,925
                                                                   ===========   ===========     ===========   ===========
</TABLE>
                                   (See Below)

               See accompanying notes to the financial statements

<TABLE>

                               MEDGRUP CORPORATION
             STATEMENT OF SHAREHOLDERS' EQUITY From January 1, 2000
                            through December 31, 2001

                                   (CONTINUED)
<CAPTION>

                                                                    Additional          Total
                                                                     Paid In           Retained     Shareholders'
                                                                      Capital          Earnings        Equity
                                                                    -----------      -----------     -----------

<S>                                                                 <C>              <C>             <C>
                                        BALANCE, JANUARY 1, 2000    $   428,000      $   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 options .............................           --               --            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      1,088,436          579,132       1,774,715

Cashless exercise of 166,667 Executive Stock Options ...........        147,034             --           147,126

Cashless exercise of 2,000 Employee Stock Options ..............          1,229             --             1,230

30,000 warrants issued in exchange for consulting
   services, at fair value of warrants .........................           --               --            45,750

Net income for the year ended December 31, 2001 ................           --            202,315         202,315
                                                                    -----------      -----------     -----------
                                      BALANCE, DECEMBER 31, 2001    $ 1,236,699      $   781,447     $ 2,171,136
                                                                    ===========      ===========     ===========
</TABLE>
               See accompanying notes to the financial statements

                                       F-5
<PAGE>

<TABLE>
                             MEDGRUP CORPORATION
                           STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                       For the Years Ended
                                                                            December 31,
                                                                   -------------------------
                                                                        2001          2000
                                                                      ---------    ---------
<S>                                                                   <C>          <C>
OPERATING ACTIVITIES
     Net income ...................................................   $ 202,315    $ 424,905
     Transactions not requiring cash:
        Depreciation ..............................................     235,288      141,901
        Increase to allowance for doubtful accounts ...............      30,750         --
        Stock based compensation expense ..........................     148,356       24,596

     Changes in current assets and current liabilities:
        Increase in receivables and  prepaid expenses .............    (276,737)    (422,233)
        Increase in accounts payable and accrued liabilities ......     314,638      130,332
                                                                      ---------    ---------
                                               NET CASH PROVIDED BY
                                               OPERATING ACTIVITIES     654,610      299,501
                                                                      ---------    ---------

INVESTING ACTIVITIES
     Equipment and leasehold purchases ............................    (673,475)    (626,808)
     Cash paid for deposits .......................................        (750)      (4,000)
                                                                      ---------    ---------
                                                 NET CASH (USED IN)
                                               INVESTING ACTIVITIES    (674,225)    (630,808)
                                                                      ---------    ---------

FINANCING ACTIVITIES
     Sale of common stock .........................................        --        808,750
     Cash paid for offering costs .................................        --       (122,121)
     Distributions, loan repayments to shareholder ................        --       (100,000)
     Payments on capital leases ...................................     (61,240)     (58,338)
     Payments on note payable .....................................     (15,794)     (16,051)
                                                                      ---------    ---------
                                     NET CASH (USED IN) PROVIDED BY
                                               FINANCING ACTIVITIES     (77,034)     512,240
                                                                      ---------    ---------

NET CHANGE  IN CASH ...............................................     (96,649)     180,933
Cash, beginning ...................................................     363,376      182,443
                                                                      ---------    ---------
Cash, ending ......................................................   $ 266,727    $ 363,376
                                                                      =========    =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................   $   5,697    $  12,180
                                                                      =========    =========
Cash paid for income taxes ........................................   $  10,800    $ 153,750
                                                                      =========    =========

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Cashless exercise of executive and employee options ...............   $ 148,356    $    --
68,000 stock warrants issued for payment of offering costs ........   $    --      $  45,011
Vehicle acquired in exchange for note payable .....................   $    --      $  35,550
30,000 and 10,000 stock warrants issued for software
   consulting costs ...............................................   $  45,750    $  19,300
</TABLE>

               See accompanying notes to the financial statements

                                       F-6
<PAGE>

                               MEDGRUP CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

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

Organization and business:
--------------------------
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 75 hospitals in ten 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.
Substantially  all medical record coding  agreements with the hospitals are on a
pay-per -chart basis.

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  33 percent and 34 percent of the Company's  revenues  during 2001
and  2000,  respectively,  were for  services  rendered  to two  hospitals.  Two
hospitals  comprised 28 percent of the accounts  receivable  balance at December
31, 2001.

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
$182,733  at  December  31,  2001,  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.  The Company periodically charges
approximately  one percent of its monthly  revenue to bad debt  expense  with an
offset to the allowance for bad debt  expense.  Accounts that are  significantly
past due are reviewed for possible  collection.  Those  accounts that are deemed
non-collectible  are  written  off and a charge  is  recorded  to the  allowance
account.
                                       F-7
<PAGE>

                               MEDGRUP CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

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 Company
accounts  for income  taxes  under the  provisions  of  Statement  of  Financial
Accounting  Standards No. 109,  Accounting for Income Taxes (SFAS 109). SFAS 109
requires  recognition  of deferred tax  liabilities  and assets for the expected
future tax  consequences  of events  that have been  included  in the  financial
statements  or tax returns.  Under this method,  deferred  tax  liabilities  and
assets are determined  based on the difference  between the financial  statement
and tax bases of assets and  liabilities  using  enacted tax rates in effect for
the year in which the differences are expected to reverse.

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  stock-based  compensation  arrangements in accordance
with Statement of Financial  Accounting  Standards ("SFAS") No. 123, "Accounting
for Stock-Based  Compensation,"  which permits  entities to recognize as expense
over the vesting period the fair value of all stock-based  awards on the date of
grant.  Alternatively,  SFAS No. 123 allows  entities  to  continue to apply the
provisions of Accounting  Principle Board ("APB") Opinion No. 25 and provide pro
forma net earnings (loss) disclosures for employee stock option grants as if the
fair-value-based  method  defined in SFAS No. 123 had been applied.  The Company
has  elected to  continue  to apply the  provisions  of APB  Opinion  No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.

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.


                                       F-8
<PAGE>

                               MEDGRUP CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

Earnings per share
------------------
The Company  accounts for earnings  per share under the  provisions  of SFAS No.
128, "Earnings Per Share" (SFAS 128). 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.

During the fourth quarter,  the Company  launched a new project,  Code@Home(TM).
The project's new technology  allows certain hospitals to transmit charts to the
Company's central server.  From the server, the charts are 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 is  transmitted  back to the
server.

                                                   Property
                                   Property     under Capital      Total
                                   Acquired         Lease        Property
                                  -----------    -----------    -----------
  Furniture and fixtures ......   $    83,118    $      --      $    83,118
  Computer equipment ..........       524,667           --          524,667
  Fax equipment ...............       398,139         88,919        487,058
  Vehicles ....................        72,988           --           72,988
  Leasehold improvements ......        63,582           --           63,582
  Code@Home(TM) assets:
       Hardware ...............       293,595           --          293,595
       Software ...............       303,175           --          303,175
                                  -----------    -----------    -----------
                                    1,739,264         88,919      1,828,183
  Less accumulated depreciation      (407,881)       (47,590)      (455,471)
                                  -----------    -----------    -----------
                                  $ 1,331,383    $    41,329    $ 1,372,712
                                  ===========    ===========    ===========

                                       F-9
<PAGE>

                               MEDGRUP CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

Note B: Debt
------------

Long-term  debt  consists of the  following  notes  payable  and capital  leases
payable at December 31, 2001:

Notes payable:
Note payable due in monthly installments of $489,
   interest at 0.90 percent, maturing October 15, 2002,
   collateralized by vehicle ...............................  $  4,872

Note payable due in monthly installments of $494,
   interest at 0.90 percent, maturing February 1, 2003,
   collateralized by vehicle ...............................     6,881

Note payable due in monthly installments of $447,
   interest at 8.99 percent, maturing December 30, 2004,
   collateralized by vehicle ...............................    13,954
                                                              --------
                                                                25,707
Less: current maturities ...................................   (15,045)
                                                              --------
                                                              $ 10,662
                                                              ========

Maturities on notes payable, subsequent to December 31, 2001 are as follows:


                                   2002 ....................  $ 15,045
                                   2003 ....................     5,669
                                   2004 ....................     4,993
                                                               -------
                                                              $25,707
                                                               =======

Capital lease payable:
Capital lease, due in monthly installments of
   $2845, net of imputed interest,
maturing May 2002, collateralized by equipment...........     $ 13,890
  Less: current maturities...............................      (13,890)
                                                              --------
                                                              $   --
                                                              ========


Payments  on capital  lease  payable,  subsequent  to  December  31, 2001 are as
follows:

                                   2002 ....................  $ 14,227
                                   Less: imputed interest ..      (337)
                                                              --------
Present value of net minimum lease payments                   $ 13,890
                                                              ========

On March 20, 2001 the Company entered into a $250,000  line-of-credit  agreement
with a financial institution. The line bears interest at the lending institute's
prime rate plus one percent. The line is secured with the business assets of the
Company.  The line  matures on March 20,  2002.  At December 31, 2001 the entire
amount of $250,000 was available for use to the Company.


                                      F-10
<PAGE>

                               MEDGRUP CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

Note C: Stock based compensation
--------------------------------

Common stock options
--------------------
The Company has an Incentive  Stock Option Plan (the  "Plan"),  and has reserved
2,057,193  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 or options 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
without receipt of additional consideration by the Company.

During the years ended December 31, 2001 and 2000, the Company  granted  333,000
and  936,000  options,  respectively,  pursuant  to the Plan.  In 2001 and 2000,
375,833 and 127,500, 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  2001,  168,667  options  were  exercised on a no cash basis,
resulting in the issuance of 92,946 shares of common stock. The Company recorded
$148,356 of  compensation  expense with  respect to the no cash  exercise of the
employee options. The options vest over a period of up to three years or certain
performance  criteria  and are priced at or above the  current  over-the-counter
trading price on the date of grant.  The options  expire on various dates ending
2008. 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, 2001:

                             Expiration              Number
                               Date                of Options
              ------------------------------------------------
              2nd Quarter 2006 ...................    567,000
              3rd Quarter 2006 ...................      3,000
              4th Quarter 2006 ...................     69,500
              1st Quarter 2007 ...................    120,000
              2nd Quarter 2007 ...................     27,000
              3rd Quarter 2007 ...................     81,000
              4th Quarter 2007 ...................    59,500
              1st Quarter 2008 ...................    141,000
              2nd Quarter 2008 ...................     54,000
              3rd Quarter 2008 ...................    134,000
                                                    ---------
                                                    1,256,000
                                                    =========

                                      F-11
<PAGE>

                               MEDGRUP CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

Executive employment options
----------------------------
On January 3, 2000, the Company granted options for 100,000 shares of its common
stock to an officer of the Company, exercisable for $1.30 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 provided
for an annual salary and a grant of 500,000 incentive stock options. The options
vested in increments of 83,333 options every six months,  provided the President
was still employed by the Company.  The options were  exercisable  for $1.30 per
share and the market  price on the date of grant was  $1.19.  During  2001,  the
officer left the Company and exercised 166,667 vested options on a no cash basis
resulting in the issuance of 91,954 shares of common stock. The Company recorded
$147,126 of compensation expense with respect to the transaction.  The remaining
unvested 333,333 options were canceled.

During 2001,  the Company  granted a total of 200,000  common  stock  options to
three  officers of the Company.  The options were granted at prices ranging from
$1.41 to $2.75 per share  and were  granted  at a 10  percent  premium  over the
market price.

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 was $4,634 which was charged to operations  during
1999 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 options were
vested and the Company recorded  compensation  expense for the fair value of the
vested options 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 $1.31 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-12
<PAGE>

                               MEDGRUP CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

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. The  weighted-average
assumptions  of risk-free  interest  rates of 5.18 percent and 6.623 percent and
expected volatility of 40 percent and 50 percent were used for each of the years
ended  December  31, 2001 and 2000,  respectively.  For each of the years in the
two-year period ended December 31, 2001, the assumed expected dividend yield was
zero and the expected life of the options is seven years.

During the year ended December 31, 2000, the weighted-average exercise price and
fair values of options  granted with an exercise  price  greater than the market
price of the  stock  were  $1.31 and $.64,  respectively.  The  weighted-average
exercise  price and fair values of options  granted with an exercise price equal
to the market  price were  $1.50 and $.90,  respectively.  There were no options
granted at prices less than the market price of the underlying  stock on date of
grant.

During the year ended December 31, 2001, the weighted-average exercise price and
fair values of options  granted with an exercise  price  greater than the market
price of the  stock  were  $2.01 and $.88,  respectively.  The  weighted-average
exercise  price and fair values of options  granted with an exercise price equal
to the market  price were $2.39 and $1.23,  respectively.  There were no options
granted at prices less than 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:

                                              For the year ended December 31,
                                              -------------------------------
                                                    2001            2000
                                                 -----------    -----------
Net income, as reported .......................  $   202,315    $   424,905
   Decrease due to:
       Employee stock options .................     (187,821)       (94,487)
       Executive employment options ...........     (156,487)      (144,680)
                                                 -----------    -----------
Pro forma net (loss) income ...................  $  (141,993)   $   185,738
                                                 ===========    ===========

Net income per share - basic, as reported .....  $      0.03    $      0.08
Net income per share - diluted, as reported ...  $      0.03    $      0.07

Pro Forma:
    Net (loss) income per share - basic .......  $     (0.02)   $      0.03
    Net (loss) income per share - diluted .....  $     (0.02)   $      0.03



                                      F-13
<PAGE>


<TABLE>
<CAPTION>

                                          Incentive Stock
                                            Option Plan                                                               Weighted
                                       ---------------------    Options and    Weighted   Weighted                     Average
                                       Incentive  Executive      Warrants      Average    Average                  Exercise Price-
                                         Stock    Employment     Issued to     Exercise    Fair      Currently       Currently
                                        Options    Options     Non-Employees    Price      Value     Exercisable     Exercisable
                                       ---------  ----------   -------------   --------   --------   -----------   ---------------

<S>                                    <C>        <C>          <C>             <C>        <C>        <C>           <C>
         Outstanding, January 1, 2000    159,000     500,000         167,293     $ 1.05     $ 0.32      516,500             $ 1.06

Options and warrants granted ........    336,000     600,000          88,000       1.49       0.78      321,333               1.63
Options and warrants cancelled ......   (127,500)       --           (18,462)     (1.45)     (0.72)           -                  -
Options and warrants exercised ......       --          --           (21,831)     (1.00)     (0.30)           -                  -
                                       ---------  ----------   -------------   --------   --------   -----------   ---------------
       Outstanding, December 31, 2000    367,500   1,100,000         215,000       1.29       0.57      837,833               1.29

Options and warrants granted ........    133,000     200,000          30,000       2.20       1.03       30,000               3.00
Options and warrants cancelled ......    (42,500)   (333,333)             --      (1.42)     (0.74)          --                 --
Options and warrants exercised ......     (2,000)   (166,667)             --      (1.31)     (0.69)          --                 --
                                       ---------  ----------   -------------   --------   --------   -----------   ---------------
       Outstanding, December 31, 2001    456,000     800,000         245,000     $ 1.48     $ 0.32      867,833             $ 1.34
                                       =========  ==========   =============   ========   ========   ===========   ===============
</TABLE>


<TABLE>
<CAPTION>

                                                 Options and Warrants as of December 31, 2001
                                       ---------------------------------------------------------------
                                                    Outstanding                       Exercisable
                                       --------------------------------------   ----------------------
                                                                   Weighted
                                                     Weighted      Average                    Weighted
                                                     Average      Remaining                   Average
                                         Number      Exercise     Contractual     Number      Exercise
  Range of Exercisable Price           Outstanding     Price     Life (Years)   Exercisable    Price
  --------------------------           -----------   ---------   ------------   -----------   --------
<S>                                    <C>            <C>        <C>            <C>            <C>
        $1.00 - $2.00                    1,195,500    $ 1.18             4.68       789,500     $ 1.17
        $2.01 - $3.00                      278,500    $ 2.54             6.61        58,000     $ 2.77
        $3.01 - $4.00                       27,000    $ 3.61             7.17        20,333     $ 3.74
                                       -----------   ---------   ------------   -----------   --------
                                         1,501,000    $ 1.48             5.09       867,833     $ 1.34
                                       ===========   =========   ============   ===========   ========
</TABLE>


                                      F-14
<PAGE>


                               MEDGRUP CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

Note D: Shareholders' equity
----------------------------

In January  2000,  the Company sold  215,000  shares of its common stock 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 should receive 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. Offering costs consist primarily of placement
and legal fees and selling commissions.

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(TM)  project.  The warrants,  valued at
their fair  value of  $19,300,  are  recorded  in the  financial  statements  as
outstanding common stock warrants.

Preferred Stock
---------------
The Company's  articles of  incorporation  provide for  5,000,000  shares of its
50,000,000 authorized shares 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.

Note E: Income taxes
--------------------

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

                                                            December 31,
                                                      ------------------------
                                                          2001        2000
                                                      ---------      ---------
Tax expense at statutory rate ....................    $ 109,302      $ 222,230
State income taxes, net of federal benefit .......       14,884         30,263
Accrual to cash conversion .......................      (43,693)      (139,690)
Expenses not deductible for income taxes .........       11,971          6,207
Difference in depreciation methods ...............      (19,315)       (22,792)
Net operating loss carryforward ..................         --          (37,985)
Increase in deferred tax liability ...............       46,012        165,733
                                                      ---------      ---------
Income tax expense from operations ...............    $ 119,161      $ 223,966
                                                      =========      =========

                                      F-15
<PAGE>

                               MEDGRUP CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

At December 31, the deferred tax liability  consisted of the following temporary
differences:

                                                           2001           2000
                                                         --------       --------
Accrual to cash conversion .......................       $394,594       $350,743
Tax versus book depreciation methods .............         18,000         15,839
                                                         --------       --------
Net deferred taxes ...............................       $412,594       $366,582
                                                         ========       ========

The  expense  for  income  taxes consists  of the  following  for the year ended
December 31, 2001:

                                          Current       Deferred       Total
                                          --------      --------      --------
            Federal ..................    $ 64,372      $ 40,491      $104,862
            State ....................       8,778         5,521        14,299
                                          --------      --------      --------
            Total ....................    $ 73,150      $ 46,012      $119,161
                                          ========      ========      ========

Note F: Commitments
-------------------

Non-cancelable leases
---------------------

The Company entered into a new  non-cancelable  operating lease for office space
beginning  July 2000 and ending June 30,  2003.  In December  2000,  the Company
leased  additional  office space for $15,000 per year. Total office rent expense
incurred  under the leases for the years  ended  December  31, 2001 and 2000 was
$79,165 and  $39,745,  respectively.  The Company  also  leases  vehicles  under
non-cancelable leases that begin to expire in November 2002. Total lease expense
for the vehicles for the years ended  December 31, 2001 and 2000 was $22,413 and
$22,971, respectively. Future minimum lease payments for the leases with initial
terms in excess of one year as of December 31, 2001 are as follows:

                    December 31, 2002 ........  $86,033
                    December 31, 2003 ........   42,848
                    December 31, 2004 ........      551

Note G: Subsequent event
------------------------

Subject  to  shareholder  approval,  the  Company  plans to sell  the  Company's
outstanding common shares to an unrelated third party.


                                      F-16