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SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM 10-Q

(Mark One)

|ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended January 31, 2002

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from to  to

Commission file number 0-20488

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PMR CORPORATION(Exact Name of Registrant as Specified in Its Charter)

Delaware

23-2491707(State or Other Jurisdiction of Incorporation or Organization)

(IRS Employer Identification No.)501 Washington Street, 5th FloorSan Diego, California

92103(Zip Code)(Address of Principal Executive Offices)619-610-4001(Registrant's Telephone Number, Including Area Code)(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 ý    No o

As
of January 31, 2002, PMR Corporation had 7,145,442 shares of common stock outstanding.

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PMR CORPORATION        INDEX

|        |  |         |  |                                                                                                                           |  | Page
|------- |  | ------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ----
|PART I  |  |         |  | FINANCIAL INFORMATION                                                                                                     |  |     
|        |  | Item 1. |  | Financial Statements                                                                                                      |  |     
|        |  |         |  | Condensed Consolidated Balance Sheets as of January 31, 2002 (Unaudited) and April 30, 2001                               |  | 1   
|        |  |         |  | Condensed Consolidated Statements of Operations for the three and nine months ended January 31, 2002 and 2001 (Unaudited) |  | 2   
|        |  |         |  | Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2002 and 2001 (Unaudited)           |  | 3   
|        |  |         |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                          |  | 4   
|        |  | Item 2. |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 6   
|        |  | Item 3. |  | Quantitative and Qualitative Disclosures about Market Risks                                                               |  | 12  
|PART II |  |         |  | OTHER INFORMATION                                                                                                         |  |     
|        |  | Item 1. |  | Legal Proceedings                                                                                                         |  | 12  
|        |  | Item 2. |  | Changes in Securities and Use of Proceeds                                                                                 |  | 12  
|        |  | Item 3. |  | Defaults Upon Senior Securities                                                                                           |  | 12  
|        |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                       |  | 12  
|        |  | Item 5. |  | Other Information                                                                                                         |  | 12  
|        |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                                          |  | 13  

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Part IFINANCIAL INFORMATION        Item 1. Financial Statements

PMR Corporation        Condensed Consolidated Balance Sheets

|                                                                                                                   |                                                                                                                      | January 31,
2002 |            | April 30,
2001 |  
|------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------- | ---------------- | ---------- | -------------- | -
|
|Assets                                                                                                             |                                                                                                                      |                  |            |                |  
|Current assets:                                                                                                    |                                                                                                                      |                  |            |                |  
|                                                                                                                   | Cash and cash equivalents                                                                                            |                  | $          | 11,367,100     |  
|                                                                                                                   | Short-term investments, available for sale                                                                           |                  |            | 8,168,459      |  
|                                                                                                                   | Accounts receivable, net of allowance for doubtful accounts of $3,932,000 in 2002 and $4,992,000 in 2001             |                  |            | 1,458,443      |  
|                                                                                                                   | Prepaid expenses and other current assets                                                                            |                  |            | 406,922        |  
|                                                                                                                   |                                                                                                                      |                  |            |                |  
|Total current assets                                                                                               |                                                                                                                      |                  | 21,400,924 |                |  
|Furniture and office equipment, net of accumulated depreciation of $2,570,000 in 2002 and $2,473,000 in 2001       |                                                                                                                      |                  | 306,430    |                |  
|Long-term accounts and notes receivable, net of allowance for doubtful accounts of $0 in 2002 and $520,000 in 2001 |                                                                                                                      |                  | 499,136    |                |  
|Other assets                                                                                                       |                                                                                                                      |                  | 65,671     |                |  
|                                                                                                                   |                                                                                                                      |                  |            |                |  
|Total assets                                                                                                       |                                                                                                                      | $                | 22,272,161 |                | $
|                                                                                                                   |                                                                                                                      |                  |            |                |  
|Liabilities and stockholders' equity                                                                               |                                                                                                                      |                  |            |                |  
|Current liabilities:                                                                                               |                                                                                                                      |                  |            |                |  
|                                                                                                                   | Accounts payable                                                                                                     |                  | $          | 179,268        |  
|                                                                                                                   | Accrued expenses                                                                                                     |                  |            | 1,231,522      |  
|                                                                                                                   | Accrued compensation and employee benefits                                                                           |                  |            | 292,529        |  
|                                                                                                                   | Advances from case management agencies                                                                               |                  |            | 1,872,722      |  
|                                                                                                                   |                                                                                                                      |                  |            |                |  
|Total current liabilities                                                                                          |                                                                                                                      |                  | 3,576,041  |                |  
|Note payable                                                                                                       |                                                                                                                      |                  |           |                |  
|Contract settlement reserve                                                                                        |                                                                                                                      |                  | 3,750,439  |                |  
|Other long-term liabilities                                                                                        |                                                                                                                      |                  | 4,812      |                |  
|Stockholders' equity:                                                                                              |                                                                                                                      |                  |            |                |  
|                                                                                                                   | Common stock, $.01 par value, authorized shares19,000,000; issued and outstanding shares7,255,017 in 2002 and 2001 |                  |            | 72,550         |  
|                                                                                                                   | Additional paid-in capital                                                                                           |                  |            | 31,294,658     |  
|                                                                                                                   | Notes receivable from employees and officers                                                                         |                  |            | (435,750       | )
|                                                                                                                   | Accumulated other comprehensive income                                                                               |                  |            | 51,782         |  
|                                                                                                                   | Accumulated deficit                                                                                                  |                  |            | (15,846,864    | )
|                                                                                                                   | Treasury stock, common stock at cost109,575 shares in 2002 and 10,000 shares in 2001                                |                  |            | (195,507       | )
|                                                                                                                   |                                                                                                                      |                  |            |                |  
|Total stockholders' equity                                                                                         |                                                                                                                      |                  | 14,940,869 |                |  
|                                                                                                                   |                                                                                                                      |                  |            |                |  
|Total liabilities and stockholders' equity                                                                         |                                                                                                                      | $                | 22,272,161 |                | $
|                                                                                                                   |                                                                                                                      |                  |            |                |  

See
notes to condensed consolidated financial statements

1

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PMR CORPORATION        Condensed Consolidated Statements of Operations        Unaudited

|                                                                                                 |                                                     | Three months ended January 31, |                | Nine months ended January 31, |          
|------------------------------------------------------------------------------------------------ | --------------------------------------------------- | ------------------------------ | -------------- | ----------------------------- | ---------
|
|Revenues                                                                                         |                                                     | $                              | 4,886,930      |                               | $        
|                                                                                                 |                                                     |                                |                |                               |          
|Expenses:                                                                                        |                                                     |                                |                |                               |          
|                                                                                                 | Direct operating expenses                           |                                |                | 4,213,680                     |          
|                                                                                                 | Research & development                              |                                |                |                              |          
|                                                                                                 | Marketing, general and administrative               |                                |                | 664,850                       |          
|                                                                                                 | Provision for doubtful accounts                     |                                |                | 8,895                         |          
|                                                                                                 | Recovery of provision for doubtful accounts         |                                |                | (1,937,012                    | )        
|                                                                                                 | Depreciation and amortization                       |                                |                | 128,146                       |          
|                                                                                                 | Software development amortization                   |                                |                |                              |          
|                                                                                                 | Special charges (credit)                            |                                |                | (22,588                       | )        
|                                                                                                 |                                                     |                                |                |                               |          
|                                                                                                 |                                                     |                                | Total expenses |                               |          
|                                                                                                 |                                                     |                                |                |                               |          
|Interest expense                                                                                 |                                                     |                                | (2,537         | )                             |          
|Interest income                                                                                  |                                                     |                                | 178,369        |                               |          
|                                                                                                 |                                                     |                                |                |                               |          
|Net income (loss) before income taxes                                                            |                                                     |                                | 2,006,791      |                               |          
|Income tax benefit                                                                               |                                                     |                                | (44,481        | )                             |          
|                                                                                                 |                                                     |                                |                |                               |          
|Net income (loss)                                                                                |                                                     | $                              | 2,051,272      |                               | $        
|                                                                                                 |                                                     |                                |                |                               |          
|                                                                                                 | Earnings (loss) per common share                    |                                |                |                               |          
|                                                                                                 |                                                     | Basic                          |                | $                             | 0.29     
|                                                                                                 |                                                     |                                |                |                               |          
|                                                                                                 |                                                     | Diluted                        |                | $                             | 0.28     
|                                                                                                 |                                                     |                                |                |                               |          
|                                                                                                 | Shares used in computing earnings (loss) per share: |                                |                |                               |          
|                                                                                                 |                                                     | Basic                          |                |                               | 7,192,179
|                                                                                                 |                                                     |                                |                |                               |          
|                                                                                                 |                                                     | Diluted                        |                |                               | 7,211,368
|                                                                                                 |                                                     |                                |                |                               |          
|Dividend declared per share of common stock outstanding of 7,255,017 shares on December 29, 2000 |                                                     | $                              |               |                               | $        
|                                                                                                 |                                                     |                                |                |                               |          

See
notes to condensed consolidated financial statements

2

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PMR Corporation        Condensed Consolidated Statements of Cash Flows        Unaudited

|                                                     |                                                                                                    | Nine Months Ended January 31,                |                                           
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------
|
|Operating activities                                 |                                                                                                    |                                              |                                           
|                                                     | Net income (loss)                                                                                  |                                              | $                                         
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                              |                                           
|                                                     |                                                                                                    | Stock compensation expense                   |                                           
|                                                     |                                                                                                    | Special charge                               |                                           
|                                                     |                                                                                                    | Depreciation and amortization                |                                           
|                                                     |                                                                                                    | Provision for doubtful accounts              |                                           
|                                                     |                                                                                                    | Changes in operating assets and liabilities: |                                           
|                                                     |                                                                                                    |                                              | Accounts and notes receivable             
|                                                     |                                                                                                    |                                              | Prepaid expenses and other assets         
|                                                     |                                                                                                    |                                              | Accounts payable and accrued expenses     
|                                                     |                                                                                                    |                                              | Accrued compensation and employee benefits
|                                                     |                                                                                                    |                                              | Advances from case management agencies    
|                                                     |                                                                                                    |                                              | Contract settlement reserve               
|                                                     |                                                                                                    |                                              | Deferred rent expense                     
|                                                     |                                                                                                    |                                              |                                           
|                                                     | Net cash provided by (used in) operating activities                                                |                                              |                                           
|                                                     |                                                                                                    |                                              |                                           
|Investing activities                                 |                                                                                                    |                                              |                                           
|                                                     | Proceeds from the sale and maturity of short-term investments                                      |                                              |                                           
|                                                     | Purchases of short-term investments                                                                |                                              |                                           
|                                                     | Software development costs                                                                         |                                              |                                           
|                                                     | Purchases of furniture and office equipment                                                        |                                              |                                           
|                                                     |                                                                                                    |                                              |                                           
|                                                     | Net cash (used in) provided by investing activities                                                |                                              |                                           
|                                                     |                                                                                                    |                                              |                                           
|Financing activities                                 |                                                                                                    |                                              |                                           
|                                                     | Proceeds from sale of common stock                                                                 |                                              |                                           
|                                                     | Payments on note payable to bank                                                                   |                                              |                                           
|                                                     | Acquisition of treasury stock                                                                      |                                              |                                           
|                                                     | Proceeds from payments of notes receivable from employees and officers                             |                                              |                                           
|                                                     | Cash dividend paid                                                                                 |                                              |                                           
|                                                     |                                                                                                    |                                              |                                           
|                                                     | Net cash used in financing activities                                                              |                                              |                                           
|                                                     |                                                                                                    |                                              |                                           
|Net (decrease) increase in cash and cash equivalents |                                                                                                    |                                              | (2,269,022                                
|Cash and cash equivalents at beginning of period     |                                                                                                    |                                              | 13,636,122                                
|                                                     |                                                                                                    |                                              |                                           
|Cash and cash equivalents at end of period           |                                                                                                    | $                                            | 11,367,100                                
|                                                     |                                                                                                    |                                              |                                           

See
notes to condensed consolidated financial statements

3

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PMR CORPORATION        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)        January 31, 2002

NOTE ABASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United States for audited financial statements. The condensed consolidated balance sheet at April 30, 2001
has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States
for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of PMR
Corporation ("PMR" or the "Company") have been included. Operating results for the three and nine months ended January 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending April 30, 2002. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended April 30, 2001.

During
the quarter ended January 31, 2002, the Company recovered $1.9 million in provision for doubtful accounts. The recovery was primarily due to the collection of
approximately $600,000 of previously reserved accounts receivable relating to closed outpatient programs and a change in estimate on the collectability of certain other related receivables.

NOTE BEARNINGS PER SHARE

Statement of Financial Accounting Standards ("SFAS") No. 128,Earnings per Share, requires dual
presentation of basic and diluted earnings per share by entities with complex capital structures. Basic earnings per share includes no dilution and is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of the entity. The Company has
calculated its earnings per share in accordance with SFAS No. 128 for all periods presented.

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The
following table sets forth the computation of basic and diluted earnings per share:

|                                                                  |  | Three Months Ended January 31, |           | Nine Months Ended January 31, |  
|----------------------------------------------------------------- |  | ------------------------------ | --------- | ----------------------------- | -
|
|Numerator:                                                        |  |                                |           |                               |  
|Net income (loss) available to common stockholders                |  | $                              | 2,051,272 |                               | $
|                                                                  |  |                                |           |                               |  
|Denominator:                                                      |  |                                |           |                               |  
|Weighted average shares outstanding for basic earnings per share  |  |                                | 7,192,179 |                               |  
|                                                                  |  |                                |           |                               |  
|Effects of dilutive securities:                                   |  |                                |           |                               |  
|Employee stock options and warrants                               |  |                                | 19,189    |                               |  
|                                                                  |  |                                |           |                               |  
|Dilutive potential common shares                                  |  |                                | 19,189    |                               |  
|                                                                  |  |                                |           |                               |  
|Shares used in computing diluted earnings (loss) per common share |  |                                | 7,211,368 |                               |  
|                                                                  |  |                                |           |                               |  
|Earnings (loss) per common share, basic                           |  | $                              | 0.29      |                               | $
|                                                                  |  |                                |           |                               |  
|Earnings (loss) per common share, diluted                         |  | $                              | 0.28      |                               | $
|                                                                  |  |                                |           |                               |  

No
potential common shares were included in the computation of diluted earnings per share for the three and nine months ended January 31, 2001 because the inclusion thereof would
have had an antidilutive effect.

NOTE CDISCLOSURES ABOUT REPORTABLE SEGMENTS

In accordance with the criteria of SFAS No. 131,Disclosures About Segments of an Enterprise and Related
Information,the Company determined that it operates in two reportable segments: Health Services Business and Health Information Business. The Company's reportable segments are
strategic business units that offer different services to a variety of inpatient and outpatient recipients and healthcare industry participants. The Health Services Business segment consists of two
outpatient programs and two case management programs. Under the Health Information Business, the Company has licensed its software application to Conundrum Communications, Inc. ("Conundrum") in
exchange for eligibility to receive royalties for a period of five years. The Company does not anticipate incurring any further costs associated with the Health Information Business. Activities
classified as "Other" in the following schedule relate primarily to unallocated home office items.

A
summary of segment activity is as follows:

|                                  |  | Nine months ended January 31, |           
|--------------------------------- |  | ----------------------------- | ----------
|
|2002                              |  |                               |           
|Revenues                          |  | $                             | 14,325,692
|Income (loss) before income taxes |  |                               | 5,199,846 
|2001                              |  |                               |           
|Revenues                          |  | $                             | 13,544,880
|Income (loss) before income taxes |  |                               | 1,275,938 

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

When used in this Quarterly Report on Form 10-Q and in other public statements by the Company and Company's officers,
the words "may", "will", "expect", "anticipate", "continue", "forecast", "estimate", "project", "intend", and similar expressions are intended to identify forward-looking statements regarding events
and financial trends that may affect the Company's future operating results and financial position. Forward-looking statements in this document include discussions regarding (i) future sources
of revenue; (ii) the anticipated amount of expenditures associated with the termination of the InfoScriber operations and the potential royalties from the licensure of the InfoScriber
application; (iii) forecasted cash flows for fiscal year 2002; (iv) potential indemnification obligations and uncollectable accounts; (v) the adequacy of contract settlement
reserves; and (vi) the sufficiency of the Company's financial resources. Such statements are subject to risks and uncertainties that could cause the Company's actual results and financial
position to differ materially. Please carefully review and consider the various disclosures advising interested parties of factors that affect the Company, including those discussed below and in the
Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2001 and the Company's other periodic reports and filings with the Securities and Exchange
Commission. The Company expressly disclaims any obligation or undertaking to release publicly the results of any revision of forward-looking statements to reflect trends or circumstances after the
date they are made or to reflect the occurrence of unanticipated events.

Overview

During the quarter ended January 31, 2002, the Company continued to focus on maximizing cash flow. The Company had $2.1 million in net income during
the three months ended January 31, 2002, versus a loss of $2.9 million for the same period in the prior year. The income for the quarter ended January 31, 2002 included a recovery
of bad debt expense of $1.9 million resulting primarily from the collection of approximately $600,000 of previously reserved accounts receivable relating to closed outpatient programs and a
change in estimate on the collectability of certain other related receivables. Excluding the effects of this recovery of bad debt expense, $23,000 in special charge recovery due to the sale of idle
and previously retired assets, and a $44,000 tax benefit, the Company's net income from operations was approximately $47,000.

On
July 30, 2001, the Company agreed to license the InfoScriber application to Conundrum Communications, Inc. ("Conundrum"). Conundrum will have the opportunity to grow the
InfoScriber application in the behavioral health and social service areas while the Company's InfoScriber subsidiary will be eligible to receive royalties for a period of five years. As of
January 31, 2002, no royalties have been earned by the Company. Other than some transition services that were already reimbursed by Conundrum, and certain termination costs, already accounted
for as part of the Company's special
charges for the quarter ended July 31, 2001, we do not anticipate incurring any further costs associated with the InfoScriber subsidiary.

Sources of revenue

Outpatient Programs.The Company continues to manage or administer two outpatient programs with one acute care hospital.
Although the Company is exploring strategic alternatives, including the sale or merger of its health services operations, the Company does not otherwise intend to continue to devote resources to
develop additional outpatient programs. The Company expects that revenues from outpatient programs will decrease in fiscal year 2002 due to the likely restructuring of the existing contract.

Revenues
under the outpatient programs are recognized at estimated net realizable amounts when services are rendered based upon the Company's contractual arrangement with the hospital.
Under the terms of the Company's current contract, as well as some of the Company's terminated or expired contracts, the Company is required to indemnify the providers for some or all of the Company's
fees if

6

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the fees were disallowed by Medicare or its fiscal intermediaries, or if the claims associated with the Company's fees for services rendered to patients were denied. In some instances, the Company is
required to indemnify the hospital for certain of the hospital's direct costs if the claims associated with the Company's fees for services rendered to patients were denied. As of January 31,
2002, the Company had recorded $3.8 million in contract settlement reserves to provide for an estimate of possible amounts ultimately owed to its provider customers resulting from disallowance
of costs by Medicare and Medicare cost report settlement adjustments. Such reserves are classified as long-term liabilities because ultimate determination of substantially all of the
potential contract disallowances, if any, is not anticipated to occur during the current fiscal year.

Case Management Programs.For its case management programs in Tennessee, the Company receives a monthly case rate fee from
the managed care consortium responsible for managing the Tennessee TennCare Partners State Medicaid Managed Care Program ("TennCare"). Revenue under the TennCare program is recognized in the period in
which the related service is to be provided and may fluctuate based on rates set by the managed care consortium as well as level of patient enrollment.

Results of OperationsQuarter Ended January 31, 2002 Compared to Quarter Ended January 31, 2001

RevenueRevenues increased from $4.1 million for the quarter ended January 31, 2001 to
$4.9 million for the quarter ended January 31, 2002, an increase of $787,000 or 19.2%. The outpatient programs
recorded revenues of $348,000 for the quarter ended January 31, 2002, a decrease of approximately $216,000 or (38.2%) as compared to $564,000 for the quarter ended January 31, 2001. This
decrease was primarily the result of the Company's changed business strategy and the associated reduction in the Company's outpatient programs. Revenues from the Company's case management programs
increased from $3.5 million for the quarter ended January 31, 2001 to $4.5 million for the quarter ended January 31, 2002, an increase of $1.0 million or 28.4%. The
increase was primarily due to an increase in patient enrollment as well as an increase in reimbursement rates from TennCare.

Direct Operating ExpensesDirect operating expenses consist of costs incurred at the program sites and costs associated with
the field management responsible for administering the programs. Direct operating expenses were $4.2 million in the third quarter of fiscal year 2002, compared to $3.7 million a year
ago, an increase of 12.8%. As a percentage of revenues, direct operating expenses decreased to 86.2% for the quarter ended January 31, 2002 from 91.1% for the quarter ended January 31
2001. The decrease was primarily attributable to the termination of the InfoScriber operations.

Research and DevelopmentThe Company stopped incurring research and development costs with the termination of the InfoScriber
operations in July 2001.

Marketing, General and AdministrativeMarketing, general and administrative expenses from continuing operations were $665,000
for the quarter ended January 31, 2002 versus $2.5 million for the quarter ended January 31, 2001. As a percentage of total revenues, marketing, general and administrative
expenses improved from 60.4% for the quarter ended January 31, 2001 to 13.6% for the quarter ended January 31, 2002. The improvement was primarily due to the elimination of marketing,
general and administrative expenses related to the terminated InfoScriber operations.

Recovery of Provision for Doubtful AccountsDuring the quarter ended January 31, 2002, the Company recovered
$1.9 million in provision for doubtful accounts. The recovery was primarily due to the collection of approximately $600,000 of previously reserved accounts receivable relating to closed
outpatient programs and a change in estimate on the collectability of certain other related receivables.

Depreciation and AmortizationDepreciation and amortization expenses decreased from $198,000 for the quarter ended
January 31, 2001 to $128,000 for the quarter ended January 31, 2002, a decrease

7

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of $70,000 or (35.4%). The decrease was primarily due to disposal and write-off of assets as a result of contract terminations or expirations.

Special ChargeDuring the quarter ended January 31, 2002, the Company recorded a recovery of special charges totaling
$23,000 primarily due to the sale of idle and previously retired assets. For the same period in the preceding year, the Company incurred special charges totaling $273,000 related to contract
terminations or expirations.

Net Interest IncomeInterest income, net of interest expense, decreased from $364,000 for the quarter ended January 31,
2001 to $176,000 for the quarter ended January 31, 2002, a decrease of $188,000 or (51.6%). The decrease was primarily due to lower cash, cash equivalents, and short-term
investments at January 31, 2002 versus January 31, 2001. The reduction in the interest-bearing assets was primarily a result of cash dividends of approximately $7.3 million paid
in December 2000 and the cash burn from InfoScriber, offset by positive cash flows for the nine months ended January 31, 2002.

Income Tax BenefitThe Company has received refunds amounting to $44,000 from various State tax authorities during the quarter
ended January 31, 2002. For the same quarter in the previous year, the Company recorded refunds from the Internal Revenue Service and various State tax authorities for the sum of $929,000
associated with the Company's income tax returns for the fiscal year ended April 30, 2000. The Company has treated the entire amount of such refunds as income tax benefit during both quarters
ended January 31, 2002 and 2001 because the Company had previously recognized a valuation allowance against all of its deferred tax assets. The valuation allowance was originally established
because realization of the deferred tax assets was uncertain in light of the changes in the Company's core business and associated business risks.

Net Income (Loss)The Company's net income for the quarter ended January 31, 2002 was $2.1 million versus a
$2.9 million net loss for the same period in the preceding year. Excluding the effects of the recovery of bad debt expense (seeRecovery of Provision for Doubtful
Accounts), a $23,000 in special charge recovery due to the sale of idle and previously retired assets, and a $44,000 tax benefit, the Company's net income from operations was
approximately $47,000.

Results of OperationsNine Months Ended January 31, 2002 Compared to Nine Months Ended January 31, 2001

RevenueRevenues for the nine months ended January 31, 2002 were $14.3 million, a
$781,000 increase, or 5.8%, from $13.5 million for the same period the previous year. Outpatient program revenues decreased from $2.8 million during the nine months ended
January 31, 2001 to $1.1 million during the nine months ended January 31, 2002. The decrease was primarily the result of the Company's changed business strategy and the associated
reduction in the Company's outpatient programs. The case management program revenues increased by $2.4 million from $10.8 million during the nine months ended January 31, 2001 to
$13.2 million during the nine months ended January 31, 2002, or 22.9%. The increase in case management program revenues was primarily due to an increase in patient enrollment as well as
an increase in reimbursement rates from TennCare.

Direct Operating ExpensesDirect operating expenses consist of costs incurred at the program sites and costs associated with
the field management responsible for administering the programs. Direct operating expenses remained unchanged at $12.0 million during the nine months ended January 31, 2001 and 2002. As
a percentage of revenues, direct operating expenses decreased to 84.1% for the nine months ended January 31, 2002 from 88.8% for the nine months ended January 31, 2001. The decrease was
primarily attributable to the termination of the InfoScriber operations.

Research and DevelopmentThe Company stopped incurring research and development costs with the termination of the InfoScriber
operations in July 2001.

8

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Marketing, General and AdministrativeMarketing, general and administrative expenses from continuing operations were
$2.8 million for the nine months ended January 31, 2002 versus $6.5 million for the nine months ended January 31, 2001. As a percentage of total revenues, marketing,
general and administrative expenses improved from 47.7% for the nine months ended January 31, 2001 to 19.7% for the nine months ended January 31, 2002. The improvement was primarily due
to the elimination of marketing, general and administrative expenses related to the terminated InfoScriber operations.

Recovery of Provision for Doubtful AccountsDuring the nine months ended January 31, 2002, the Company recovered
$3.2 million in provision for doubtful accounts. The recovery was primarily due to the collection of approximately $1.9 million of previously reserved accounts receivable relating to
closed outpatient programs and a change in estimate on the collectability of certain other related receivables.

Depreciation and AmortizationDepreciation and amortization expenses decreased from $661,000 for the nine months ended
January 31, 2001 to $438,000 for the nine months ended January 31, 2002, a decrease of $223,000 or (33.6%). The decrease was primarily due to disposal and write-off of assets
as a result of contract terminations or expirations.

Special ChargesDuring the nine months ended January 31, 2002, the Company recorded special charges, net of recoveries,
totaling $1.0 million. These charges were primarily for severance and other costs related to the termination of the InfoScriber operations as well as marketing and administrative services that
were terminated during the period. For the same period in the preceding year, the Company incurred a charge of $484,000 related to contract terminations or expirations.

Net Interest IncomeInterest income, net of interest expense, decreased from $1.0 million for the nine months ended
January 31, 2001 to $500,000 for the nine months ended January 31, 2002, a decrease of $542,000 or (52.0%). The decrease was primarily due to lower cash, cash equivalents, and
short-term investments at January 31, 2002 versus January 31, 2001. The reduction in the interest-bearing assets was primarily a result of cash dividends of approximately
$7.3 million paid in December 2000 and the cash burn from InfoScriber, offset by positive cash flows for the nine months ended January 31, 2002.

Income Tax BenefitThe Company has received refunds amounting to $44,000 from various State tax authorities during the nine
months ended January 31, 2002. For the same period in the previous year, the Company recorded refunds from the Internal Revenue Service and various State tax authorities for
the sum of $929,000 associated with the Company's income tax returns for the fiscal year ended April 30, 2000. The Company has treated the entire amount of such refunds as income tax benefit
during both nine month periods ended January 31, 2002 and 2001 because the Company had previously recognized a valuation allowance against all of its deferred tax assets. The valuation
allowance was originally established because realization of the deferred tax assets was uncertain in light of the changes in the Company's core business and associated business risks.

Net Income (Loss)The Company's net income for the nine months ended January 31, 2002 was $1.5 million versus a
loss of $7.0 million for the same period in the preceding year, an improvement of $8.5 million. The improvement in net income was primarily due to reduced operating expenses during the
first nine months of fiscal year 2002 resulting from the termination of the InfoScriber operations as well as the $3.2 million recovery in provision for doubtful accounts.

Liquidity and Capital Resources

For the nine months ended January 31, 2002, net cash provided by operating activities was $1.6 million versus net operating cash used of
$1.1 million during the same period in the prior year. The improvement in cash flow was primarily due to the reduction in operating expenditures and collection of receivables from closed
programs.

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Working
capital at January 31, 2002 was approximately $17.8 million, an increase of $2.4 million, versus working capital at April 30, 2001. Cash, cash
equivalents and short-term investments totaled $19.5 million at January 31, 2002, an increase of $1.8 million versus April 30, 2001. The increase in working
capital was primarily due to the collection of approximately $1.9 million of previously reserved accounts receivable relating to closed outpatient programs and a change in estimate on the
collectability of certain other related receivables.

Working
capital is anticipated to improve during fiscal year 2002 as a result of the Company's termination of its InfoScriber operations, positive cash flow from its existing operations,
and the continued collection on accounts receivable balances from closed programs. Actual cash usage may fluctuate and vary depending upon PMR's success in executing strategic alternatives or based on
further changes in the Company's outpatient programs and case management programs.

Additionally,
the Company has continued to repurchase shares of its common stock. These shares will be used for corporate purposes, including issuance under PMR's stock compensation
plans. During the nine months ended January 31, 2002, the Company repurchased 99,575 shares of its common stock at an average price of $1.69 per share, or $168,007 in open market transactions.
All shares repurchased are held in treasury.

Working
capital may also be used, from time to time, to pay dividends to the Company's stockholders. No dividends were paid during the nine months ended January 31, 2002.

In
connection with our outpatient programs, we maintain reserves to cover the potential impact of two significant uncertainties: (i) the Company may have an obligation to
indemnify certain providers for some portions of its management fee which may be subject to disallowance upon audit of a provider's cost report by fiscal intermediaries; and (ii) the Company
may not receive full payment of the management fees owed by a provider during the periodic review of the provider's claims by the fiscal intermediaries.

From
time to time, we recognize charges to operations as a result of particular uncertainties associated with the healthcare reimbursement rules as they apply to the outpatient programs.
During the first nine months of fiscal year 2002, a portion of the Company's revenue was derived from the management of the outpatient programs. Since substantially all of the patients of the
outpatient programs are eligible for Medicare, collection of a significant component of the Company's management fees is dependent upon reimbursement of claims submitted to fiscal intermediaries by
the hospitals or community mental health centers on whose behalf these programs are managed. Certain of our contracts with providers contain warranty obligations that require us to indemnify such
providers for the portion of our management fees disallowed for reimbursement by Medicare's fiscal intermediaries. As of January 31, 2002, we had recorded $3.8 million in contract
settlement reserves to provide for such indemnity obligations. These reserves have been classified as non-current because the ultimate determination of substantially all potential contract
disallowances, if any, is not anticipated to occur during the current fiscal year. Although we believe that our potential liability to satisfy such requirements has been adequately reserved in the
financial statements, there can be no assurance that the amount of fees disallowed will not be greater than the amount of such reserves. Also, the obligation to pay such amounts, if and when they
become due, could have a material adverse effect on our short-term liquidity. Certain factors are, in management's view, likely to lessen the impact of any such effect, including the
expectations that (i) if claims arise, they will arise on a periodic basis over several years and (ii) any disallowance may be offset against obligations already owed by the provider to
us.

In
addition, we have been advised by the Centers for Medicare & Medicaid Services, formerly Health Care Financing Administration, that certain program-related costs are not
allowable for reimbursement. Thus, we may be responsible for reimbursement of the amounts previously paid to us that are disallowed pursuant to obligations that exist with certain providers. Although
we believe that

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the potential liability to satisfy such requirements has been adequately reserved in the financial statements, there can be no assurance that such reserves will be adequate. The obligation to pay the
amounts so reserved, if and when they become due, could have a material adverse effect upon our cash flows and liquidity and, if greater amounts became due, on our business, financial condition, and
results of operations.

Management
believes that the Company has the financial resources needed to meet its business requirements throughout fiscal year 2002. The Company will continue to evaluate the
allocation of its financial resources including, but not limited to, the sale or merger of its health service operations, dividend distributions, and funding of on-going working capital
requirements. The Company may also, from time to time, use working capital, issue debt or equity securities, or a combination thereof, to finance other selective acquisitions of assets or businesses
or for general corporate purposes. The Company's ability to effect any such issuance will be dependent on its results of operations, its financial condition, current market conditions and other
factors beyond its control.

Impact of Inflation

A substantial portion of the Company's revenue is subject to reimbursement rates that are regulated by the federal and state governments and that do not
automatically adjust for inflation. As a result, increased operating costs due to inflation, such as labor and supply costs, without a corresponding increase in reimbursement rates, may adversely
affect the Company's earnings in the future.

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Item 3. Quantitative and Qualitative Disclosures about Market Risks

The information included in this Item 3 is considered to constitute "forward-looking statements" for purposes of the statutory safe harbor
provided in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended.

Interest Rate Sensitivity

The Company's financial instruments include an equipment note payable and investments in debt securities, including U.S. Treasury securities, commercial paper and
certificates of deposit. The equipment note payable, due in November 2002, has an effective interest rate of 8.36% and there was approximately $102,000 outstanding under this note at
January 31, 2002.

At
January 31, 2002, the fair market value of the investment in debt securities was approximately $8.2 million, which includes an unrealized gain of approximately $52,000.
These securities bear interest rates ranging from 1.82% to 7.88% and are generally short-term and readily marketable.

We
do not and have not used derivative financial instruments for any purpose, including hedging or mitigating interest rate risk, and we believe the increase in the fair value of our
investments in debt securities due to interest rate sensitivity is temporary in nature. This determination was based on the marketability of the instruments, our ability to retain our investment in
the instruments, past market movements and reasonably possible, near-term market movements. Therefore, we do not believe that potential, near-term gains or losses in future
earnings, fair values, or cash flows from changes in interest rates are likely to be material.

Exchange Rate Sensitivity

We do not currently have financial instruments that are sensitive to foreign currency exchange rates.

PART IIOTHER INFORMATION

Item 1Legal Proceedings

From
time to time, the Company has been involved in routine litigation incidental to the conduct of its business. There are currently no material pending litigation proceedings to which
the Company is a party.

Item 2Changes in Securities and Use of Proceeds

None

Item 3Defaults upon Senior Securities

None

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

None

Item 5Other Information

None

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Item 6Exhibits and Reports on Form 8-K





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SIGNATURES

Pursuant to the requirements 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.

|Dated: March 13, 2002 |  |                 |  |                                                                                                                    
|--------------------- |  | --------------- |  | -------------------------------------------------------------------------------------------------------------------
|                      |  | PMR CORPORATION
|                      |  | BY:             |  | /s/REGGIE A. ROMANREGGIE A. ROMAN Chief Financial Officer (Duly Authorized Officer and Principal
Financial Officer)
|                      |  | BY:             |  | /s/SUSAN CHUASUSAN CHUA Controller (Principal Accounting Officer)                                                  

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