U.S. SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                   FORM 10-KSB

(MARK ONE)

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934 [FEE REQUIRED]

                   FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934 [NO FEE REQUIRED]

              FOR THE TRANSITION PERIOD FROM _________ TO _________

                           COMMISSION FILE NO. 0-15936

                        HEALTH OUTCOMES MANAGEMENT, INC.
                 (Name of small business issuer in its charter)

              MINNESOTA                                          41-1546471
   (State or other jurisdiction of                            (I.R.S. Employer
    incorporation or organization)                           Identification No.)

     2331 UNIVERSITY AVENUE S.E.
        MINNEAPOLIS, MINNESOTA                                     55414
(Address of principal executive offices)                         (Zip Code)

                  Registrant's telephone number (612) 378-3053


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

Securities registered under Section 12(g) of the Exchange Act: None

                          Common Stock, $.01 par value
                          ----------------------------
                                (Title of class)

    Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __X__  No ____

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

    Issuer's revenue for its most recent fiscal year was $2,509,022.

    The aggregate market value of the voting stock held by non-affiliates of the
registrant as of May 1, 1997, was approximately $958,703.

    The number of shares of the registrant's Common Stock, $.01 par value,
outstanding at May 1, 1997 was 8,499,029.

                    DOCUMENTS INCORPORATED BY REFERENCE: NONE




                        HEALTH OUTCOMES MANAGEMENT, INC.
                                   FORM 10-KSB
                                      INDEX


Part I:

Item 1.           Business
Item 2.           Properties
Item 3.           Legal proceedings
Item 4.           Submission of matters to a vote of
                    security holders


Part II:

Item 5.           Market for registrant's common stock and
                    related stockholder matters
Item 6.           Management's discussion and analysis of financial
                    condition and results of operations
Item 7.           Financial statements and supplementary data
Item 8.           Disagreements on accounting and financial disclosure


Part III:

Item 9.           Directors and officers of the registrant
Item 10.          Executive compensation
Item 11.          Security ownership of certain beneficial owners
                    and management
Item 12.          Certain relationships and related transactions
Item 13.          Compliance with Section 16(a) of the Exchange Act


Part IV:

Item 13.          Exhibits, financial statement schedules,
                    and reports on Form 8-K




PART I

Item 1.  Business

The Company

Health Outcomes Management, Inc. (the "Company" or "Health Outcomes Management")
was incorporated in Minnesota in February 1986. Until September 1995, the
Company operated under the name "Data Med Clinical Support Services, Inc". The
term the "Company" or "Health Outcomes Management" as used herein includes
Health Outcomes Management, Inc. and subsidiaries, unless otherwise indicated.
The Company's executive offices are located at 2331 University Avenue Southeast,
Minneapolis, Minnesota 55414. The Company's telephone number is 612-378-3053.

On June 15, 1994, the Company formed Pharmaceutical Care Outcomes, Inc. as a
wholly owned subsidiary. The primary purpose of the new corporation is to
continue to refine the Assurance Coordinated Pharmaceutical Care System(TM),
market it to pharmacies across the United States and work closely with the
Peters Institute of Pharmaceutical Care at the University of Minnesota in the
practice of comprehensive Pharmaceutical Care.

During July 1996, and April 1997, the Company acquired certain assets of two
community pharmacies located in the Minneapolis, Minnesota metropolitan area.
These community pharmacies are being developed into prototype stores applying
patient care concepts utilizing the Company's Assurance Coordinated
Pharmaceutical Care System(TM) software.

The Company has another subsidiary operating under the name of HO Management,
Inc. which is inactive at this time.

Description of Business

The Company's mission statement is to improve the quality of patient outcomes in
healthcare - cost effectively; using modern computer software technology.

The Company's primary business consists of licensing its proprietary clinical
support and financial software services to long-term care facilities, home
healthcare agencies, retail pharmacies and hospitals. The principal elements of
these services include software, training and 24-hour telephone support.

In addition, the Company operates two community pharmacies that are being
developed into prototype stores applying patient care concepts.

The Company markets its software services under the trade name "ASSURANCE 2001".
These comprehensive services are designed to give health care professionals the
assurance that productivity and costs are being carefully managed, and to give
clinicians the assurance that patient care is optimized by using some of the
most advanced technology available to provide successful patient healthcare
outcomes.



The Products

Long-Term Care

The Company markets computer software services to long-term care facilities to
provide the clinical documentation required by federal regulation. A shortage of
nurses also makes computerized clinical records desirable. The Assurance
Long-Term Care System(TM) utilizes a relational data base. The Company also
provides Point-of-Care remote data collection software for use at nursing
stations. The Company's Assurance Financial System(TM) software may be installed
singularly or as a complete system with the clinical documentation system.

Home Healthcare Agencies

The Assurance Homecare System(TM) is designed for the collection and analysis of
information needed to manage homecare patients when they no longer need to be in
a hospital after a sickness and are being cared for at home. Nurses can record
their findings at a patient's home using Health Outcomes Management's unique
Point-of-Care Software(TM) and a notebook computer. All information is then made
available to the homecare agency and to the physicians via a relational data
base for activities such as clinical trend analysis and prompt billing. The
Company's Assurance Financial System(TM) software may be installed alone or as a
part of a complete system with the Company's clinical documentation system.

Community Pharmacy Software

The Assurance Coordinated Pharmaceutical Care System(TM) utilizes pharmacy
protocols that have been developed for the most cost effective treatment of
patients who are using multiple drugs, prescribed by more than one physician,
plus over-the-counter drugs. This system is a quality assurance and continuous
quality improvement approach to caring for patients. The system provides a major
step forward in the everyday practice of pharmacy in community pharmacies. A
major emphasis of this system is outcome management to enhance the patient's
quality of life, cost effectively.

Hospitals

Hospitals may utilize several of the Company's software services. Rehabilitation
hospitals utilize a customized computerized system specifically for the needs of
the rehabilitation market segment. Procedures and reports are specific for the
needs of treating acute care, long-term care and outpatient rehabilitation
patients. Outcome management techniques are included to improve the likelihood
of successful patient health outcomes.

Pharmacokinetics is the study of how drugs get into and out of a patient's body
and the changes which take place while they are in the body. The Assurance
Kinetics System(TM) makes it easier, faster and less costly to calculate proper
dosages, and to track schedules of commonly monitored drugs. The heart of Health
Outcomes Management's Assurance Kinetics System(TM) is the unique Health
Outcomes Management software, updated with the latest findings in
pharmacokinetic research.

Studies indicate that many patients in hospitals are suffering from
malnutrition. The patient's nutritional status plays a major role in determining
the outcome of any medical intervention. Health Outcomes Management's Assurance
Nutrition System(TM) allows an institution or physician to provide a nutritional
consult which is specifically geared to the severity of the patient's
nutritional status.

Continuing Support Services

All computerized Health Outcomes Management systems are licensed with an
agreement for Health Outcomes Management to provide continuing support services
on a 24-hour-a-day, 7 day-a-week basis via the Company's telephone helpline
(1-800-STAT-911).

Community Pharmacy Stores

At the Company's community pharmacy locations prescription and over-the-counter
drugs are sold at the retail level. The Company also utilizes the Assurance
Coordinated Pharmaceutical Care System(TM) to market a "Personalized
Pharmaceutical Care Plan" to pharmacy patients which summarizes, analyzes and
assists patients in understanding all medications being taken.



Competition

The market for clinical information and financial software systems and services
continues to undergo rapid development and is highly competitive. Although no
one company directly competes with Health Outcomes Management's complete line of
services, many companies offer services that compete directly with individual
Health Outcomes Management services, or offer alternatives to such services.

The Company's principal competition in the market for the Assurance Long-Term
Care System(TM) and Assurance Financial System(TM) include Care Computer, MCS,
Beechwood, AA Data Systems, Achieve, Melyx, and Long-Term Care Computer Systems
as well as approximately eighty-five other suppliers.

The Assurance Homecare System(TM) has principally the following competitors:
Infomed, Sandata, Delta, Kiyo, ProMac, RX:Home and Mesta Med.

In the market for the drug dosing and nutritional support, competition consists
of Simkin, Cedar Systems and the Diagnostics Division of Abbott. The Abbott
product is intended primarily to serve as a complement to Abbott's laboratory
instruments.

In the area of Pharmaceutical Care, competition consists primarily of Carepoint,
Encara, CareStream and MedOutcomes. Many pharmacy dispensing systems advertise
that they also provide pharmaceutical care. However, the Company believes that
dispensing systems do not provide comprehensive patient care and drug outcomes
measurement.

The Company believes that the Assurance Long-Term Care System 2001(TM) and
Assurance Homecare System 2001(TM) are among the leading clinical products in
their fields. Company management believes that the Company's comprehensive
clinical services distinguish its products from the competition. The Company
believes that competitors could introduce new competing comprehensive clinical
services and products but not without significant investments of time and
capital. Many of the Company's competitors, however, do have greater financial
and marketing resources than the Company.

While there are approximately 60,000 community pharmacies in the U. S. that sell
prescription and over-the-counter drugs, few offer the service of pharmaceutical
care that is available at the Company's community pharmacies and the pharmacies
who license the Company's software for pharmaceutical care.



Sales and Marketing

The Company's products are presently marketed through direct marketing efforts.
The direct approach consists of efforts by Company personnel and commissioned
sales representatives in the promotion and sales of products and services into
all of the Company's markets.

The Company's marketing objective is to establish itself as a leader in
providing clinical support services by placing a major emphasis on the service
component of its business. To accomplish this, the Company has implemented the
following strategies:

    o   Offer a wide variety of clinical and financial support services that are
        adaptable to multiple health care applications and settings such as
        long-term care facilities, community pharmacies, home healthcare
        agencies and hospitals.

    o   Distinguish Health Outcomes Management as a technology leader. The
        Company's expert staff of Doctors of Pharmacy and Registered Nurses
        enables Health Outcomes Management to stay on the leading edge of
        patient outcome management technology.

    o   Provide a 24-hour-a-day helpline (l-800-STAT-911) so that Health
        Outcomes Management clinical and financial experts are available on a
        seven day, 24-hour basis to provide excellent clinical and financial
        support services to its clients.

    o   Exhibit the Company's products and services at important national trade
        shows and technical convocations.

    o   Develop strategic alliances with healthcare providers.

    o   Develop and operate prototype community pharmacies applying patient care
        concepts utilizing the Company's Assurance Coordinated Pharmaceutical
        Care System(TM) software.


The ASSURANCE 2001 systems are stand alone services which can be integrated, but
are designed to meet specific productivity and outcome management needs of
practitioners and clinicians. They are generally licensed directly by the
Company to existing clients and to prospects generated from magazine
advertising, trade shows, direct mailings and direct sales efforts.



Significant Clients

During the year ended February 28, 1997, one client accounted for approximately
27% of total revenue. In 1996 and 1995, this client accounted for approximately
23% and 31%, respectively, of total revenues. In January 1997, the Company's
relationship with this client terminated at the end of the three year agreement.

During April 1996, the Company terminated its one year marketing agreement with
a major client in order to pursue other marketing arrangements. Revenues from
this client constituted approximately 21% of the Company's total 1996 revenue.
Revenues from the client were not material in 1997 or 1995.



Research and Development

The Company spent approximately $223,000, $503,000 and $383,000 for research and
development efforts in 1997, 1996 and 1995, respectively. For fiscal year 1998
the Company intends to fund software development at approximately the same
levels as fiscal year 1997.



Government Regulation

Medical products and devices are subject to extensive federal regulations by the
United States Food and Drug Administration (the "FDA") and are also subject to
state regulations. To date, the FDA has not adopted any substantive regulation
on computer software or related services and, currently, none of the Company's
products or services is subject to FDA oversight.

Changes in reimbursement formulas and in the types of items eligible for
reimbursement under government funded health care programs, and the availability
and timing of funding appropriations for such programs, have affected the health
care industry generally and may, directly or indirectly, affect the market for
the Company's products and services.



Copyrights, Patents and Trademarks

Computer software systems, which form an integral part of the Company's products
and services, may, in general, be copyrighted, but copyright laws do not provide
complete protection from unauthorized use.

The Company currently holds no patents with respect to any of its products or
services, but may seek patent protection in the future. Currently, the Company
seeks to protect proprietary information regarding its products and services as
trade secrets by utilizing nondisclosure agreements with its employees, clients
and others who are permitted access to such information.



Employees

On May 1, 1997, the Company employed 21 staff members. In addition, the Company
was utilizing the services of 7 independent marketing representatives. The
Company is not subject to any collective bargaining agreements and considers its
relationships with employees to be good.



Insurance

The Company currently maintains insurance for general property and liability
insurance claims in an aggregate amount which it believes to be sufficient given
the nature of its business. These policies generally provide coverage on a
claims made or occurrence basis and have certain exclusions from coverage. These
insurance policies must be renewed annually. There can be no assurance that
insurance coverage will be adequate to cover liability claims that may be
asserted against the Company or that adequate insurance will be available in the
future at acceptable cost. The Company does not have insurance against
liabilities arising in connection with errors and omissions in its computer
software.


Item 2.  Properties

The Company leases its corporate office and training facilities, which are
located at 233l University Avenue Southeast in Minneapolis, Minnesota. The
facilities are covered by an operating lease with an original term of three (3)
years commencing January 1, 1992. Under an amendment signed December 23, 1996,
and effective February 28, 1997, the Company terminated a portion of this lease.
The lease term for the remaining office space has been extended to December 31,
1998, with an option for an additional two years. Rent is payable monthly in the
amount of $8,944. In addition to such rent, the Company is obligated to pay
certain operating costs and increases in real property taxes. Such facility
consists of approximately 7,477 square feet.

The Company leases a community pharmacy site which is located at 3831 West 50th
Street, Minneapolis, Minnesota. The site is covered by an operating lease which
will terminate on September 30, 1998. Rent is payable monthly in the amount of
$997.50. In addition to such rent, the Company is obligated to pay certain
operating costs and increases in real property taxes.

The Company leases a community pharmacy site located at 9611 Anderson Lake
Parkway, Eden Prairie, Minnesota. The site is covered by an operating lease with
a term of five (5) years commencing on April 3, 1997. For lease years one
through three the rent is payable monthly in the amount of $905. For the lease
years four and five the rent is payable monthly in the amount of $1,006. Due to
temporary construction at the site, the Company is not obligated to pay rent
from April 1, 1997 through December 31, 1997. In addition to such rent, the
Company is obligated to pay certain operating costs and increases in real
property taxes. Such facility consists of approximately 604 square feet.
Additional space likely will be required in the near future at this location.


Item 3.  Legal Proceedings.

As of May 1, 1997, the Company was not involved in any legal proceedings.


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

No matter was submitted to a vote of stockholders during the Company's fourth
quarter.


Part II

Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters.

The Company's common stock is traded in the over-the-counter market and is
quoted by the National Quotation Bureau. The following tables reflect the
quarterly high and low bid quotations for the Company's stock. These quotations
represent inter-dealer prices, without retail markup, markdown or commission,
and may not necessarily represent actual transactions.

                                   STOCK PRICE

                  FISCAL 1997                                    FISCAL 1996
--------------------------------------------------------------------------------
QUARTER        HIGH         LOW                  QUARTER       HIGH        LOW
               ----         ---                                ----        ---
First         $  .44       $  .31                First        $  .94      $  .50
Second        $  .38       $  .19                Second       $ 1.12      $  .81
Third         $  .19       $  .08                Third        $  .94      $  .69
Fourth        $  .16       $  .13                Fourth       $  .69      $  .50

As of May 7, 1997, there were approximately 278 shareholders of record of the
Company's common stock.

To date, the Company has paid no dividends, and it does not intend to pay
dividends in the foreseeable future. Future dividend policy with respect to the
Common Stock will depend on conditions existing at the time, including the
Company's earnings, if any, capital needs, financial condition, general business
conditions and other factors considered by the Board of Directors.


Item 6.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.

GENERAL. Health Outcomes Management, Inc., is a developer and supplier of
proprietary computer software and services to the healthcare industry. In
addition, during fiscal 1997, the Company operated one community pharmacy.
Revenues are derived primarily from five sources: (1) licensing computerized
clinical and financial information management software systems; (2) providing
on-going software support services; (3) software training services; (4)
consulting services and (5) prescription and over-the-counter drug sales.
License and training fees are usually received at the beginning of the license
term, which is generally from one to three years in duration. Annual and monthly
support fees pay for periodic software updates, telephone helpline support and
software usage.

FISCAL 1997 V. FISCAL 1996

REVENUE. For fiscal 1997, revenue was $2,509,022. Total revenue decreased by
$673,696, or 21.2%, from $3,182,718 in fiscal 1996. The Company recorded a net
loss in fiscal 1997 of $113,244, compared to net income of $95,615 in fiscal
1996, a decrease of $208,859 or 218.4%. The fiscal 1997 decrease was primarily
the result of the termination of a one year marketing relationship with one of
the Company's major clients in April 1996 and the expenses associated with the
startup and operation of the pharmacy acquired in July 1996. Revenue received
from client support fees decreased by 8.6%, license fees decreased by 33.7%,
software training fees decreased by 73.6%, consulting revenue decreased by 69.9%
and other revenue decreased by 37.5%. Revenues from prescription and
over-the-counter drug sales at the pharmacy acquired in fiscal 1997 partially
offset the decreases in other revenues.

Support fee revenue from the Company's Long-Term Care and Homecare products
increased by 7.3%. Decreased revenues from the Assurance Community
Pharmaceutical Care System(TM) accounted for 50.1% of the decline in license
fees, 96.2% of the decline in training fees, and all of the decline in support
fees and in other revenue, primarily the result of the Company terminating its
marketing relationship with one of its largest clients.

Consulting fee revenue decreased 69.9%, primarily reflecting changes in the
method of reimbursement by the Company's largest client. During part of fiscal
1996, the Company received monthly retainer fees; for the remainder of fiscal
1996 and all of fiscal 1997 the Company received reimbursement based on the
number of Homecare systems licensed and trained. See Note 11 to the Consolidated
Financial Statements for discussion of this arrangement.

During fiscal 1997, the Company received a one-time payment of $159,000 pursuant
to the terms of a "transition agreement" between the Company and its largest
client. See Note 11 to the Consolidated Financial Statements for discussion of
this "transition agreement".

The effects of inflation on the Company's revenue and operating results were not
significant.

COSTS AND EXPENSES. Total expenses in fiscal 1997, including interest,
depreciation and amortization, decreased 15.1% to $2,622,266 from $3,087,103 in
fiscal 1996. Total operating expenses, including the expenses of the pharmacy
acquired in fiscal 1997, decreased 13.6% to $1,032,390 from $1,194,859 in fiscal
1996. Compensation, benefits and payroll taxes decreased 22.8% in fiscal 1997.
The decrease in payroll expenses is primarily due to the approximate 35% staff
reduction from the prior fiscal period, reductions in health insurance benefit
costs and a 10% voluntary salary reduction by the President and Vice President.
Staff reductions are the result of staff attrition and the involuntary
termination of seven (7) employees. Administrative expenses such as telephone,
accounting, legal, postage, supplies, education and equipment maintenance
decreased 17.3% in fiscal 1997. Administrative expenses have declined
significantly as the Company has implemented expense reductions in an attempt to
offset reductions in revenue. Commissions paid to sales representatives in
fiscal 1997 decreased 17.3% due to decreases in commissionable license fees.
Travel expenses and fees paid to outside consultants also decreased in fiscal
1997 when compared to fiscal 1996. Depreciation and amortization expenses
decreased 27.3% in fiscal 1997 to $124,678 from $171,531 in fiscal 1996.
Amortization of various capitalized software costs was completed in fiscal 1995.

Net interest expense decreased 40.6% in fiscal 1997 to $15,395 from $25,927 in
fiscal 1996, primarily due to interest income earned on the note receivable from
an officer of the Company. During fiscal 1997 and fiscal 1996, the Company's
interest costs related primarily to leased computer and office equipment. In
fiscal 1996, the interest costs related primarily to leased computer and office
equipment


FISCAL 1996 V. FISCAL 1995

REVENUE. For fiscal 1996, revenue was essentially flat at $3,182,718. Total
revenue rose $13,900, or 0.4%, from $3,168,818 in fiscal 1995. Revenue received
from client support fees increased 28.7%, license fees 10.6% and software
training fees 102.7%. Decreases in consulting revenue and sales of client
networking systems offset these increases.

During fiscal 1996, the Company introduced the Assurance Coordinated
Pharmaceutical Care System(TM). Revenues generated from this software system
accounted for 69.8% of the total increase in client support fees, and all of the
increase in training fees, and offset decreases in license fees received from
Long-Term Care and Hospital products.

Consulting fee revenue decreased 74.1% in fiscal 1996 compared to fiscal 1995,
primarily reflecting changes in the method of reimbursement by the Company's
largest client. During fiscal 1995, the Company received monthly retainer fees;
in fiscal 1996 the Company received reimbursement based on the number of
Homecare systems licensed and trained. See Note 11 to the Consolidated Financial
Statements for discussion of this arrangement.

The effects of inflation on the Company's revenue and operating results were not
significant.

COSTS AND EXPENSES. Total expenses, including interest, depreciation and
amortization decreased 2.2% in fiscal 1996 to $3,087,103 from $3,157,823 in
fiscal 1995. Total operating expenses decreased 6.4% in fiscal 1996 to
$1,194,859 from $1,276,178 in fiscal 1995. Compensation, benefits and payroll
taxes increased 5.6% in fiscal 1996 from the prior year period. Administrative
expenses such as telephone, accounting, legal, postage, supplies, education and
equipment maintenance increased 4.2% during fiscal 1996 from the prior year
period. Expense increases were principally due to increased equipment
maintenance costs associated with the upgrade of existing computer equipment and
increased education expenses for computer programmers. Commissions paid to sales
representatives decreased 12.9% in fiscal 1996 from the prior year period due to
decreases in commissionable license fees. Travel expenses, fees paid to outside
consultants and new client training expenses also decreased in fiscal 1996 when
compared to fiscal 1995. Expenses associated with advertising and marketing
increased by 8.1% in fiscal 1996 from the prior year period. Depreciation and
amortization expenses decreased 42.7% in fiscal 1996 to $171,531 from $299,524
in fiscal 1995. Amortization of various intangible costs associated with the
1993 acquisition of certain assets of Applied Micro Management, Inc. was
completed in 1995.

Net interest expense decreased 27.6% in fiscal 1996 to $25,927 from $35,826 in
fiscal 1995, primarily due to reduced borrowing from an officer of the Company.
During fiscal 1996 and fiscal 1995, the Company's interest costs related
primarily to leased computer and office equipment.



LIQUIDITY AND CAPITAL RESOURCES

As of February 28, 1997, the Company had a working capital deficit of $(210,537)
compared to a deficit of $(237,560) at February 29, 1996, an improvement of
$27,023. The improvement in the working capital position was principally due to
payments received from the exercise of stock options and from the payments
received on a note receivable which was mostly offset by capital lease
obligation payments and the net loss for the year.

The Company does not have commitments to purchase additional equipment, but does
plan to continue to fund software development efforts at approximately the same
levels as the past year.

The Company believes that it will have short-term cash needs. When the need
arises, the Company will supplement its cash needs with the available line of
credit discussed in Note 15 to the Consolidated Financial Statements. An officer
and major shareholder of the Company has also agreed to make short-term interest
bearing advances to the Company as needed.

Improved capital availability will ultimately depend on improved sales
performance and continued cost containment of all operational costs. There can
be no assurance that sales results will improve and that the Company will
experience profitable operations. Management anticipates profitability will
return and that liquidity problems will be resolved as a result of the actions
described below. The financial statements do not include any adjustments that
might result should the Company be unable to continue as a going concern.

Management has adopted the following plans for the coming year:

*   Continue to market the Company's Assurance Coordinated Pharmaceutical Care
    System(TM) to community pharmacies.

*   Develop and operate prototype community pharmacies using the Assurance
    Coordinated Pharmaceutical Care System(TM) with a potential to franchise
    this prototype concept.

*   Expand the Company's marketing efforts in Subacute Care and Transitional
    Care, which are two emerging healthcare market segments where the Company
    has established clients and well accepted software.

*   Reduce operating costs and ensure that the effectiveness of remaining
    expenditures is consistent with support of the Company's growing client
    base.

If operations and cash flow can be improved through these efforts, management
believes that the Company can continue to operate. However, no assurance can be
given that management's actions will result in profitable operations and the
resolution of its liquidity problems.

The independent auditors report included in this report on Form 10-KSB states
that the Company's working capital deficiency and stockholders deficit raise
substantial doubts about the Company's ability to continue as a going concern.

FORWARD LOOKING INFORMATION

Except for the historical information contained herein, the matters discussed in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward looking statements that involve risks and uncertainties,
including the availability of sufficient working capital should the Company
experience operating losses, increased market acceptance and market penetration
of the Company's Assurance Coordinated Pharmaceutical Care System(TM), improved
sales performance of all of the Company products, changes in government
regulations and continued containment of operational costs. In addition, the
market for clinical information and financial software systems and services is
highly competitive, and the Company's results may be adversely affected by the
actions of existing or future competitors including the introduction of new
products and technologies in competition with the Company.

RECENT ACCOUNTING PRONOUNCEMENTS

During fiscal 1997, the Company adopted the disclosure requirements under
Statement of Financial Accounting Standards No. 123 (SFAS No. 123). ACCOUNTING
FOR STOCK-BASED COMPENSATION. See footnote 8 for the full disclosure.

In fiscal 1997, The Company was required to adopt Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF which prescribes accounting and
reporting standards when circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable. SFAS No. 121 had no impact on the
Company's financial statements.


Item 7.  Financial Statements and Supplementary Data.

The following Consolidated Financial Statements of the Company and the
Independent Auditors' Report thereon are included on this Form 10-KSB



Independent Auditors' Report


Consolidated Balance Sheets - February 28, 1997 and February 29, 1996


Consolidated Statements of Operations - Years Ended
   February 28, 1997, February 29, 1996 and February 28, 1995


Consolidated Statements of Changes in Stockholders' Deficit - Years Ended
   February 28, 1997, February 29, 1996 and February 28, 1995


Consolidated Statements of Cash Flows - Years Ended
   February 28, 1997, February 29, 1996 and February 28, 1995


Notes to Consolidated Financial Statements



INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Health Outcomes Management, Inc.:


We have audited the accompanying consolidated balance sheets of Health Outcomes
Management, Inc. (the Company) and subsidiaries as of February 28, 1997, and
February 29, 1996, and the related statements of operations, changes in
stockholders' deficit and cash flows for each of the fiscal years in the
three-year period ended February 28, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Health Outcomes
Management, Inc. and subsidiaries as of February 28, 1997 and February 29, 1996,
and the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended February 28, 1997 in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that Health Outcomes Management, Inc. will continue as a going concern. As
discussed in note 2 to the consolidated financial statements, the Company's
operating loss, net working capital deficiency and stockholders' deficit raise
substantial doubt about the entity's ability to continue as a going concern.
Management's plans in regard to these matters are described in note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

KPMG Peat Marwick LLP



Minneapolis, Minnesota
April 18, 1997



<TABLE>
<CAPTION>

Health Outcomes Management, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
February 28, 1997 and February 29, 1996

                                                                                     1997             1996
------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C>   
Assets
Current assets:
    Cash and cash equivalents                                                   $   209,024           68,657
    Trade receivables, less allowance for doubtful accounts
         of $35,000 and $15,000, respectively                                        92,402          140,219
    Inventory                                                                        52,436             --
    Prepaid expenses                                                                 17,366           43,805
    Other current assets                                                               --                679
                                                                                -----------      -----------
            Total current assets                                                    371,228          253,360

Property and equipment, net                                                         104,009          180,353

Other assets, net of accumulated amortization of
    $319,631 and $286,867, respectively                                              49,837           82,601
                                                                                -----------      -----------
            Total assets                                                        $   525,074          516,314
                                                                                ===========      ===========


Liabilities and Stockholders' Deficit
Current liabilities:
    Notes payable, current portion                                                    6,904             --
    Current installments of obligation under capital leases                          60,974           58,928
    Accounts payable                                                                102,827          126,936
    Deferred revenue                                                                313,926          193,660
    Accrued compensation                                                             56,547           74,955
    Accrued payroll taxes                                                            14,979           20,222
    Other current liabilities                                                        25,608           16,219
                                                                                -----------      -----------
            Total current liabilities                                               581,765          490,920
                                                                                -----------      -----------

Notes payable, excluding current portion                                              4,289             --
Obligation under capital leases, excluding current installments                      25,377           81,962
                                                                                -----------      -----------
            Total liabilities                                                       611,431          572,882
                                                                                -----------      -----------

Stockholders' deficit:
    Series A, convertible preferred stock, $.01 par value:
      Authorized - 1,000,000
      Issued and outstanding shares - none                                             --               --
    Common stock--$.01 par value:
      Authorized - 15,000,000
      Issued and outstanding shares - 8,499,029 and 8,327,885, respectively          84,990           83,279
    Additional paid-in capital                                                    4,724,568        4,665,724
    Accumulated deficit                                                          (4,826,415)      (4,713,171)
    Note receivable from officer                                                    (69,500)         (92,400)
                                                                                -----------      -----------
            Total stockholders' deficit                                             (86,357)         (56,568)
                                                                                -----------      -----------
Commitments and contingencies (notes 6, 13 & 15)
            Total liabilities and stockholders' deficit                         $   525,074          516,314
                                                                                ===========      ===========

The accompanying notes are an integral part of the consolidated financial
statements.

</TABLE>


<TABLE>
<CAPTION>

Health Outcomes Management, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended February 28, 1997, February 29, 1996 and February 28, 1995


                                               1997             1996             1995
----------------------------------------------------------------------------------------
<S>                                       <C>               <C>              <C>      
Revenues                                   $ 2,509,022        3,182,718        3,168,818
Cost of revenues                             1,574,481        1,866,317        1,845,819
                                           -----------      -----------      -----------
      Gross profit                             934,541        1,316,401        1,322,999
                                           -----------      -----------      -----------

Operating expenses:
  Research and development                     223,437          502,627          383,263
  Selling and marketing                        146,267          195,668          279,146
  General and administrative                   662,686          496,564          613,769
                                           -----------      -----------      -----------
      Total operating expenses               1,032,390        1,194,859        1,276,178
                                           -----------      -----------      -----------

      Income (loss) from operations            (97,849)         121,542           46,821
                                           -----------      -----------      -----------


Other (income) expense:
   Interest income                              (7,714)            (641)          (1,108)
   Interest expense                             23,109           26,568           36,934
                                           -----------      -----------      -----------
                                                15,395           25,927           35,826
                                           -----------      -----------      -----------

Net income (loss)                          $  (113,244)          95,615           10,995
                                           ===========      ===========      ===========

Income (loss) per common share             $      (.01)             .01              .00
                                           ===========      ===========      ===========


Weighted average number of common and
  common equivalent shares outstanding       8,434,058        8,720,983        8,974,608
                                           ===========      ===========      ===========

The accompanying notes are an integral part of the consolidated financial
statements.

</TABLE>



<TABLE>
<CAPTION>

Health Outcomes Management, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT Years ended February
28, 1997, February 29, 1996 and February 28, 1995

                          PREFERRED STOCK              COMMON STOCK                                      NOTE
                       ----------------------     ----------------------   ADDITIONAL                 RECEIVABLE
                        NUMBER        PAR          NUMBER        PAR        PAID-IN     ACCUMULATED      FROM          TOTAL
                       OF SHARES     VALUE        OF SHARES     VALUE       CAPITAL       DEFICIT       OFFICER       DEFICIT
--------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>       <C>             <C>        <C>          <C>           <C>               <C>       <C>
BALANCES,
  FEBRUARY
    28, 1994            625,000   $     6,250     7,640,385  $    76,404  $ 4,487,319   $(4,819,781)         --     $  (249,808)

Issuance of
   common stock
   for acquisition         --            --         100,000        1,000       37,500          --            --          38,500
Proceeds from
   stock options
   exercised               --            --           9,000           90        3,240          --            --           3,330
Issuance of
   common stock            --            --         200,000        2,000       48,000          --            --          50,000
Purchase of
   preferred stock     (625,000)       (6,250)         --           --        (43,750)         --            --         (50,000)
Net income                 --            --            --           --           --          10,995          --          10,995
                    -----------   -----------   -----------  -----------  -----------   -----------   -----------   -----------
BALANCES,
  FEBRUARY
    28, 1995                  0             0     7,949,385       79,494    4,532,309    (4,808,786)         --        (196,983)

Proceeds from
   stock options
   exercised               --            --         265,500        2,655      110,410          --            --         113,065
Issuance of
   common stock            --            --         113,000        1,130       23,005          --            --          24,135
Net income                 --            --            --           --           --          95,615          --          95,615
Note receivable
   from officer            --            --            --           --           --            --         (92,400)      (92,400)
                    -----------   -----------   -----------  -----------  -----------   -----------   -----------   -----------
BALANCES,
  FEBRUARY
    29, 1996                  0             0     8,327,885       83,279    4,665,724    (4,713,171)      (92,400)      (56,568)

Proceeds from
   stock options
   exercised               --            --         123,000        1,230       44,280          --            --          45,510
Issuance of
   common stock            --            --          48,144          481       14,564          --            --          15,045
Net loss                   --            --            --           --           --        (113,244)         --        (113,244)
Proceeds from
   payments of
   note receivable
   from officer            --            --            --           --           --            --          22,900        22,900
                    -----------   -----------   -----------  -----------  -----------   -----------   -----------   -----------
BALANCES,
  FEBRUARY
    28, 1997                  0   $      --       8,499,029  $    84,990  $ 4,724,568   $(4,826,415)  $   (69,500)  $   (86,357)
                    ===========   ===========   ===========  ===========  ===========   ===========   ===========   ===========

The accompanying notes are an integral part of the consolidated financial
statements.

</TABLE>


<TABLE>
<CAPTION>

Health Outcomes Management, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended February 28, 1997, February 29, 1996 and February 28, 1995

                                                                   1997          1996          1995
-----------------------------------------------------------------------------------------------------
<S>                                                            <C>            <C>           <C>   
Cash flows from operating activities:
    Net income (loss)                                           $(113,244)       95,615        10,995
                                                                ---------     ---------     ---------
Adjustments to reconcile net income(loss) to cash
provided by operating activities:
    Depreciation                                                   91,913       110,893       103,673
    Amortization                                                   32,764        60,638       195,850
    Provision for losses on accounts receivable                    31,234        36,160         7,425
    Recoveries of bad debts                                         5,114          --            --
    Gain on disposal of equipment                                    --            --             671
    Payments in stock                                              15,045         9,135          --
Changes in operating assets and liabilities, net of
         acquisitions
    Decrease (increase) in trade receivables                       11,469        86,363        (6,100)
    Increase in inventory                                         (18,405)         --            --
    Decrease (increase) in prepaid expenses                        26,439       (30,576)       94,605
    Decrease (increase) in other current assets                       679         4,818        (3,137)
    Increase (decrease) in accounts payable                       (32,624)     (100,998)       44,038
    Increase (decrease) in deferred revenue                       120,266        77,984      (407,442)
    Increase (decrease) in accrued compensation                   (18,408)      (54,096)       25,873
    Increase (decrease) in payroll taxes                           (5,243)      (87,440)       61,820
    Increase (decrease) in other current liabilities                9,389       (20,541)       31,992
                                                                ---------     ---------     ---------
       Total adjustments                                          269,632        92,340       149,268
                                                                ---------     ---------     ---------
       Cash provided by operating activities                      156,388       187,955       160,263
                                                                ---------     ---------     ---------

Cash flows from investing activities:
    Capital expenditures                                           (2,569)      (63,697)      (40,436)
    Cash paid for acquisitions                                    (23,544)         --         (22,500)
                                                                ---------     ---------     ---------
       Cash flows used in investing  activities                   (26,113)      (63,697)      (62,936)
                                                                ---------     ---------     ---------

Cash flows from financing activities:
    Bank overdraft                                                   --            --          (8,488)
    Principal payments received from note receivable               22,900          --            --
    Principal payments under capital lease obligations            (54,538)      (47,938)      (44,888)
    Repayments of note payable assumed in the
       Edina Pharmacy acquisition                                  (3,780)         --            --
    Repayments of bank loans assumed in the
       Applied Micro Management, Inc. acquisition                    --          (6,123)      (17,486)
    Net repayment of loans to officer                                --         (60,000)       (7,000)
    Proceeds from issuance of common stock                         45,510        35,665        53,330
    Repurchase of preferred stock                                    --            --         (50,000)
                                                                ---------     ---------     ---------
       Cash flows provided by (used in) financing activities       10,092       (78,396)      (74,532)
                                                                ---------     ---------     ---------
Increase in cash and cash equivalents                             140,367        45,862        22,795
Cash and cash equivalents at beginning of year                     68,657        22,795             0
                                                                ---------     ---------     ---------
Cash and cash equivalents at end of year                        $ 209,024        68,657        22,795
                                                                =========     =========     =========

Supplemental disclosures of cash flow information:
Cash paid during the year for:
       Interest                                                 $  23,027        27,661        37,442
                                                                =========     =========     =========

The accompanying notes are an integral part of the consolidated financial
statements.

</TABLE>



Health Outcomes Management, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1997

1. SUMMARY OF ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF BUSINESS  Health Outcomes Management, Inc., (the
Company) formerly known as Data Med Clinical Support Services, Inc., and its
wholly owned subsidiaries, develop and supply computer software systems and
services to the healthcare industry and sell prescription and over-the-counter
drugs at the retail level.

The Company markets clinical and financial software and related services used
for the management of Community Pharmacies, Long-Term Care Nursing Facilities,
Homecare Facilities and Hospital Departments.

PRINCIPLES OF CONSOLIDATION  The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All intercompany
transactions and balances are eliminated in consolidation.

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

INCOME TAXES  The Company utilizes Financial Accounting Standard No. 109,
Accounting for Income Taxes. Under the asset and liability method of Statement
No. 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.

PROPERTY AND EQUIPMENT  Property and equipment are stated at cost. Depreciation
of property and equipment is provided over the useful lives of the respective
assets on a straight-line basis. The useful lives for financial reporting
purposes range from three to five years.

RESEARCH AND DEVELOPMENT  Research and development costs are charged to expense
as incurred.

REVENUE RECOGNITION  Revenue from software systems and services is recognized
upon delivery of software and clients' completion of required training programs.
Revenue from prescription and over-the-counter drug sales is recognized at the
point of sale.

DEFERRED REVENUE  Deferred revenue is recorded when payments are received from
clients in advance of software services being provided, usually pursuant to
long-term software systems contracts or annual support service agreements.
Deferred revenue is amortized monthly over the life of the agreements, usually
from one to three years.

NET INCOME (LOSS) PER COMMON SHARE  Income (loss) per common share is computed
based on the weighted average number of common shares outstanding during the
period. Common stock issuable upon exercise of stock options, warrants or upon
conversion of Preferred Stock is included in the income per share calculation.

CAPITALIZED SOFTWARE  The Company capitalizes software production costs after
technological feasibility has been established and prior to general release to
clients. Annual amortization of capitalized software is based on the greater of
the amount computed using the straight-line method over the estimated 36-month
economic product life or using the ratio that current gross revenues for the
software product bears to the total of current and anticipated future gross
revenues for that product.

STATEMENTS OF CASH FLOWS  For purposes of reporting cash flows, the Company
considers highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.

INVENTORIES  Inventories are valued at the lower of cost or market.

STOCK BASED COMPENSATION  The Company applies Accounting Principles Board
Opinion No. 25 (APB No. 25), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations in accounting for its stock option plan. Accordingly, no
compensation expense has been recognized for its stock-based compensation plan.
The Company has adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), ACCOUNTING FOR STOCK-BASED
COMPENSATION.

ACCOUNTING FOR LONG-LIVED ASSETS  In March 1995, the Financial Accounting
Standards Board issued Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS No. 121).
SFAS No. 121 prescribes accounting and reporting standards when circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company adopted SFAS No. 121 during 1997, which had no impact on the financial
statements.

2. CONTINUATION AS A GOING CONCERN
The accompanying consolidated financial statements are prepared assuming the
Company will continue as a going-concern. The Company incurred an operating loss
of $97,849 during the year ended February 28, 1997. As of February 28, 1997, the
Company had an accumulated deficit of $4,826,415, a stockholders' deficit of
$86,357, and a working capital deficit of $210,537. Accordingly, there is
substantial doubt about the Company's ability to continue in existence. The
Company's continued existence is dependent upon management's ability to return
to profitable operations and resolve its liquidity problems. Management
anticipates profitability will return and that liquidity problems will be
resolved as a result of the actions described below. The financial statements do
not include any adjustments that might result should the Company be unable to
continue as a going concern.

Management has adopted the following plans for the coming year:

*   Continue to market the Company's Assurance Coordinated Pharmaceutical Care
    System(TM) to community pharmacies.

*   Develop and operate prototype community pharmacies using the Assurance
    Coordinated Pharmaceutical Care System(TM) with a potential to franchise
    this prototype concept.

*   Expand the Company's marketing efforts in Subacute Care and Transitional
    Care, which are two emerging healthcare market segments where the Company
    has established clients and well accepted software.

*   Reduce operating costs and ensure that the effectiveness of remaining
    expenditures is consistent with support of the Company's growing client
    base.

If operations and cash flow can be improved through these efforts, management
believes that the Company can continue to operate. However, no assurance can be
given that management's actions will result in profitable operations and the
resolution of its liquidity problems.

3. BUSINESS ACQUISITIONS
On July 19, 1996, the Company acquired certain assets of Edina Pharmacy, a
community pharmacy located in Minneapolis, Minnesota. Assets acquired include
inventory, fixtures and equipment, and the patient list. The purchase price was
$47,408 of which $12,000 was paid in cash. A note payable of $14,973 was
assumed. The remaining balance of $20,435 will be paid by the Company in 12
equal monthly installments.

The transaction was accounted for using the purchase method of accounting. The
accompanying consolidated financial statements include results of operations of
the acquired business from the date of acquisition. Due to the nature of the
transaction under which the Company purchased only certain assets of Edina
Pharmacy, owned by an individual reporting financial information on an income
tax basis, meaningful pro-forma financial information is not available.

This community pharmacy is being developed into a prototype store applying
patient care concepts utilizing the Company's Assurance Coordinated
Pharmaceutical Care System(TM) software.

On August 17, 1993, the Company completed the acquisition of certain assets and
the client list of Applied Micro Management, Inc., (AMM) of Belleville, IL. AMM
was a competitor of the Company in the Long-Term Care software services
business. The initial purchase price was $264,750, of which $24,112 was paid in
cash, a note payable of $35,888 was assumed and $204,750 in restricted common
stock was issued. During 1995, the Company issued an additional 100,000 shares
of the Company's common stock and made an additional cash payment of $22,500 to
AMM pursuant to the terms of the acquisition agreement.

The accompanying consolidated financial statements include results of operations
of the acquired business from the date of acquisition. Due to the nature of the
transaction under which the Company purchased only certain assets of AMM,
meaningful pro-forma financial information is not available.

The purchase price was determined as follows:

-----------------------------------------------------------------------------
Restricted common stock issued                                     $ 243,250
Liability assumed                                                     35,888
Cash paid                                                             46,612
                                                                   ---------
    Total purchase price                                           $ 325,750
                                                                   =========

The allocation of the purchase price is as follows:

Non-compete agreements                                             $ 150,000
Furniture and equipment                                               10,000
Purchased software                                                    40,000
Other assets-client list                                             125,750
                                                                   ---------
                                                                   $ 325,750
                                                                   =========

The Company is amortizing the non-compete agreements over five years.
Amortization expense was $30,000 in 1997, 1996 and 1995, respectively.

The Company amortized the client list over a 12 month period. Amortization
expense was $93,375 in 1995.

4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:

                                                           1997          1996
--------------------------------------------------------------------------------
Property under
    capitalized leases                                   $ 310,005     $ 310,005
Furniture and equipment                                    373,932       359,854
                                                         ---------     ---------
                                                           683,937       669,859
Less accumulated amortization and depreciation             579,928       489,506
                                                         ---------     ---------
Net property and equipment                               $ 104,009     $ 180,353
                                                         =========     =========


5. CAPITALIZED SOFTWARE
During 1996, the Company became licensed as an authorized reseller of financial
software from Solomon Software. The software is for corporate use and inclusion
into the Company's Windows based software products presently under development.
The Company is amortizing the $8,292 of software costs over three years.

During 1994, the Company purchased as a part of its acquisition of certain
assets of AMM, computer software with an assigned value at $40,000. This
software was previously licensed to AMM clients. On September 30, 1994, the
Company discontinued software support services to the clients who had not
converted from the AMM software to the Company's software products. The Company
amortized these costs over 12 months. These costs were fully amortized as of the
end of 1995.

New software products, developed in 1997, 1996 and 1995, were expensed as
incurred due to the lack of significant revenues generated from such products.

Amortization of capitalized computer software costs was $2,764, $30,638 and
$72,475 in 1997, 1996 and 1995, respectively.

6. LEASES
The Company leases its corporate office facility under an operating lease with
an original term of three years commencing January 1, 1992. The Company
exercised a one year option to extend the lease through December 31, 1995. Under
an amendment signed December 23, 1996, and effective February 28, 1997, the
Company terminated a portion of this lease. The lease term for the remaining
office space has been extended to December 31, 1998, with an option for an
additional two years.

The Company leases its community pharmacy site under an operating lease which
will terminate on September 30, 1998.

The Company previously leased office facilities in Belleville, IL. That facility
was closed on September 30, 1994, and the month to month lease was terminated.

Rental expense in 1997, 1996 and 1995 was $144,753, $127,413 and $112,756,
respectively.

Future minimum rental payments due under non-cancelable operating leases are as
follows:

--------------------------------------------------------------------------------
1998                                                                  $ 119,293
1999                                                                     96,418

The following summarizes assets under lease that have been capitalized and
included in property and equipment in the accompanying consolidated balance
sheets:

                                                          1997           1996
--------------------------------------------------------------------------------
Office and computer
    equipment                                          $  310,005       310,005
Less accumulated
    amortization                                         (275,692)     (228,384)
                                                       ----------     ---------
                                                       $   34,313        81,621
                                                       ==========     =========

Future minimum lease payments under capital leases are as follows:

--------------------------------------------------------------------------------
1998                                                                 $   69,610
1999                                                                     17,097
2000                                                                      8,168
2001                                                                      2,964
                                                                     ----------
Total                                                                    97,839
Less amounts representing interest                                      (11,488)
                                                                     ----------
Present value of net minimum
   lease payments                                                        86,351
Less current installments                                               (60,974)
                                                                     ----------
Obligations under capital leases,
   excluding current installments                                    $   25,377
                                                                     ==========

All equipment purchased under capital leases is pledged as collateral.

7. INCOME TAXES
There was no income tax expense or benefit amounts recorded for 1997, 1996 or
1995.

The provision for income taxes for the years ended February 28, 1997, February
28, 1996, and February 28, 1995, differs from the statutory federal tax rate
applied as follows:

                                                    1997       1996       1995
--------------------------------------------------------------------------------
Federal tax calculated at the
   statutory rate                                    (34%)       34%        34%
State taxes, net                                      (2%)        2%         2%
Change in valuation allowance                         36%       (36%)      (36%)
                                                   ------     ------     ------
                                                       0%         0%         0%
                                                   ======     ======     ======

Deferred taxes, calculated using an effective tax rate of 36% in 1997, 1996 and
1995 consist of the following:

                                           1997          1996           1995
--------------------------------------------------------------------------------
Deferred tax assets:
 Capital leases                        $   10,000         23,500         16,200
 Book depreciation
     greater than tax                      30,000         42,500         46,800
 Accounts receivable
     allowance                             12,600          5,400          9,000
 Net operating loss
     carryforwards                      1,512,000      1,709,000      1,905,800
 Deferred revenue                         113,000         69,700         41,600
                                       ----------      ---------    -----------
 Gross deferred
     tax assets                         1,677,600      1,850,100      2,019,400
 Less valuation
     allowance                         (1,677,600)    (1,850,100)    (2,019,400)
                                        ---------      ---------      ---------
Net deferred tax assets                $        0              0              0
                                       ==========      =========      =========


As of February 28, 1997, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $4,200,000 which expire beginning in
2002. Included in the above carryforward amounts are approximately $670,000 of
net operating losses attributable to the former separate operations of STAT
Systems, Inc., utilization of which is restricted subject to the annual
limitations specified by the Internal Revenue Code of 1986 as amended.

8. STOCKHOLDERS' EQUITY (DEFICIT)
STOCK ISSUANCES

During 1997, 48,144 shares of common stock were issued as part of the Company
match benefit for the 401(k) pension plan.

During 1996, 13,000 shares of common stock, respectively, were awarded to
related parties, directors, associates and consultants as payment for services
performed.

In May 1995, warrants to purchase 100,000 shares of common stock were exercised.

On September 8, 1994, the Company issued 200,000 shares of its restricted common
stock in a private placement. The $50,000 proceeds from this private placement
were used to purchase all outstanding shares (625,000) of the Company's
preferred stock from a former client.

During June 1994, the Company issued an additional 100,000 shares of restricted
common stock to AMM pursuant to the additional compensation provisions of the
Company's August 17, 1993, agreement with AMM in which the Company acquired the
client list and certain assets of AMM.

PREFERRED STOCK The Company has one series of preferred stock; Series A,
convertible preferred. All preferred shares are non-voting, receive no dividends
and have liquidation preference over the Company's common stock. All 1,000,000
preferred shares are unissued and are undesignated as of February 28, 1997.

STOCK OPTION PLAN In February 1986, the Company adopted a stock option plan
providing for the issuance of up to 1,200,000 shares of common stock to
associates, members of the board of directors and other nonemployee agents of
the Company. The exercise price of the options must be at least 100% (110% for
shareholders with 10% or more ownership) of the fair market value of the common
stock as of the date of grant. Generally, options are exercisable for a period
of ten years (five years for shareholders with 10% or more ownership) commencing
on the date of grant.

During February 1996, the Company's 1986 stock option plan expired. No
additional stock options can be issued to associates, members of the board of
directors or other nonemployee agents of the Company without shareholder
approval of a new stock option plan.

Information with respect to options for the Company's common shares is
summarized as follows:

                                                 OPTIONS OUTSTANDING
                                                 -------------------
                                        SHARES                  WEIGHTED-AVERAGE
                                       AVAILABLE                 EXERCISE PRICE
                                       FOR GRANT      SHARES       PER SHARE
Balance
February 28, 1994                        47,000     1,091,565        $0.37

Granted in 1995                         (13,000)       13,000         0.45
  Exercised                               ---          (9,000)        0.37
  Canceled                               88,000       (88,000)        0.37
                                      ---------     ---------
Balance
February 28, 1995                       122,000     1,007,565         0.37

Granted in 1996                        (281,500)      281,500         0.75
  Exercised                                 --       (265,500)        0.43
  Canceled                              203,750      (203,750)        0.41
  Canceled upon
    plan expiration                     (44,250)          --
                                      ---------     ---------
Balance
February 29, 1996                                     819,815         0.47

  Exercised                                          (123,000)        0.37
  Canceled                                           (151,000)        0.54
                                                    ---------
Balance
February 28, 1997                             0       545,815         0.47
                                      =========     =========


At February 28, 1997, the range of exercise prices of outstanding options was
$0.25 - 0.97. At February 28, 1997, and February 29, 1996, currently exercisable
options aggregated 445,565 shares and 611,940 shares of common stock,
respectively, and the weighted-average exercise price of those options was $0.41
and $0.38, respectively.

The per share weighted-average fair value of stock options granted in 1996 is
estimated at $0.56 on the date of grant using the Black-Scholes option pricing
model with the following assumptions: volatility of 63%, weighted-average
risk-free interest rate of 6.5% and an expected life of 9 years.

The Company applies APB No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its plan. Accordingly, no compensation
expense has been recognized for its stock-based compensation plan. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, the Company's fiscal 1997 net loss and loss per share would have
been increased by approximately $43,000, or $0.01 per share. Fiscal 1996 net
income and earnings per share would have reduced by approximately $82,000, or
$0.01 per share.

Pro forma amounts reflect only options granted in 1996. Therefore, the full
impact of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net income amounts presented because compensation
cost is reflected over the options' vesting period and compensation cost for
options granted prior to March 1, 1995 is not considered.

WARRANTS

From time to time the Company grants warrants to officers, employees and
nonemployees in consideration for loans extended to the Company and for
recognition of services performed.

Information with respect to warrants for the Company's common shares is
summarized as follows:

                                                       WARRANTS OUTSTANDING
                                                       --------------------
                                                                WEIGHTED-AVERAGE
                                                                 EXERCISE PRICE
                                                     SHARES        PER SHARE
Balance
February 28, 1994                                    345,000         $0.25

Balance
February 28, 1995                                    345,000          0.25

Granted in 1996                                       30,000          1.00
  Exercised                                         (100,000)         0.15
Balance
February 29, 1996                                    275,000          0.37

Canceled in 1997                                     (60,000)         0.38
                                                   ---------
Balance
February 28, 1997                                    215,000          0.37
                                                   =========


9. MAJOR CLIENTS
During fiscal 1997, 1996 and 1995, one client accounted for approximately 27%,
23% and 31%, respectively, of total revenues. During January 1997, the Company's
relationship with this client terminated at the end of the three year agreement.
The Company received a one-time payment of $159,000 in fiscal 1997 pursuant to a
"transition agreement" between the Company and this client. See Note 11 to the
Consolidated Financial Statements for discussion of this "transition agreement".
During April 1996, the Company terminated its one year marketing agreement with
another of its major clients in order to pursue other marketing arrangements.
Revenues from this client constituted approximately 21% of the Company's total
1996 revenue. Revenue from the client was not material in 1997 or 1995.

10.  NOTE RECEIVABLE FROM OFFICER
At February 28, 1997 and February 29, 1996, the Company had a 9.25% secured note
receivable from an executive officer, with interest payable quarterly on the
unpaid balance. Collateral consists of 210,000 shares of the Company's common
stock. Additional provisions of the note require that the officer assign other
personal assets as additional collateral should the value of the then existing
collateral be insufficient to pay off the unpaid loan balance. At February 28,
1997 and February 29, 1996, the balance due on the note receivable was $69,500
and $92,500, respectively.

11. MARKETING AGREEMENT
On February 1, 1995, an amendment to an agreement dated February 1, 1994, was
entered into with Option Care, Bannockburn, IL. The terms of the amendment
appointed the Company as the exclusive marketing representative to market and
promote the licensing of Option Care's private label clinical and financial
software system commonly known as FOCIS to existing and future franchisees of
Option Care. Additional terms of the amendment provided that Health Outcomes
Management received 80% of the license fee charges to each Option Care franchise
rather than the monthly retainer payments provided for in the original
agreement. In addition to providing the software, the Company performed all
software training and client support. The term of the original agreement was for
a period of three years. The amendment did not alter the termination date of the
agreement. The amendment also provided for the cancellation of an unrelated
marketing agreement effective June 15, 1994. The February 1, 1994, agreement
canceled a software development and marketing agreement effective November 29,
1991.

On January 31, 1997, the marketing agreement between the Company and Option
Care, Inc. terminated. On October 31, 1996, the Company and Option Care signed a
"transition agreement" that according to the terms of the agreement, required
Option Care to pay the Company a one-time payment of $159,000 for consulting
services and certain software tools owned by the Company which is included in
revenue in the statement of operations. The Company also received an additional
$15,000 for training services provided.

12. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental schedule of noncash investing and financing activities:

In 1997, the Company assumed a note payable obligation of $14,973 associated
with its acquisition of certain assets of Edina Pharmacy.

In 1996, notes receivable from an officer for the purchase of common stock
totaled $92,400.

In 1996, capital lease obligations incurred for leases of new equipment totaled
$28,081.

In 1995, capital lease obligations incurred for leases of new equipment totaled
$106,841.

In 1995, the Company issued 100,000 shares of its restricted common stock
totaling $38,500 in value pursuant to the terms of its acquisition of certain
assets of AMM.

13. EMPLOYMENT AGREEMENT
On February 1, 1991, the Company entered into employment agreements with its
president and vice president which provided for their employment for a term of
three years with automatic renewal of the term for one-year periods thereafter,
unless terminated by the Company within provisions of the agreement, or by the
president or vice president for any reason upon twelve (12) weeks advance
notice. The Company may be required to purchase all of the employees' common
shares including unregistered shares, unexercised stock options and warrants at
the average fair market value price at the time of the termination. The
agreements also contain certain restrictive covenants including a noncompete
covenant. These employment agreements are being renewed for one year periods
pursuant to the automatic renewal provisions of the original agreements.

14. RETIREMENT PLANS
On March 1, 1995, the Company established a defined contribution, 401(k),
pension plan for substantially all of its employees. The Company matches 25% of
the employee's contribution up to 6% of compensation, as defined. The expense
recognized in 1997 relating to the plan totaled $14,000. For the year ended
February 29, 1996, the expense was $15,000. The Company issued 48,144 shares of
the Company's common stock as payment for the Company's matching contribution.

15. LINE OF CREDIT AGREEMENT
On April 4, 1996, the Company entered into a $50,000 Line of Credit agreement
with a bank. Amounts borrowed under the agreement will be used for working
capital purposes. All outstanding borrowings bear interest at a reference rate
plus 1.5%. The agreement expires April 1, 1997. The agreement is secured by all
accounts receivable, equipment not covered under financing agreements,
inventory, if any, and general intangibles. The agreement also requires the
Company to maintain certain financial covenants, including but not limited to,
maintaining positive net worth. As of February 28, 1997, the Company was in
default of the covenant requiring the Company to maintain positive net worth. As
of February 28, 1997, the Company had no outstanding balance under this credit
facility.

On April 1, 1997, the Company renewed its line of credit agreement which expired
April 1, 1997. All outstanding borrowings bear interest at the fixed rate of
6.5%. The agreement expires April 1, 1998. The agreement is secured by selected
corporate assets including a $50,000 certificate of deposit which must remain on
deposit at the bank for the entire loan term.

16. ACQUISITION SUBSEQUENT TO FISCAL YEAR END
On April 1, 1997, the Company acquired certain assets of Preserve Rexall Drug, a
community pharmacy located in Eden Prairie, Minnesota from Supplee Enterprises,
Inc. The Company acquired some fixtures and the patient list. The purchase price
was $40,000 of which $10,000 was paid in cash. The remaining balance of $30,000
will be paid by the Company in 11 equal monthly installments. Similar to Edina
Pharmacy which was acquired in July 1996, this pharmacy is being developed into
a prototype store applying patient care concepts utilizing the Company's
Assurance Coordinated Pharmaceutical Care System(TM) software.


Item 8.  Disagreements on Accounting and Financial Disclosure.

None.


Part III

Item 9.  Directors and Officers of the Registrant

The following table sets forth information regarding the Company's executive
officers and directors as of May 1, 1997:


         Name                           Age          Position
         ----                           ---          --------

         William A. Peter, Jr.          61           President, Chief Executive
                                                     Officer and Director

         Michael J. Frakes              45           Vice President and Director

         Jerry L. Hoganson              46           Director

         Robert J. Cipolle              46           Director

         Rosemary Salzwedel             37           Controller and Principal
                                                     Accounting Officer


William A. Peter, Jr. is the founder of the Company and has served as President
and Chief Executive Officer and as a member of the Board of Directors since its
incorporation. From December 17, 1985 to May 22, 1986, Mr. Peter was also the
president of Data Med, Inc., the company from which the Company purchased
certain of its current products and services. From May 1985 to December 1985,
Mr. Peter was president of Delaware Business Consultants, a firm which provided
sales and marketing consulting services principally to the health care industry.
Prior to May 1985, Mr. Peter was employed for 26 years by E.I. Dupont DeNemours
& Company, his last position being marketing manager in the health care
division. Mr. Peter holds a bachelor's degree in industrial management and a
master's degree in chemical engineering from the Massachusetts Institute of
Technology.

Michael J. Frakes, Pharm.D., has served as a Vice President of the Company since
May 22, 1986, and as a member of the Board of Directors since March 16, 1987.
Mr. Frakes was a cofounder of Data Med, Inc., and served as the vice president
of Data Med, Inc., from 1981 until joining the Company. Mr. Frakes has primary
responsibility for ongoing development of the Company's products and services.
Mr. Frakes holds a doctor of pharmacy degree from the University of Minnesota.

Jerry L. Hoganson, CNHA, has served as a member of the Board of Directors of the
Company since June 27, 1991, and has served on the Company's Clinical Consulting
Board since October 1990. Mr. Hoganson has been the Administrator of St. Paul's
Church Home in St. Paul, Minnesota since 1988. From 1982 to 1988, Mr. Hoganson
was the Administrator of the Zumbrota, Minnesota Nursing Home. Mr. Hoganson
holds a bachelor's degree in Hospital Administration from Concordia College,
Moorhead, Minnesota. Mr. Hoganson is a Certified Nursing Home Administrator
(CNHA) and a past president of the Minnesota Chapter of the American College of
Health Care Administrators.

Robert J. Cipolle, Pharm.D., previously served as a member of the Board of
Directors of the Company from June 29, 1989, until June 30, 1993, when he
resigned because of his duties as Acting Dean of the College of Pharmacy at the
University of Minnesota. Mr. Cipolle was reappointed to the Board of Directors
on May 19, 1994. Mr. Cipolle currently serves as an Associate Professor of
Pharmacy Practice at the University of Minnesota. Mr. Cipolle was the Acting
Dean of the College of Pharmacy from 1992 to 1994. Mr. Cipolle has also served
the University of Minnesota as the Associate Dean of the College of Pharmacy and
as the Assistant Head for Research and Post-Graduate Education for the
Department of Pharmacy Practice. Mr. Cipolle co-developed the concept of
pharmaceutical care. Mr. Cipolle has authored or co-authored a number of
articles, textbook chapters and educational modules dealing with the disciplines
of Pharmacokinetics and Pharmacy Practice.

Rosemary Salzwedel joined the Company in June 1993 in the position of Financial
Reporting and Software Systems. On March 1, 1997, Ms. Salzwedel was appointed
Controller. From December 1982 to June 1993, Ms. Salzwedel was a General
Accountant for Krelitz Industries, Inc., where she performed financial and SEC
reporting. Ms. Salzwedel holds a B.S. degree in Accounting from the University
of Minnesota, Minneapolis, Minnesota.

On March 7, 1997, Russell Jackson resigned his positions of Chief Financial
Officer, Treasurer and Secretary. Mr. Jackson had been with the Company since
August 1990.


Item 10.  Executive Compensation.

Effective August 2, 1994, each nonemployee member of the Board of Directors
received, per meeting, $200 plus 800 shares of the Company's common stock. For
telephonic conferences each nonemployee member receives $50 plus 200 shares of
the Company's common stock. Prior to August 2, 1994, nonemployee members
received $100 per meeting and there was no compensation paid for telephonic
conferences. No compensation is paid to employee members of the Board of
Directors for attending meetings. During the fiscal year ended February 28,
1997, nonemployee Board of Director compensation totaled $2,648.

The following table sets forth the compensation paid or to be paid by the
Company with respect to the fiscal year ended February 28, 1997, to the
President and Chief Executive officer, who was the only executive officer whose
total cash compensation (including bonuses) exceeded $100,000.

<TABLE>
<CAPTION>
                                           SUMMARY COMPENSATION TABLE

                                                                                                Long-Term
                                                     Annual Compensation Table                 Compensation
                                             -----------------------------------------     --------------------
        Name and                 Fiscal                                   Other Annual      Stock          All
     Principal Position           Year        Salary          Bonus       Compensation     Options        Other
     --------------------        -------     --------         -----       ------------     --------       -----
<S>                              <C>        <C>             <C>            <C>                <C>          <C>
     William A. Peter, Jr.,       1997       $ 97,723        $    --        $2,190(1)          --           --
       President & CEO            1996       $103,881(2)     $   925        $2,190(1)          --           --
                                  1995       $ 99,234        $   104        $2,190(1)          --           --
</TABLE>


(1) Amount shown represents a health insurance allowance paid to Mr. Peter.

(2) Amount shown does not include salary totaling $74,787 for prior years which
    was paid during the current year. This amount has been previously reported.


         STOCK OPTIONS AND WARRANTS HELD AND FISCAL YEAR OPTION VALUES

The following table sets forth information concerning the value of Stock Options
and Warrants held by the Company's executive officers named in the compensation
table as of February 28, 1997.

<TABLE>
<CAPTION>
                                                                                  Value of Unexercised
                                          Number of Unexercised                 In-The-Money Options at
                                  Options and Warrants Held at Year End                Year End(1)
                                  -------------------------------------        --------------------------
      Name                           Exercisable       Unexercisable           Exercisable  Unexercisable
      ----                           -----------       -------------           -----------  -------------
<S>                                  <C>                  <C>                     <C>          <C> 
     William A. Peter, Jr.,           136,250(2)           6,250                   $-0-         $-0-
       President & CEO

</TABLE>

(1) Based upon the average of the bid and ask price of $.14 for the Company's
Common Stock on February 28, 1997, as reported by the National Quotation Bureau.

(2) Includes warrants to purchase 115,000 shares of the Company's Common Stock.

EMPLOYMENT AGREEMENTS

On February 1, 1991, the Company entered into employment agreements with William
A. Peter, Jr. and Michael J. Frakes, for a term of three years. The agreements
provide for automatic renewals for one-year periods, pursuant to which they have
been extended to January 31, 1998. Under the employment agreements with Mr.
Peter, Mr. Peter was paid $9,012 per month from February 1, 1996 to January 31,
1997. Beginning May 1, 1996, Mr. Peter took a 10% voluntary salary reduction
which is still in effect as of May 1, 1997. Mr. Peter may also receive bonus
compensation in the form of cash or shares of Common Stock. The employment
agreement between the Company and Mr. Peter contains certain restrictive
covenants, including prohibition of the use of proprietary information by Mr.
Peter and restrictions on future competing employment. The restrictions on
competing employment will be enforceable following termination of employment by
the Company only if the Company continues to pay prescribed amounts each month
during the period of restriction. Certain provisions of the agreement may
require the Company to purchase all of Mr. Peter's common shares including
unregistered shares, unexercised stock options and warrants at the average fair
market value price upon termination or an ownership control change exceeding 40%
control by an outside party.

Mr. Peter has been granted incentive stock options under Division A of the
Company's Stock Option Plan for purchase of a total of 27,500 shares of Common
Stock of which 15,000 shares are exercisable until January 17, 1998, at $0.28
and 12,500 shares are exercisable until February 4, 2001, at $0.65 per share.

Under the employment agreements with Mr. Frakes, Mr. Frakes was paid $8,412 per
month from February 1, 1996 to January 31, 1997. Beginning May 1, 1996, Mr.
Frakes took a 10% voluntary salary reduction which is still in effect as of May
1, 1997. Mr. Frakes may also receive bonus compensation in the form of cash or
shares of Common Stock. The employment agreement between the Company and Mr.
Frakes contains certain restrictive covenants, including prohibition of the use
of proprietary information by Mr. Frakes and restrictions on future competing
employment. The restrictions on competing employment will be enforceable
following termination of employment by the Company only if the Company continues
to pay prescribed amounts each month during the period of restriction. Certain
provisions of the agreement may require the Company to purchase all of Mr.
Frakes' common shares including unregistered shares, unexercised stock options
and warrants at the average fair market value price upon termination or an
ownership control change exceeding 40% control by an outside party.

Mr. Frakes has been granted incentive stock options under Division A of the
Company's Stock Option Plan for purchase of a total of 127,500 shares of Common
Stock of which 10,000 shares are exercisable until April 24, 1998, at $0.37 per
share; 20,000 shares are exercisable until March 23, 1999, at $0.34 per share;
50,000 shares are exercisable until January 18, 2000, at $0.37 per share; 10,000
shares are exercisable until September 28, 2000, at $0.25 per share; 10,000
shares are exercisable until January 7, 2001, at $0.40 per share; 5,000 shares
are exercisable until June 5, 2001, at $0.35 per share; 10,000 shares are
exercisable until June 11, 2002, at $0.31 per share; and 12,500 shares are
exercisable until February 4, 2006, at $0.59 per share.

STOCK OPTION PLAN

On February 17, 1986, the Board of Directors and the shareholders of the Company
adopted a Stock Option Plan (the "Stock Option Plan") that authorizes the
issuance of options to purchase an aggregate of 400,000 shares of the Company's
Common Stock. As a result of the three-for-one stock split effective June 15,
1987, the number of shares authorized and reserved for grant of options is
1,200,000. Options may be granted to employees and agents of the Company,
including executive officers of the Company. Options granted pursuant to the
Stock Option Plan may be intended either to qualify as "incentive stock options"
under Section 422 of the Internal Revenue Code of 1986, as amended (the Code),
or to be nonqualified stock options. The exercise price of any incentive stock
option granted under the Stock Option Plan must be at least 100% (110% in the
case of 10% shareholders) of the fair market value of the Common Stock on the
date of grant, and the value of Common Stock (determined on the date of grant)
for which an optionee's incentive stock options become exercisable in any
calendar year may not exceed $100,000. The value of nonqualified options granted
under the Stock Option Plan is not subject to any dollar limitation, but the
exercise price of nonqualified options must also be at least 100% of the fair
market value of the Common Stock on the date of grant. Options must be granted
within 10 years from the date of adoption of the Stock Option Plan. Options will
expire on the date set forth in the respective stock option agreements, but in
no event later than 10 years from the date an option is granted (5 years in the
case of 10% shareholders). Options are subject to earlier termination in certain
events, including termination of employment, disability, or death of the
optionee. The Stock Option Plan is administered by the Stock Option Committee of
the Board of Directors. As of May 1, 1997, incentive stock options for the
purchase of 772,500 shares and nonqualified stock options for the purchase of
148,000 shares have been granted under the Stock Option Plan.

During February 1996, the Company's 1986 Stock Option Plan expired. No
additional stock options can be issued to associates, members of the Board of
Directors or other nonemployee agents of the Company without shareholder
approval of a new stock option plan.

Options to purchase a total of 201,000 shares were held by the Company's
officers and directors as a group as of May 1, 1997. The Company's employees
(including certain officers and directors) held options to purchase a total of
822,500 shares at the same date. Options totaling 374,685 shares had been
exercised as of the end of the fiscal 1997.


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

The following table lists, as of May 1, 1997, the securities ownership of all
directors of the Company, the directors and officers of the Company as a group,
and all persons known by the Company to own beneficially more than 5% of the
issued and outstanding Common Stock of the Company. Unless otherwise indicated,
each person in the table has sole voting and investment power as to the shares
shown.

                                                    Number           Percentage
         Name and Address                         of Shares          Ownership
         ----------------                         ---------          ---------

         William A. Peter, Jr.                   1,508,850(1)             17.5%
         6650 Vernon Hills Road
         Edina, MN 55436

         Michael J. Frakes                         381,549(2)              4.4%
         3712 Chatham Circle
         Arden Hills, MN 55112

         Robert J. Cipolle                          64,250(3)               .8%
         14721 80th Place N.
         Maple Grove, MN 55369

         Jerry L. Hoganson                          19,000(4)               .2%
         1742 Lark Avenue
         Maplewood, MN 55109

         Directors and officers                  1,980,149(5)             22.4%
         as a group (5 persons)


--------------------------
(1) Includes 115,000 shares which may be purchased pursuant to warrants and
21,250 shares which may be purchased pursuant to stock options which will become
exercisable within 60 days of the date hereof.

(2) Includes 30,000 shares which may be purchased pursuant to warrants and
121,250 shares which may be purchased pursuant to stock options which will
become exercisable within 60 days of the date hereof.

(3) Includes 20,000 shares which may be purchased pursuant to stock options
which will become exercisable within 60 days of the date hereof.

(4) Includes 15,000 shares which may be purchased pursuant to stock options
which will become exercisable within 60 days of the date hereof.

(5) Includes 329,000 shares which certain directors and officers have the right
to purchase pursuant to warrants and stock options which will become exercisable
within 60 days of the date hereof.


Item 12.  Certain Relationships and Related Transactions.

As of February 28, 1995, the Company had a $60,000 note payable to an officer.
As of March 1, 1995, the note was repaid in full to Mr. Peter.

At February 29, 1996, the Company held a 9.25% secured note receivable from Mr.
Peter, with interest payable quarterly on the unpaid balance. Collateral
consists of 210,000 shares of the Company's common stock. Additional provisions
of the note require that Mr. Peter assign other personal assets as additional
collateral should the value of the then existing collateral be insufficient to
pay off the unpaid loan balance. At February 28, 1997, the balance due on the
note receivable was $69,500.


Item 13. Compliance with Section 16(a) of the Exchange Act.

The Securities Exchange Act of 1934 requires all executive officers and
directors to report any changes in the ownership of common stock of the Company
to the Securities and Exchange Commission and the Company.

Based solely upon a review of these reports and written representations that no
additional reports were required to be filed in fiscal 1997, the Company
believes that all reports were filed on a timely basis.


PART IV

Item 13.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)(1) The following Consolidated Financial Statements of the Company and the
Independent Auditor's Report thereon are included on this Annual Report on Form
10-KSB:


Independent Auditors' Report


Consolidated Balance Sheets - February 28, 1997 and February 29, 1996


Consolidated Statements of Operations - Years Ended
   February 28, 1997, February 29, 1996 and February 28, 1995


Consolidated Statements of Changes in Stockholders' Deficit - Years Ended
   February 28, 1997, February 29, 1996 and February 28, 1995


Consolidated Statements of Cash Flows - Years Ended
   February 28, 1997, February 29, 1996 and February 28, 1995


Notes to Consolidated Financial Statements


(a)(3)  Exhibits including those incorporated by reference:

        Exhibit
        Number    Document
        ------    --------

         *3(a)    Restated Articles of Incorporation, as amended. (Filed as
                  exhibit 3(a) to registrant's quarterly report on Form 10-Q for
                  the quarter ended November 30,1995).

         *3(b)    By-laws (Filed as exhibit 3B to the Company's Registration
                  Statement on Form S-18 [Reg. No. 33-9417C] on October 10,
                  1986).

         *3(c)    Certificate of Designation of Non-Voting Convertible Preferred
                  Stock, Series A (Filed as exhibit 4(a) to registrant's
                  quarterly report on Form 10-Q for the quarter ended May 31,
                  1990).

         *3(d)    Articles of Incorporation of Pharmaceutical Care Outcomes,
                  Inc. (Filed as exhibit 3(a) to registrant's quarterly report
                  on Form 10-Q for the quarter ended August 31, 1994).

         *3(e)    By-laws of Pharmaceutical Care Outcomes, Inc. (Filed as
                  exhibit 3(b) to registrant's quarterly report on Form 10-Q for
                  the quarter ended August 31, 1994).

         *3(f)    Restated Articles of Incorporation of HO Management, Inc.
                  (Filed as exhibit 3(b) to registrant's quarterly report on
                  Form 10-Q for the quarter ended November 30, 1995).

         *3(g)    By-laws of HO Management, Inc. (Filed as exhibit 3(b) to
                  registrant's quarterly report on Form 10-Q for the quarter
                  ended August 31, 1995).

         4(a)     Note receivable dated February 1, 1995, due from William A.
                  Peter, Jr.

         *10(a)   Software development, installation and training agreement
                  between OPTION Care, Inc., and Data Med Clinical Support
                  Services, Inc., dated as of February 1, 1994 (Filed as exhibit
                  10(d) on Form 10-KSB for the year ended February 28, 1994).

         *10(b)   Consulting agreement between Data Med Clinical Support
                  Services, Inc., and OPTION Care, Inc., dated as of February
                  15, 1994 for consulting services performed during the period
                  from July 1, 1993, through December 31,1993 (Filed as exhibit
                  10(e) on Form 10-KSB for the year ended February 28, 1994).

         *10(c)   Consulting agreement between Data Med Clinical Support
                  Services, Inc., and OPTION Care, Inc., dated as of November
                  15, 1993 for consulting services performed during the period
                  from January 1, 1993, through June 30,1993 (Filed as exhibit
                  10(d) on Form 10-KSB for the year ended February 28, 1994).

         *10(d)   Asset Purchase Agreement for the purchase of certain assets
                  and the client list of Applied Micro Management, Inc., of
                  Belleville, IL, on August 17, 1993. (Filed by registrant on
                  Form 8-K dated August 30, 1993).

         *10(e)   Amendment I to software development, installation and training
                  agreement between OPTION Care, Inc. and Data Med Clinical
                  Support Services, Inc., dated as of February 1, 1995.(Filed by
                  registrant on Form 10-KSB for the year ended February 29,
                  1996).

         *10(f)   Asset Purchase Agreement for the purchase of certain assets of
                  Edina Pharmacy on July 19, 1996.(Filed as exhibit 10(a) to
                  registrant's quarterly report on Form 10-QSB for the quarter
                  ended November 30, 1996).

         *10(g)   Transition Agreement between Health Outcomes Management, Inc.
                  and Option Care, Inc. dated as of October 31, 1996, for
                  consulting services and termination of Agreement dated
                  February 1, 1994, as amended by Amendment I effective as of
                  February 1, 1995.(Filed as exhibit 10(b) to registrant's
                  quarterly report on Form 10-QSB for the quarter ended November
                  30, 1996).

         10(h)    Asset Purchase Agreement for the purchase of certain assets of
                  Supplee Enterprises, Inc. on April 1, 1997.

         11       Computation of earnings per share

         *  Incorporated herein by reference as indicated.
         +  Not to be deemed a part of the filing except to the extent
            specifically incorporated by reference herein.


(4)  Reports on Form 8-K

No reports on Form 8-K were filed during the Company's fourth quarter ended
February 28, 1997.


                                   SIGNATURES


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


                                   HEALTH OUTCOMES MANAGEMENT, INC.



                                   By:    /s/ William A. Peter, Jr.
                                          -------------------------------
                                          William A. Peter, Jr.
                                          Chairman and President
                                          Principal Executive Officer

                                   Date:  /s/ May 29, 1997
                                          -------------------------------

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

     Signature                           Title                  Date
     ---------                           -----                  ----


/s/ William A. Peter, Jr.       Chairman, President             /s/ May 29, 1997
-----------------------------   and Director                    ----------------
William A. Peter, Jr.           (Principal Executive Officer)



/s/ Michael J. Frakes           Vice President and Director     /s/ May 29, 1997
-----------------------------                                   ----------------
Michael J. Frakes



/s/ Rosemary Salzwedel          Controller and Principal        /s/ May 29, 1997
-----------------------------   Accounting Officer              ----------------
Rosemary Salzwedel


/s/ Jerry Hoganson              Director                        /s/ May 29, 1997
-----------------------------                                   ----------------
Jerry L. Hoganson



/s/ Robert Cipolle              Director                        /s/ May 29, 1997
-----------------------------                                   ----------------
Robert J. Cipolle




                                Index to Exhibits


Exhibit
-------


10(h)    Purchase Agreement

11       Calculation  of earnings per share