---

UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


---

FORM 10-KSB


Commission File Number 0-15936


---

HEALTH OUTCOMES MANAGEMENT, INC.


(Name of small business issuer in its charter)


|Minnesota(State or other jurisdiction of incorporation or organization) | 41-1546471(IRS Employer Identification Number)
|----------------------------------------------------------------------- | ----------------------------------------------

---

---

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 is not contained in this form, and no disclosure will be contained, to the best
of the 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.  [  ]

Registrant's revenues for the fiscal year ended February 28, 2001 were $868,983.

The aggregate market value of the Common Stock held by non-affiliates (persons other than officers, directors or holders of more than 5% of the outstanding stock) as of June
12, 2001 was approximately $80,772 based on the closing price of the issuer's Common Stock on such date.



---

---

ITEM 1.    DESCRIPTION OF BUSINESS

Health Outcomes Management, Inc. ("Health Outcomes" or "the Company") is engaged in licensing proprietary software services to long-term care facilities, home
healthcare agencies, hospitals and retail pharmacies.

BUSINESS DEVELOPMENT

GENERAL

The Company was incorporated in the State of Minnesota in September of 1987.  On June 15, 1994, the Company formed Pharmaceutical Care Outcomes, Inc. as a wholly owned subsidiary
 .

On February 8, 2001, the Company disposed of one of its assets relating to The Assurance Patient-Centered Coordinated Comprehensive Pharmaceutical Care System (tm) as reported
on Form 8-K filed with the Securities and Exchange Commission on February 9, 2001.

BUSINESS OF ISSUER

PRINCIPAL PRODUCTS AND/OR SERVICES AND THEIR MARKETS

Long-Term Care SoftwareThe Company markets computer software services to long-term care facilities to provide the clinical documentation required by federal and
state regulations.  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 that can be interfaced with the Long-Term Care System.  The Company's Assurance
Financial System TM software may be installed individually 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-based long-term care program, trains new customers how to use the program and provides on-going telephone support to those customers.

Home Healthcare Agency SoftwareThe 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.  Homecare providers can record their findings at a patient's home using Health Outcomes unique Point-Of-Care software TM and a notebook computer.  All information is then available to the homecare agency and 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 as a stand alone or as part of a complete system with the Company's clinical documentation system.

Hospital SoftwareHospitals 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.

Pharmakokinetics is the study of how drugs are processed and the changes they create within the patient's body.  The Assurance Kinetics System TM
 makes it easier, faster and more cost efficient to calculate proper dosages and to track schedules of commonly monitors drugs.  The Company's software is unique in this area and is updated with the latest findings in pharmacokinetic research.

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

The Assurance Kinetics System TM and the Assurance Nutrition System TM can be used as a complete system when
interfaced.

---

Pharmacy Practice SoftwareThe Assurance Patient-Centered Coordinated Comprehensive Pharmaceutical Care System TM incorporates two
components.  The first component is software designed to help the practitioner care for patients.  The system is designed to implement the (University of Minnesota's) Peter's Institute of Pharmaceutical Care model of a generalist pharmaceutical care
practice.  The system tracks patient outcomes, allows extensive documentation of professional services performed and generates billing and other supporting documents.  The second component is software for network and practice management.  This product
permits information from many practice sites to be aggregated for analysis, quality assurance and reimbursement purposes.  Together, the two components enable a network of pharmacies to provide pharmaceutical care services to a broad base of patients
while demonstrating significant cost savings to third party payers on an episode of care basis.

On February 8, 2001, the Company disposed of one of its assets relating to The Assurance Patient-Centered Coordinated Comprehensive Pharmaceutical Care System (tm) as reported
on Form 8-K filed with the Securities and Exchange Commission on February 9, 2001.

Continuing Support ServicesAll computerized Health Outcomes systems are licensed with an agreement for Health Outcomes to provide continuing support services via the
Company's telephone help line (800-STAT-911).

Community Pharmacy StoresDuring July 1996 and April 1997, the Company acquired certain assets of two community pharmacies located in the Minneapolis, Minnesota
metropolitan area.  At these community pharmacy locations, prescription and over-the-counter (OTC) drugs were sold at the retail level.

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

MARKETING AND DISTRIBUTION

The Company's products are presently marketed through direct marketing efforts.  The direct approach consists of efforts by Company personnel and a commissioned sales
representative 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 healthcare applications and settings, such as long-term care facilities, home
healthcare agencies, hospitals and community pharmacies.
- Provide a help line (800-STAT-911) for customers that will provide them access to the Company's clinical and financial support staff.
- Develop strategic alliances with healthcare providers.

The ASSURANCE 2001 systems are stand alone systems that can be integrated, but are designed to meet specific productivity and outcome management needs of practitioners and
clinicians.  The software is licensed directly by the Company to its clients.

STATUS OF NEW PRODUCTS

There are currently no new product or service announcements.

---

COMPETITION

The market for healthcare information products and services is intensely competitive.  Competitors vary in size and in scope and breadth of products and services offered, and
the Company competes with various companies in each of its markets.  Many of the Company's competitors have significantly greater financial, technical, product development and marketing resources than the Company.

In addition, other major information, pharmaceutical and healthcare companies not currently offering a similar line of products and/or services may enter the markets in which
the Company intends to compete.  With sufficient financial and other resources, many of these competitors may provide services similar to those of the Company without substantial barriers.

The Company's competitors include specialty healthcare companies, healthcare information system and software vendors, healthcare management organizations, pharmaceutical
companies and other service companies within the healthcare industry.  Many of these competitors have substantial installed customer bases in the healthcare industry and the ability to fund significant product development and acquisition efforts.  The
Company also competes against other companies that provide statistical and data management services, including clinical trial services to pharmaceutical companies.

The Company's competitive advantages are that its products have a wide range of applications in different healthcare settings and the software products available to the
industry by the Company can be interfaced.

The Company's competitive disadvantages are that major competitors may have larger sales forces and greater financial resources.

SOURCES AND AVAILABILITY OF RAW MATERIALS

The Company does not utilize any outside sources for its products and/or services provided to its customers.

CUSTOMER DEPENDENCE

During fiscal year 2001, one customer accounted for approximately 17.0% of the Company's revenues.  Revenue derived from this client pertained to the Assurance Patient-Centered
Coordinated Comprehensive Pharmaceutical Care System TM.  This software was sold during the fiscal year (see Note 16 of the Company's audited financial statements within this document).

The Company is not dependent upon a single customer or a few customers for a material portion of sales of any of its products or services.

PATENTS AND TRADEMARKS

The Company currently holds no patents, concessions, licenses or franchises with respect to any of its products or services, but has filed for patent protection in relevant
areas.  Additionally, the Company seeks to protect proprietary information regarding its products and services as trade secrets by utilizing non-disclosure agreements with its employees, clients and others who are permitted access to such information.

GOVERNMENT APPROVALS

The Company is not required to obtain government approval of its products.

---

EFFECT OF GOVERNMENTAL REGULATIONS

The healthcare industry is subject to extensive regulation by both the Federal and State governments.  Generally, state laws prohibit the practice of medicine and nursing
without a license. Many states interpret the practice of nursing to include health teaching, health counseling, the provision of care supportive to or restorative of life and well being and the execution of medical regimens prescribed by a physician.
Accordingly, to the extent that the Company assists providers in improving patient compliance by publishing educational materials or providing behavior modification training to patients, such activities could be deemed by a state to be the practice of
medicine or nursing. Although the Company has not conducted a survey of the applicable law in all 50 states, it believes that it is not engaged in the practice of medicine.

On August 21, 1996 Congress passed the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), P.L. 104-191. This legislation requires the Secretary of
the Department of Health and Human Services to adopt national standards for electronic health transactions and the data elements used in such transactions. The Secretary is required to adopt safeguards to ensure the integrity and confidentiality of such
health information. Violation of the standards is punishable by fines and, in the case of wrongful disclosure of individually identifiable health information, imprisonment. The Secretary is in the process of promulgating and publishing proposed rules
addressing the standards, however, no final rules have been adopted to date. Final rules may be adopted during 2001. Although the Company intends to comply with all applicable laws and regulations regarding medical information privacy, failure to do so
could have an adverse effect on the Company's business.

The Company and its customers may be subject to Federal and state laws and regulations that govern financial and other arrangements among health care providers. These laws
prohibit certain fee splitting arrangements among health care providers, as well as direct and indirect payments, referrals or other financial arrangements that are designed to induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. Possible sanctions for violation of these restrictions include civil and criminal penalties. Specifically, HIPAA increased the amount of civil monetary penalties from $2,000 to $10,000. Criminal
penalties range from misdemeanors, which carry fines of not more than $10,000 or imprisonment for not more than one year, or both, to felonies, which carry fines of not more than $25,000 or imprisonment for not more than five years, or both. Further,
criminal violations may result in permanent mandatory exclusions and additional permissive exclusions from participation in Medicare and Medicaid programs.

Furthermore, the Company and its customers may be subject to federal and state laws and regulations governing the submission of false healthcare claims to the government and
private payers. Possible sanctions for violations of these laws and regulations include minimum civil penalties between $5,000-$10,000 for each false claim and treble damages.

Regulation in the health care field is constantly evolving. The Company is unable to predict what government regulations, if any, affecting its business may be promulgated in
the future. The Company's business could be adversely affected by the failure to obtain required licenses and governmental approvals, comply with applicable regulations or comply with existing or future laws, rules or regulations or their interpretations.

Significant and Extensive Changes in the Health Care IndustryThe health care industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of health care industry
participants. Several lawmakers have announced that they intend to propose programs to reform the U.S. health care system. These programs may contain proposals to increase governmental involvement in health care, lower reimbursement rates and otherwise
change the operating environment for the Company and its targeted customers. Health care industry participants may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring certain expenditures, including those for
the Company's programs. The Company cannot predict what impact, if any, such changes in the health care industry might have on its business, financial condition and results of operations. In addition, many health care providers are consolidating to create
larger health care delivery enterprises with greater regional market power. As a result, the remaining enterprises could have greater bargaining power, which may lead to price erosion of the Company's programs. The failure of the Company to maintain
adequate price levels could have a material adverse effect on the Company.

---

RESEARCH AND DEVELOPMENT

The Company has spent approximately $71,221 and $151,580 on research and development efforts in the past two fiscal years ended February 28, 2001 and February 29, 2000,
respectively.  These expenditures were incurred primarily by the Pharmaceutical Coordinated Care System software development.  The Company has not conducted any additional research and development with respect to this product since September of 2000.

ENVIRONMENTAL COMPLIANCE

Compliance with federal, state and local environmental provisions has had no effect on current or anticipated capital expenditures and has had no material effect on earnings or
on the competitive position of the Company.

EMPLOYEES

As of June 12, 2001, the Company has 2 staff members, 1 sales agent and 3 contract employees.

ITEM 2.    DESCRIPTION OF PROPERTY

The Company leases an approximated 3,000 square foot facility located at 2331 University Avenue SE, Minneapolis, Minnesota 55414.  All operating entities are located within
this facility.  Rent is payable monthly in the amount of $4,169.  In addition to such rent, the Company is obligated to pay certain operating costs and increase in real property taxes.

ITEM 3.    LEGAL PROCEEDINGS

As of June 12, 2001, the Company was not involved in any material legal proceedings.

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

There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

---

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's Common Stock trades on the OTC Bulletin Board Market (Over-The-Counter includes OTC and OTCBB) under the symbol "HOMI".  The following table sets forth
the quarterly high and low reported last sales prices for the Company's Common Stock over the past two years.

| | Period | High | Low
| | ------ | ---- | ---

|Fiscal 2001 | First Quarter | $0.250 | $0.125
|----------- | ------------- | ------ | ------

| | Second Quarter | $0.150 | $0.120
| | -------------- | ------ | ------

| | Third Quarter | $0.130 | $0.040
| | ------------- | ------ | ------

| | Fourth Quarter | $0.040 | $0.010
| | -------------- | ------ | ------

|Fiscal 2000 | First Quarter | $0.150 | $0.070
|----------- | ------------- | ------ | ------

| | Second Quarter | $0.440 | $0.110
| | -------------- | ------ | ------

| | Third Quarter | $0.200 | $0.140
| | ------------- | ------ | ------

| | Fourth Quarter | $0.280 | $0.090
| | -------------- | ------ | ------

HOLDERS

As of June 12, 2001, there were approximately 270 shareholders of record (as defined in Rule 12g5-1 of the Securities Exchange Act of 1934) of the Company's Common Stock.

DIVIDENDS

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

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements (including the notes
thereto), and the other information included elsewhere herein.  Our fiscal year starts March 1st and ends the last day of February.

PLAN OF OPERATION

The Company had a working capital deficit of $208,507 compared to a deficit of $344,797 for fiscal 2001 and 2000, respectively, a decrease in deficit of $136,290.  The increase
in working capital was substantially due to decreases in accounts payable and deferred revenue.
The Company does not have commitments for any capital expenditures and will be reducing software development efforts, as described throughout this document, in fiscal year 2002.
The Company's cash flow position has shown some improvement since the prior fiscal year.  Improved capital availability will depend on improved sales performance and continued containment of all operational costs.  There can be no assurance that
the Company's cash flow will improve or that it 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 the following initiatives for the next twelve months:

- Continue to service its client base effectively
- Continue to reduce operating costs and ensure the effectiveness of remaining expenditures is consistent with support of the Company's client base
- Continue efforts to merge or sell a portion of the Company's assets to an existing healthcare product/service provider

If operations and cash flow can continue to 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.

---

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fiscal Year 2001 vs. Fiscal Year 2000

RevenueTotal revenue decreased from $1,277,502 to $868,983 for fiscal year 2001, a decrease of 32.0%.  This decrease represents reduced sales for third-party software and declining support and training fees.Cost of SalesCost of sales decreased from $835,616 to $586,201 for fiscal year 2001, a decrease of 29.8%.  This decrease is representative of the decrease in revenues for the fiscal year.Operating ExpensesTotal operating expenses decreased from $395,131 to $180,622 for fiscal year 2001, a decrease of 54.3%.Research and Development expenses decreased to $71,221 for fiscal year 2001 versus $151,580 for fiscal year 2000, a decrease of 53.0%.  The majority of this decrease resulted from reduced staffing in this area (the Company laid off six staff members
in September 2000).Selling and Marketing expenses increased to $1,635 for fiscal year 2001 versus $676 for fiscal year 2000, an increase of 141.9%.  The Company completes all marketing functions internally at minimal cost.General and Administrative expenses decreased to $107,806 for fiscal year 2001 versus $242,875 for fiscal year 2000, a decrease of 55.6%.  This decrease accounts for ongoing efforts to reduce expenses throughout the fiscal year.Net IncomeTotal net income increased to $135,681 from $45,270 for fiscal year 2000, an increase of 199.7%%.  Net income from continuing operations increased to $135,681 from $36,558 for fiscal year 2000, an increase of 271.1%.  This
increase is representative of the reduction in expenses for the fiscal year.

ITEM 7.    FINANCIAL STATEMENTS

Index

- Independent Auditor's Report
- Consolidated Balance Sheets - Fiscal Years 2001 and 2000
- Consolidated Statements of Operations - Fiscal Years 2001, 2000 and 1999
- Consolidated Statements of Cash Flows - Fiscal Years 2001, 2000 and 1999
- Consolidated Statements of Changes in Stockholders Equity - Fiscal Years 2001, 2000 and 1999
- Notes to Consolidated Financial Statements

---

---

To the Board of Directors and StockholdersHealth Outcomes Management, Inc. and SubsidiariesMinneapolis, Minnesota

We have audited the accompanying consolidated balance sheets of Health Outcomes Management, Inc. and Subsidiaries as of February 28, 2001 and February 29, 2000, and the related
consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three year period ended February 28, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Health Outcomes Management, Inc. and
Subsidiaries as of February 28, 2001 and February 29, 2000, and the results of their operations and their cash flows for each of the years in the three year period ended February 28, 2001, 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 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 KARON & BREMER, LLCCertified Public AccountantsMinneapolis, MinnesotaJune 07, 2001

---

---

| | February 28,2001 | February 29,2000 | 
| | ---------------- | ---------------- | 

---

ASSETS


CURRENT ASSETS:


|Cash and cash equivalents | $         35,036 | $         47,009 | 
|------------------------- | ---------------- | ---------------- | 

|Trade receivables, less allowance for doubtful accounts of
|----------------------------------------------------------

|$1,400 and $4,700 in 2001 and 2000, respectively | 26,158 | 53,768 | 
|------------------------------------------------ | ------ | ------ | 

|Prepaid expenses | 7,043 | 11,214 | 
|---------------- | ----- | ------ | 

---

|Total Current Assets | 68,237 | 111,991 | 
|-------------------- | ------ | ------- | 

---

|PROPERTY AND EQUIPMENT | 18,746 | 13,431 | 
|---------------------- | ------ | ------ | 

---

|Total Assets | $         86,983 | $       125,422 | 
|------------ | ---------------- | --------------- | 

---

LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES:


|Notes payable | $       117,500 | $         93,598 | 
|------------- | --------------- | ---------------- | 

|Current installments of obligations under capital lease | 5,377 | 3,531 | 
|------------------------------------------------------- | ----- | ----- | 

|Accounts payable | 71,539 | 192,979 | 
|---------------- | ------ | ------- | 

|Deferred revenue | 25,115 | 110,701 | 
|---------------- | ------ | ------- | 

|Accrued compensation | 32,647 | 32,410 | 
|-------------------- | ------ | ------ | 

|Accrued payroll taxes | 3,160 | 10,497 | 
|--------------------- | ----- | ------ | 

|Accrued interest | 13,728 | 6,212 | 
|---------------- | ------ | ----- | 

|Other current liabilities | 7,678 | 6,860 | 
|------------------------- | ----- | ----- | 

---

|Total Current Liabilities | 276,744 | 456,788 | 
|------------------------- | ------- | ------- | 

|OBLIGATION UNDER CAPITAL LEASES, less current installments | 5,924 | 0 | 
|---------------------------------------------------------- | ----- | - | 

---

|Total Liabilities | 282,668 | 456,788 | 
|----------------- | ------- | ------- | 

---

|COMMITMENTS AND CONTINGENCIES (Notes 7, 13 and 14)
|--------------------------------------------------

|STOCKHOLDERS' DEFICIT:
|----------------------

|Common stock, par value $.01 par value; authorized 15,000,000 shares;
|---------------------------------------------------------------------

|issued and outstanding 9,262,130 shares | 92,622 | 92,622 | 
|--------------------------------------- | ------ | ------ | 

|Additional paid-in capital | 4,815,148 | 4,815,148 | 
|-------------------------- | --------- | --------- | 

|Accumulated deficit | (5,103,455) | (5,239,136) | 
|------------------- | ----------- | ----------- | 

---

|Total Stockholders' Deficit | (195,685) | (331,366) | 
|--------------------------- | --------- | --------- | 

---

|Total Liabilities and Stockholders' Deficit | $         86,983 | $       125,422 | 
|------------------------------------------- | ---------------- | --------------- | 

---

---

---

|Years Ended | February 28,2001 | February 29,2000 | February 28,1999 | 
|----------- | ---------------- | ---------------- | ---------------- | 

---

|Revenues | $     868,983 | $   1,277,502 | $   1,377,990 | 
|-------- | ------------- | ------------- | ------------- | 

|Cost of Revenues | 586,201 | 835,616 | 737,342 | 
|---------------- | ------- | ------- | ------- | 

---

|Gross Profit | 282,782 | 441,886 | 640,648 | 
|------------ | ------- | ------- | ------- | 

---

|Operating Expenses
|------------------

|Research and Development | 71,221 | 151,580 | 127,236 | 
|------------------------ | ------ | ------- | ------- | 

|Selling and Marketing | 1,635 | 676 | 4,846 | 
|--------------------- | ----- | --- | ----- | 

|General and Administrative | 107,806 | 242,875 | 458,932 | 
|-------------------------- | ------- | ------- | ------- | 

---

|Total Operating Expenses | 180,662 | 395,131 | 591,014 | 
|------------------------ | ------- | ------- | ------- | 

---

|Operating Income  (Loss) | 102,120 | 46,755 | 49,634 | 
|------------------------ | ------- | ------ | ------ | 

---

|Other Income (Expense):
|-----------------------

|Other Income | 50,346 | 0 | 0 | 
|------------ | ------ | - | - | 

|Interest Income | 0 | 0 | 2,441 | 
|--------------- | - | - | ----- | 

|Interest expense | (16,785) | (10,197) | (20,344) | 
|---------------- | -------- | -------- | -------- | 

---

|Income (Loss) from Continuing Operations | 135,681 | 36,558 | 31,731 | 
|---------------------------------------- | ------- | ------ | ------ | 

---

|Discontinued Operations (Note 14)
|---------------------------------

|Income (Loss) from Operations of Discontinued    Retail Pharmacy Division | 0 | 0 | 0 | 
|------------------------------------------------------------------------- | - | - | - | 

|Gain (Loss) on Disposal of   Retail Pharmacy Division | 0 | 8,712 | 212,713 | 
|----------------------------------------------------- | - | ----- | ------- | 

---

|Net Income (Loss) | $     135,681 | $       45,270 | $     244,444 | 
|----------------- | ------------- | -------------- | ------------- | 

---

|Income (Loss) per Common Share:
|-------------------------------

|Basic
|-----

|Income (Loss) from Continuing Operations | $           0.01 | $           0.00 | $           0.00 | 
|---------------------------------------- | ---------------- | ---------------- | ---------------- | 

|Net Income (Loss) Per Share | $           0.01 | $           0.00 | $           0.03 | 
|--------------------------- | ---------------- | ---------------- | ---------------- | 

|Shares used in Per Share Calculations | 9,262,130 | 9,198,761 | 8,872,853 | 
|------------------------------------- | --------- | --------- | --------- | 

|Diluted
|-------

|Income (Loss) from Continuing Operations | $           0.01 | $           0.00 | $           0.00 | 
|---------------------------------------- | ---------------- | ---------------- | ---------------- | 

|Net Income (Loss) Per Share | $           0.01 | $           0.00 | $           0.03 | 
|--------------------------- | ---------------- | ---------------- | ---------------- | 

|Shares used in Per Share Calculations | 10,022,130 | 10,079,052 | 8,913,096 | 
|------------------------------------- | ---------- | ---------- | --------- | 

---

---

---

|Years Ended | February 28,2001 | February 29,2000 | February 28,1999 | 
|----------- | ---------------- | ---------------- | ---------------- | 

---

|CASH FLOWS FROM OPERATING ACTIVITIES:
|-------------------------------------

|Net Income (Loss) | $     135,681 | $       45,270 | $     244,444 | 
|----------------- | ------------- | -------------- | ------------- | 

---

|Adjustments to Reconcile Net Income (Loss) to Cash  Provided by Operating Activities:
|-------------------------------------------------------------------------------------
|Depreciation                                                                         
|Amortization                                                                         
|Provision for Losses on Trade Receivables                                            
|Net Recoveries (Writeoffs) of Bad Debt(s)                                            
|Loss (Gain) on Disposal of Inventory and Equipment                                   
|Loss (Gain) on Disposal of Segment                                                   
|Accounts Payable Writeoffs                                                           
|Accrued Severance Expense Converted to Notes Payable                                 
|Interest on Capital Leases                                                           
|Accrued Consulting Fees Converted to Notes Payable                                   
|Net Monies Owed Relieved on Sale of Software                                         
|Changes in Operating Assets and Liabilities  Net of Acquisitions:                    
|Decrease (Increase) in Trade Receivables                                             
|Decrease (Increase) in Prepaid Expenses                                              
|Increase (Decrease) in Accounts Payable                                              
|Increase (Decrease) in Deferred Revenue                                              
|Increase (Decrease) in Accrued Compensation                                          
|Increase (Decrease) in Payroll Taxes                                                 
|Increase (Decrease) in Accrued Interest                                              
|Increase (Decrease) in Other Current Liabilities                                     

---

|Total Adjustments | (191,394) | (4,805) | (295,491) | 
|----------------- | --------- | ------- | --------- | 

---

|Cash flows provided by (used in) operating activities | (55,713) | 40,465 | (51,047) | 
|----------------------------------------------------- | -------- | ------ | -------- | 

---

|CASH FLOWS FROM INVESTING ACTIVITIES:
|-------------------------------------

|Capital Expenditures                | 0     | (4,621) | 0     | 
|----------------------------------- | ----- | ------- | ----- | 
|Proceeds from the Sale of Equipment | 5,739 | 205     | 3,425 | 

---

|Cash flows (provided by) used in investing activities | 5,739 | (4,416) | 3,425 | 
|----------------------------------------------------- | ----- | ------- | ----- | 

---

|CASH FLOWS FROM FINANCING ACTIVITIES:
|-------------------------------------

|Principal Payments under Capital Lease Obligations                      | (7,902)  | (5,098)  | (19,799) | 
|----------------------------------------------------------------------- | -------- | -------- | -------- | 
|Repayments of Note Payable Assumed in the    Edina Pharmacy Acquisition | 0        | (6,000)  | (4,500)  | 
|Principal Payments under Other Notes Payable                            | (19,097) | (29,976) | (17,761) | 
|Proceeds from Notes Payable                                             | 65,000   | 22,000   | 0        | 

---

|Cash flows provided by (used in) financing activities | 38,001 | (19,074) | (42,060) | 
|----------------------------------------------------- | ------ | -------- | -------- | 

---

|Increase in cash and cash equivalents | (11,973) | 16,975 | (89,682) | 
|------------------------------------- | -------- | ------ | -------- | 

|Cash and cash equivalents:
|--------------------------

|Beginning | 47,009 | 30,034 | 119,716 | 
|--------- | ------ | ------ | ------- | 

---

|Ending | $       35,036 | $       47,009 | $       30,034 | 
|------ | -------------- | -------------- | -------------- | 

---

|SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
|---------------------------------------------------

|Cash Paid During the Year for Interest | $         9,269 | $         4,314 | 21,537 | 
|-------------------------------------- | --------------- | --------------- | ------ | 

---

---

---

| | Preferred | Stock  | Common | Stock  | Addl Pd-In | Accum   | Total   | 
| | --------- | ------ | ------ | ------ | ---------- | ------- | ------- | 
| | Shares    | Amount | Shares | Amount | Capital    | Deficit | Deficit | 

---

|Balance, February 28, 1998 | 0 | $ 0 | 8,872,853 | $ 88,729 | $ 4,770,194 | $ (5,528,850) | $ (669,927) | 
|-------------------------- | - | --- | --------- | -------- | ----------- | ------------- | ----------- | 
|Issuance of Common Stock   | 0 | 0   | 325,908   | 3,259    | 33,548      | 0             | 36,807      | 
|Net Income                 | 0 | 0   | 0         | 0        | 0           | 244,444       | 244,444     | 

---

|Balance, February 28, 1999 | 0 | 0 | 9,198,761 | 91,988 | 4,803,742 | (5,284,406) | (388,676) | 
|-------------------------- | - | - | --------- | ------ | --------- | ----------- | --------- | 
|Issuance of Common Stock   | 0 | 0 | 63,369    | 634    | 11,406    | 0           | 12,040    | 
|Net Income                 | 0 | 0 | 0         | 0      | 0         | 45,270      | 45,270    | 

---

|Balance, February 29,2000 | 0 | 0 | 9,262,130 | 92,622 | 4,815,148 | (5,239,136) | (331,366) | 
|------------------------- | - | - | --------- | ------ | --------- | ----------- | --------- | 
|Net Income                | 0 | 0 | 0         | 0      | 0         | 135,681     | 135,681   | 

---

|Balance, February 28, 2001 | 0 | $ 0 | 9,262,130 | $ 92,622 | $ 4,815,148 | $ (5,103,455) | $ (195,685) | 
|-------------------------- | - | --- | --------- | -------- | ----------- | ------------- | ----------- | 

---

---

---

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 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 long-term care facilities, homecare facilities, hospital departments
and community pharmacies.  The various software systems have been designed to meet the needs of the specific industry and require little or no production, modification or customization.

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.  The wholly owned subsidiaries are inactive as of February 2001.

Fair Value of Financial Instruments:

The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables and payables for which current carrying amounts approximate fair market
value.

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 revenue and expenses during the reporting period.  Actual results could differ from those
estimates.

Income Taxes:

The Company utilized 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 consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Property and Equipment:

Property and equipment are recorded at cost.  Expenditures for renewals and betterments are capitalized.  Repairs and maintenance costs are charged to expense.  Additonally,
where required by generally accepted accounting principles, all significant equipment leases are capitalized as installment purchases.  When items are disposed of, the cost and accumulated depreciation are eliminated from the accounts, and any gain or
loss is reflected in the results of operations.

Depreciation and Amortization:

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 seven years.

---

---

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:

The Company generates several types of revenue, including the following:

Software LicensesThe Company licenses software for which revenues are generally recognized when a non-cancelable license agreement is signed, the customer has
completed necessary training, the software product has been shipped, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable.  For customer license agreements which meet these
recognition criteria, the poriton of the fees related to software licenses will generally be recognized in the current period, while the poriton related to services (maintenance, support and consulting) is recognized over the period the services are to be
performed.  For arrangements including multiple elements, revenues are allocated to the various elements based upon vendor-specific objective evidence (VSOE) of fair value.  VSOE of fair value is determined by the price charged when the same element is
sold separately.  When the Company is acting as a reseller, the software license revenue is not recognized until the license has been delivered and necessary training has been completed.

Training and Education ServicesThe Company provides training and education services to its customers in the use of its software products.  Classes held either at the
Company's training facilities or the customer's site generally run 3-5 days; revenues from such services are recognized at completion of the training.  VSOE is determined by the price charged when the same element is sold separately.  VSOE is not
essential to the functionality of any other element of the transaction, and the total price of the arrangement would be expected to vary as the result of the inclusion or exclusion of these services.

Software Maintenance and SupportThe Company enters into agreements with its software customers to provide post-contract support (PCS) activities including industry
consulting, software support and software maintenance.  These agreements vary in length from one month to three years.  The maintenance agreements include certain program updates, which principally result from various changes in regulations affecting the
healthcare industry.  These updates are unspecified.  There is no implicit or explicit commitment or agreement to deliver any upgrades or enhancements at any time.  They are provided on a when-and-if available basis.  Support fees are considered PCS and
are recognized ratably.  Maintenance is included in the pricing of support fees and therefore is also recognized ratably.

Deferred Revenue:

Revenues related to post-contract support agreements (generally product maintenance and consulting agreements) are deferred and recognized ratably over the period of the
agreement.  The Company changed its support agreement billing practices to generally billing on a monthly basis.The Company defers revenues received for software licenses that do not meet its revenue recognition criteria until such criteria are met.

Net Income (Loss) Per Common Share:

The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, 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 and convertible debt for all periods.  All prior period net income (loss) per share amounts have been restated to comply with SFAS 128.

---

---

Note 1.      Nature of Business and Significant Accounting Policies (Continued)

Significant accounting policies of the Company are summarized below: (continued)

Capitalized Software:

The Company capitalizes software production costs after technological feasability 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 ration 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 $0 in 2001, $0 in 2000, and $15,000 in 1999.

Cash and Cash Equivalents:

For purposes of the cash flow statements, the Company considers highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits.  The Company has not experienced any losses in such accounts.  The Company believes it is not exposed to any significant credit risk on cash.

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 Standard No. 123 ("SFAS No. 123"),
Accounting for Stock-Based Compensation.

New Accounting Pronouncements:

The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments of an Enterprise and Related Information, in the fiscal
year ended February 28, 1999.  SFAS 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to
stockholders.  SFAS 131 also establishes standards for related disclosures about products and services and geographic areas.  Operating segments are identified as components of an enterprise about which separate discrete financial information is available
for evaluation by the chief operating decision maker, or decision making group, in making decisions regarding the allocation of resources and assessment of performance.  Since the closing of the pharmacy operations, the Company has viewed its operations
as principally one segment, the sale and service of software to the healthcare industry.  As a result, the information disclosed herein, materially represents all of the financial information related to the Company's principal operating segment.The Company generates all of its sales throughout the United States.

---

---

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 generated operating profits from continuing
operations during the years ended February 28, 1999, 2000 and 2001 of $31,731, $36,558 and $135,681, respectively.  As of February 28, 2001, the Company had an accumulated deficit of $5,103,455, a stockholders' deficit of $195,685, and a working capital
deficit of $208,507.  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 sustain profitable operations and resolve its liquidity
problems.  Management believes profitability will continue and that liquidity problems will be resolved as a result of the actions described below.  The financial statements do not include any adjustments that might result should the Company be unable to
continue as a going concern.

Management has adopted the following plans for the coming year:

- Continue its relationship with Advanced Information Management (AIM) through 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.

Management believes that under the plan, operations and cash flows will continue to improve and will be sufficient to support the Company's liquidity requirements through
February 28, 2002.  However, no assurance can be given that management's actions will result in continued profitable operation and the resolution of its liquidity problems.

Note 3.      Business Acquisitions

During 1998, the Company acquired certain assets of Preserve Rexall Drug, a community pharmacy located in Eden Prairie, Minnesota.  The Company acquired some fixtures and the
patient list.  The purchase price was $40,000 of which $10,000 was paid in cash.  The remaining balance of $30,000, payable by the Company in eleven equal installments, was paid off during 1998.  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 TM software.  During 1998, the Company discontinued the operations of both the Edina and Eden Prairie facilities (see Note 14).

Note 4.      Property and Equipment

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

---

| | 2001 | 2000 | 
| | ---- | ---- | 

---

|Property acquired under capitalized leases | $    26,560 | $    10,379 | 
|------------------------------------------ | ----------- | ----------- | 
|Furniture and equipment                    | 261,261     | 423,039     | 

---

| | 287,821 | 433,418 | 
| | ------- | ------- | 

|Less accumulated amortization and depreciation,  including accumulated amortization on equipment  acquired under capital
leases of  $13,066 and $7,929, respectively | (269,075) | (419,987) | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | --------- | 

---

|Net property and equipment | $    18,746 | $    13,431 | 
|-------------------------- | ----------- | ----------- | 

---

---

---

Note 5.      Other Assets

Capitalized SoftwareNew software products, developed in 1998, were expensed as incurred due to the lack of significant revenues generated from such products.  No
new software products were developed during 2001 or 2000, however, this Company continued to modify and improve its existing products.  Costs related to these improvements and Year 2000 compliance were expensed.Amortization of capitalized computer software costs were $0, $0, and $2,073 in 2001, 2000, and 1999, respectively.

Note 6.      Notes Payable

Notes payable consisted of the following:

---

| | 2001 | 2000 | 
| | ---- | ---- | 

---

|Note payable to related party maturing January 2001, including interest at 8.0%, and secured by inventory, receivables, equipment and general
intangibles, fully subordinate toother obligations of the Company as designated by the Board of Directors, and convertible intocommon stock at a conversion price of $.25 per share.  Interest accrued and unpaid at February 28, 2001 and February 29, 2000 was $4,800 and $0,
respectively.  Interestexpense was $4,800, $0 and $0 for the years ended February 28, 2001, February 29,2000 and February 28, 1999, respectively. | $  65,000 | $         0 | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | ----------- | 

|Note payable maturing March 2000, payable in monthly installments of $500, including interest at 8.0%. | 0 | 298 | 
|------------------------------------------------------------------------------------------------------ | - | --- | 

|Note payable maturing December 2000, payable in average monthly installments of $1,167,secured by inventory, receivables, equipment and general
intangibles. | 0 | 14,000 | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------ | 

|Note payable to related party maturing June 2000, including interest at 8.0%, andsecured by inventory, receivables, equipment and general
intangibles, fully subordinate toother obligations of the Company as designated by the Board of Directors, and convertible intocommon stock at a conversion price of $.10 per share.  Interest accrued and unpaid atFebruary 28, 2001 and February 29, 2000 was $8,900 and $4,200,
respectively.  Interestexpense was $4,700, $4,000 and $700 for the years ended February 28, 2001, February 29,2000 and February 28, 1999, respectively. | 50,000 | 50,000 | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------ | ------ | 

|Notes payable to contractors maturing December 2000, including interest at 8,0%, andsecured by inventory, receivables, equipment and general
intangibles, fully subordinate toother obligations of the Company as designated by the Board of Directors, and convertible intocommon stock at a conversion price of $.10 per share. | 0 | 22,000 | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------ | 

|Note payable to former employee maturing November 2000, payable in monthlyinstallments of $800, including interest at 10.0%. | 2,500 | 7,300 | 
|---------------------------------------------------------------------------------------------------------------------------- | ----- | ----- | 

---

|Total Notes Payable | $ 117,500 | $  93,598 | 
|------------------- | --------- | --------- | 

---

Note 7.      Leases

The Company currently leases its corporate office facility under an operating lease agreement which expires December 31, 2001.  This lease may be cancelled by the Company after
June 30, 2001 under certain circumstances, with 60 days notice.Rental expense in 2001, 2000 and 1999 was $84,050, $96,272 and $109,864, respectively.

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

---

|Year | Amount | 
|---- | ------ | 

---

|2002 | $  37,440 | 
|---- | --------- | 

---

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

---

|Year | Amounts | 
|---- | ------- | 

---

|2002 | $   6,241 | 
|---- | --------- | 

|2003 | 6,240 | 
|---- | ----- | 

---

|Total | 12,481 | 
|----- | ------ | 

|Less amounts representing interest | (1,180) | 
|---------------------------------- | ------- | 

---

|Present value of net minimum lease payments | 11,301 | 
|------------------------------------------- | ------ | 

|Less current installments | (5,377) | 
|------------------------- | ------- | 

---

|Obligations under capital leases, excluding current installments | $   5,924 | 
|---------------------------------------------------------------- | --------- | 

---

All equipment purchased under capital leases is pledged as collateral.

---

---

Note 8.      Income Taxes

There was no income tax expense or benefit amounts recorded for 2001, 2000 or 1999.

The provision for income taxes from continuing operations for the years ended February 28, 2001, February 29, 2000 and February 28, 1999 differs from the statutory federal tax
rate applied as follows:

---

| | 2001 | 2000 | 1999
| | ---- | ---- | ----

---

|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 2001, 2000 and 1999 consist of the following:

---

| | 2001 | 2000 | 1999
| | ---- | ---- | ----

---

|Deferred tax assets: |  |  | 
|-------------------- |  |  | 

|Capital leases                     | $          1,000 | $              300 | $        (200)
|---------------------------------- | ---------------- | ------------------ | --------------
|Book depreciation greater than tax | 2,900            | 4,000              | 10,800        
|Trade receivables                  | 500              | 1,700              | 2,800         
|Net operating loss carryforwards   | 1,603,400        | 1,652,400          | 1,670,400     
|Deferred revenue                   | 9,000            | 39,900             | 67,300        

---

|Gross deferred tax assets | 1,616,800   | 1,698,300   | 1,751,100  
|------------------------- | ----------- | ----------- | -----------
|Less valuation allowance  | (1,616,800) | (1,698,300) | (1,751,100)

---

|Net deferred tax assets | $                  0 | $                0 | $                0
|----------------------- | -------------------- | ------------------ | ------------------

---

As of February 28, 2001, the Company had net operating loss carryforwards for tax reporting purposes of approximately $4,454,000, which expire beginning in 2003.  Included in
the above carryforward amounts are approximately $670,000 of net operating losses attributable to the former separated 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 9.      Net Income (Loss) Per Share

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

---

| | 2001 | 2000 | 1999
| | ---- | ---- | ----

---

|Income (loss) from continuing operations | $  135,681 | $    36,558 | $    31,731
|---------------------------------------- | ---------- | ----------- | -----------
|Discontinued operations                  | 0          | 8,712       | 212,713    

---

|Net income (loss) available to common shareholders, for basic earnings per share | 135,681 | 45,270 | 244,444
|-------------------------------------------------------------------------------- | ------- | ------ | -------

---

|Income (loss) from continuing operations | 135,681 | 36,558 | 31,731
|---------------------------------------- | ------- | ------ | ------
|Plus interest on convertible debt        | 9,487   | 4,993  | 0     

---

|Income (loss) from continuing operations available to common shareholders for diluted earnings per share | 145,168 | 41,551 | 31,731 
|-------------------------------------------------------------------------------------------------------- | ------- | ------ | -------
|Discontinued operations                                                                                  | 0       | 8,712  | 212,713

---

|Net income (loss) available to common shareholders, for diluted earnings per share | $ 145,168 | $  50,263 | $ 244,444
|---------------------------------------------------------------------------------- | --------- | --------- | ---------

---

---

---

Note 9.      Net Income (Loss) Per Share (Continued)

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

---

| | 2001 | 2000 | 1999
| | ---- | ---- | ----

---

|Reconciliation of shares used in basic and diluted per share calculations:         
|-----------------------------------------------------------------------------------
|Denominator for basic income per share - weighted average common shares outstanding
|Effect of dilutive securities:                                                     
|Stock options                                                                      
|Warrants                                                                           
|Convertible debt                                                                   

---

|Denominator for diluted net income (loss) per share adjusted weighted average shares and assumed conversions | 10,022,130 | 10,079,052 | 8,913,096
|------------------------------------------------------------------------------------------------------------ | ---------- | ---------- | ---------

---

|Basic per share data:                   
|----------------------------------------
|Income (loss) from continuing operations
|Discontinued operations                 

---

|Net income (loss) | $0.01 | $0.00 | $0.03
|----------------- | ----- | ----- | -----

---

|Diluted per share data:                 
|----------------------------------------
|Income (loss) from continuing operations
|Discontinued operations                 

---

|Net income (loss) | $0.01 | $0.00 | $0.03
|----------------- | ----- | ----- | -----

---

Note 10.    Stockholders' Deficit

Stock IssuanceDuring 1999, 325,908 shares of common stock were issued as part of the Company match benefit for the 401(k) retirement plan.
During 2000, 63,369 shares of common stock were issued as part of the Company match benefit for the 401(k) retirement plan.
No shares of common stock were issued during 2001.
Preferred Stock
The Company has authorized Series A, convertible preferred stock.  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, 2001.
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 non-employee 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 non-employee agents of the Company without shareholder
approval of a new stock option plan.
During 2001, 2000 and 1999, the Company granted non-qualified options to various employees, directors, and non-employee agents.

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

---

| |  |  | Incentive | Options | Non-Qualified | Options | 
| |  |  | --------- | ------- | ------------- | ------- | 

---

| | Price | Per   | Stock   | Weighted Avg   | Stock   | Weighted Avg   | 
| | ----- | ----- | ------- | -------------- | ------- | -------------- | 
| | Share | Range | Options | Exercise Price | Options | Exercise Price | 

---

|Balance,February 28, 1998 | $0.08 | $0.97 | 282,315  | $0.45 | 335,000  | $0.29 | 
|------------------------- | ----- | ----- | -------- | ----- | -------- | ----- | 
|Granted                   | $0.10 | $0.10 | 0        |       | 246,400  | $0.10 | 
|Exercised                 |       |       | 0        |       | 0        |       | 
|Cancelled                 | $0.28 | $0.97 | (57,500) | $0.47 | (28,000) | $0.32 | 

---

|Balance,February 28, 1999 | $0.10 | $0.97 | 224,815  | $0.47 | 553,400  | $0.21 | 
|------------------------- | ----- | ----- | -------- | ----- | -------- | ----- | 
|Granted                   | $0.10 | $0.35 | 0        | 0     | 451,400  | $0.10 | 
|Exercised                 |       |       | 0        |       | 0        |       | 
|Cancelled                 | $0.10 | $0.97 | (91,000) | $0.36 | (96,000) | $0.25 | 

---

|Balance,February 29, 2000 | $0.10 | $0.97 | 133,815  | $0.54 | 908,800   | $0.15 | 
|------------------------- | ----- | ----- | -------- | ----- | --------- | ----- | 
|Granted                   | $0.12 | $0.18 | 0        | $0.14 | 9,600     | $0.14 | 
|Exercised                 |       |       | 0        |       | 0         |       | 
|Cancelled or Expired      | $0.10 | $0.97 | (90,315) | $0.51 | (445,000) | $0.16 | 

---

|Balance,February 28, 2001 | $0.09 | $0.97 | 43,500 | $0.51 | 473,400 | $0.16 | 
|------------------------- | ----- | ----- | ------ | ----- | ------- | ----- | 

---

At February 28, 2001, February 29, 2000 and February 28, 1999, currently exercisable options aggregated 393,600, 567,115 and 497,215 shares of common stock, respectively, and
the weighted average exercise price of those options was $0.22, $0.29 and $0.37, respectively.

---

---

Note 10.    Stockholders' Deficit (Continued)

Stock Option Plan (Continued)

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

---

| | Estimated Weighted Average Fair Value | 
| | ------------------------------------- | 

---

|1999 grants | $   0.03 | 
|----------- | -------- | 
|2000 grants | $   0.09 | 
|2001 grants | $   0.13 | 

---

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 2001, 2000 and 1999.

---

| | 2001 | 2000 | 1999
| | ---- | ---- | ----

---

|Risk-free interest rate  | 6.32%   | 5.80%   | 4.39%  
|------------------------ | ------- | ------- | -------
|Expected life of options | 5 years | 5 years | 7 years
|Expected volatility      | 158%    | 164%    | 9%     
|Expected dividend yield  | 0%      | 0%      | 0%     

---

The Company applies APB No. 25 ("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 net income and income per share would have been reduced as follows:

---

| | 2001 | 2000 | 1999
| | ---- | ---- | ----

---

|Net income         | $ 10,700 | $ 30,000 | $ 35,000
|------------------ | -------- | -------- | --------
|Earnings Per Share | $ 0.010  | $ 0.003  | $ 0.001 

---

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 non-employees 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:

---

| | Shares | Average ExercisePrice Per Share
| | ------ | -------------------------------

---

|Balance, February 28, 1998 | 165,000 | $  0.39
|-------------------------- | ------- | -------

---

|Balance, February 28, 1999 | 165,000 | $  0.39
|-------------------------- | ------- | -------

---

|Balance, February 28, 2000 | 165,000   | $  0.39
|-------------------------- | --------- | -------
|Expired                    | (165,000) | $  0.39

---

|Balance, February 28, 2001 | 0 | $  0.00
|-------------------------- | - | -------

---

All warrants expired during 2001.

---

---

Note 11.    Supplemental Cash Flow Information

Supplemental schedule of non-cash investing and financing activities:
In 2001, The Company acquired equipment under a capital lease obligation in the amount of $16,181.
In 2001, The Company wrote-off $22,478 in settlement of amounts owed to a vendor.
In 2001, The Company received $27,868 in consideration for sale of Pharmaceutical Care software (see Note 16).
In 2000, the Company issued 63,369 shares of common stock in payment of a $12,040 matching contribution to the Company's 401(k) retirement plan.
In 1999, the Company issued 325,908 shares of common stock in payment of a $36,807 matching contribution to the Company's 401(k) retirement plan.
In 1999, the Company entered into an installment contract obligation of $30,000 with a vendor, as a result of the restructuring of an accounts payable obligation with the same vendor.  This contract was completed in 2001.
In 1999, the Company entered into an installment contract of $12,537 with a lessor, as a result of the restructuring of a capital lease obligation, with the same lessor, upon termination of the lease.  This contract was completed in 2000.

Note 12.    Employment Agreement

On February 1, 1991, the Company entered into employment agreements with its then 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 threafter, unless terminated by the Company within the 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 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 13.    Retirement Plans

On March 1, 1995, the Company established a defined contribution, 401(k), retirement plan for substantially all of its employees.  The Company may match up to 50% of the
employees' contribution of 6% compensation, as defined.  The expense recognized in years ending 2001, 2000 and 1999 relating to the plan totaled $8,000, $12,000 and $13,000, respectively. The Company issued 325,908 shares for its 1997, 1998 and 1999
matching contribution, and 63,369 shares for its 2000 matching contribution.

Note 14.    Discontinued Operations

In December 1997, the Company discontinued its operation of retail prescription and over-the-counter drug sales (pharmacy operations).  Accordingly, the $114,000 operating loss
of the pharmacy operations and the $215,000 loss from the disposal of the pharmacy operations are included in the loss from discontinued operations on the statement of operations for 1998.  The loss from the disposal of pharmacy operations includes a
provision for anticipated costs to be incurred under its non-cancellable lease commitment and write-off of leasehold improvements for the pharmacy leasehold.

During 2000 and 1999, the Company negotiated certain agreements relating to commitments and liabilities, including lease commitments and accounts and notes payable relating to
the discontinuation of the pharmacy operations.  These agreements, most significantly its lease obligation for the pharmacy, resulted in a $213,000 reduction in the amounts which were accrued in 1998 for the provision for phase-out costs and accounts
payable of $213,000.  In addition, during 2000 the Company reached settlements on various amounts owed vendors, which resulted in a gain of $8,700.
During 2001, the Company wrote off $22,478 for settlements on amounts previously owed to vendors relating to the pharmacy operations.

Note 15.    Major Clients

During fiscal year 2001, 2000 and 1999, one client accounted for approximately 17.0%, 12.7% and 0% of total revenues, respectively.  Revenue derived from this client pertained
to the Pharmaceutical Care software.  This software was sold in February 2001. (see Note 16).

Note 16.    Sale of Pharmaceutical Care Software

The Company developed Pharmaceutical Care software in conjunction with an outside entity.  The Company assigned its rights to the Pharmaceutical Care software during the year
2001 to that outside entity.  The Company received consideration via extinguishment of amounts owed to this outside entity totaling $27,868 and the right to royalties from future revenues generated by the software licenses.  The Company is entitled to
receive royalties at varying rates, on gross revenues pertaining to Pharmaceutical Care software through February of 2007.

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no changes in or disagreements with independent accountants on accounting and financial disclosure during fiscal year 2001.

---

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;  COMPLIANCE WITH SECTION 16(a) OF TEH EXCHANGE ACT

The following table sets forth information regarding the Company's executive officers and directors as of June 12, 2001:

---

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

---

|Peter J. Zugschwert | 35 | President, Chief Executive Officer and Director
|------------------- | -- | -----------------------------------------------
|Stanford M. Baratz  | 45 | Director                                       
|Jonathan R. Gordon  | 49 | Director                                       
|Matthew E. Goldberg | 34 | Director                                       
|B. Marie Cooper     | 33 | Principal Accounting Officer and Controller    

---

Business Experience

Peter J. Zugschwert, age 35, has served as President of the Company since December 1997 and CEO of the Company since September 1997.  Prior to joining the Company, he was 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 45, 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.  Mr. Baratz has been a Director of the Company since September 1997.

Jonathan R. Gordon, age 49, is the President of JR Gordon, Ltd.  Mr. Gordon is a Certified Public Accountant (CPA).  Mr. Gordon has been a Director of the Company since September 1997.

Matthew E. Goldberg, age 34, was the President of In-Sight Optical, Inc., dba InVision, a retail optical store chain, from 1996 through 1998.  Between 1992 and 1996, Mr. Goldberg was an account manager with Campbell-Mithun Esty, a Minneapolis based
advertising agency.  Mr. Goldberg has been a director of the Company since September 1997.

B. Marie Cooper, age 33, joined the Company in April 1998 as its Principal Accounting Officer and Controller.  From June 1995 to March 1998, Ms. Cooper was the Accounting Manager for Newcom Group, Inc. and its subsidiaries, as well as The Express Pages,
LLC.  Ms. Cooper holds a BA degree in Accounting from Augsburg College in Minneapolis, Minnesota.

Committee and Board MeetingsDuring 2001, the Board of Directors of the Company held three formal meetings.  Each incumbent director attended 75% or more of the
total number of meetings of the Board.

Compensation of DirectorsEffective October 23, 1997, each member of the Board of Directors receives, in lieu of compensation, 800 shares of the Company's Common
Stock per meeting.  In addition, in consideration for their services, each of the new directors elected at the Annual Meeting of Shareholders on September 19, 1997, were granted a 5-year option to purchase 10,000 shares of the Company's Common Stock
exercisable at a price of $0.08 per share (the price of the Company's Common Stock on the day of their agreement to serve, if elected).  During the fiscal year ended February 28, 2001, Board of Director compensation totaled 7,200 shares.  Board of
Director compensation shares for fiscal years 1999, 2000 and 2001 have not yet been issued.

---

ITEM 10.  EXECUTIVE COMPENSATION

Summary Compensation TableThe following table sets forth information regarding compensation for each of the Company's last three fiscal years earned by the Chief Executive Officer of the Company and each executive officers of the Company whose total compensation exceeded
$100,000 in 2001.  (Note:  No officer of the Company received compensation in excess of $100,000).

---

| | Long-Term Compensation
| | ----------------------

| | Awards | Payouts
| | ------ | -------

| | Annual Compensation | 
| | ------------------- | 

| |  |  |  |  |  | Securities |  | 
| |  |  |  |  |  | ---------- |  | 

| |  |  |  | Other | Restricted | Underlying |  | All
| |  |  |  | ----- | ---------- | ---------- |  | ---

| |  |  |  | Annual | Stock | Options | LTIP | Other
| |  |  |  | ------ | ----- | ------- | ---- | -----

|Name and |  | Salary | Bonus | Comp | Award(s) | SARs | Payouts | Comp
|-------- |  | ------ | ----- | ---- | -------- | ---- | ------- | ----

|Principal Position | Year | ($) | ($) | ($) | ($) | (#) | ($) | ($)
|------------------ | ---- | --- | --- | --- | --- | --- | --- | ---

|Peter J. Zugschwert  (1) | 2001 | 78,925 |  |  |  |  |  | 2,100  (2)
|------------------------ | ---- | ------ |  |  |  |  |  | ----------

|President and CEO | 2000 | 34,700 |  |  |  |  |  | 61,550  (3)
|----------------- | ---- | ------ |  |  |  |  |  | -----------

| | 1999 | 26,613 |  |  |  |  |  | 67,550  (4)
| | ---- | ------ |  |  |  |  |  | -----------

---

Options/SAR Grants and Exercises During Fiscal Year 2001The following table sets forth information concerning the value of stock options and warrants granted to the Company's executive officer(s) named in the compensation table during the fiscal year ended February 28, 2001.

---

|Name(a) | Number of SecuritiesUnderlying Options/SARsGranted (#) (b) | % of Total Options/SARsGranted to Employeesin Fiscal Yr (c) | Exercise or BasePrice ($/Sh) (d) | Expiration Date (e)
|------- | ---------------------------------------------------------- | ----------------------------------------------------------- | -------------------------------- | -------------------

|Peter J. Zugschwert | 65,000 | 0% | $0.25 | 01/01/05
|------------------- | ------ | -- | ----- | --------

---

Options and Warrants Held and Option Value for Fiscal Year 2001The following table sets forth information concerning the value of stock options and warrants held by the Company's executive officer(s) named in the comepensation table as of February 28, 2001.

---

|Name | Shares Acquiredon Exercise | ValueRealized($) | Number ofUnexercisedOptions/SARsat FYE (#)Exercisable/Unexercisable | Value ofUnexercisedIn-The-MoneyOptions/SARsat FYE (#)Exercisable/Unexercisable(1)
|---- | -------------------------- | ---------------- | ------------------------------------------------------------------- | ---------------------------------------------------------------------------------

|Peter J. ZugschwertPresident and CEO | 0 | $ 0 | 46,250/28,750 | $4,425/$3,675
|------------------------------------ | - | --- | ------------- | -------------

---

---

Employment AgreementsOn February 1, 1991, the Company entered an employment agreement with Micheal J. Frakes, then Vice President of the Company, for a period of three years.  The agreement provided for automatic renewals for one year periods, pursuant to which the
agreement had been extended to January 31, 2001.Under the employment agreement with Mr. Frakes, he 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 was still in effect at September 15, 2000.  Mr.
Frakes, per the agreement, was also eligible to 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.In September 2000, the Company laid-off 6 employees primarily employed for research and development of the Pharmaceutical Care System TM; Mr. Frakes was included in this layoff.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table contains information as of June 12, 2001, concerning the beneficial ownership of Common Stock of the Company by each person known to the Company to be the
beneficial owner of five percent (5%) or more of the Company's Common Stock, by each executive officer of the Company named in the Summary Compensation Table, by each director and nominee director of the Company, and by all directors and executive
officers of the Company as a group:

---

| | Name ofof Beneficial Owner | Number of SharesBeneficially Owned (1) |  | Percentof Class | 
| | -------------------------- | -------------------------------------- |  | --------------- | 

| | William A. Peter, Jr. | 928,319 | (2) | 10.0% | 
| | --------------------- | ------- | --- | ----- | 

| | Peter J. Zugschwert | 998,780 | (3) | 10.8% | 
| | ------------------- | ------- | --- | ----- | 

| | Jonathan R. Gordon | 78,800 | (4) | 0.9% | 
| | ------------------ | ------ | --- | ---- | 

| | Stanford M. Baratz | 59.800 | (4) | 0.6% | 
| | ------------------ | ------ | --- | ---- | 

| | Matthew E. Goldberg | 18,800 | (4) | 0.2% | 
| | ------------------- | ------ | --- | ---- | 

| | B. Marie Cooper | 28,750 | (5) | 0.3% | 
| | --------------- | ------ | --- | ---- | 

| | All Officers and Directorsas a group (5 persons) | 1,184,930 | (6) | 12.8% | 
| | ------------------------------------------------ | --------- | --- | ----- | 

---

(1) Based upon 9,262,130 outstanding shares of common stock as of June 12, 2001.(2) No shares may be purchased pursuant to stock options or warrants.
(3) Includes 46,250 shares which may be purchased pursuant to stock options and 760,000 shares which may be purchased pursuant to convertible debt, exercisable within 60 days of the date hereof.(4) Includes 10,000 shares which may be purchased pursuant to stock options, exercisable within 60 days of the date hereof.(5) Includes 23,750 shares which may be purchased pursuant to stock options, exercisable within 60 days of
the date hereof.(6) Includes 860,000 shares which certain directors and officers may purchase pursuant to convertible debt and stock options, exercisable within 60 days of the date hereof.

---

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

At February 28, 2001, the Company had $117,500 in notes payable and outstanding accounts payable of $2,100 with Mr. Zugschwert related to consulting services rendered.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITSReference is made to the Exhibit Index hereinafter contained on page xx of this report.(b)  REPORTS ON FORM 8-KThe Company filed Form 8-K on February 9, 2001, regarding the sale of Pharmaceutical Care software.

---

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 OfficerDate: /s/  June 12, 2001

---