U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB
(MARK ONE)

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

                   FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934


              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:

                                                    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. [ ]

     Issuer's revenue for its most recent fiscal year was $1,160,675.

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 1998, was approximately $676,524.

     The number of shares of the registrant's Common Stock, $.01 par value,
outstanding at February 28, 1998 was 8,872,853.

                    DOCUMENTS INCORPORATED BY REFERENCE: NONE

Exhibit Index Page: 39                                             Page 1 of 49

<PAGE>


                        HEALTH OUTCOMES MANAGEMENT, INC.
                                   FORM 10-KSB
                                      INDEX

Part I:                                                                     Page
                                                                            ----
Item 1.      Business......................................................   3
Item 2.      Properties....................................................   7
Item 3.      Legal proceedings.............................................   7
Item 4.      Submission of matters to a vote of
                 security holders..........................................   7


Part II:

Item 5.      Market for registrant's common stock and
                  related stockholder matters..............................   8
Item 6.      Management's discussion and analysis of financial
                  condition and results of operations......................   9
Item 7.      Financial statements and supplementary data...................  13
Item 8.      Disagreements on accounting and financial disclosure..........  32


Part III:

Item 9.      Directors and officers of the registrant......................  33
Item 10.     Executive compensation........................................  34
Item 11.     Security ownership of certain beneficial owners
                 and management............................................  37
Item 12.     Certain relationships and related transactions................  38
Item 13.     Compliance with Section 16(a) of the Exchange Act.............  38

Part IV:

Item 13.     Exhibits, financial statement schedules,
                 and reports on Form 8-K...................................  39

<PAGE>


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.
During fiscal year 1998, the Company divested itself of these pharmacies.

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.

During fiscal year 1998, the Company operated two community pharmacies. The
Company divested itself of both pharmacies during the fiscal year.

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. These
services also 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 Software

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 database. 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.
During fiscal year 1998, the Company entered into an agreement with Advanced
Information Management (AIM) of Appleton, WI. As part of this relationship, the
Company resells AIM's Windows(TM) based long term care program, trains new
customers on how to use the program, and provides on going telephone support to
customers.

<PAGE>


Home Healthcare Agencies Software

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 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 database 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.

Hospital Software

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 were sold at the retail level. The Company divested itself of both
pharmacies during the fiscal year.


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 entire line of
services, many companies offer services that compete directly with individual
Health Outcomes Management services, or offer alternatives to such services.

<PAGE>


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.

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.


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:

          * 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.

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

          * 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.

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

          * Develop strategic alliances with healthcare providers.

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.

<PAGE>


Significant Clients

During the year ended February 28, 1998, no one client accounted for a
significant portion of the Company's revenues. During the year ended February
28, 1997, one client accounted for approximately 27% of total revenue. In
January 1997, the Company's relationship with this client terminated at the end
of the three year agreement.


Research and Development

The Company spent approximately $129,000, $223,000 and $503,000 for research and
development efforts in the years ended February 28, 1998, 1997 and 1996,
respectively. For fiscal year 1999 the Company intends to fund software
development at approximately the same levels as fiscal year 1998.


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, 1998, the Company employed 14 staff members and 2 contract employees.
In addition, the Company was utilizing the services of 2 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.

<PAGE>


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 two additional one year options. Rent is payable monthly in the
amount of $9,507. 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 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 $2,405. For the lease
years four and five the rent is payable monthly in the amount of $2,672. 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. While the Company is currently attempting to sublease this
property, there can be no assurance that this will be accomplished prior to the
completion of the lease. As part of the discontinuation of its retail Pharmacy
business, the Company expensed the entire cost of this lease in its 1997 fiscal
year.


Item 3. Legal Proceedings

As of May 1, 1998, 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.

<PAGE>


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 1998                                   FISCAL 1997
--------------------------------------------------------------------------------
QUARTER          HIGH        LOW               QUARTER          HIGH       LOW
                 ----        ---                                ----       ---
First           $  .13      $  .13             First           $  .44     $  .31
Second          $  .13      $  .08             Second          $  .38     $  .19
Third           $  .21      $  .08             Third           $  .19     $  .08
Fourth          $  .18      $  .10             Fourth          $  .16     $  .13

As of May 31, 1998, there were approximately 330 shareholders "of record" (as
defined in Rule 12g5-1 of the Securities Exchange Act of 1934) 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.

<PAGE>


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 1998, the Company operated two community pharmacies.
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 1998 v. FISCAL 1997

REVENUE. For fiscal 1998, revenue from continuing operations was $1,160,675.
Total revenue from continuing operations decreased by $1,140,951, or 49.6%, from
$2,301,626 in fiscal 1997. The Company recorded a net loss from continuing
operations in fiscal 1998 of $372,708 compared to net income of $19,921 from
continuing operations in fiscal 1997. The Company recorded a net loss, including
discontinued operations, in fiscal 1998 of $702,435, compared to net loss of
$113,244, including discontinued operations in fiscal 1997, an increase in loss
from continuing and discontinued operations combined of $589,191 or 520%.

The fiscal 1998 decrease in revenue was substantially impacted by the sale of
the Company's two pharmacy locations. The sales were treated as a
discontinuation of a division of the Company. While the revenues from
prescription and over-the-counter drug sales at the pharmacies operated in
fiscal 1998 increased by 300%, these revenues were of low margin and contributed
little to the Company's income. The revenue received from client support fees
decreased by 25%, license fees decreased by 81%, software training fees
decreased by 85%, and consulting revenue decreased by 42%.

Revenue from license fees, support, and training of the Company's Long-Term Care
products decreased by $164,000 or 15%. Revenue from license fees, support, and
training of the Company's pharmacokinetics and nutrition products decreased by
$50,000 or 34%. Revenue from license fees, support, and training of the
Company's Assurance Community Pharmaceutical Care System(TM) decreased by
$123,000 or 49.7%.

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

COSTS AND EXPENSES. Total expenses in fiscal 1998, including cost of sales,
interest, depreciation and amortization, decreased 33% to $1,533,000 from
$2,282,000 in fiscal 1997. Total operating expenses decreased 17% to $718,000
from $870,000 in fiscal 1997. General and administrative expenses decreased 8%
in fiscal 1998. Administrative expenses have declined significantly as the
Company has implemented expense reductions in an attempt to offset reductions in
revenue.

Net interest expense decreased 24% in fiscal 1998 to $8,939 from $11,777 in
fiscal 1997. During fiscal 1998 and fiscal 1997, the Company's interest costs
related primarily to leased computer and office equipment.


FISCAL 1997 v. FISCAL 1996

REVENUE. For fiscal 1997, revenue as adjusted for discontinued operations was
$2,301,626. Total revenue decreased by $881,092, or 28%, from $3,182,718 in
fiscal 1996. The Company recorded a net loss as adjusted for discontinued
operations 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%.

<PAGE>


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 1997
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 discontinued
operations, 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.

LIQUIDITY AND CAPITAL RESOURCES

As of February 28, 1998, the Company had a working capital deficit of $(718,000)
compared to a deficit of $(211,000) at February 29, 1997, an increase in deficit
of $507,000. The decline in working capital was substantially due to write off
of leases in connection to the discontinuation to the Company's pharmacy
business and the willingness of certain vendors of the pharmacy locations to
accept extended payment plans for inventory that was purchased prior to
divestiture.

The Company has identified an exposure to the "Year 2000 Problem". Management
currently estimates the total cost of internal reprogramming of its software
products and the upgrading of purchased hardware and software to be
approximately $20,000. While this is management's best current estimate, items
outside management's control relating to the "Year 2000 Problem" may impact the
Company.

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 continue to have short-term cash needs. The
Company's cash flow position has not shown improvement since the previous fiscal
year and has been negatively impacted by the cash requirements of the retail
pharmacy operations. The closing of both retail pharmacies in late fiscal 1998
has eliminated the cash needs related to these operations (except for continuing
lease obligations, certain accounts payable, and promissory notes issued as part
of the discontinuation of operations).

<PAGE>


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 or that the Company will
experience profitable operations. The financial statements do not include any
adjustments that might result should the Company be unable to continue as a
going concern.

Management intends to continue to implement the following initiatives during the
coming year:

*    Continue to market the Company's Assurance Coordinated Pharmaceutical Care
     System(TM) to community pharmacies, pharmacy benefit managers, and third
     party payers.

*    Expand its current strategy of locating a strategic partner in the
     pharmaceutical care marketplace that has the financial strength to bring
     the company's product to market a substantially increased pace, thus adding
     stability to the Company's balance sheet.

*    Continue to strengthen its relationship with Advanced Information
     Management (AIM) through additional sales of AIM's software to its clients
     and to new prospects.

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

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

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

<PAGE>


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.
These include but are not limited to: the availability of sufficient working
capital should the Company experience continuing 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
may be adversely affected by the actions of existing or future competitors, who
may introduce new products or 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 Note 1 in the Consolidated Financial
Statements of the Company, included in this Report on Form 10KSB, 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.

<PAGE>


Item 7. Financial Statements and Supplementary Data.

The following Consolidated Financial Statements of the Company and the
Independent Auditors' Report thereon are included on pages 14 through 29 of this
Form 10-KSB



                        HEALTH OUTCOMES MANAGEMENT, INC.
                                AND SUBSIDIARIES
                          CONSOLIDATED FINANCIAL REPORT
                                FEBRUARY 28, 1998


                                    CONTENTS


                                                                            PAGE

     INDEPENDENT ACCOUNTANT'S REPORT ON THE FINANCIAL STATEMENTS..............14

     FINANCIAL STATEMENTS
        Consolidated balance sheets...........................................15
        Consolidated statements of operations.................................16
        Consolidated statements of changes in stockholder's deficit...........17
        Consolidated statements of cash flows.................................18
        Notes to consolidated financial statements.......................19 - 31

<PAGE>


                         INDEPENDENT ACCOUNTANT'S REPORT



To the Board of Directors and Stockholders
Health Outcomes Management, Inc.
Minneapolis, MN


We have audited the accompanying consolidated balance sheet of Health Outcomes
Management, Inc. and Subsidiaries as of February 28, 1998, and the related
consolidated statements of income, changes in stockholders' deficit, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements for
Health Outcomes Management, Inc. and Subsidiaries for the two years in the
period ended February 28, 1997 were audited by other auditors whose report,
dated April 18, 1997, on those financial statements included an explanatory
paragraph that described factors which raise substantial doubt about the
entity's ability to continue as a going concern.

We conducted our audit 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 evaluation the overall financial statement presentation.
We believe that our audit provides 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, 1998, and the results of
their operations and their cash flows for the year then ended, 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 entity'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.



SCHWEITZER RUBIN KARON & BREMER
Certified Public accountants
Minneapolis, Minnesota
May 21, 1998

<PAGE>


            Health Outcomes Management, Inc. and Subsidiaries
            CONSOLIDATED BALANCE SHEETS
            February 28, 1998 and February 28, 1997

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------       -----------
FEBRUARY 28,                                                                1998             1997
----------------------------------------------------------------------------------       -----------
<S>                                                                    <C>               <C>        
ASSETS
CURRENT ASSETS:
      Cash and cash equivalents                                        $   119,716       $   209,024
      Trade receivables, less allowance for doubtful
          accounts of $13,400 in 1998; $35,000 in 1997                      43,902            92,402
      Inventory                                                                  0            52,436
      Prepaid expenses                                                      15,383            17,366
----------------------------------------------------------------------------------       -----------
TOTAL CURRENT ASSETS                                                       179,001           371,228

PROPERTY AND EQUIPMENT, net of accumulated depreciation                     55,384           104,009
      of $606,501 in 1998; $579,928 in 1997
OTHER ASSETS, net of accumulated amortization
      of $6,219 in 1998; $3,455 in 1997                                     17,073            49,837
----------------------------------------------------------------------------------       -----------
TOTAL ASSETS                                                           $   251,458       $   525,074
====================================================================================================

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
      Notes payable, current portion                                   $     7,500       $     6,904
      Current installments of obligations under capital leases              34,451            60,974
      Accounts payable                                                     470,385           102,827
      Deferred revenue                                                     326,075           313,926
      Accrued compensation                                                  35,478            56,547
      Accrued payroll taxes                                                 10,671            14,979
      Other current liabilities                                             12,814            25,608
----------------------------------------------------------------------------------       -----------
TOTAL CURRENT LIABILITIES                                                  897,374           581,765

NOTES PAYABLE, less current portion                                         10,000             4,289
OBLIGATIONS UNDER CAPITAL LEASES, less current installments                 14,011            25,377
----------------------------------------------------------------------------------       -----------
TOTAL LIABILITIES                                                          921,385           611,431
----------------------------------------------------------------------------------       -----------

COMMITMENTS AND CONTINGENCIES (Note 6, 13, & 15)

STOCKHOLDERS' DEFICIT:
      Common stock, $.01 par value; authorized 15,000,000 shares;
          issued 8,872,853 in 1998; 8,499,029 in 1997                       88,729            84,990
      Additional paid-in capital                                         4,770,194         4,724,568
      Accumulated deficit                                               (5,528,850)       (4,826,415)
      Note receivable from officer                                               0           (69,500)
----------------------------------------------------------------------------------       -----------
TOTAL STOCKHOLDERS' DEFICIT                                               (669,927)          (86,357)
----------------------------------------------------------------------------------       -----------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                            $   251,458       $   525,074
====================================================================================================

</TABLE>

<PAGE>


Health Outcomes Management, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended February 28, 1998, February 28, 1997 and February 29, 1996

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------
                                                               1998              1997              1996
-----------------------------------------------------------------------      ------------      ------------
<S>                                                        <C>               <C>               <C>        
REVENUES                                                   $ 1,160,675       $ 2,301,626       $ 3,182,718
COST OF REVENUES                                               806,928         1,399,522         1,866,317
-----------------------------------------------------------------------      ------------      ------------
GROSS PROFIT                                                   353,747           902,104         1,316,401
-----------------------------------------------------------------------      ------------      ------------

OPERATING EXPENSES:
      Research and development                                 128,740           223,437           502,627
      Selling and marketing                                    115,962           135,713           195,668
      General and administrative                               472,814           511,256           496,564
-----------------------------------------------------------------------      ------------      ------------
TOTAL OPERATING EXPENSES                                       717,516           870,406         1,194,859
-----------------------------------------------------------------------      ------------      ------------

OPERATING INCOME (LOSS)                                       (363,769)           31,698           121,542

OTHER INCOME (EXPENSE):
      Interest income                                            3,801             7,714               641
      Interest expense                                         (12,740)          (19,491)          (26,568)
-----------------------------------------------------------------------      ------------      ------------

INCOME (LOSS) FROM CONTINUING OPERATIONS DISCONTINUED         (372,708)           19,921            95,615

OPERATING INCOME (LOSS) FROM
      DISCONTINUED OPERATIONS                                 (329,727)         (133,165)                0
-----------------------------------------------------------------------      ------------      ------------

NET INCOME (LOSS)                                          $  (702,435)      $  (113,244)      $    95,615
==========================================================================================================


NET INCOME (LOSS) PER SHARE DATA:
BASIC
Income (loss) from continuing operations                   $     (0.04)      $      0.00       $      0.01
Net Income (loss) per share                                $     (0.08)      $     (0.01)      $      0.01
Shares used in per share calculations                        8,574,910         8,434,058         8,080,577

DILUTED
Income (loss) from continuing operations                   $     (0.04)      $      0.00       $      0.01
Net Income (loss) per share                                $     (0.08)      $     (0.01)      $      0.01
Shares used in per share calculations                        8,574,910         8,434,058         8,720,983

</TABLE>

<PAGE>


Health Outcomes Management, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Years ended February 28, 1998, February 28, 1997 and February 29, 1996

<TABLE>
<CAPTION>
                               Preferred Stock           Common Stock        Additional                  Note
                             -------------------    ----------------------    Paid In   Accumulated    Receivable       TOTAL
                             Shares       Amount     Shares        Amount     Capital      Deficit    From Officer     DEFICIT
---------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>     <C>            <C>        <C>          <C>          <C>           <C>           <C>
Balance, February 28, 1996        0  $         0    7,949,385  $    79,494  $ 4,532,309  $(4,808,786)  $         0   $  (196,983)

     Proceeds from stock          0            0      265,500        2,655      110,410            0             0       113,065
     options exercised            

     Issuance of                  0            0      113,000        1,130       23,005            0             0        24,135
     common stock


     Net income                   0            0            0            0            0       95,615             0        95,615

     Note receivable              0            0            0            0            0            0       (92,400)      (92,400)
     from officer
---------------------------------------------------------------------------------------------------------------------------------

Balance, February 29, 1997        0            0    8,327,885       83,279    4,665,724   (4,713,171)      (92,400)      (56,568)

     Proceeds from stock          0            0      123,000        1,230       44,280            0             0        45,510
     options exercised            

     Issuance of                  0            0       48,144          481       14,564            0             0        15,045
     common stock


     Net loss                     0            0            0            0            0     (113,244)            0      (113,244)

     Payments received            0            0            0            0            0            0        22,900        22,900
     on note receivable
         from officer
---------------------------------------------------------------------------------------------------------------------------------

Balance, February 28, 1998        0            0    8,499,029       84,990    4,724,568   (4,826,415)      (69,500)      (86,357)

     Issuance of                  0            0      373,824        3,739       45,626            0             0        49,365
     common stock

     Net loss                     0            0            0            0            0     (702,435)            0      (702,435)

     Payments received            0            0            0            0            0            0        69,500        69,500
     on note receivable
         from officer
---------------------------------------------------------------------------------------------------------------------------------

BALANCE, FEBRUARY 28, 1998        0  $         0    8,872,853  $    88,729  $ 4,770,194  $(5,528,850)  $         0   $  (669,927)
=================================================================================================================================

</TABLE>

<PAGE>


Health Outcomes Management, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended February 28, 1998, February 28, 1997 and February 29, 1996

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                  1998           1997          1996
------------------------------------------------------------------------------------------    ----------    ----------
<S>                                                                             <C>           <C>           <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                           $(702,435)    $(113,244)    $  95,615
------------------------------------------------------------------------------------------    ----------    ----------

    Adjustments to reconcile net income (loss) to cash provided by operating
    activities:
        Depreciation                                                               57,002        91,913       110,893
        Amortization                                                               40,264        32,764        60,638
        Provision for losses on trade receivables                                  13,613        31,234        36,160
        Recoveries of bad debts                                                     2,267         5,114             0
        Loss on disposal of inventory and equipment                                49,048             0             0
        Loss on disposal of segment                                               208,550             0             0
        Stock issued as payment for services performed                             49,365        15,045         9,135
    Changes in operating assets and liabilities, net of acquisitions:
        Decrease (increase) in trade receivables                                   32,620        11,469        86,363
        Decrease (increase) in inventory                                           16,498       (18,405)            0
        Decrease (increase) in prepaid expenses                                     1,983        26,439       (30,576)
        Decrease (increase) in other current assets                                     0           679         4,818
        Increase (decrease) in accounts payable                                   161,634       (32,624)     (100,998)
        Increase (decrease) in deferred revenue                                    12,149       120,266        77,984
        Increase (decrease) in accrued compensation                               (21,069)      (18,408)      (54,096)
        Increase (decrease) in payroll taxes                                       (4,308)       (5,243)      (87,440)
        Increase (decrease) in other current liabilities                          (12,794)        9,389       (20,541)
------------------------------------------------------------------------------------------    ----------    ----------
Total adjustments                                                                 606,822       269,632        92,340
------------------------------------------------------------------------------------------    ----------    ----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES                             (95,613)      156,388       187,955
------------------------------------------------------------------------------------------    ----------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                                          (21,698)       (2,569)      (63,697)
    Proceeds from the sale of equipment                                             2,310             0             0
    Proceeds from the sale of intangibles                                          14,091             0             0
    Purchase of pharmacy assets                                                   (10,000)      (23,544)            0
------------------------------------------------------------------------------------------    ----------    ----------
CASH FLOWS USED IN INVESTING ACTIVITIES                                           (15,297)      (26,113)      (63,697)
------------------------------------------------------------------------------------------    ----------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Principal payments received on note receivable                                 69,500        22,900             0
    Principal payments under capital lease obligations                            (43,214)      (54,538)      (47,938)
    Repayments of note payable assumed in the
        Edina Pharmacy acquisition                                                 (4,684)       (3,780)            0
    Repayments of bank loans assumed in the
        Applied Micro Management, Inc. acquisition                                      0             0        (6,123)
    Net repayment of loans to officer                                                   0             0       (60,000)
    Proceeds from issuance of common stock                                              0        45,510        35,665
------------------------------------------------------------------------------------------    ----------    ----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES                              21,602        10,092       (78,396)
------------------------------------------------------------------------------------------    ----------    ----------

INCREASE IN CASH AND CASH EQUIVALENTS                                             (89,308)      140,367        45,862

CASH AND CASH EQUIVALENTS:
    Beginning                                                                     209,024        68,657        22,795
------------------------------------------------------------------------------------------    ----------    ----------

    Ending                                                                      $ 119,716     $ 209,024     $  68,657
======================================================================================================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
    Cash paid during the year for interest                                      $  19,415     $  23,027     $  27,661
======================================================================================================================

</TABLE>

<PAGE>


NOTE 1.     NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

            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. During 1998 the Company
            disposed of its retail prescription and over-the-counter drug
            operations.

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

            SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY ARE SUMMARIZED BELOW:

            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.

            INVENTORIES:

            Inventories are valued at the lower of cost or market.

            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.

<PAGE>


NOTE 1.     NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

            SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY ARE SUMMARIZED BELOW:
            (CONTINUED)

            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:

            The Company has adopted the provisions of statement of Financial
            Accounting Standards No. 128, Earnings Per Share ("SFAS 128")
            effective February 28, 1998. SFAS 128 requires the presentation of
            basic and diluted net income (loss) per share. Basic net income
            (loss) per share is computed by dividing net income (loss) available
            to common stockholders by the weighted average number of common
            shares outstanding for that period. Diluted net income (loss) per
            share is computed giving effect to all dilutive potential common
            shares that were outstanding during that period. Dilutive potential
            shares consist of incremental common shares issuable upon exercise
            of stock options and warrants and conversion of preferred stock for
            all periods. All prior period net income (loss) per share amounts
            have been restated to comply with SFAS No. 128.

            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.

            NON-COMPETE AGREEMENTS:

            As a part of a purchase of certain assets of a business the Company
            acquired non-compete agreements. These agreements are being
            amortized over five years. The related amortization expense was
            $30,000 in 1998, 1997, and 1996, respectively.

            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.

<PAGE>


NOTE 1.     NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

            SIGNIFICANT ACCOUNTING POLICIES OF THE COMPANY ARE SUMMARIZED BELOW:
            (CONTINUED)

            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 Statements of Financial Accounting
            Standards No.123 (SFAS No. 123), Accounting for Stock-Based
            Compensation.

            NEW ACCOUNTING PRONOUNCEMENTS

            In March 1997, the Financial Accounting Standards Board (FSBA)
            issued Statement of Financial Accounting Standards (SFAS) No. 128,
            "Earnings per Share," which changed the way companies calculated
            their earnings per share (EPS). SFAS No. 128 replaced primary EPS
            with basic EPS. Basic EPS is computed by dividing reported earnings
            by weighted average shares outstanding, excluding potentially
            dilutive securities. Fully diluted EPS, termed diluted EPS under
            SFAS No. 128, is also to be disclosed. The Company adopted SFAS No.
            128 in fiscal 1998, at which time all prior year EPS was restated in
            accordance with SFAS No. 128.

            In June 1997, the FASB issued SFAS No.130, "Reporting Comprehensive
            Income," which establishes standards for reporting and displaying
            comprehensive income and its components in financial statements. The
            Company will adopt the provisions of SFAS No. 130 in fiscal 1999.

            In October 1997, the AICPA issued Statement of Position (SOP) 97-2
            on Software Revenue Recognition which supersedes SOP 91-1. The SOP
            is effective for all fiscal years beginning after December 15, 1997
            and will be effective for the Company's fiscal year 1999.

NOTE 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 $702,435 during the year ended
            February 28, 1998. As of February 28, 1998, the Company had an
            accumulated deficit of $5,528,850, a stockholders' deficit of
            $669,927, and a working capital deficit of $718,373. 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.

<PAGE>


NOTE 2.     CONTINUATION AS A GOING CONCERN (CONTINUED)

            Management has adopted the following plans for the coming year:

            *   Continue to market the Company's Assurance Coordinated
                Pharmaceutical Care System to community pharmacies, pharmacy
                benefit managers, and third party payers.

            *   Expand its current strategy of locating a strategic partner in
                the pharmaceutical care marketplace that has the financial
                strength to bring the Company's product to market at a
                substantially increased pace.

            *   Continue to strengthen its relationship with Advanced
                Information Management (AIM) through additional sales of AIM's
                software to its clients and to new prospects.

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

            If operations and cash flows 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.

NOTE 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 twelve 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.

            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 unpaid balance of $17,500 is payable
            at $500 per month and matures in October 2000. The remaining balance
            of $30,000 will be paid by the Company in eleven equal monthly
            installments. Similar to Edina Pharmacy which was acquired in July
            1996, the Company planned to develop this pharmacy into a prototype
            store applying patient care concepts utilizing the Company's
            Assurance Coordinated Pharmaceutical Care System software. During
            1998 the Company discontinued the operations of both the Edina and
            Eden Prairie facilities (see Note 17).

<PAGE>


NOTE 4.     PROPERTY AND EQUIPMENT

            Property and equipment, at cost, consists of the following:

            --------------------------------------------------------------------
                                                                1998        1997
            --------------------------------------------------------------------
            Property under capitalized leases              $ 181,547   $ 310,005
            Furniture and equipment                          480,338     373,932
            --------------------------------------------------------------------
                                                             661,885     683,937
            Less accumulated amortization and depreciation   606,501     579,928
            --------------------------------------------------------------------
            NET PROPERTY AND EQUIPMENT                     $  55,384   $ 104,009
            ====================================================================

NOTE 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.

            New software products, developed in 1998, 1997 and 1996, were
            expensed as incurred due to the lack of significant revenues
            generated from such products.

            Amortization of capitalized computer software costs was $2,764,
            $2,764 and $30,638 in 1998, 1997 and 1996, respectively.

NOTE 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 December 31, 2002.

            Rental expense in 1998, 1997 and 1996 was $150,069, $144,753 and
            $127,413, respectively.

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

            -------------------------------------------------------------------
                                                                        AMOUNTS
            -------------------------------------------------------------------
            1999                                                      $ 121,554
            2000                                                         28,854
            2001                                                         29,388
            2002                                                         32,060
            2003                                                         26,717
            -------------------------------------------------------------------
            TOTAL                                                     $ 238,573
            ===================================================================

<PAGE>


NOTE 6.     LEASES (CONTINUED)

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

            -------------------------------------------------------------------
                                                             1998          1997
            -------------------------------------------------------------------
            Office and computer equipment              $  181,547    $  310,005
            Less accumulated amortization                (160,747)     (275,692)
            -------------------------------------------------------------------
                                                       $   20,800    $   34,313
            ===================================================================

            Future minimum lease payments under capital lease obligations are as
            follows:

            -------------------------------------------------------------------
                                                                        AMOUNTS
            -------------------------------------------------------------------
            1999                                                      $  39,248
            2000                                                         10,578
            2001                                                          4,973
            -------------------------------------------------------------------
            Total                                                        54,799
            Less amounts representing interest                           (6,337)
            -------------------------------------------------------------------
            Present value of net minimum lease payments                  48,462
            Less current installments                                   (34,451)
            -------------------------------------------------------------------
            OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING CURRENT
              INSTALLMENTS                                            $  14,011
            ===================================================================

            All equipment purchased under capital leases is pledged as
            collateral.

NOTE 7.     INCOME TAXES

            There was no income tax expense or benefit amounts recorded for
            1998, 1997 or 1996.

            The provision for income taxes from continuing operations for the
            years ended February 28, 1998, February 28, 1997, and February 29,
            1996, differs from the statutory federal tax rate applied as
            follows:

            -------------------------------------------------------------------
                                                          1998     1997    1996
            -------------------------------------------------------------------

            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:

<TABLE>
<CAPTION>
            -------------------------------------------------------------------------------
                                                            1998         1997          1996
            -------------------------------------------------------------------------------
<S>                                                  <C>          <C>           <C>        
            Deferred tax assets:
                 Capital leases                      $    11,000  $    10,000   $    23,500
                 Book depreciation greater than tax       18,000       30,000        42,500
                 Trade receivables                         4,800       12,600         5,400
                 Net operating loss carryforwards      1,983,600    1,512,000     1,709,000
                 Deferred revenue                        117,400      113,000        69,700
            -------------------------------------------------------------------------------
                 Gross deferred tax assets             2,134,800    1,677,600     1,850,100
                 Less valuation allowance             (2,134,800)  (1,677,600)   (1,850,100)
            -------------------------------------------------------------------------------
            NET DEFERRED TAX ASSETS                  $         0  $         0   $         0
            ===============================================================================
</TABLE>

<PAGE>


NOTE 7.     INCOME TAXES (CONTINUED)

            As of February 28, 1998, the Company had net operating loss
            carryforwards for tax reporting purposes of approximately $5,510,000
            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.

NOTE 8.     NET INCOME (LOSS) PER SHARE

            The following table presents the computation of basic and diluted
            net income (loss) per share:

<TABLE>
<CAPTION>
            ------------------------------------------------------------------------------------------------------------
            DECEMBER 31,                                                       1998            1997             1996
            ------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>               <C>        
            Income (loss) from continuing operations                      $   (372,708)    $      19,921     $    95,615
            Discontinued operations                                           (329,727)         (133,165)              -
            ------------------------------------------------------------------------------------------------------------
            NET INCOME (LOSS)                                             $   (702,435)    $    (113,244)    $    95,615
            ============================================================================================================

            RECONCILIATION OF SHARES USED IN BASIC AND DILUTED PER SHARE CALCULATIONS:


            Weighted average common shares outstanding                       8,574,910         8,434,058       8,080,577

            Dilutive effect of stock options and warrants                            0                 0         640,406
            ------------------------------------------------------------------------------------------------------------

            SHARES USED IN DILUTED NET INCOME
                 (LOSS) PER SHARE CALCULATION                                8,574,910         8,434,058       8,720,983
            ============================================================================================================

            BASIC PER SHARE DATA:
                 Income (loss) from continuing operations                 $      (0.04)    $        0.00     $      0.01
                 Discontinued operations                                  $      (0.04)    $       (0.01)    $      0.00
            ------------------------------------------------------------------------------------------------------------
                 NET INCOME (LOSS)                                        $      (0.08)    $       (0.01)    $      0.01
            ============================================================================================================

            DILUTED PER SHARE DATA:
                 Income (loss) from continuing operations                 $      (0.04)    $        0.00     $      0.01
                 Discontinued operation                                   $      (0.04)    $       (0.01)    $      0.00
            ------------------------------------------------------------------------------------------------------------
                 NET INCOME (LOSS)                                        $      (0.08)    $       (0.01)    $      0.01
            ============================================================================================================
</TABLE>

<PAGE>


NOTE 9.     STOCKHOLDERS' DEFICIT

            STOCK ISSUANCES:

            During 1998, 373,824 shares of common stock were awarded to related
            parties, directors, associates and consultants as payment for
            services performed.

            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 were awarded to related
            parties, directors, associates and consultants as payment for
            services performed.

            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, 1998.

            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 stockholders 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 under this plan to
            associates, members of the board of directors or other nonemployee
            agents of the Company without shareholder approval of a new stock
            option plan.

            During 1998, the Company granted non-qualified options to various
            employees and non-employee agents.

<PAGE>


NOTE 9.     STOCKHOLDERS' DEFICIT (CONTINUED)

            STOCK OPTION PLAN: (CONTINUED)

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

<TABLE>
<CAPTION>
            -------------------------------------------------------------------------------------------
                                                                                        Non Qualified
                                                                Incentive Options          Options
                                                              -------------------   -------------------

                                                                         WEIGHTED              WEIGHTED
                                                                          AVERAGE               AVERAGE
                                              PRICE PER       STOCK      EXERCISE    STOCK     EXERCISE
                                               SHARE          OPTIONS       PRICE    OPTIONS      PRICE
            -------------------------------------------------------------------------------------------
<S>                                        <C>      <C>       <C>          <C>       <C>          <C>  
            Balance February 28, 1995                         873,565      $0.36     134,000      $0.44

            Granted in 1996                $0.59    $0.97     267,500      $0.97      14,000      $0.59
            Exercised                      $0.37    $0.97    (250,500)     $0.43     (15,000)     $0.37
            Canceled                       $0.25    $0.97    (203,750)     $0.41           0
            -------------------------------------------------------------------------------------------
            Balance February 29, 1996                         686,815      $0.47     133,000      $0.46

            Exercised                      $0.37    $0.37    (123,000)     $0.37           0
            Canceled                       $0.25    $0.97    (151,000)     $0.54           0
            -------------------------------------------------------------------------------------------
            Balance February 28, 1997      $0.25    $0.97     412,815      $0.48     133,000      $0.46

            Granted                        $0.08    $0.23           0                202,000      $0.22
            Exercised                                               0                      0
            Canceled                       $0.25    $0.97    (130,500)     $0.51           0
            -------------------------------------------------------------------------------------------

            BALANCE FEBRUARY 28, 1998      $0.08    $0.97     282,315      $0.46     335,000      $0.29
            ===========================================================================================
</TABLE>

            At February 28, 1998, February 28, 1997 and February 29, 1996,
            currently exercisable options aggregated 388,565, 445,565 and
            611,940 shares of common stock, respectively, and the
            weighted-average exercise price of those options was $0.37, $0.41
            and $0.38, respectively.

            The weighted average fair values of options granted were as follows:

            --------------------------------------------------------------------
                                                             Estimated Weighted
                                                             Average Fair Value
            --------------------------------------------------------------------
            1996 grants                                            $  .56
            1998 grants                                            $  .22
            ====================================================================

            The fair value of each option grant is estimated on the date of
            grant using the Black-Scholes option pricing model with the
            following weighted-average assumptions used for grants in fiscal
            1998, 1997, and 1996:

            --------------------------------------------------------------------
                                                                1998       1996
            --------------------------------------------------------------------
            Risk-free interest rate                            6.18%       6.5%
            Expected life of options                         9 YEARS    9 years
            Expected volatility                                 .52%       6.3%
            Expected dividend yield                                0       3.0%
            ====================================================================

<PAGE>


NOTE 9.     STOCKHOLDERS' DEFICIT (CONTINUED)

            STOCK OPTION PLAN: (CONTINUED)

            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 1998 and 1997 net loss and loss
            per share would have been increased by approximately $35,000 and
            $43,000, or $0.01 per share for each year. Fiscal 1996 net income
            and earnings per share would have been reduced by approximately
            $82,000, or $0.01 per share.

            Pro forma amounts reflect only options granted in 1996 and after.
            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, 1995               345,000        $   0.25

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

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

            Canceled                                 50,000            0.30
            -------------------------------------------------------------------
            BALANCE FEBRUARY 28, 1998               165,000        $   0.39
            ===================================================================

<PAGE>


NOTE 10.    MAJOR CLIENTS

            During fiscal 1998, 1997, and 1996, one client accounted for
            approximately 0%, 27% and 23%, 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
            12 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 1998 or 1997.

NOTE 11.    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 consisted 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. The
            officer paid the remaining balance of note receivable in 1997. At
            February 28, 1997 and February 29, 1996, the balance due on the note
            receivable was $69,500 and $92,500, respectively.

NOTE 12.    MARKETING AGREEMENT

            On February 1, 1995, an amendment to the 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 franchises 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.

<PAGE>


NOTE 13.    SUPPLEMENTAL CASH FLOW INFORMATION

            Supplemental schedule of noncash investing and financing activities:

            In 1998, the Company incurred a net installment contract obligation
            of $24,416 associated with the purchase of pharmacy assets and
            equipment.

            During 1998, the Company received credits totaling $15,500 from
            vendors for pharmacy inventory disposed of in connection with
            disposition of the operations.

            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.

NOTE 14.    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 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. The employment agreements
            were being renewed for one-year periods pursuant to the automatic
            renewal provisions of the original agreements. In December 1997 the
            Company terminated the employment of its president. The Company's
            commitments to purchase stock, warrants and options discussed above
            lapsed subsequent to year end February 28, 1998.

NOTE 15.    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 years ending
            1998, 1997 and 1996 relating to the plan totaled $14,000, $14,000
            and $15,000, respectively. The Company issued 48,144 shares of the
            Company's common stock in 1997 as payment for the Company's 1996
            matching contribution.

<PAGE>


NOTE 16.    LINE OF CREDIT AGREEMENT

            The Company has a $50,000 Line of Credit agreement with a bank for
            working capital purposes. 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.

            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.

NOTE 17.    DISCONTINUED OPERATIONS

            In December 1997, the Company discontinued its operation of retail
            prescription and over the counter drug sales. Accordingly, the
            operating results of the drug sales operations including provision
            for estimated lease termination costs, employee benefits and any
            losses during the phase out period, of approximately $199,235, and a
            write off of leasehold improvements and equipment of approximately
            $9,300, are included with losses from discontinued operations on the
            statement of operations.

            The Company has restated its prior financial statements to present
            the operating results of the retail drug operations as discontinued.
            The Company has provided a valuation allowance for any tax benefits
            which may be realized in the future from the carryforward of the
            loss from discontinued operations. The current components of net
            assets from discontinued operations included in the Company's
            consolidated balance sheet at February 28, 1998 and 1997 are as
            follows:

            --------------------------------------------------------------------
                                                                 1998      1997
            --------------------------------------------------------------------
            Cash                                           $        0  $ 18,000
            Accounts receivable                                     0    11,000
            Inventories                                             0    52,000
            Property and equipment - net                            0    11,000
            Accounts payable and other current liabilities   (147,000)  (15,000)
            Provision for phase out costs                    (208,000)        0
            --------------------------------------------------------------------
                                                           $ (355,000) $ 77,000
            ====================================================================

<PAGE>


Item 8.  Disagreements on Accounting and Financial Disclosure.

During the first quarter of fiscal 1999, the Company dismissed its principal
independent accountant and retained a new independent accountant, as reported on
Form 8-k. See Item 13 in this Report on Form 10-KSB. The dismissal was not based
upon any disagreement concerning any matter of accounting practice or policy.

<PAGE>


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, 1998:

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

         Peter J. Zugschwert             32          President, Chief Executive
                                                     Officer and Director

         Stanford M. Baratz              42          Director

         Jonathan R. Gordon              46          Director

         Matthew E. Goldberg             31          Director

         Michael J. Frakes               46          Vice President

         Marie Cooper                    30          Controller and Principal
                                                     Accounting Officer

Peter J. Zugschwert, age 32, has served as President of the company since
December 1997 and CEO of the Company since September 1997. Prior to joining the
Company, he had been the Senior Vice President of Operations for Baratz
Financial, Inc. since June 1995. Between 1993 and 1995, Mr. Zugschwert was a
private business consultant in Chicago and Minneapolis.

Stanford M. Baratz, age 41, has been the President of Baratz Financial, Inc., a
Minneapolis-based private investment firm, since founding the company in 1994.
Between 1985 and 1994, Mr. Baratz served in various capacities with the Welsh
Companies, a Minneapolis-based real estate firm, most recently as Executive Vice
President. 

Jonathan R. Gordon, age 47, has been President of The Vault, Inc., an Edina,
Minnesota-based document storage company, since 1988. Mr. Gordon is a Certified
Public Accountant.

Matthew E. Goldberg, age 30, has been President of In-Sight Optical, Inc. dba
InVision, a retail optical store chain, since 1996. Between 1992 and 1996, Mr.
Goldberg was an account manager with Campbell-Mithun Esty, a Minneapolis based
advertising agency.

Michael J. Frakes, Pharm.D., has served as a Vice President of the Company since
May, 1986. 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.

Marie Cooper joined the Company on April 1998 as its Controller and Principal
Accounting Officer. From June 1995 to March 1998, Ms. Cooper was the accounting
manager for a the Newcom Group, Inc., and its subsidiaries, as well as The
Express Pages, LLC. Ms. Cooper holds a BS degree in Accounting from Augsburg
College, in Minneapolis, Minnesota.

On December 9, 1997, William A. Peter was removed as president and chief
executive officer. Mr. Peter had been with the Company since December 1985.

In April, 1998, Rosemary Salzwedel resigned her position as Controller. Ms.
Salzwedel had been with the Company since June 1993.

<PAGE>


Item 10. Executive Compensation.

Effective October 23, 1997, each member of the Board of Directors receives in
lieu cash compensation, 800 shares of the Company's common stock per meeting. In
addition, in consideration for their service, each of the new directors elected
at the annual meeting of the shareholders on September 19,1997 were granted a 5
year option to purchase 10,000 shares of the Company's stock exercisable at a
price of $.08 per share ($.08 was the price of the Company's stock on the day of
their agreement to serve, if elected). During the fiscal year ended February 28,
1998, Board of Director compensation totaled 25,200 shares, $1,520.00, and
options to purchase 40,000 shares.

The following table sets forth the compensation paid or to be paid by the
Company with respect to the fiscal year ended February 28, 1998, to the
Presidents and Chief Executive officers, neither of whose total cash
compensation (including bonuses) exceeded $100,000.


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                             Annual Compensation                      Long Term Compensation
                                             -------------------                      ----------------------
                                                                                       Awards               Payouts
                                                                             Restricted      Securities       LTIP
                                                             Other Annual       Stock        Underlying      payouts     All other
             Name and                 Salary       Bonus     Compensation     Award(s)      Options/SARs                Compensation
             principal       Year       ($)         ($)          ($)             ($)            (#)            ($)           ($)
             position

                (a)           (b)       (c)         (d)          (e)             (f)            (g)            (h)           (i)
-------------------------    ----     ------       -----     ------------     --------      ------------    --------    ------------
<S>                          <C>      <C>           <C>      <C>                <C>           <C>            <C>          <C>
Peter J. Zugschwert (1)      1998     27,050                 20,000 (5)
President & CEO

William A. Peter, Jr. (2)    1998     97,960                                    1,734 (3)                                 26,500 (6)
Ex-President & CEO           1997     97,723        925                         2,190 (3)
                             1996     10,388 (4)    104                         2,190 (3)

</TABLE>

(1) Mr. Peter J Zugschwert was Chairman of the Board of Directors from September
19, 1997 through the end of the fiscal year and President & CEO from December 9,
1997 through the end of the fiscal year.
(2) Mr. William A. Peter was Chairman of the Board of Directors from March 1,
1997 through September 18, 1997 and President & CEO from March 1, 1997 through
December 8, 1997.
(3) Amount shown represents a health insurance allowance paid to Mr. Peter.
(4) 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.
(5) During fiscal year Mr. Zugschwert accepted stock in lieu of cash
compensation in the amount of $20,000.
(6) Subsequent to the end of the fiscal year ended February 28, 1998, the
Company agreed to sign a note for $26,500 at an interest rate of 8% to settle
litigation with Mr. Peter relating to his termination on December 9, 1997 and 
the resulting severance payment as per his employment agreement.

<PAGE>


OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table sets forth information concerning the value of Stock Options
and Warrants granted to the Company's executive officers named in the
compensation table during the fiscal year ended February 28, 1998.


                               (INDIVIDUAL GRANTS)

<TABLE>
<CAPTION>
                               Number of           Percentage of total
                              Securities              Options /SARs
                              underlying               granted to             Exercise or
                             Options/SARs             employees in             base price       Expiration
         Name                 granted (#)              fiscal year               ($/Sh)            Date

          (a)                     (b)                      (C)                    (d)              (e)
------------------------  --------------------  ------------------------  ------------------  ---------------
<S>                             <C>                        <C>                   <C>             <C> 
  Peter J. Zugschwert           10,000                     5%                    $0.08           10/23/02
    President & CEO

</TABLE>

There were no Long - Term Incentive Plans - Awards in Last Fiscal Year (Table
Omitted)



STOCK OPTIONS AND WARRANTS HELD AND FISCAL YEAR END 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, 1998.

<TABLE>
<CAPTION>
                                                                                                Value of Unexercised
                                                       Number of Unexercised                  in-the-money Options at
                       Shares                          Options/SARs at FY-end                        Year End(1)
                     acquired on      Value            ----------------------                        -----------
Name                  exercise       realized     Exercisable          Unexercisable      Exercisable      Unexercisable
----                 --------        --------     -----------          -------------      -----------      -------------
<S>                     <C>             <C>          <C>                   <C>                <C>               <C> 
Peter J. Zugschwert     0               $ 0          2,500                 7,500              $-0-              $-0-
   President & CEO

William A. Peter, Jr.   0               $ 0        139,375(2)              3,125              $-0-              $-0-
  President & CEO

</TABLE>


(1) Based upon the average of the bid and ask price of $.10 for the Company's
Common Stock on February 28, 1998, as reported by the National Quotation Bureau.

(2) Includes warrants to purchase 115,000 shares of the Company's Common Stock.
Options covering 27,500 shares expired in March 1998, 90 days after the
termination of Mr. Peters' Employment.

<PAGE>


EMPLOYMENT AGREEMENTS

On February 1, 1991, the Company entered an employment agreement with Michael J.
Frakes, for a term of three years. The agreement provides for automatic renewals
for one-year periods, pursuant to which the agreement has been extended to
January 31, 1999. Under the employment agreement 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, 1998. 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 were 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 was
increased to 1,200,000. As of May 1, 1998, incentive stock options for the
purchase of 254,815 shares remained outstanding under the Stock Option Plan. As
of May 1, 1998, non-qualified options for the purchase of 133,000 shares
remained outstanding under the Stock Option Plan.During February 1996, the
Company's 1986 Stock Option Plan expired. No additional stock options can be
issued under the Plan.

On October 23, 1998, the Company, by resolution of its Board of Directors,
issued 162,000 non-qualified stock options to certain non-management employees
for incentive and retention purposes. These options were not issued pursuant to
any previously adopted plan.

Options to purchase a total of 167,500 shares were held by the Company's
officers and directors as a group as of February 28, 1998. The Company's
employees (including certain officers and directors) held options to purchase a
total of 809,630 shares at the same date. Options totaling 374,685 shares had
been exercised as of the end of the fiscal 1998.

<PAGE>


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

The following table lists, as of February 28, 1998, 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.

<TABLE>
<CAPTION>
                                                                    Number         Percentage
            Name and Address                                       of Shares       Ownership
            ----------------                                       ---------       ---------
<S>                                                               <C>                <C>   
Shareholders who own greater than 5% of the shares outstanding:

            William A. Peter, Jr.
            6650 Vernon Hills Road
            Edina, Minnesota  55436                               1,442,000(1)       16.25%

            Steven C. Wolf
            820 S. 59th Street
            Belleville, Illinois  62223                             550,000           6.20%

Officers & Directors:

            Michael J. Frakes
            3712 Chatham Circle
            Arden Hills, Minnesota  55112                           381,549(2)        4.30 %

            Peter J. Zugschwert
            5500 Wayzata Boulevard, Suite 1075
            Minneapolis, Minnesota  55416                           164,430(3)        1.85%

            Jonathan R. Gordon
            7300 France Avenue South
            Edina, Minnesota  55435                                  66,500(3)         .75%

            Stanford M. Baratz
            5500 Wayzata Boulevard, Suite 1075
            Minneapolis, Minnesota  55416                            47,500(3)         .54%

            Matthew E. Goldberg
            119 North Fourth Street
            Minneapolis, Minnesota  55401                             5,700(3)         .06%

            ALL OFFICERS AND DIRECTORS AS A GROUP (5 PERSONS)       665,609(4)        7.50%
</TABLE>

(1)  Includes 115,000 shares which may be purchased pursuant to warrants which
     are 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 are
     exercisable within 60 days of the date hereof.

(3)  Includes 2,500 shares which may be purchased pursuant to stock options
     which are exercisable within 60 days of the date hereof.

(4)  Includes 161,250 shares which certain directors and officers have the right
     to purchase pursuant to warrants and stock options which are exercisable
     within 60 days of the date hereof.

<PAGE>


Item 12. Certain Relationships and Related Transactions.

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
consisted of 210,000 shares of the Company's common stock. Additional provisions
of the note required 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, 1998, the balance due on the
note receivable had been paid in full.

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, the Company believes that the
following reports were not filed on a timely basis in fiscal 1998 : each of the
current members of the Board of Directors failed to file form 5 within the
allotted time with respect to the grant of shares granted to board members, as
described above. As of the date of the filing of this report on form 10KSB, such
filing deficiencies have not been corrected.

<PAGE>


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 pages 14 through 29 of this
Annual Report on Form 10-KSB:


                                                                            Page
                                                                            ----

Independent Auditors' Report.............................................     14



Consolidated Balance Sheets - February 28, 1998 and February 28, 1997...      15



Consolidated Statements of Operations - Years Ended
 February 28, 1998, February 28, 1997 and February 29, 1996.............      16



Consolidated Statements of Changes in Stockholders' Deficit - Years 
 Ended February 28, 1998, February 28, 1997 and February 29, 1996.......      17



Consolidated Statements of Cash Flows - Years Ended
 February 28, 1998, February 28, 1997 and February 29, 1996.............      18



Notes to Consolidated Financial Statements.............................. 19 - 31

<PAGE>


(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).

<PAGE>


         *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.

         10(i)    Royalty Agreement with The University of Minnesota

         11       Computation of earnings per share

         27       Financial Data Schedule

         *  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

The company filed a form 8-K on 5/11/98, a form 8-KA 5/15/98 and a form 8KA
5/21/98. All three filings were in the fourth quarter. All three filings related
to the changing of the Company's auditor from KPMG Peat Marwick LLP to
Schweitzer Ruben Karon & Bremer.

<PAGE>


                                   SIGNATURES


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


                                    HEALTH OUTCOMES MANAGEMENT, INC.



                                    By:    /s/  Peter J. Zugschwert
                                           ---------------------------
                                           Peter J. Zugschwert
                                           Chairman and President
                                           Principal Executive Officer

                                    Date:  /s/ June 10, 1998
                                           ---------------------------

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/ Peter J. Zugschwert       Chairman, President             /s/ June 10, 1998
----------------------------   and Director                    -----------------
Peter J. Zugschwert            (Principal Executive Officer)


 /s/ Marie Cooper              Controller and Principal        /s/ June 10, 1998
----------------------------   Accounting Officer              -----------------
Marie Cooper


/s/ Stanford M. Baratz         Director                        /s/ June 10, 1998
----------------------------                                   -----------------
Stanford M. Baratz


 /s/ Matthew Goldberg          Director                        /s/ June 10, 1998
----------------------------                                   -----------------
Matthew Goldberg


 /s/ Jonathan R. Gordon        Director                        /s/ June 10, 1998
----------------------------                                   -----------------
Jonathan R. Gordon

<PAGE>


                                Index to Exhibits
                                -----------------

                                                                    Page Number
Exhibit                                                             Reference
-------                                                             ---------


10(i)       Royalty Agreement with The University of Minnesota          44

11          Calculation of earnings per share                           48

27          Financial Data Schedule                                     49